Marketable Treasury Securities Redemption Operations

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 375

Marketable Treasury Securities Redemption Operations

AGENCY: Bureau of the Public Debt, Fiscal Service, Department of the

Treasury.

ACTION: Proposed rule.

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SUMMARY: The Department of the Treasury (``Treasury'', ``We'', or

``Us'') is publishing for comment proposed rules setting out the terms

and conditions by which we may redeem outstanding, unmatured marketable

Treasury securities. While we have not decided to conduct redemption

operations, we are publishing this proposed rule to obtain comments on

the mechanism by which we might conduct such operations. By

establishing the mechanism in advance, we would be able to conduct

redemption operations in a more timely and efficient way should such a

decision be made.

We would establish a new part in the Code of Federal Regulations

for this purpose. The proposed rules describe a process by which an

entity may submit competitive offers to sell us securities. The

proposed rules also describe how we would announce the redemption

operation results and the requirements for delivering securities to us

and receiving payment.

Redemption operations would help us better manage our financing

needs, promote more efficient capital markets, and may lower financing

costs for taxpayers.

DATES: Submit comments on or before October 4, 1999.

ADDRESSES: You may send us hardcopy comments at: Government Securities

Regulations Staff, Bureau of the Public Debt, 999 E Street NW., Room

315, Washington, DC 20239-0001. You may also send us comments by e-mail

at [email protected]. When sending comments by e-mail, please use

an ASCII file format and provide your full name and mailing address.

Comments received will be available for public inspection and

downloading from the Internet and for public inspection and copying at

the Treasury Department Library, FOIA Collection, Room 5030, Main

Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220.

To visit the library, call (202) 622-0990 for an appointment.

This proposed amendment is also available for downloading from

Public Debt's web site at the following address:

www.publicdebt.treas.gov.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Acting Executive

Director) or Chuck Andreatta (Senior Financial Advisor), Bureau of the

Public Debt, Government Securities Regulations Staff, (202) 691-3632.

SUPPLEMENTARY INFORMATION:

I. Background

The government's improved fiscal position has caused Treasury's

borrowing needs to decline significantly, and we have been adjusting

the government's borrowing program accordingly. Our adjustments to date

have distributed the required cuts in borrowing across various

maturities and sectors of the federal debt. In this environment, we

began examining the concept of purchasing outstanding Treasury

securities in the market. No decisions have been made to use a debt

buy-back program, but having the infrastructure available to be able to

use this tool would provide Treasury additional flexibility.

Debt buy-backs could provide us with greater flexibility to manage

the government's debt and to respond to our improved fiscal condition.

First, buy-backs could enhance market liquidity by allowing us to

maintain regular issuance of new benchmark securities across the

maturity spectrum, in greater volume than otherwise. Over the long

term, this enhanced liquidity could reduce the government's interest

expense and promote more efficient capital markets.

Second, buy-backs could enhance our ability to exert control over

the maturity structure of the debt. Without a debt buy-back program,

further reductions in Treasury new issue sizes and frequencies could be

necessary. A buy-back program, however, would provide us the option of

managing the maturity structure of the debt by selectively targeting

the maturities of debt to be repurchased.

Third, buy-backs could be used as a cash management tool, absorbing

excess cash in periods such as late April when tax revenues greatly

exceed immediate spending needs.

In addition, although not a primary reason for conducting buy-

backs, we may occasionally be able to reduce the government's interest

expense by purchasing ``off-the-run'' debt and replacing it with lower-

yield ``on-the-run'' debt.;1

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\1\ A Treasury security is ``on-the-run'' when it is the newest

security issue of its maturity (e.g., in October the two-year note

issued September 30 would be ``on-the-run'' while the two-year note

issued August 31 would be ``off-the-run''). An on-the-run security

is normally the most liquid issue for that maturity.

