Regulations Governing CUBES (Coupons Under Book-Entry Safekeeping)

SUMMARY: The Department of the Treasury (Department or Treasury) is

issuing in final form an amendment to its regulations governing the

CUBES (Coupons Under Book-Entry Safekeeping) program. The amendment

provides a method to convert United States Treasury bearer securities

that have been stripped of all non-callable coupons (stripped bearer

corpora) to book-entry accounts. Stripped bearer corpora will be held

in BECCS (Bearer Corpora Conversion System). Stripped coupons will

continue to be held in CUBES. The amendment benefits investors in two

ways: First, conversion of bearer securities to book-entry form

provides a safe alternative to storage and accounting burdens

associated with physical storage, and second, conversion eliminates the

risk of loss or destruction of physical securities.

EFFECTIVE DATE: March 6, 1998.

FOR FURTHER INFORMATION CONTACT: Maureen Parker, Director, Division of

Securities Systems, Bureau of the Public Debt (304) 480-7761; Susan

Klimas, Attorney-Adviser, Office of the Chief Counsel, Bureau of the

Public Debt (304) 480-5192; Edward C. Gronseth, Deputy Chief Counsel,

Office of the Chief Counsel, Bureau of the Public Debt (304) 480-5192.

SUPPLEMENTARY INFORMATION: This final rule amends the general

regulations governing CUBES by adding a new program, BECCS, that

provides for the conversion of United States Treasury stripped bearer

corpora to book-entry.

To reflect the expanded scope of part 358, the Department has

changed its title to Regulations Governing Book-Entry Conversion of

Detached Bearer Coupons and Bearer Corpora. The amendment does the

following:

(a) eliminates the Appendix and moves the terms and conditions

formerly contained in the Appendix into the part;

(b) updates the terms and conditions governing conversions of

coupons that occur after the effective date of this rule;

(c) provides the terms and conditions for the conversion of bearer

corpora to BECCS;

(d) eliminates provisions of the regulations that refer to the

maintenance of CUBES after conversion; and

(e) shortens the notice requirement for openings of the CUBES

program from two months to not less than 30 calendar days.

Previously, in order to submit bearer coupons for conversion to

CUBES, a depository institution was required to sign an ``Agreement to

the Terms and Conditions Governing CUBES''. This rule deletes the

requirement for individual written agreements. The written agreements

will continue to apply to the conversion of coupons submitted under

openings of the CUBES program prior to the effective date of this rule.

The provisions formerly contained in the written agreement have

been updated and are now contained in the part. Some of the provisions

applied to systems which are obsolete, and have been deleted.

Provisions that applied to the maintenance of CUBES after conversion

have been eliminated as redundant, since, after conversion to book-

entry, CUBES and BECCS are maintained in the commercial book-entry

system (also referred to as the Treasury Reserve/Automated Debt Entry

System or TRADES) governed by the provisions of 31 CFR part 357,

subpart B. Among the provisions eliminated as redundant are those

covering the fees for transfers occurring after conversion.

With BECCS Treasury will accept for conversion United States

Treasury bearer corpora, extending book-entry conversion to include all

United States Treasury detached bearer coupons and bearer corpora. A

bearer corpus that is subject to call and that is submitted with all

associated callable coupons will be transferable within BECCS. The

associated callable coupons will be linked with the BECCS security. If

a callable bearer corpus is submitted minus one or more associated

callable coupons, the corpus will be converted to a non-transferable

book-entry security within BECCS, and each callable coupon submitted

will be converted to a non-transferable coupon within CUBES.

In the event that the United States suffers a loss as a result of a

missing callable coupon, the submitting depository institution will be

required to indemnify the United States against the loss. The

indemnification will only apply in the event that a security is called.

Indemnification is consistent with the current policy of redemption of

called bearer instruments missing associated callable coupons.

Fees will be charged for the conversion of detached bearer coupons

and bearer corpora. A notice of applicable fees will be published in

the Federal Register. A separate fee will be charged for each coupon

and each corpus conversion transaction processed. A corpus submitted

with all associated callable coupons will be charged one conversion

transaction fee. A corpus submitted minus one or more associated

callable coupons will be charged a transaction fee for the conversion

of the corpus and a transaction fee for each separate callable coupon

converted. Each non-callable coupon submitted will be charged a

conversion transaction fee. The fee for any coupon or corpus that is

rejected by the Department, for whatever reason, is non-refundable.

