[Federal Register: August 23, 1996 (Volume 61, Number 165)]
[Rules and Regulations]               
[Page 43625-43636]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23au96-21]

[[Page 43625]]

_______________________________________________________________________

Part III

Department of the Treasury

_______________________________________________________________________

Fiscal Service

_______________________________________________________________________

31 CFR Part 306, et al.

Regulations Governing Book-Entry Treasury Bonds, Notes and Bills; 
Conforming Book-Entry Changes; Final Rules

[[Page 43626]]

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 357

[Department of the Treasury Circular, Public Debt Series, No. 2-86]

 
Regulations Governing Book-Entry Treasury Bonds, Notes and Bills

AGENCY: Bureau of the Public Debt, Fiscal Service, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury is publishing a final rule 
that, on and after the effective date, will govern Treasury bonds, 
notes, and bills (Treasury securities) in book-entry form held in the 
commercial book-entry system. The rule incorporates recent and 
significant changes in commercial law addressing the holdings of 
securities in book-entry form through financial intermediaries. The 
rule replaces existing Treasury regulations that contain outdated legal 
concepts.

EFFECTIVE DATE: January 1, 1997. The incorporation by reference of 
certain publications listed in the regulations is approved by the 
Director of the Federal Register as of January 1, 1997.

FOR FURTHER INFORMATION CONTACT: Walter T. Eccard, Chief Counsel (202) 
219-3320, or Cynthia E. Reese, Deputy Chief Counsel, (202) 219-3320. 
Copies of the final rule are being made available for downloading from 
the Bureau of the Public Debt home page at the following address: 
http:\\www.ustreas.gov/treasury/bureaus/ pubdebt/pubdebt.html.

SUPPLEMENTARY INFORMATION:

I. Background

    On March 4, 1996, the Department published a proposed rule that 
would govern securities held in the commercial book-entry system, now 
referred to as the Treasury/Reserve Automated Debt Entry System 
(``TRADES''). 61 FR 8420. Eleven written comment letters were received 
in response to that proposed rule. All but one of the comment letters 
were very supportive of the proposed rule. Most commenters recommended 
adoption of the proposed rule with various suggested clarifications. 
The Department found the comments extremely useful in making the 
revisions described herein. Although some minor comments are not 
addressed, all comments have been considered in the formulation of this 
final rule.
    As indicated in the March 4 release, Treasury will include 
commentary on TRADES in the Code of Federal Regulations. This 
commentary can be found in Appendix B.
    Comments from several persons overlapped and those comments 
addressed three general areas:
    (1) The scope of federal preemption and related issues involving 
state variations on Revised Article 8 of the UCC as well as Treasury 
procedures and notice regarding acceptance of state enactments of 
Revised Article 8;
    (2) Coordination as to timeframes and notices to facilitate 
revision and issuance of parallel rules for book-entry securities of 
Government Sponsored Enterprises (GSEs) to conform to the final TRADES 
rule; and
    (3) The need for further explanation and clarification, especially 
the inclusion of hypotheticals, to illustrate how TRADES will apply to 
a variety of transaction scenarios of varying complexity, including the 
application of the federal law to transactions involving clearing 
banks.

II. General Comment Discussion

    In the March 4 proposal, Treasury set forth its conclusion that, 
because of the size and importance of the Treasury market, uniformity 
of treatment of holders of interests in Treasury securities was 
essential. In addition, Treasury set forth in some detail the reasons 
it had concluded that Revised Article 8 was an appropriate vehicle to 
use to obtain that uniformity. As of March 4, 13 states had adopted 
Revised Article 8. As of the date of this release 28 states <SUP>1 have 
adopted Revised Article 8 and it has been introduced in 4 additional 
states and the District of Columbia.<SUP>2 This remarkable progress 
reflects strong support for the legal concepts set forth in Revised 
Article 8 and supports Treasury's decision to base TRADES on Revised 
Article 8, which is incorporated by reference in this final rule.
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    \1\ Alabama, Alaska, Arizona, Arkansas, Colorado, Idaho, Iowa, 
Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, 
Massachusetts, Minnesota, Mississippi, Nebraska, New Mexico, 
Oklahoma, Oregon, Pennsylvania, Texas, Utah, Vermont, Virginia, 
Washington, West Virginia, Wyoming.
    \2\ California, District of Columbia, Hawaii, New York, Ohio.
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    In the March 4 release, Treasury proposed achieving uniformity for 
Treasury securities in two ways. First, Section 357.10(a) established a 
rule of Federal preemption in describing the rights and obligations of 
Treasury and the Federal Reserve Banks. Second, TRADES established a 
choice of law rule that mandated use of Revised Article 8 in the event 
the state determined by the application of the choice of law rule had 
not adopted Revised Article 8.
    Commenters generally supported Treasury's conclusion that 
uniformity was important for the market and investors in Treasury 
securities. In addition commenters were supportive of the use of 
Revised Article 8 to achieve this uniformity. Three different 
questions, however, were raised about the manner in which Treasury 
achieved uniformity and used Revised Article 8.

A. Federal Preemption

    First, 5 commenters questioned whether Secs. 357.10(c) and 
357.11(d) were intended to be a complete or limited preemption of a 
state's law if the state had not adopted Revised Article 8. As set 
forth in the March 4 release, the preemption in TRADES is limited. See 
the commentary in Appendix B. In order to clarify this issue, Treasury 
has adopted language in both Secs. 357.10(c) and 357.11(d) suggested by 
a commenter to make the limited nature of the preemption clearer. This 
language provides that, if a state has not adopted Revised Article 8, 
that state's laws shall be viewed as though that state had adopted 
Revised Article 8.
    Second, 4 commenters noted that while in the discussion section of 
the March 4 release Treasury stated that minor variations made by a 
state in adopting Revised Article 8 would not affect Treasury's 
conclusion that a state had adopted Revised Article 8, the language of 
the proposed rule had no similar qualification. Further, commenters 
noted that while the standard in the commentary seemed appropriate, 
determination of what constituted minor variations could be difficult. 
In response to these comments, and in an attempt to provide certainty, 
Treasury is taking the following actions. Treasury has reviewed the 
form of Revised Article 8 adopted by the 28 states <SUP>3 that have 
adopted Revised Article 8 as of the date of this release and has 
concluded that the changes made by these states indeed are minor. 
Therefore, Treasury has concluded that they all are substantially 
similar to Revised Article 8. Accordingly, if either Sec. 357.10(b) or 
357.11(a) directs a person to one of these 28 states, the provisions of 
Secs. 357.10(c) and 357.11(d) are not applicable. In addition, as 
additional states adopt Revised Article 8, Treasury will, after review 
of the statute, publish in the Federal Register a notice setting forth 
its conclusion as to whether Secs. 357.10(c) and 357.11(d) remain 
applicable to those states.
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    \3\ See Note 1 supra.

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[[Page 43627]]

    Third, a commenter raised a question of what Treasury would do in 
the event a state adopted Revised Article 8 and then subsequently 
amended Revised Article 8 in a fashion that resulted in an 
unsatisfactory lack of uniformity. Treasury believes such an event is 
unlikely. In addition, once Treasury has announced its determination 
that a state has adopted Revised Article 8, the market is entitled to 
rely on that decision.<SUP>4 Nonetheless, if such an unlikely event 
were to occur, Treasury has the authority to take the action that would 
result in Secs. 357.10(c) and 357.11(d) (or their equivalent) being 
reapplied. Any such action would be published in the Federal Register.
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    \4\ One commenter noted that Article 9 is currently being 
revised, which could lead to the result that a state could adopt 
different Article 9 provisions than are included in the Article 8 
conforming amendments. Treasury does not anticipate that such an 
event would result in the need to reapply Secs. 357.10(c) and 
357.11(d). If that were necessary, Treasury would take the same 
action, after notice, as described herein.
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B. Action With Respect to GSEs

    Several commenters noted that market participants and practitioners 
were concerned about coordination among Treasury and other GSEs that 
issue book-entry securities. The assumption is that the substance of 
any such regulations will be substantially identical to the Treasury 
proposed rule. Treasury is working with the GSEs and their regulators 
toward the goal of having the effective dates of all final book-entry 
regulations timed to coincide. One commenter specifically suggested 
delaying the effective date of the final TRADES rule to provide 
sufficient lead time to GSE issuers. Treasury understands the market's 
desire for simultaneous adoption of book-entry rules substantially 
similar to TRADES for GSEs. While adoption of rules for GSEs is subject 
to the control of the various GSEs and the entities that promulgate 
their rules, Treasury has taken several steps to facilitate the 
simultaneous adoption of parallel GSE rules. These steps have included 
meetings with representatives of the GSEs and their regulators to 
inform them of the actions Treasury was taking with respect to TRADES 
and the timetable for adoption of TRADES. Consistent with this 
supportive approach, Treasury has determined that it will, at the 
request of the Federal Farm Credit Banks Funding Corporation, delay the 
effectiveness of TRADES until January 1. That should permit sufficient 
time for rules similar to TRADES to be in place for GSEs by the 
effective date of TRADES.