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II. Analysis

In a buy-back operation (a ``redemption operation'' in the proposed

rule), we would redeem securities by purchasing them from current

owners. The most equitable method for determining redemption prices is

through a process in which market participants submit competitive

offers to sell particular Treasury securities to the Treasury. We

welcome comments about this proposed methodology.

Under the proposal, we would announce our intention to purchase

specified Treasury securities, including the approximate total amount

that we want to buy, and the deadlines for offers and settlement. We

would accept offers on a multiple-price basis--that is, we would

determine and accept the most attractive offers and each successful

offeror would receive the price at which it offered securities. We

could decide to buy back less than the announced amount if market

conditions warranted.

For the reasons set forth below, we propose that the entities that

have a trading relationship with the Federal Reserve Bank of New York

(primary dealers) be eligible to submit offers. Other entities could

submit offers through the primary dealers or an intermediary that has a

relationship with a primary dealer.

Restricting direct offers to primary dealers would permit us to use

the

[[Page 42627]]

Federal Reserve Bank of New York's existing electronic systems for

executing open market transactions and facilitate transfers of

securities to Treasury at settlement. No customer lists would be

required under these proposed rules.

Redemption operation announcements would be in the form of an

official Treasury press release, supplemented by a posting on the

Bureau of the Public Debt's website (www.publicdebt.treas.gov) and on-

line broadcast messages over the Federal Reserve's Fedline OM (Open

Market) system. The Treasury securities eligible for redemption and the

privately held amount of each security would be included in the

redemption operation announcement.

To expedite tender processing and calculation and announcement of

redemption operation results, we would accept competitive offers only.

Price-based offers would be most convenient for redemption operation

participants since the eligible securities already would be trading in

the secondary market on a price basis.

The price format would be consistent with that already used by the

Federal Reserve's open market operations. See Sec. 375.13(b). The only

limitation on the dollar amount of offers is that the total amount of

offers from a submitter for any particular security could not exceed

the total outstanding privately held amount of that security.

Calculation of redemption operation results would occur at the

Federal Reserve Bank of New York, acting as Treasury's fiscal agent,

using a methodology determined by Treasury. There would be no

limitation on the number of offers for each security. We also would not

limit the aggregate amount of offers for securities that Treasury would

accept from any one submitter.2

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\2\ In other words, there is no limitation similar to the ``35-

percent limit'' on awards in the auction process. See 31 CFR

356.22(b).

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It is possible that, in a particular redemption operation, the

calculations could result in our redeeming only one security. We also

would not set any limits on the amount or percentage of the outstanding

amount of a security that could be redeemed. It is possible, therefore,

that following a redemption operation or redemption operations, the

privately held amount still outstanding of a particular security could

be very small.

Once the redemption operation calculations have been completed,

Treasury would announce the results through an official press release,

including a listing of the amount of each security we accept for

redemption. We would also post the results to Public Debt's website and

other on-line broadcast messages. The Federal Reserve Bank of New York

would transmit results messages to the submitters who participated in

the redemption operation. A results message would inform a submitter

only of the acceptance or rejection of the offers it submitted.

Submitters would in turn notify customers of successful offers in the

redemption operation.

Settlement would occur on the business day after the deadline for

submission of offers (tenders). Successful submitters would transfer

the securities they submitted offers for in the redemption operation to

Treasury, via the Federal Reserve Bank of New York. This next-day

delivery requirement follows current market convention for other

Treasury securities transactions. The settlement amount would include

any accrued interest payable by Treasury through the settlement date.

We request specific comment on this proposed requirement or any other

settlement-related issues.

The securities delivered may be in either book-entry (electronic)

or definitive (paper) form. Those delivering book-entry securities

would transfer via Fedwire the correct par amount of securities against

payment for the correct settlement amount to the account specified on

the redemption operation announcement. A submitter planning to deliver

definitive securities would be required to contact the Federal Reserve

Bank of New York within two hours of the announcement of the redemption

operation results and make arrangements for delivery.