The CUBES system has been in existence for a number of years and

participants are familiar with the system and its requirements.

Accordingly, a two month notice is no longer considered necessary. The

notice requirement for openings of the CUBES and BECCS systems has been

reduced to not less than 30 calendar days prior to the opening.

Procedural Requirements

This final rule does not meet the criteria for a ``significant

regulatory action,'' pursuant to Executive Order 12866.

This final rule relates to matters of public contract and

procedures for U.S. securities. Accordingly, pursuant to 5 U.S.C. 553

(a) (2), the notice, public comment and delayed effective date

provisions of the Administrative Procedure Act do not apply.

As no notice of proposed rulemaking is required, the provisions of

the Regulatory Flexibility Act (5 U.S.C. 601, et seq.) do not apply.

There are no collections of information contained in this final

rule. Therefore, the Paperwork Reduction Act does not apply.

List of Subjects in 31 CFR Part 358

Federal Reserve System, Government securities.

Dated: March 3, 1998.

Donald V. Hammond,

Acting Fiscal Assistant Secretary.

For the reasons set out in the preamble, 31 CFR part 358 is revised

to read as follows:

[[Page 11355]]

PART 358-- REGULATIONS GOVERNING BOOK-ENTRY CONVERSION OF DETACHED

BEARER COUPONS AND BEARER CORPORA

Sec.

358.0 Applicability.

358.1 Definitions.

358.2 Governing regulations.

358.3 Securities not eligible for conversion.

358.4 Transferability.

358.5 Submissions of detached bearer coupons and bearer corpora.

358.6 Delivery of detached bearer coupons and bearer corpora.

358.7 Fees for conversion transactions.

358.8 Crediting of amounts less than one dollar.

358.9 Authority of depository institution.

358.10 Adjustments to or rejection of securities.

358.11 Audit and verification of securities.

358.12 Separate maintenance of accounts.

358.13 Processing against master accounts.

358.14 Program prohibitions.

358.15 Authority of Federal Reserve Banks.

358.16 Limitation of liability.

358.17 Indemnification.

358.18 Waiver of regulations.

358.19 Supplements, amendments or revisions.

Authority: 12 U.S.C. 391; 31 U.S.C. Ch. 31.

Sec. 358.0 Applicability.

(a) These regulations apply to the conversion of United States

Treasury detached bearer coupons and bearer corpora to book-entry form.

These instruments are accepted from depository institutions for

conversion under the Coupons Under Book Entry Safekeeping program

(CUBES) and Bearer Corpora Conversion System (BECCS) program during

specified time periods. The Department of the Treasury (Department or

Treasury) will determine the time periods during which detached bearer

coupons and bearer corpora will be accepted for conversion into book-

entry form, and the fees applicable to conversion. The time periods and

fees will be announced in the Federal Register no less than 30 calendar

days prior to the date such instruments may be presented. Presentment

shall be to the Federal Reserve Bank of New York in accordance with a

schedule provided by the Federal Reserve Bank of New York.

(b) For coupons converted after the effective date of this rule,

these regulations supersede the terms and conditions governing CUBES

set forth in the written ``Agreements to the Terms and Conditions

Governing CUBES'' signed by those depository institutions that

previously participated in the CUBES program.

(c) Depository institutions that submit detached bearer coupons and

bearer corpora are deemed to agree to the terms and conditions set

forth in this part and any other requirements that may be prescribed by

the Department or the Federal Reserve Bank of New York.

Sec. 358.1 Definitions.

In this part, unless the context indicates otherwise:

BECCS refers to the Treasury's Bearer Corpora Conversion System. A

BECCS security refers to a United States Treasury definitive bearer

bond held in BECCS.

Callable refers to a United States Treasury bond subject to call,

at the option of the Secretary, before maturity in accordance with the

terms and conditions of its offering. Coupons associated with a

callable bond that are due after the date upon which the bond is

subject to call are callable coupons.

Corpus (plural corpora) refers to the principal portion of a United

States Treasury definitive bearer bond.

Coupon refers to a definitive bearer interest instrument associated

with a United States Treasury definitive bearer bond.

CUBES refers to the Treasury's Coupons Under Book-Entry Safekeeping

program. A CUBES security is a definitive coupon detached from a United

States Treasury bond and held in CUBES.