C. Request for Hypotheticals

    Several commenters suggested that Treasury include in the 
Commentary to the final regulations various hypotheticals to illustrate 
the manner in which selected transactions would be treated under the 
TRADES regulations.
    Initially, Treasury notes that Revised Article 8 provides numerous 
hypotheticals that explain the operation of Revised Article 8. Treasury 
has studied those hypotheticals carefully and believes that they are 
very useful in understanding Revised Article 8. In light of those 
hypotheticals, and since TRADES is based, in large measure, on Revised 
Article 8, Treasury has concluded that developing hypotheticals 
explaining the operation of Revised Article 8 is unnecessary. On the 
other hand, TRADES does provide for an interaction of federal and state 
law. Since the results in a particular factual situation could depend 
on which law is applicable, Treasury has concluded that hypotheticals 
that illustrate what law would apply in different situations would be 
useful. Accordingly, the Commentary contains hypotheticals to explain 
the interaction of federal and state law.

III. Other Comments

    In addition to the general comments described above, Treasury 
received a number of other comments. Many of these included technical 
drafting suggestions.
    One commenter noted concerns with the tiered nature of the 
commercial book-entry system and indicated that investors may not be 
aware of how the commercial book-entry system works. Treasury agrees 
that it is important that investors understand the operation of both 
the book-entry system and TRADES. The discussion in the March 4 
Proposed Rule was designed to promote that understanding. In addition, 
the inclusion of a commentary on TRADES in the Code of Federal 
Regulations is another effort to promote an understanding of both 
TRADES and the book-entry system. Furthermore, Treasury plans to 
continue its investor education efforts in the coming months.
    One commenter questioned the use of the term ``Security 
Entitlement'' to describe the interest of a Participant in a Treasury 
book-entry security. The commenter noted that the term ``Security 
Entitlement'' is used in Revised Article 8 and its use in TRADES to 
describe the interest of a Participant could be confusing. Treasury 
considered using different terms to describe this interest but 
concluded that Security Entitlement was the most useful. In order to 
avoid confusion, there was language in the commentary in the March 4 
release that attempted to make it clear that the term ``Security 
Entitlement'' has a special meaning in TRADES. Additional language has 
been added to the commentary to clarify this further. Due to Treasury's 
obligation to pay a Participant (see Sec. 357.13(b)), the interest of a 
Participant and a person holding in TREASURY DIRECT are, in practical 
terms, the same since both the Participant and the person holding in 
TREASURY DIRECT have a direct claim against the United States.
    One commenter proposed adding a new defined term, ``State,'' and 
made certain other drafting changes to the definitions. Those 
suggestions mainly clarify the meaning intended by Treasury in the 
March release and were adopted. In adopting these drafting suggestions, 
Treasury concluded that a new defined term, ``Adverse Claim'' was 
needed. This definition is based on the definition of that term in 
Revised Article 8. By adding this term, Treasury is able to adopt the 
suggestions that it delete the general incorporation reference in the 
definition section that appeared in the March release. Section 357.2 is 
complete and reference to other definitions is unnecessary.
    One commenter found the language of Sec. 357.10(b) unclear and 
proposed drafting suggestions to clarify its meaning. Section 357.10(b) 
decribes the law that governs security interests granted to Federal 
Reserve Banks. The Commentary, and hypotheticals included in the 
commentary, explain how Sec. 357.10(b) works. In addition Treasury has 
redrafted Sec. 357.10(b) in order to make its meaning clearer.
    Several comments stated that Sec. 357.11(c) should be modified to 
conform to the choice of law rule in Section 9-103(6)(f) of Revised 
Article 8. Treasury agrees with this comment and has made changes to 
Sec. 357.11(c). In particular, Treasury agrees that it is appropriate 
to delete reference to priority so that, as provided in 
Sec. 357.11(a)(5), the law of the Securities Intermediary's 
jurisdiction governs on this issue.

Procedural Requirements

    This final rule does not meet the criteria for a ``significant 
regulatory action'' pursuant to Executive Order 12866.
    The notice and public comment procedures requirements of the 
Administrative Procedure Act are inapplicable, pursuant to 5 U.S.C. 
553(a)(2).
    As no notice of proposed rulemaking was required, the provisions of 
the

[[Page 43628]]

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 357

    Bonds, Electronic funds transfer, Federal Reserve System, 
Government securities, Incorporation by reference, Securities.

    For the reasons set forth in the preamble, title 31, chapter II, 
subchapter B, part 357 is amended as follows:

PART 357--[AMENDED]

    1. The authority citation for part 357 continues to read as 
follows:

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

    2. Sections 357.0 and 357.1 are added to read as follows:

Sec. 357.0  Dual book-entry systems.

    (a) Treasury securities shall be maintained in either of the 
following two book-entry systems:
    (1) Treasury/Reserve Automated Debt Entry System (TRADES). A 
Treasury security is maintained in TRADES if it is credited by a 
Federal Reserve Bank to a Participant's Securities Account. See subpart 
B of this part for rules pertaining to TRADES.
    (2) TREASURY DIRECT Book-entry Securities System (TREASURY DIRECT). 
A Treasury security is maintained in TREASURY DIRECT if it is credited 
to a TREASURY DIRECT account as described in Sec. 357.20. Such accounts 
may be accessed by investors in accordance with subpart C of this part 
through any Federal Reserve Bank or the Bureau of the Public Debt. See 
subpart C of this part for rules pertaining to TREASURY DIRECT.
    (b) A Treasury security eligible to be maintained in TREASURY 
DIRECT under the terms of its offering circular or pursuant to notice 
published by the Secretary may be transferred to or from an account in 
TRADES from or to an account in TREASURY DIRECT in accordance with 
Sec. 357.22(a).

Sec. 357.1  Effective date.

    Subpart B of this Part, the definitions of ``Adverse Claim,'' 
``Book-entry Security,'' ``Entitlement Holder,'' ``Federal Reserve Bank 
Operating Circular,'' ``Funds Account,'' ``Issue,'' ``Participant,'' 
``Participant's Securities Account,'' ``Person,'' ``Revised Article 
8,'' ``Securities Intermediary,'' ``Security Entitlement,'' ``State,'' 
and ``Transfer Message'' and revisions to the definitions of 
``Security'' and ``TRADES,'' and Secs. 357.42 and 357.44 and the 
revisions to Sec. 357.41 are effective January 1, 1997. All other 
provisions in effect prior to January 1, 1997, remain in effect.
    3. Section 357.3 is redesignated Sec. 357.2, in the definition of 
``depository institution'' paragraphs (a) through (f) are redesignated 
as paragraphs (1) through (6), the definition of ``security interest 
and pledge'' is removed, the definitions of ``Security'' and ``TRADES'' 
are revised, and the remaining definitions are added in alphabetical 
order as follows:

Sec. 357.2  Definitions.

* * * * *
    Adverse Claim means a claim that a claimant has a property interest 
in a Security and that it is a violation of the rights of the claimant 
for another Person to hold, transfer, or deal with the Security.
* * * * *
    Book-entry Security means, in subpart B of this part, a Treasury 
Security maintained in TRADES and, in subpart C of this part, a 
Treasury Security maintained in TREASURY DIRECT.
* * * * *
    Entitlement Holder means a Person to whose account an interest in a 
Book-entry Security is credited on the records of a Securities 
Intermediary.
* * * * *
    Federal Reserve Bank Operating Circular means the publication 
issued by each Federal Reserve Bank that sets forth the terms and 
conditions under which the Reserve Bank maintains Book-entry Securities 
accounts and transfers Book-entry Securities.
* * * * *
    Funds Account means a reserve and/or clearing account at a Federal 
Reserve Bank to which debits or credits are posted for transfers 
against payment, book-entry securities transaction fees, or principal 
and interest payments.
* * * * *
    Issue means a group of securities, as defined in this section, that 
is identified by the same CUSIP (Committee on Uniform Securities 
Identification Practices) number.
* * * * *
    Participant means a Person that maintains a Participant's 
Securities Account with a Federal Reserve Bank.
    Participant's Securities Account means an account in the name of a 
Participant at a Federal Reserve Bank to which Book-entry Securities 
held for a Participant are or may be credited.
    Person means and includes an individual, corporation, company, 
governmental entity, association, firm, partnership, trust, estate, 
representative and any other similar organization, but does not mean or 
include the United States or a Federal Reserve Bank.
* * * * *
    Revised Article 8 means Uniform Commercial Code, Revised Article 8, 
Investment Securities (with Conforming and Miscellaneous Amendments to 
Articles 1, 3, 4, 5, 9, and 10) 1994 Official Text. Revised Article 8 
of the Uniform Commercial Code is incorporated by reference in this 
Part pursuant to 5 U.S.C. 552(a) and 1 CFR part 51. Article 8 was 
adopted by the American Law Institute and the National Conference of 
Commissioners On Uniform State Laws and approved by the American Bar 
Association on February 14, 1995. Copies of this publication are 
available from the Executive Office of the American Law Institute, 4025 
Chestnut Street, Philadelphia, PA 19104, and the National Conference of 
Commissioners on Uniform State Laws, 676 North St. Clair Street, Suite 
1700, Chicago, IL 60611. Copies are also available for public 
inspection at the Department of the Treasury Library, Room 5030, Main 
Treasury Building, 1500 Pennsylvania Avenue, NW., Washington DC 20220, 
and at the Office of the Federal Register, 800 North Capitol Street, 
NW., Suite 700, Washington DC.
    Securities Intermediary means:
    (1) A Person that is registered as a ``clearing agency'' under the 
federal securities laws; a Federal Reserve Bank; any other person that 
provides clearance or settlement services with respect to a Book-entry 
Security that would require it to register as a clearing agency under 
the federal securities laws but for an exclusion or exemption from the 
registration requirement, if its activities as a clearing corporation, 
including promulgation of rules, are subject to regulation by a federal 
or state governmental authority; or
    (2) A Person (other than an individual, unless such individual is 
registered as a broker or dealer under the federal securities laws) 
including a bank or broker, that in the ordinary course of its business 
maintains securities accounts for others and is acting in that 
capacity.
    Security means a bill, note, or bond, each as defined in this 
section. It also means any other obligation issued by the Department 
that, by the terms of the applicable offering circular or announcement, 
is made subject to this part. Solely for purposes of this part, it also 
means:
    (1) The interest and principal components of a security eligible 
for