We encourage comments on any aspect of this proposed rule to ensure

that we address the concerns of market participants and Treasury. In

addition, this proposed rule has been drafted using plain language. We

specifically request comment on the clarity of this rule and how we can

make it easier to understand.

III. Procedural Requirements

This proposed rule is not a ``significant regulatory action'' under

Executive Order 12866. Although we are issuing this proposed rule in

proposed form to benefit from public comment, the notice and public

procedures requirements of the Administrative Procedure Act do not

apply, under 5 U.S.C. 553(a)(2).

Since no notice of proposed rulemaking is required, the provisions

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

List of Subjects in 31 CFR Part 375

Bonds, Federal Reserve System, Government securities, Securities.

For the reasons stated in the preamble, the Treasury proposes to

amend 31 CFR chapter II, subchapter B, by adding new part 375 to read

as follows:

PART 375--MARKETABLE TREASURY SECURITIES REDEMPTION OPERATIONS

Subpart A--General Information

Sec.

375.0 What authority does the Treasury have to redeem its

securities?

375.1 Where are the rules for the redemption operation located?

375.2 What special definitions apply to this rule?

375.3 What is the role of the Federal Reserve Bank of New York in

this process?

Subpart B--Offering, Certifications, and Delivery

375.10 What is the purpose of the redemption operation

announcement?

375.11 Who may participate in a redemption operation?

375.12 How do I submit an offer?

375.13 What requirements apply to offers?

375.14 Do I have to make any certifications?

375.15 Who is responsible for delivering securities?

Subpart C--Determination of Redemption Operation Results; Settlement

375.20 When will the Treasury decide on which offers to accept?

375.21 When and how will the Treasury announce the redemption

operation results?

375.22 Will I receive any additional information and, if I am

submitting offers for others, do I have to provide confirmations?

375.23 How does the securities delivery process work?

Subpart D--Miscellaneous Provisions

375.30 Does the Treasury have any discretion in this process?

375.31 What could happen if someone does not fully comply with the

redemption operation rules or fails to deliver securities?

Authority: 5 U.S.C. 301; 31 U.S.C. 3111; 12 U.S.C. 391.

Subpart A--General Information

Sec. 375.0 What authority does the Treasury have to redeem its

securities?

Section 3111 of Title 31 of the United States Code authorizes the

Secretary of the Treasury to use money received from the sale of an

obligation and other money in the general fund of the Treasury to buy,

redeem, or refund, at or before maturity, outstanding bonds, notes,

certificates of indebtedness, Treasury bills, or savings certificates

of

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the United States Government. For the purposes of this part, we will

refer to these outstanding obligations as ``securities.''

Sec. 375.1 Where are the rules for the redemption operation located?

The provisions in this part and the redemption operation

announcement govern the redemption of marketable Treasury securities

under 31 U.S.C. 3111. (See Sec. 375.10.)

Sec. 375.2 What special definitions apply to this rule?

The definitions in 31 CFR part 356 govern this part except as

follows:

Accrued interest means an amount payable by the Treasury as part of

the settlement amount for the interest income earned between the last

interest payment date and the settlement date.

Bank means the Federal Reserve Bank of New York.

Customer means a person or entity on whose behalf a submitter has

been directed to submit an offer of a specified amount of securities in

a specific redemption operation.

Definitive security means a security that is issued and maintained

as a certificate. Definitive securities are in either registered or

bearer form.

Minimum offer amount means the smallest par amount of a security

that may be offered to the Treasury. We will state the minimum offer

amount in the redemption operation announcement.

Multiple means the smallest additional par amount of a security

that may be offered to the Treasury. We will state the multiple in the

redemption operation announcement.

Offer means an offer to deliver for redemption a stated par amount

of a specific security to the Treasury at a stated price.

Price means the price of a security as offered by a submitter or

its customer and excludes accrued interest.

Privately held amount means the total amount outstanding of a

security eligible for redemption less holdings of the Federal Reserve

System and Federal Government accounts.