Depository institution means an entity described in section 19(b)

of the Federal Reserve Act (12 U.S.C. 461(b)).

Federal Reserve Bank or Reserve Bank means a Federal Reserve Bank

or Branch.

Non-callable refers to a United States Treasury bond not subject to

call before maturity. Non-callable coupons are coupons associated with

a non-callable bond, and coupons associated with a callable bond that

are due on or before the date upon which the callable bond is subject

to call.

Non-transferable means that the ownership of a security held in

BECCS or CUBES may not be transferred, pursuant to the provisions of

section 358.4 of this part.

Transferable means that the ownership of a security held in BECCS

or CUBES may be transferred, pursuant to the provisions of Sec. 358.4

of this part.

Sec. 358.2 Governing regulations.

CUBES and BECCS securities are deemed to be securities for purposes

of, and upon their conversion to book-entry are governed by, subparts

A, B, and D of part 357 of this chapter. Notwithstanding the provisions

of part 357 of this chapter, certain CUBES and BECCS securities are

non-transferable, pursuant to Sec. 358.4 of this part.

Sec. 358.3 Securities not eligible for conversion.

(a) Detached bearer coupons and bearer corpora that are submitted

within 30 days of their maturity date or, if the call provision has

been invoked, within 30 days of their call date, will not be accepted

for conversion.

(b) Bearer corpora with a maturity date on or before November 15,

1998, will not be accepted for conversion.

Sec. 358.4 Transferability.

In order for a callable corpus to be eligible for conversion to a

transferable BECCS security all associated callable coupons must be

submitted with the corpus. These callable coupons will be linked with

the corpus within BECCS when converted. Once the coupons are linked to

the corpus, they may not be separately transferred. If all of the

callable coupons associated with the corpus are not submitted with the

corpus, the corpus will be converted to a non-transferable BECCS

security, and the remaining callable coupons submitted with the corpus

will be converted to individual non-transferable CUBES securities. A

corpus that is not subject to call will be converted to a transferable

BECCS security. Non-callable coupons will be converted to transferable

CUBES securities.

Sec. 358.5 Submissions of detached bearer coupons and bearer corpora.

(a) Detached bearer coupons and bearer corpora must be submitted to

the Federal Reserve Bank of New York in accordance with Federal Reserve

Bank of New York procedures and must be accompanied by an approved

form, executed by an authorized officer of the submitting depository

institution.

(b) Until verified by the Department, submitted detached bearer

coupons and bearer corpora will be subject to rejection or adjustment.

Sec. 358.6 Delivery of detached bearer coupons and bearer corpora.

The depository institution shall bear the expense and assume the

risk of loss associated with the delivery of the detached bearer

coupons and bearer corpora to the Federal Reserve Bank of New York. The

United States shall bear the expense and assume the risk of loss

associated with the delivery of the submitted detached bearer coupons

and bearer corpora between the Federal Reserve Bank of New York and the

Department. The depository institution shall bear the expense and

assume the risk of loss associated with the delivery of any detached

bearer coupons and bearer corpora that are returned to the depository

institution.

[[Page 11356]]

Sec. 358.7 Fees for conversion transactions.

The depository institution will pay a fee for each CUBES and BECCS

conversion transaction processed. The fees for conversion transactions

will be published in the Federal Register prior to the start of the

initial conversion period. A corpus subject to call that is submitted

with all of its associated callable coupons will be considered a single

conversion transaction and will be charged a single fee. If one or more

of the associated callable coupons are not submitted with the corpus,

the conversion of each callable coupon submitted and the corpus will be

considered a separate conversion transaction and will be charged a

separate fee. Each non-callable coupon submitted will be considered a

separate conversion transaction and will be charged a separate fee. The

fee for any conversion transaction that is rejected by the Department

for any reason is non-refundable.

Sec. 358.8 Crediting of amounts less than one dollar.

Upon the conversion of coupons to CUBES, amounts of less than one

dollar in the aggregate per CUBES CUSIP will not be credited to the

account of the depository institution.

Sec. 358.9 Authority of depository institution.

(a) Submission of detached bearer coupons and bearer corpora to the

Federal Reserve Bank of New York for conversion to book-entry accounts

under the CUBES and BECCS programs constitutes a representation by the

depository institution that it has authority to convert the coupons and

corpora to book-entry form.