[[Page 43629]]

Separate Trading of Registered Interest and Principal of Securities 
(``STRIPS''), if such security has been divided into such components as 
authorized by the express terms of the offering circular under which 
the security was issued and the components are maintained separately on 
the books of one or more Federal Reserve Banks; and
    (2) The interest coupons that have been converted to book-entry 
form under the Treasury's Coupons Under Book-Entry Safekeeping Program 
(``CUBES''), pursuant to agreement and the regulations in 31 CFR part 
358.
    Security Entitlement means the rights and property interest of an 
Entitlement Holder with respect to a Book-entry Security.
* * * * *
    State means any State of the United States, the District of 
Columbia, Puerto Rico, the Virgin Islands, or any other territory or 
possession of the United States.
* * * * *
    TRADES is the Treasury/Reserve Automated Debt Entry System, also 
referred to as the commercial book-entry system.
* * * * *
    Transfer Message means an instruction of a Participant to a Federal 
Reserve Bank to effect a transfer of a Book-entry Security maintained 
in TRADES, as set forth in Federal Reserve Bank Operating Circulars.
* * * * *
    4. Subpart B, consisting of Secs. 357.10 through 357.14, is added 
to read as follows:

Subpart B--Treasury/Reserve Automated Debt Entry System (TRADES)

Sec. 357.10  Law governing rights and obligations of United States 
and Federal Reserve Banks; rights of any Person against United 
States and Federal Reserve Banks.
Sec. 357.11  Law governing other interests.
Sec. 357.12  Creation of ``Participant's Security Entitlement; 
security interests.
Sec. 357.13  Obligations of United States; no Adverse Claims.
Sec. 357.14  Authority of Federal Reserve Banks.

Subpart B--Treasury/Reserve Automated Debt Entry System (TRADES)

Sec. 357.10  Law governing rights and obligations of United States and 
Federal Reserve Banks; rights of any Person against United States and 
Federal Reserve Banks.

    (a) Except as provided in paragraph (b) of this section, the rights 
and obligations of the United States and the Federal Reserve Banks with 
respect to: A Book-entry Security or Security Entitlement and the 
operation of the Treasury book-entry system; and the rights of any 
Person, including a Participant, against the United States and the 
Federal Reserve Banks with respect to: A Book-entry Security or 
Security Entitlement and the operation of the Treasury book-entry 
system; are governed solely by Treasury regulations, including the 
regulations of this Part, the applicable offering circular (which is 31 
CFR part 356, in the case of securities issued on and after March 1, 
1993), the announcement of the offering, and Federal Reserve Bank 
Operating Circulars.
    (b) A security interest in a Security Entitlement that is in favor 
of Federal Reserve Bank from a Participant and that is not recorded on 
the books of a Federal Reserve Bank pursuant to Sec. 357.12(c)(1), is 
governed by the law (not including the conflict-of-law rules) of the 
jurisdiction where the head office of the Federal Reserve Bank 
maintaining the Participant's Securities Account is located. A security 
interest in a Security Entitlement that is in favor of a Federal 
Reserve Bank from a Person that is not a Participant, and that is not 
recorded on the books of a Federal Reserve Bank pursuant to 
Sec. 357.12(c)(1), is governed by the law determined in the manner 
specified in Sec. 357.11.
    (c) If the jurisdiction specified in the first sentence of 
paragraph (b) of this section is a State that has not adopted Revised 
Article 8 (incorporated by reference, see Sec. 357.2) then the law 
specified in paragraph (b) of this section shall be the law of that 
State as though Revised Article 8 had been adopted by that State.

Sec. 357.11  Law governing other interests.

    (a) To the extent not inconsistent with these regulations, the law 
(not including the conflict-of-law rules) of a Securities 
Intermediary's jurisdiction governs:
    (1) The acquisition of a Security Entitlement from the Securities 
Intermediary;
    (2) The rights and duties of the Securities Intermediary and 
Entitlement Holder arising out of a Security Entitlement;
    (3) Whether the Securities Intermediary owes any duties to an 
adverse claimant to a Security Entitlement;
    (4) Whether an Adverse Claim can be asserted against a Person who 
acquires a Security Entitlement from the Securities Intermediary or a 
Person who purchases a Security Entitlement or interest therein from an 
Entitlement Holder; and
    (5) Except as otherwise provided in paragraph (c) of this section, 
the perfection, effect of perfection or non-perfection and priority of 
a security interest in a Security Entitlement.
    (b) The following rules determine a ``Securities Intermediary's 
jurisdiction'' for purposes of this section:
    (1) If an agreement between the Securities Intermediary and its 
Entitlement Holder specifies that it is governed by the law of a 
particular jurisdiction, that jurisdiction is the Securities 
Intermediary's jurisdiction.
    (2) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify the governing law as provided in 
paragraph (b)(1) of this section, but expressly specifies that the 
securities account is maintained at an office in a particular 
jurisdiction, that jurisdiction is the Securities Intermediary's 
jurisdiction.
    (3) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) of this section, the Securities 
Intermediary's jurisdiction is the jurisdiction in which is located the 
office identified in an account statement as the office serving the 
Entitlement Holder's account.
    (4) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) of this section and an account statement 
does not identify an office serving the Entitlement Holder's account as 
provided in paragraph (b)(3) of this section, the Securities 
Intermediary's jurisdiction is the jurisdiction in which is located the 
chief executive office of the Securities Intermediary.
    (c) Notwithstanding the general rule in paragraph (a)(5) of this 
section, the law (but not the conflict-of-law rules) of the 
jurisdiction in which the Person creating a security interest is 
located governs whether and how the security interest may be perfected 
automatically or by filing a financing statement.
    (d) If the jurisdiction specified in paragraph (b) of this section 
is a State that has not adopted Revised Article 8 (incorporated by 
reference, see Sec. 357.2), then the law for the matters specified in 
paragraph (a) of this section shall be the law of that State as though 
Revised Article 8 had been adopted by that State. For purposes of the 
application of the matters specified in paragraph (a) of this section, 
the Federal Reserve Bank maintaining the Securities Account is a 
clearing corporation, and the

[[Page 43630]]

Participant's interest in a Book-entry Security is a Security 
Entitlement.

Sec. 357.12  Creation of Participant's Security Entitlement; security 
interests.

    (a) A Participant's Security Entitlement is created when a Federal 
Reserve Bank indicates by book entry that a Book-entry Security has 
been credited to a Participant's Securities Account.
    (b) A security interest in a Security Entitlement of a Participant 
in favor of the United States to secure deposits of public money, 
including without limitation deposits to the Treasury tax and loan 
accounts, or other security interest in favor of the United States that 
is required by Federal statute, regulation, or agreement, and that is 
marked on the books of a Federal Reserve Bank is thereby effected and 
perfected, and has priority over any other interest in the securities. 
Where a security interest in favor of the United States in a Security 
Entitlement of a Participant is marked on the books of a Federal 
Reserve Bank, such Reserve Bank may rely, and is protected in relying, 
exclusively on the order of an authorized representative of the United 
States directing the transfer of the security. For purposes of this 
paragraph, an ``authorized representative of the United States'' is the 
official designated in the applicable regulations or agreement to which 
a Federal Reserve Bank is a party, governing the security interest.
    (c) (1) The United States and the Federal Reserve Banks have no 
obligation to agree to act on behalf of any Person or to recognize the 
interest of any transferee of a security interest or other limited 
interest in favor of any Person except to the extent of any specific 
requirement of Federal law or regulation or to the extent set forth in 
any specific agreement with the Federal Reserve Bank on whose books the 
interest of the Participant is recorded. To the extent required by such 
law or regulation or set forth in an agreement with a Federal Reserve 
Bank, or the Federal Reserve Bank Operating Circular, a security 
interest in a Security Entitlement that is in favor of a Federal 
Reserve Bank or a Person may be created and perfected by a Federal 
Reserve Bank marking its books to record the security interest. Except 
as provided in paragraph (b) of this section, a security interest in a 
Security Entitlement marked on the books of a Federal Reserve Bank 
shall have priority over any other interest in the securities.
    (2) In addition to the method provided in paragraph (c)(1) of this 
section, a security interest, including a security interest in favor of 
a Federal Reserve Bank, may be perfected by any method by which a 
security interest may be perfected under applicable law as described in 
Sec. 357.10(b) or Sec. 357.11. The perfection, effect of perfection or 
non-perfection and priority of a security interest are governed by that 
applicable law. A security interest in favor of a Federal Reserve Bank 
shall be treated as a security interest in favor of a clearing 
corporation in all respects under that law, including with respect to 
the effect of perfection and priority of the security interest. A 
Federal Reserve Bank Operating Circular shall be treated as a rule 
adopted by a clearing corporation for such purposes.