Redemption amount means the maximum par amount of securities that

we are planning to redeem through a redemption operation. We will state

the redemption amount in the redemption operation announcement.

Redemption operation means a competitive process by which the

Treasury accepts offers of marketable Treasury securities that by their

terms are not immediately payable.

Security means an outstanding unmatured obligation of the United

States Government that the Secretary is authorized to buy, redeem or

refund under section 3111 of Title 31 of the United States Code.

Settlement means full and complete delivery of and payment for

securities redeemed.

Settlement amount means the par amount of each security that we

redeem, multiplied by the price we accept in a redemption operation,

plus any accrued interest.

Settlement date means the date specified in the redemption

operation announcement on which you must deliver a security to the

Treasury for payment.

Submitter means an entity submitting offers directly to the

Treasury for its own account, for the account of others, or both. (See

Sec. 375.11(a).)

Tender means a computer transmission or document submitted in a

redemption operation that contains one or more offers.

We (``us'') means the Secretary of the Treasury and his or her

delegates, including the Treasury Department, Bureau of the Public

Debt, and their representatives. The term also includes the Federal

Reserve Bank of New York, acting as fiscal agent of the United States.

You means a prospective submitter in a redemption operation.

Sec. 375.3 What is the role of the Federal Reserve Bank of New York in

this process?

As fiscal agent of the United States, the Federal Reserve Bank of

New York performs various activities necessary to conduct a redemption

operation under this part. These activities include but are not limited

to:

(a) Accepting and reviewing tenders;

(b) Calculating redemption operation results;

(c) Issuing notices of redemptions;

(d) Accepting deliveries of Treasury securities at settlement; and

(e) Processing the Treasury payment for securities delivered at

settlement.

Subpart B--Offering, Certifications, and Delivery

Sec. 375.10 What is the purpose of the redemption operation

announcement?

We provide public notice that we are redeeming Treasury securities

by issuing a redemption operation announcement. This announcement lists

the details of each proposed redemption operation, including the total

redemption amount, the eligible securities, the total privately held

amount of each eligible security, and the redemption operation and

settlement dates. The redemption operation announcement and this part

specify the terms and conditions of a redemption operation. If anything

in the redemption operation announcement differs from anything in this

part, the redemption operation announcement will apply. Accordingly,

you should read the applicable redemption operation announcement along

with this part.

Sec. 375.11 Who may participate in a redemption operation?

(a) Submitters. To be a submitter, you must be an institution that

the Federal Reserve Bank of New York has approved to conduct open

market transactions with the Bank.

(b) Others. A person or entity other than a submitter may

participate only if it arranges to have an offer or offers submitted on

its behalf by a submitter.

Sec. 375.12 How do I submit an offer?

As a submitter, you must submit an offer in a tender to the

Treasury via the Federal Reserve Bank of New York through its Trading

Room Automated Processing System (TRAPS). You must submit any tenders

in an approved format and the Bank must receive them prior to the

closing time in the redemption operation announcement. If we do not

receive your tenders timely, we will reject them. Tenders are binding

on their submitter after the closing time specified in the redemption

operation announcement. You are responsible for ensuring that the

Federal Reserve Bank of New York receives your tenders on time. We will

not be responsible in any way for any unauthorized tender submissions

or for any delays, errors, or omissions in submitting tenders.

Sec. 375.13 What requirements apply to offers?

(a) General. You may only submit competitive offers (specifying a

price). All offers must state the CUSIP number or security description,

par amount, and price of each security offered. All offers must equal

or exceed the minimum offer amount, and be in the multiple, stated in

the redemption operation announcement.

(b) Price format. You must express offered prices in terms of price

per $100 of par with three decimals, e.g., 102.172. The first two

decimals represent fractional 32nds of a dollar. The third decimal

represents eighths of a 32nd of a dollar, and must be a 0, 2, 4, or 6.

For example, an offer of 102.172 means one hundred two and seventeen

32nds and two eighths of a 32nd, or in decimals, 102.5390625.