(b) Neither the Department nor the Federal Reserve Bank of New York

shall be liable if the depository institution has no authority to

convert the detached bearer coupons and bearer corpora to book-entry

form or to take other actions in respect to book-entry accounts in

CUBES and BECCS.

(c) Neither the Department nor the Federal Reserve Bank of New York

shall be liable for any loss incurred by the depository institution

which may result from the failure of the depository institution to

properly follow the procedures provided by the Federal Reserve Bank of

New York.

Sec. 358.10 Adjustments to or rejection of securities.

In the event that the Department makes an adjustment to or rejects

all or part of the submitted securities, the Federal Reserve Bank of

New York will instruct the depository institution to transfer CUBES or

BECCS securities of the same payment date and face value from the

depository institution's account to the Federal Reserve Bank of New

York. If no such CUBES or BECCS securities exist in the depository

institution's account, the Federal Reserve Bank of New York will

instruct the depository institution as to how an adjustment will be

made. In the event that the depository institution fails to comply with

the instructions of the Federal Reserve Bank of New York within five

(5) business days of receipt of the instructions, the Federal Reserve

Bank of New York reserves the right to debit the master account of the

depository institution for the face value of the rejected detached

bearer coupons and bearer corpora. By the submission of the detached

bearer coupons and bearer corpora, the depository institution is deemed

to agree to this debit.

Sec. 358.11 Audit and verification of securities.

After processing and initial verification, the Federal Reserve Bank

of New York will credit the securities accepted to the depository

institution's book-entry account, establishing a securities entitlement

in TRADES pursuant to 31 CFR part 357 subpart B. Final verification by

the Department will be accomplished within ten (10) business days of

receipt of the detached bearer coupons and bearer corpora at the

Department. The depository institution shall not trade in the

securities prior to final verification. If at any time after this ten

(10) day period the Department determines that the security was

improperly credited to the CUBES or BECCS account of the depository

institution, such as in the case of a previously undetected counterfeit

security, the Department reserves the right to adjust the CUBES or

BECCS account.

Sec. 358.12 Separate maintenance of accounts.

CUBES and BECCS accounts will be maintained separately from

accounts maintained in Treasury's STRIPS (Separate Trading of

Registered Interest and Principal of Securities) program.

Sec. 358.13 Processing against master accounts.

The depository institution agrees that all charges associated with

its CUBES and BECCS accounts, including the conversion fee, will be

processed against its master account on the books of a Federal Reserve

Bank.

Sec. 358.14 Program prohibitions.

Once detached bearer coupons and bearer corpora have been converted

to book-entry form, reconversion to physical form is prohibited. The

reconstitution of a BECCS security with CUBES securities or any

combination of Treasury obligations is prohibited.

Sec. 358.15 Authority of Federal Reserve Banks.

The Federal Reserve Bank of New York is hereby authorized as fiscal

agent of the United States to perform functions with respect to this

part.

Sec. 358.16 Limitation of liability.

Except as otherwise provided by regulation, circular, or written

agreement, the Federal Reserve Bank of New York shall be liable in

connection with any action taken or omission by it only for its failure

to exercise ordinary care. In no event shall the Federal Reserve Bank

of New York or the Department have or assume any responsibility to any

party except the sending and receiving depository institutions involved

in a CUBES or BECCS transaction. In no event shall the Federal Reserve

Bank of New York or the Department assume any responsibility, in

connection with a CUBES or BECCS transaction, for the insolvency,

neglect, misconduct, mistake or default of another bank or person,

including the immediate participants.

Sec. 358.17 Indemnification.

The submitting depository institution shall indemnify the United

States against any loss which may occur as a result of the conversion

of a bearer corpus missing one or more associated callable coupons.

Sec. 358.18 Waiver of regulations.

The Secretary of the Treasury reserves the right, in the

Secretary's discretion, to waive or modify any provision(s) of these

regulations in any particular case or class of cases for the

convenience of the United States or in order to relieve any person(s)

of unnecessary hardship, if such action is not inconsistent with law,

does not impair any existing rights, and the Secretary is satisfied

that such action will not subject the United States to any substantial

expense or liability.

Sec. 358.19 Supplements, amendments or revisions.

The Secretary may, at any time, prescribe additional supplemental,

amendatory or revised regulations with respect to CUBES and BECCS.

[FR Doc. 98-5928 Filed 3-5-98; 8:45 am]

BILLING CODE 4810-39-P