Sec. 357.13  Obligations of the United States; no Adverse Claims.

    (a) Except in the case of a security interest in favor of the 
United States or a Federal Reserve Bank or otherwise as provided in 
Sec. 357.12(c)(1), for the purposes of this subpart B, the United 
States and the Federal Reserve Banks shall treat the Participant to 
whose Securities Account an interest in a Book-entry Security has been 
credited as the person exclusively entitled to issue a Transfer 
Message, to receive interest and other payments with respect thereof 
and otherwise to exercise all the rights and powers with respect to the 
Security, notwithstanding any information or notice to the contrary. 
Neither the Federal Reserve Banks nor Treasury is liable to a Person 
asserting or having an Adverse Claim to a Security Entitlement or to a 
Book-entry Security in a Participant's Securities Account, including 
any such claim arising as a result of the transfer or disposition of a 
Book-entry Security by a Federal Reserve Bank pursuant to a Transfer 
Message that the Federal Reserve Bank reasonably believes to be 
genuine.
    (b) The obligation of the United States to make payments of 
interest and principal with respect to Book-entry Securities is 
discharged at the time payment in the appropriate amount is made as 
follows:
    (1) Interest on Book-entry Securities is either credited by a 
Federal Reserve Bank to a Funds Account maintained at the Bank or 
otherwise paid as directed by the Participant.
    (2) Book-entry Securities are redeemed in accordance with their 
terms by a Federal Reserve Bank withdrawing the securities from the 
Participant's Securities Account in which they are maintained and by 
either crediting the amount of the redemption proceeds, including both 
principal and interest, where applicable, to a Funds Account at the 
Bank or otherwise paying such principal and interest as directed by the 
Participant. No action by the Participant is required in connection 
with the redemption of a Book-entry Security.

Sec. 357.14  Authority of Federal Reserve Banks.

    (a) Each Federal Reserve Bank is hereby authorized as fiscal agent 
of the United States to perform functions with respect to the issuance 
of Book-entry Securities offered and sold by the Department to which 
this Subpart applies, in accordance with the terms of the applicable 
offering circular and with procedures established by the Department; to 
service and maintain Book-entry Securities in accounts established for 
such purposes; to make payments of principal and interest, as directed 
by the Department; to effect transfer of Book-entry Securities between 
Participants' Securities Accounts as directed by the Participants; and 
to perform such other duties as fiscal agent as may be requested by the 
Department.
    (b) Each Federal Reserve Bank may issue Operating Circulars not 
inconsistent with this Part, governing the details of its handling of 
Book-entry Securities, Security Entitlements, and the operation of the 
book-entry system under this Part.
    5. In subpart D, Sec. 357.41 is revised and the text of 
Secs. 357.42 and 357.44 are added, to read as follows:

Subpart D--Additional Provisions

Sec. 357.41  Waiver of regulations.

    The Secretary reserves the right, in the Secretary's discretion, to 
waive any provision(s) of these regulations in any 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 adversely affect any substantial 
existing rights, and the Secretary is satisfied that such action will 
not subject the United States to any substantial expense or liability.

Sec. 357.42  Liability of Department and Federal Reserve Banks.

    The Department and the Federal Reserve Banks may rely on the 
information provided in a tender, transaction request form, or Transfer 
Message, and are not required to verify the information. The Department 
and the Federal Reserve Banks shall not be liable for any action taken 
in accordance with the information set out in a tender, transaction 
request form, or Transfer

[[Page 43631]]

Message, or evidence submitted in support thereof.

Sec. 357.44  Notice of attachment for securities in TRADES.

    The interest of a debtor in a Security Entitlement may be reached 
by a creditor only by legal process upon the Securities Intermediary 
with whom the debtor's securities account is maintained, except where a 
Security Entitlement is maintained in the name of a secured party, in 
which case the debtor's interest may be reached by legal process upon 
the secured party. These regulations do not purport to establish 
whether a Federal Reserve Bank is required to honor an order or other 
notice of attachment in any particular case or class of cases.
    6. Appendix B to part 357 is added to read as follows:

Appendix B to Part 357--TRADES Commentary

Introduction

    The adoption of regulations for the Treasury/Reserve Automated 
Debt Entry System (``TRADES'') is the culmination of a multi-year 
Treasury process of moving from issuing securities only in 
definitive (physical/certificated/paper) form to issuing securities 
exclusively in book-entry form. The TRADES regulations provide the 
legal framework for all commercially-maintained Treasury book-entry 
securities. For a more detailed explanation of the procedural and 
legal development of book-entry and the TRADES regulations, see the 
preamble to the rule proposed March 4, 1996 (61 FR 8420), as well as 
the earlier proposals cited therein 51 FR 8846 (March 14, 1986); 51 
FR 43027 (November 28, 1986); 57 FR 12244 (April 9, 1992).

Comparison of TRADES and Treasury Direct

    A person may hold interests in Treasury book-entry securities 
either in TRADES <SUP>1 or TREASURY DIRECT. The following summarizes 
the major differences between the two systems.
---------------------------------------------------------------------------

    \1\ In TRADES a Person's interest in a Treasury book-entry 
security is a Security Entitlement, as described in TRADES. A 
Participant's interest in a marketable Treasury book-entry security 
also is a Security Entitlement. A Participant's Security Entitlement 
is different than a Security Entitlement as described in Revised 
Article 8, with respect to the Participant's rights against the 
issuer. A non-Participant's Security Entitlement is described in 
Revised Article 8.
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    Persons holding Treasury book-entry securities in TRADES hold 
their interests in such securities in a tiered system of ownership 
accounts. In TRADES, Treasury, through its fiscal agents, the 
Federal Reserve Banks, recognizes the identity only of Participants 
(persons with a direct account relationship with a Federal Reserve 
Bank). While Participants may be beneficial owners of interests in 
Treasury book-entry securities, there are many beneficial owners of 
such interests that are not Participants. Such beneficial owners 
hold their interests through one or more Securities Intermediaries 
such as banks, brokerage firms or securities clearing organizations.
    In TRADES, the rights of non-Participant beneficial owners may 
be exercised only through their Securities Intermediaries. Neither 
Treasury nor the Federal Reserve Banks have any obligation to a non-
Participant beneficial owner of an interest in a Treasury book-entry 
security. Two examples illustrate this principle. First, except 
where a pledge has been recorded directly on the books of a Federal 
Reserve Bank pursuant to Sec. 357.12(c)(1), Federal Reserve Banks, 
as Treasury's fiscal agents, will act only on instructions of the 
Participant in whose Securities Account the Treasury book-entry 
security is maintained in recording transfers of an interest in a 
Treasury book-entry security. A beneficial owner of the interest 
that is a non-Participant has no ability to direct a transfer on the 
books of a Federal Reserve Bank. Second, Treasury discharges its 
payment obligation with respect to a Treasury book-entry security 
when payment is credited to a Participant's account or paid in 
accordance with the Participant's instructions. Neither Treasury nor 
a Federal Reserve Bank has any payment obligation to a non-
Participant beneficial owner of an interest in a Treasury book-entry 
security. A non-Participant beneficial owner receives its payment 
when its Securities Intermediary credits the owner's account.
    Persons holding Treasury book-entry securities in TREASURY 
DIRECT, on the other hand, hold their securities accounts on records 
maintained by Treasury through its fiscal agents, the Federal 
Reserve Banks. The primary characteristic of TREASURY DIRECT is a 
direct account relationship between the beneficial owner of a 
Treasury book-entry security and Treasury. In TREASURY DIRECT, 
Treasury discharges its payment obligation when payment is credited 
to the depository institution specified by the beneficial owner of 
the Treasury book-entry security, paid directly to the beneficial 
owner by check, or paid in accordance with the beneficial owner's 
instructions. Unlike TRADES, TREASURY DIRECT does not provide a 
mechanism for the exchange of cash to settle a secondary market 
transaction, nor are pledges of Treasury book-entry securities held 
in TREASURY DIRECT generally recognized. Accordingly, TREASURY 
DIRECT is suited for persons who plan to hold their Treasury 
securities until maturity, and provides an alternative for investors 
who are concerned about holding securities through intermediaries 
and who do not wish to hold their interests in Treasury securities 
indirectly in TRADES.