(c) Maximum amount offered. The total amount of your offers for any

individual security may not exceed the total privately held amount of

the

[[Page 42629]]

security. If it does, we will recognize only your lowest-priced offer,

through successively higher-priced offers, until we reach the total

privately held amount. A list of the privately held amount of each

eligible security will appear in the redemption operation announcement.

(d) Maximum number of offers. There is no limit on the number of

offers you may make of each eligible security. There is also no limit

on the number of eligible securities you may offer.

Sec. 375.14 Do I have to make any certifications?

By submitting a tender offering a security or securities for sale,

you certify that you are in compliance with this part and the

redemption operation announcement.

Sec. 375.15 Who is responsible for delivering securities?

As a submitter, you are responsible for delivering any securities

we accept in the redemption operation. (See Sec. 375.23.) All

securities you deliver must be free and clear of all liens, charges,

claims, and any other restrictions.

Subpart C--Determination of Redemption Operation Results;

Settlement

Sec. 375.20 When will the Treasury decide on which offers to accept?

We will determine which offers or portions of offers to accept

after the closing time for receipt of tenders. All such determinations

will be final.

Sec. 375.21 When and how will the Treasury announce the redemption

operation results?

We will make an official announcement of the redemption operation

results through a press release. For each security we redeem, the press

release will include such information as the amounts offered and

accepted, the highest price accepted, and the remaining privately held

amount outstanding.

Sec. 375.22 Will I receive any additional information and, if I am

submitting offers for others, do I have to provide confirmations?

(a) Confirmations to submitters. We will provide a confirmation of

acceptance or rejection in the form of a results message to submitters

of offers by the close of the business day of the redemption operation.

(b) Confirmation of customer offers. If you submit a successful

offer for a customer, you are responsible for notifying that customer

of the impending redemption.

Sec. 375.23 How does the securities delivery process work?

(a) Deliveries of book-entry securities. If any of the offers you

submitted are accepted and you are delivering book-entry securities,

you must transfer them in the correct par amount against the correct

settlement amount on the settlement date. You must deliver the

securities to the account specified in the redemption operation

announcement.

(b) Deliveries of definitive securities. If any of the offers you

submitted are accepted and you are delivering definitive securities,

you must notify the Federal Reserve Bank of New York within two hours

of the announcement of the redemption operation results. You must

deliver them in the correct par amount on the settlement date.

Registered securities must be properly assigned. Unless otherwise

specified in the offering announcement, bearer securities must have all

of their unmatured coupons attached. Deliver them to us at the address

for the Federal Reserve Bank of New York provided in the redemption

operation announcement. On the day the Bank receives them, it will

credit the settlement amount to the depository institution's funds

account you specified when you notified the Bank of your intention to

deliver definitive securities.

Subpart D--Miscellaneous Provisions

Sec. 375.30 Does the Treasury have any discretion in this process?

(a) We have the discretion to:

(1) Accept or reject any offers or tenders submitted in a

redemption operation;

(2) Redeem less than the amount of securities specified in the

redemption operation announcement;

(3) Add to, change, or waive any provision of this part; or

(4) Change the terms and conditions of a redemption operation.

(b) Our decisions under this part are final. We will provide a

public notice if we change any redemption operation provisions, terms

or conditions.

Sec. 375.31 What could happen if someone does not fully comply with

the redemption operation rules or fails to deliver securities?

(a) General. If a person or entity fails to comply with any of the

redemption operation rules in this part, we will consider the

circumstances and take appropriate action. This could include barring

the person or entity from participating in future redemption operations

under this part and future auctions under 31 CFR part 356. We also may

refer the matter to an appropriate regulatory agency.

(b) Liquidated damages. If you fail to deliver securities on time,

we may require you to pay liquidated damages of up to 1% of your

settlement amount.

Dated: July 29, 1999.

Donald V. Hammond,

Fiscal Assistant Secretary.

[FR Doc. 99-19957 Filed 8-4-99; 8:45 am]

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