Scope of Regulation

    Just as the scope of Revised Article 8 is limited,<SUP>2 the 
scope of this regulation is limited. It is not a comprehensive 
codification of the law governing securities, transactions in 
securities or the law of contracts for the purchase or sale of 
securities. Similarly, it is not a codification of all laws that 
could affect a person's interest in a Treasury book-entry security. 
For example, state laws regarding divorce or intestate succession 
could well affect which persons have rights in the interest in a 
Treasury book-entry security. Moreover, the regulations deal with 
certain aspects of transactions in Treasury securities, such as 
perfection of a security interest and its effects and not other 
aspects, such as the contractual relationship between a debtor and 
its secured party, which are left to applicable law <SUP>3 See the 
discussion under Sec. 357.10 of the Section-by-Section Analysis.
---------------------------------------------------------------------------

    \2\ U.C.C. Revised Article 8, Prefatory Note at 12.
    \3\ The regulations in 31 CFR 306.118(b), which are being 
supplanted by TRADES, state that ``applicable law'' covers how a 
transfer or pledge is ``effected'' as well as perfected. Except with 
respect to security interests marked on the books of a Federal 
Reserve Bank, TRADES does not address how a security interest in a 
Treasury book-entry security is created or what law governs the 
creation of a security interest. Section 357.11(a) of TRADES, which 
establishes the choice of law for interests other than those covered 
by Sec. 357.10, addresses the choice of law with respect to the 
perfection, effect of perfection or non-perfection, and priority of 
security interests, but does not address the law governing creation 
or attachment of a security interest. This is consistent with the 
scope and choice of law provisions of Revised Article 8.
---------------------------------------------------------------------------

Section-by-Section Analysis

Section 357.0  Dual Book-entry Systems

    Section 357.0 sets forth that Treasury provides two systems for 
maintaining Treasury book-entry securities--TRADES and TREASURY DIRECT. 
Subpart A of part 357 of 31 CFR contains general information about 
TRADES and TREASURY DIRECT. Subpart B contains the TRADES regulations. 
Subpart C contains the TREASURY DIRECT regulations. Subpart D contains 
miscellaneous provisions. Thus, in its totality, Part 357 sets forth in 
one place the complete set of governing rules for Treasury securities 
issued in book-entry form.

Section 357.1  Effective Date

    Section 357.1 establishes the effective date for TRADES. TRADES 
applies to outstanding securities formerly governed by 31 CFR part 
306, subpart O. Conforming changes to parts 306, 356, and 358 are 
being made to coincide with the publication of TRADES in final form. 
Consistent with the approach set forth in Revised Article 8 (see 
Sec. 8-603 and the official comment thereto), on and after the 
effective date these regulations will apply to all transactions, 
including transactions commenced prior to the effective date. 
Revised Article 8, in Section 8-603, gave secured parties four 
months after the effective date to take action to continue the 
perfection of their security interests. TRADES, through its delayed 
effectiveness, provides a similar period. In TRADES, January 1, 
1997, becomes the date by which such actions must be completed.
    The effective date for TRADES is January 1, 1997. While TRADES 
is based in large part on Revised Article 8 that has received 
widespread attention in the financial community and already has been 
adopted in

[[Page 43632]]

28 states,\4\ Treasury has determined that TRADES will be effective 
on January 1, 1997, to ensure a smooth transition to TRADES. In 
making that determination, Treasury has taken into account the time 
required by other Government-Sponsored Enterprises (GSEs) to 
promulgate similar regulations for their securities. Such an 
effective date, when combined with TRADES having been published in 
proposed form with a 60-day comment period, should provide 
sufficient time for an orderly transition to the new TRADES rules.
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    \4\ As of August 1, 1996, those states are: Alabama, Alaska, 
Arizona, Arkansas, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, 
Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, 
Mississippi, Nebraska, New Mexico, Oklahoma, Oregon, Pennsylvania, 
Texas, Utah, Vermont, Virginia, Washington, West Virginia and 
Wyoming. See discussion accompanying footnote 11.
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Section 357.2  Definitions

    Section 357.2 contains definitions for use in subparts B and C. 
While most of the definitions are straightforward, four terms--
Participant, Entitlement Holder, Security Entitlement and Securities 
Intermediary--are critical to an understanding of the proposed 
TRADES regulations.
    (a) Participant
    A Participant is a person that has a securities account 
relationship in its name with a Federal Reserve Bank. Accordingly, 
the Federal Reserve Bank and Treasury know both the identity of the 
persons maintaining these accounts and the Treasury book-entry 
securities held in these accounts.
    (b) Securities Intermediary
    Securities Intermediaries are persons (other than individuals, 
except as described below) that are in the business of holding 
interests in Treasury book-entry securities for others. Participants 
can be, and usually are, Securities Intermediaries.
    In addition, entities such as clearing corporations, banks, 
brokers and dealers can be Securities Intermediaries in a single 
chain of ownership of a Treasury security. An individual, unless 
registered as a broker or dealer under the federal securities laws, 
cannot be a Securities Intermediary. As an illustration of a 
possible chain of ownership, in the following chart, the Federal 
Reserve Bank, Participant and Broker-Dealer are all Securities 
Intermediaries.

                                Treasury                                
                                                                        
                          Federal Reserve Bank                          
                                    |                                   
                               Participant                              
                                    |                                   
                              Broker-Dealer                             
                                    |                                   
                            Individual Holder                           
                                                                        

    (c) Entitlement Holder
    An Entitlement Holder is any person for whom a Securities 
Intermediary holds an interest in a Treasury book-entry security. In 
the above example Individual Holder, Broker-Dealer and Participant 
are all Entitlement Holders. Thus, a person can be both a Securities 
Intermediary and an Entitlement Holder. See also the commentary on 
``Security Entitlement.''
    (d) Security Entitlement
    A Security Entitlement is the interest that an Entitlement 
Holder has in a Treasury book-entry security. In the example, 
Participant, Broker-Dealer and Individual Holder all hold Security 
Entitlements. The rights and property interests associated with a 
Security Entitlement of a Participant held on the books of a Federal 
Reserve Bank (``Participant's Security Entitlement'') are, however, 
different from the rights and property interests associated with 
other Security Entitlements. As provided in Sec. 357.10(a), Federal 
law defines the scope and nature of a Participant's Security 
Entitlement. While TRADES is based in large part on Revised Article 
8, the meaning of Security Entitlement under federal law is 
different than under Revised Article 8. For example, Participants 
have a direct claim against the United States for interest and 
principal even though, under state law, an Entitlement Holder would 
only have a claim against its Securities Intermediary for such 
payment. To the extent not inconsistent with this regulation, the 
scope and nature of a Security Entitlement of an Entitlement Holder 
below the level of a Participant, (Broker-dealer and Individual 
Holder in the example above), is defined by applicable state law, as 
determined pursuant to Sec. 357.11. It should also be noted that 
while a Participant's rights have Federal law components under 
Sec. 357.10(a), the nature of a Security Entitlement held by a lower 
tier intermediary on the books of a Participant is determined 
pursuant to applicable law as provided in Sec. 357.11.

Section 357.10  Law Governing the United States and Reserve Banks

    Section 357.10(a) provides that the rights and obligations of 
the United States and the Federal Reserve Banks (with one exception 
detailed below), with respect to both the TRADES system and Treasury 
book-entry securities maintained in TRADES are governed solely and 
exclusively by Federal law. Thus, claims against the United States 
and Federal Reserve Banks of both Participants and all other persons 
with an interest (or claiming an interest) in a Treasury book-entry 
security maintained in TRADES are governed by Federal law. Federal 
law is defined to include TRADES, the offering circulars pursuant to 
which the Treasury securities are sold, the offering announcements 
and Federal Reserve Bank Operating Circulars.<SUP>5 Prior to March 
1, 1993, the terms of each offering of Treasury securities, except 
for Treasury bills were set forth in an offering circular published 
in the Federal Register.<SUP>6 Since March 1, 1993, all Treasury 
book-entry securities have been offered pursuant to a uniform 
offering circular set forth at 31 CFR part 356.
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    \5\ A ``Federal Reserve Bank Operating Circular'' is defined in 
Sec. 357.2 as the publication issued by each Federal Reserve Bank 
that sets forth the terms and conditions under which the Reserve 
Bank maintains Book-entry Securities Accounts and transfers Book-
entry Securities.
    \6\ Treasury bills were issued pursuant to one master offering 
circular (31 CFR part 349, removed, and replaced by 31 CFR part 356) 
effective March 1, 1993. (58 FR 412)
---------------------------------------------------------------------------

    While TRADES is based in large measure on Revised Article 8, a 
fundamental principle of these regulations (and a divergence from 
Revised Article 8) is that the obligations of the issuer (the United 
States) and the Federal Reserve Banks, as well as all claims with 
respect to TRADES or a Treasury book-entry security against Treasury 
or a Federal Reserve Bank, are governed solely by Federal law. Thus, 
for example, those parts of Revised Article 8 that detail 
obligations of issuers (or their agents) of securities are not 
applicable to either the United States or Federal Reserve 
Banks.<SUP>7 In addition, neither the United States nor Federal 
Reserve Banks have any obligations to persons holding their 
interests in a Treasury book-entry security at levels below the 
level of a Participant or to any other person claiming an interest 
in a Treasury book-entry security (with the limited exception set 
out in Sec. 357.12(c)(1)). Thus, there are no derivative rights 
against either the United States or the Federal Reserve Banks.
---------------------------------------------------------------------------

    \7\ The regulations in subpart C of this part set out other 
obligations of the United States and the Federal Reserve Banks for 
securities held in TREASURY DIRECT. These regulations preempt 
applicable state law.
---------------------------------------------------------------------------

    In interpreting this section, it is important to note that the 
scope of TRADES, like that of Revised Article 8, is limited. 
Accordingly, the governing law set forth in Sec. 357.10(a) is 
applicable only to the matters set forth in Sec. 357.10(a). Other 
laws remain applicable and could affect the holders of book-entry 
securities.
    For example, the tax treatment of Securities Entitlements is 
outside the scope of TRADES and other law (the Federal income tax 
code) is applicable in determining such tax treatment. Similarly, 
nothing in Sec. 357.10(a) limits the applicability of other laws to 
matters such as whether the activities of Participants or Securities 
Intermediaries with respect to interests in Treasury book-entry 
securities are subject to banking or securities laws.
    While TRADES in Sec. 357.10(a) defines what law governs the 
contract between the United States, as issuer, and the holder of a 
Security Entitlement, it is not a complete statement of the contract 
law applicable to the United States or Federal Reserve Banks. For 
example, if a Participant obtains a discount window loan from a 
Federal Reserve Bank and agrees to pledge collateral, including 
Treasury book-entry securities, to the Federal Reserve Bank as 
security for the loan, Sec. 357.10(a) does not establish the law for 
determining the validity or enforceability of the contract or the 
law applicable to the creation and perfection of security interests 
in property that is not a Treasury book-entry security. Section 
357.10(a) does provide the law applicable for how a security 
interest in Treasury book-entry securities is perfected, the 
priority of such interest and, if Sec. 357.12(c)(1) is applicable, 
how such security interest is created. Similarly, nothing in 
Sec. 357.10(a) affects the continuing applicability or 
enforceability of Federal Reserve Bank operating circulars such as 
the circular setting forth provisions regarding

[[Page 43633]]

electronic access to services provided by Federal Reserve Banks and 
agreements executed in connection with such circulars.
    The law applicable with respect to interests granted to a 
Federal Reserve Bank depends on the manner in which the security 
interest is granted.
    Where a security interest in favor of a Federal Reserve Bank is 
marked on the books of the Federal Reserve Bank under Section 
357.12(c)(1), Sec. 357.10(a) establishes the applicable law. A 
security interest in favor of a Federal Reserve Bank would be 
recorded on the Federal Reserve Bank's books where, for example, the 
Federal Reserve Bank made a discount window loan to a depository 
institution and any Treasury book-entry securities provided by the 
depository institution as collateral have been deposited to a pledge 
account on the books of the Federal Reserve Bank. For a borrowing 
depository institution that is not a Participant, the book-entry 
securities used as collateral generally would be deposited to the 
Federal Reserve Bank pledge account by the borrowing institution's 
Securities Intermediary. See Hypothetical 5.
    Section 357.10(b) sets forth law applicable with respect to 
security interests in favor of a Federal Reserve Bank that have not 
been marked on the books of a Federal Reserve Bank. A security 
interest in the Securities Entitlement of a Participant in favor of 
a Federal Reserve Bank that is not marked on the books of the 
Federal Reserve Bank is governed by the law of the state in which 
the head office of the Federal Reserve Bank is located. Such a 
security interest could arise, for example, where the delivery of 
book-entry securities to the securities account of the Participant 
results in an overdraft in the Participant's Funds Account. The 
extent to which the Federal Reserve Bank has an interest in the 
Participant's book-entry securities to secure the overdraft 
therefore would be determined under the law of the state in which 
the Reserve Bank's head office is located. If the State in which the 
head office of the Federal Reserve Bank is located has not adopted 
Revised Article 8, under Sec. 357.10(c) that State is deemed to have 
adopted Revised Article 8.
    In certain very limited circumstances, a Federal Reserve Bank 
also may have a security interest in the book-entry securities of a 
non-Participant that is not marked on the books of the Federal 
Reserve Bank. Section 357.10(b) provides a separate rule for such a 
security interest, which would be governed by the law of the non-
Participant's Securities Intermediary, as determined under 
Sec. 357.11. Under Sec. 357.11, the perfection, effect of 
perfection, and priority of a security interest created under such 
an agreement would be governed by the law of the Securities 
Intermediary's jurisdiction, as determined under Sec. 357.11(b). 
Under Sec. 357.11(d), if the jurisdiction specified in 
Sec. 357.11(b) has not adopted Revised Article 8, jurisdiction would 
be deemed to have adopted Revised Article 8.\8\
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    \8\ An interest in book-entry securities of a non-Participant 
that is not marked on the books of the Federal Reserve Bank, while 
uncommon, could arise where the Federal Reserve Bank lends to a non-
Participant depository institution and enters into a triparty 
agreement with the depository institution and its Securities 
Intermediary rather than requiring the deposit of the book-entry 
securities in a pledge account on the books of the Federal Reserve 
Bank through an instruction given by the non-Participant depository 
institution to its Securities Intermediary.
---------------------------------------------------------------------------

    For purposes of applying the state law chosen under the rules of 
Sec. 357.10(b), Federal Reserve Banks are treated as clearing 
corporations. As a result, a security interest in a Securities 
Entitlement of a Participant in favor of a Federal Reserve Bank 
under Sec. 357.12(c)(2) has the same priority as security interests 
granted to other clearing corporations under state law. This is 
consistent with the treatment accorded to Federal Reserve Banks 
generally under Revised Article 8.

Section 357.11  Law Governing Other Interests

(a) Law Governing the Rights and Obligation of Participants and Third 
Parties

    Section 357.11 is a choice of law rule. The substantive matters 
subject to this choice of law rule are set forth in Sec. 357.11(a). 
The matters set forth in Sec. 357.11(a) are meant to be coextensive 
with those matters covered by Revised Article 8 with respect to a 
person's interest in a Treasury book-entry security (other than 
those related to a person's relationship to Treasury or a Federal 
Reserve Bank which are governed solely by federal law). For purposes 
of these choice of law rules Participants are Securities 
Intermediaries.
    Section 357.11(b) adopts Revised Article 8's general choice of 
law rule. Section 357.11(c) sets forth a special choice of law rule 
with respect to security interests perfected automatically or by 
filing, which also is included in Revised Article 8. Generally, the 
law applicable to the Securities Intermediary will govern matters 
involving an interest in a book-entry security held through that 
intermediary. This approach is not followed with respect to 
perfection of security interests automatically or by filing. In 
those cases, the law of the jurisdiction in which the debtor is 
located is the governing law. Since filing systems are based on the 
location of the debtor, this approach should reduce uncertainty and 
preserve the normal practice of searching records based on the 
debtor's location.\9\ The language ``person creating a security 
interest'' is used in lieu of the term ``debtor'' in this provision 
to avoid any confusion. The word ``debtor'' has two meanings in the 
Uniform Commercial Code and the expression ``person creating a 
security interest'' provides clarity with respect to who is covered 
by this section. The term does not refer to a creditor. The language 
``is located'' is intended to conform to its meaning under 
applicable law, as it may be amended from time to time. See, e.g., 
U.C.C. section 9-103(3)(d). Section 357.11(d) provides for the 
application of Revised Article 8 if the choice of law analysis 
required by Sec. 357.11(b) results in the choice of the law of a 
State that has not yet adopted Revised Article 8. As noted 
elsewhere, in such a situation, the State's law is viewed as if it 
had adopted Revised Article 8. This section also provides that, for 
purposes of applying state law, the Federal Reserve Banks are 
clearing corporations and Participants' interests in book-entry 
securities are Security Entitlements.
---------------------------------------------------------------------------

    \9\ The substantive effect of filing is limited and applies only 
in states which have adopted Revised Article 8. Since the effect of 
filing is a unique state law matter, in this one area, Treasury has 
determined that possible lack of uniformity does not justify 
altering state law.
---------------------------------------------------------------------------

(b) Limited Scope of Federal Preemption

    In an earlier TRADES proposal Treasury contemplated adopting a 
comprehensive regulation governing the rights of all persons in 
Treasury book-entry securities held in TRADES. Such an approach was 
proposed because Treasury believed that a uniform rule was necessary 
to preserve the efficiency and liquidity of the market for Treasury 
securities--the most liquid and efficient market in the world. 
Treasury believed then, and believes now, that the material rights 
of a holder in the United States of an interest in a Treasury 
security should not vary solely by virtue of such holder's 
geographic location or the location of the financial institution 
through which it holds its interest in Treasury securities. In light 
of Revised Article 8, Treasury has determined that it is possible to 
achieve this uniformity without developing an independent system of 
Federal commercial law.\9\ The questions inherent in a tiered system 
of ownership have been analyzed, and, in Treasury's view, 
satisfactorily addressed by Revised Article 8.
---------------------------------------------------------------------------

    \9\ As noted previously, the substantive scope of this 
regulation is limited.
---------------------------------------------------------------------------

    As of August 1, 1996, 28 states have adopted Revised Article 8 
and Treasury understands that it will soon be adopted in additional 
states. As with all uniform laws, the adoption process takes several 
years. In order to assure uniformity, in light of the unavoidable 
delays in the state-by-state adoption process of Revised Article 8, 
Treasury is promulgating regulations with a limited form of 
preemption. As provided in both Secs. 357.10(c) and 357.11(d), if 
the choice of law rules set forth in TRADES would lead to the 
application of the law of a State that has not yet adopted Revised 
Article 8, TRADES will apply Revised Article 8 (with conforming and 
miscellaneous amendments to other Articles) in the form approved by 
the ALI and NCCUSL. Treasury expects that these provisions will be 
operative only during the state-by-state adoption process and would 
plan to amend TRADES to delete reference to these provisions once 
the adoption process has been completed.
    While Revised Article 8 is defined to mean the official text of 
Article 8 as approved by the ALI and NCCUSL, Treasury recognizes 
that states may make minor changes in that text when adopting 
Article 8. Treasury has concluded that minor changes should not 
prevent Revised Article 8, as adopted by a state, from being the 
appropriate law. In other words, if a state passes a version of 
Article 8 that is substantially identical to Revised Article 8, 
reference to Revised Article 8 (as defined) would no longer be 
required. Treasury has determined that the

[[Page 43634]]

versions of Article 8 passed by 28 states \10\ that have enacted 
Article 8 as of the date this rule is published in the Federal 
Register meet this standard. Accordingly, Secs. 357.10(c) and 
357.11(d) would not be applicable if the choice of law provisions of 
TRADES directed a person to one of those states. As additional 
states adopt Revised Article 8, Treasury will provide notice in the 
Federal Register as to whether the enactments are ``substantially 
identical'' to the uniform version for purposes of these regulations 
and on an annual basis, the Commentary will be amended to reflect 
subsequent enactments. This approach represents a significantly 
reduced form of preemption of state law from former versions of 
TRADES and preserves Treasury's preeminent interest in a uniform 
system of rules applicable to all holders of interests in Treasury 
book-entry securities.
---------------------------------------------------------------------------

    \10\ Alabama, Alaska, Arizona, Arkansas, Colorado, Idaho, Iowa, 
Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, 
Massachusetts, Minnesota, Mississippi, Nebraska, New Mexico, 
Oklahoma, Oregon, Pennsylvania, Texas, Utah, Vermont, Virginia, 
Washington, West Virginia, Wyoming.
---------------------------------------------------------------------------

Section 357.12  Obtaining an Interest in a Book-entry Security

(a) Creation of a Participant's Security Entitlement

    A Participant's interest in a Treasury book-entry security is a 
Securities Entitlement. Section 357.12(a) provides that a 
Participant's Securities Entitlement is created when a Federal 
Reserve Bank indicates by book entry that a Book-entry Security has 
been credited to a Participant's Securities Account. Instead of the 
concept of initial credit and transfer of a Treasury book-entry 
security, as set forth in the existing regulations, this proposal 
focuses on the creation of a Participant's Securities Entitlement 
and, in this way, is similar to Section 8-501 of Revised Article 8.
    The regulation focuses on the creation of a Participant's 
Security Entitlement because Security Entitlement is the term used 
to describe the Participant's interest in a Treasury book-entry 
security. Once a Participant obtains that interest, the regulation 
sets forth what that interest is. Thus, as provided in Sec. 357.10, 
federal law describes a Participant's rights against the United 
States and the Federal Reserve Bank where it maintains its 
Securities Account. To the extent not inconsistent with Sec. 357.10, 
Sec. 357.11 describes the applicable law to determine Participants' 
rights and obligations with respect to all other persons. Under 
these regulations, Participants can still transfer their interests 
in a Treasury book-entry security as they did before--by issuing a 
Transfer Message to the Federal Reserve Bank where they hold such 
interest. Transfer of interests between Participants can occur by a 
Participant holding such interest issuing a Transfer Message. As a 
result of such message, the Federal Reserve Bank will make a book 
entry in favor of the receiving Participant (thereby creating a 
Security Entitlement in favor of such Participant) and also will 
make a book entry deleting the initiator Participant's interest in 
such Treasury book-entry security (thereby eliminating that 
Participant's Security Entitlement). In addition, if authorized 
under applicable state law, Participants may enter into agreements 
with other Participants that, as to the Participants, constitute a 
transfer. Such action is without effect to either the United States 
or a Federal Reserve Bank.

(b) Creation and Priority of a Security Interest

    (i)  Security Interests of the United States. Section 357.12(b) 
provides that a security interest in favor of the United States has 
priority over the interests of any other person in a Treasury book-
entry security. The United States obtains security interests in 
Treasury securities as collateral to secure funds in a variety of 
situations such as Treasury Tax and Loan accounts; government agency 
funds or funds under the control of the Federal Courts held at 
financial institutions; and securities pledged in lieu of surety by 
contractors and others. The priority provided the United States in 
these situations is consistent with existing law.
    In addition, Federal Reserve Banks do recognize on their books 
and records security interests in favor of the United States. In 
that situation, the Federal Reserve Bank will not transfer the 
security without the permission of the United States. This section 
provides that a Federal Reserve Bank may rely exclusively on the 
directions of an authorized representative of the United States to 
transfer a security and is protected in so relying. Ordinarily, an 
authorized representative of the United States would take such 
action under circumstances such as the default or insolvency of the 
pledgor.
    (ii)  Security Interests on the Books of a Reserve Bank. Where 
required by Federal law or regulation or pursuant to a specific 
agreement with a Federal Reserve Bank, a security interest in favor 
of a Federal Reserve Bank or other person may be created or 
perfected by a Federal Reserve Bank marking its books to record the 
security interest under Sec. 357.12(c)(1). An example of a security 
interest that is marked on the books of a Federal Reserve Bank would 
be the pledge in favor of a Federal Reserve Bank of a Participant's 
book-entry securities as collateral for a discount window loan.\11\ 
For limited categories of pledges, Federal Reserve Banks may agree 
to record a security interest in favor of a third party on their 
books. For example, in some circumstances a Federal Reserve Bank may 
permit the establishment of a pledge account to hold book-entry 
securities pledged to governmental entities other than the United 
States government. It is important to note that there is no 
obligation for either Treasury or a Federal Reserve Bank to agree to 
record a security interest on the books of a Federal Reserve Bank, 
except as required by Federal law or regulation. If they do so, the 
security interest is perfected when the Federal Reserve Bank records 
a security interest on its books. In addition, the security interest 
has priority over all other interests in the Treasury book-entry 
security except an interest of the United States.
---------------------------------------------------------------------------

    \11\ Book-entry securities pledged by a non-Participant to a 
Federal Reserve Bank generally would be deposited by the non-
Participant's Securities Intermediary to a pledge account at the 
Federal Reserve Bank, and therefore also would be marked on the 
books of the Federal Reserve Bank. See the discussion under D. 
(Sec. 357.10).
---------------------------------------------------------------------------

    (iii)  Other Security Interests. As provided in 
Sec. 357.12(c)(2), a security interest in a book-entry security may 
be perfected by any method available under applicable state law, as 
determined under Sec. 357.10(b) or Sec. 357.11.\12\ The perfection 
and priority of such interests shall be governed by applicable law. 
Security interests under this section may include security interests 
in favor of a Federal Reserve Bank, such as a clearing lien or 
pledge by a non-participant of book-entry securities held through a 
Securities Intermediary where the securities have not been deposited 
to a Federal Reserve Bank pledge account. Consistent with Revised 
Article 8, a Federal Reserve Bank would be treated as a clearing 
corporation under the applicable state law.
---------------------------------------------------------------------------

    \12\ Under both of these sections, if the state has not yet 
adopted Revised Article 8, the applicable law would be that state's 
law as it would be amended by Revised Article 8.
---------------------------------------------------------------------------

    If a Person perfects a security interest pursuant to 
Sec. 357.12(c)(2), obligations of the Treasury and the Federal 
Reserve Banks with respect to that security interest are limited. 
Specifically, unless special arrangements are agreed to by the 
United States or a Federal Reserve Bank pursuant to 
Sec. 357.12(c)(1), neither the Federal Reserve Bank nor the United 
States will recognize the interests of any person other than the 
person in whose securities account the interest in a Treasury book-
entry security is maintained. This does not mean that such a 
security interest is invalid. Rather, it means that the creditor's 
recourse will be solely against the debtor Participant or other 
third party.

Section 357.13  Rights and Obligations of Treasury and the Reserve 
Banks

    (a)   Adverse Claims
    Section 357.13(a) sets forth the general rule that, with limited 
exceptions, Treasury and the Federal Reserve Banks will recognize 
only the interest of a Participant in a Treasury book-entry security 
in whose Securities Account such interest is maintained.
    As noted previously, Treasury book-entry securities maintained 
in TRADES are held in a tiered system of ownership. The records of a 
Federal Reserve Bank reflect only the ownership at the top tier. 
Institutions maintaining a Securities Account with a Federal Reserve 
Bank frequently will hold interests in Treasury book-entry 
securities for their customers (which can include broker-dealers and 
other Securities Intermediaries) and in certain cases those 
customers will hold interests in securities for their customers. 
Accordingly, neither Treasury nor a Federal Reserve Bank will know 
the identity or recognize a claim of a Participant's customer if 
that customer were to present it to Treasury or a Federal Reserve 
Bank.
    In addition, except in the limited case where a security 
interest is marked on the books of a Federal Reserve Bank pursuant 
to Sec. 357.12(c)(1), neither the Treasury nor a Federal Reserve 
Bank will recognize the claims of any other person asserting a claim

[[Page 43635]]

in a Treasury book-entry security. Persons at levels below the 
Participant level must present their claims to their Securities 
Intermediary.

(b)  Payment obligations

    Section 357.13(b) contains a corollary to the rule set forth in 
Sec. 357.13(a). This section provides that Treasury discharges its 
payment responsibility with respect to a security that it has issued 
when a Federal Reserve Bank credits the funds account of a 
Participant with amounts due on that security or makes payment in 
some other manner specified by the Participant. This is consistent 
with existing law and the first TRADES proposal.<SUP>13 In Revised 
Article 8, the issuer discharges its obligations when it makes 
payment to an owner registered on its books. Under common commercial 
practice, the registered owner in the indirect system may be a 
clearing corporation or the clearing corporation's nominee. Although 
the Federal Reserve Banks are treated as clearing corporations under 
both Revised Article 8 and TRADES, Treasury remains liable until 
payment is made to, or in accordance with the instructions of, a 
Participant. Section 357.13(b)(2) establishes the mechanism of how 
Treasury book-entry securities are paid at maturity. It is intended 
to cover a variety of procedures, including where the proceeds of 
pledged securities are credited to a suspense account pending 
substitution or release. This paragraph makes clear that the payment 
takes place automatically and that, unlike with physical 
certificates, there is no act of presentment required by the 
Participant.
---------------------------------------------------------------------------

    \13\ 51 FR 8846, 8848 (March 14, 1986).
---------------------------------------------------------------------------

Section 357.14  Authority of Reserve Banks

    Section 357.14 provides that Federal Reserve Banks are 
authorized, as fiscal agents of Treasury, to operate the commercial 
book-entry system for Treasury.

Section 357.44  Notices

    Section 357.44 contains a revised version of a provision that 
appeared in earlier TRADES proposals. Similar to the rule in Revised 
Article 8 (see section 8-112), it provides where certain legal 
process should be directed. While providing instructions on where 
notice should be directed, it makes clear that the regulations do 
not establish whether a Federal Reserve Bank is required to honor 
any such order or notice.

J.  Hypotheticals

HYPOTHETICAL 1                                                          
                                                                        
                                TREASURY                                
                                                                        
                          FEDERAL RESERVE BANK                          
                                    |                                   
                               PARTICIPANT                              
                                    |                                   
                                 DEALER                                 
                                    |                                   
                                INVESTOR                                
                                                                        

    The first hypothetical is designed to show what law applies at 
different levels of the tiered book-entry system. TRADES provides 
that federal law, and only federal law (defined in Sec. 357.10(a)), 
governs the rights and obligations of the United States and the 
Federal Reserve Banks (except for those matters involving Federal 
Reserve Banks set forth in Sec. 357.10(b)). Thus, for example, 
Treasury discharges its payment obligations with respect to a 
security it has issued in the manner described in Sec. 357.13(b). 
Federal law both defines the payment obligation and describes how 
Treasury fulfills that obligation. Those portions of Revised Article 
8 dealing with issuer obligations are not applicable to Treasury or 
the Federal Reserve Banks.<SUP>14 Similarly, with certain limited 
exceptions as set forth in Sec. 357.12(c)(1), Treasury and the 
Federal Reserve Banks will recognize only the interest of a 
Participant in a Treasury book-entry security in whose Security 
Account the interest is maintained. Accordingly, as a matter of 
federal law, neither Treasury nor a Federal Reserve Bank will 
recognize any claim by Dealer or Investor.<SUP>15
---------------------------------------------------------------------------

    \14\ As provided in Sec. 357.14, Federal Reserve Banks, among 
other things, effect transfers of book-entry securities between 
Participants' Security Accounts.
    \15\ One comment questioned whether similar language in the 
March 4, 1996 release implied that, under Revised Article 8, in the 
above example Investor could have a claim against Participant. No 
such implication was intended. The only point of the language is to 
make it clear that Federal, not state, law governs the rights and 
obligations of Treasury and the Federal Reserve Banks.
---------------------------------------------------------------------------

    In the hypothetical above, as between Participant and Dealer, 
Participant is the Securities Intermediary. With respect to the 
matters set forth in Sec. 357.11(a), the law of the Securities 
Intermediary's jurisdiction governs. Thus, with respect to the 
matters in Sec. 357.11(a), the law of Participant's jurisdiction 
applies as between Participant and Dealer.<SUP>16 If Participant's 
jurisdiction, as determined under Sec. 357.11(b), has not adopted 
Revised Article 8, the law of Participant's jurisdiction, as it 
would be amended by Revised Article 8, applies. Similarly, as 
between Dealer and Investor, Dealer is a Securities Intermediary, 
with respect to the matters in Sec. 357.11(a), the law of Dealer's 
jurisdiction applies as between Dealer and Investor. If Dealer's 
jurisdiction has not adopted Revised Article 8, the law of Dealer's 
jurisdiction, as it would be amended by Article 8, applies.

HYPOTHETICAL 2
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    \16\ As described in the March 4 Release, the scope of TRADES is 
limited. As a general rule, if a matter is not covered in 
Sec. 357.11(a), TRADES is not applicable. One comment questioned 
whether TRADES covered the creation and attachment of a security 
interest. The omission of creation and attachment in Sec. 357.11(a) 
is intentional.

                                                    TREASURY                                                    
                                                                                                                
                                              FEDERAL RESERVE BANK                                              
                                                   |           |                                                
                                         PARTICIPANT A       PARTICIPANT B                                      
                                                   |           |                                                
                                              DEALER A       DEALER B                                           
                                                                                                                

    Assume that Dealer A sells its interest in a Treasury book-entry 
security to Dealer B. The transaction likely would take the 
following form. Dealer A will instruct Participant A to transfer its 
interest in a Treasury security to Participant B against cash 
payment. Dealer B will instruct Participant B to transfer cash to 
Participant A against delivery of an interest in the specified 
securities. Participant A will instruct the Federal Reserve Bank to 
transfer its interest in the Treasury security to Participant B 
against simultaneous credit of cash. The Federal Reserve Bank will 
debit Participant A's security account and credit Participant B's 
security account and simultaneously credit Participant A's cash 
account and debit Participant B's cash account. Participant A will 
mark its books to show that it has debited Dealer A's securities 
account and credited Dealer A's cash account. Participant B will 
mark its books to show the Security Entitlement in the Treasury 
security in favor of Dealer B and a debit against Dealer B's cash 
account. Federal law, set forth in Sec. 357.12(a) provides that 
Participant B acquires its interest in the Treasury book-entry 
security when the Federal Reserve Bank indicates by book-entry that 
the interest in the security has been credited to Participant B's 
Securities Account. Pursuant to Sec. 357.11(a), but subject to 
Sec. 357.11(d), Participant B's jurisdiction governs Dealer B's 
acquisition of a Securities Entitlement from Participant B.

HYPOTHETICAL 3

                                                                        
                                TREASURY                                
                                                                        
                          FEDERAL RESERVE BANK                          
                                    |                                   
                               PARTICIPANT                              
                                                                        

    Assume Participant wishes to obtain a loan from Federal Reserve 
Bank and, as part of the transaction, will grant Federal Reserve 
Bank a security interest in its Securities Entitlement with respect 
to Treasury book-entry securities. The transaction can be 
accomplished in one of two ways. Pursuant to Sec. 357.12(c)(1), the 
Federal Reserve Bank can mark its books to reflect the security 
interest. As a matter of federal law, that action creates and 
perfects the Federal Reserve Bank's security interest and grants the 
Federal Reserve Bank priority over all other claimants (other than 
the United States pursuant to Sec. 357.12(b)).<SUP>17 A second 
method for completing the transaction, as set forth in 
Sec. 357.12(c)(2), would be to take whatever actions are authorized 
by applicable law. In that case, applicable law is the law of the 
jurisdiction of the head office of the Federal Reserve Bank. If that 
jurisdiction had adopted Revised Article 8, it would be the law of 
that jurisdiction. If that jurisdiction had not adopted Revised 
Article 8, it would

[[Page 43636]]

be the law of that jurisdiction as if the jurisdiction had adopted 
Revised Article 8. Under Revised Article 8, the Federal Reserve 
Bank's interest would be that of a clearing corporation.
---------------------------------------------------------------------------

    \17\ In certain limited circumstances, a Federal Reserve Bank 
may enter into an agreement under which it agrees to record on its 
books an interest in Participant's book-entry securities in favor of 
a non-Participant, such as a governmental entity. Under these 
circumstances, the non-Participant would have a perfected security 
interest with priority over other claimants (other than the United 
States under Sec. 357.12(b)). It should be noted that, as set forth 
in Sec. 357.12(c)(1), there is no requirement that either the United 
States or a Federal Reserve Bank agree to creation and perfection of 
a security interest in this way, except as provided in 
Sec. 357.12(c)(1).

HYPOTHETICAL 4

                                                    TREASURY                                                    
                                                                                                                
                                              FEDERAL RESERVE BANK                                              
                                                   |           |                                                
                                         PARTICIPANT A       PARTICIPANT B                                      
                                                                                                                

    Assume that Participant A wishes to borrow from Participant B 
and grant Participant B a security interest in its Security 
Entitlement in Treasury book-entry securities. As provided in 
Sec. 357.12(c)(2), the transaction would be completed pursuant to 
applicable law determined in accordance with 357.11. Although such 
an interest could be recorded on the books of a Federal Reserve Bank 
under Sec. 357.12(c)(1), Federal Reserve Banks generally do not mark 
their books to record this type of security interest for 
Participants.

HYPOTHETICAL 5

                                                                        
                                TREASURY                                
                                                                        
                          FEDERAL RESERVE BANK                          
                                    |                                   
                              PARTICIPANT A                             
                                    |                                   
                                DEALER A                                
                                    |                                   
                                 BANK A                                 
                                                                        

    Assume that Bank A wishes to borrow from the Federal Reserve 
Bank and will pledge its interest in Treasury book-entry securities 
held at Dealer A to collateralize that loan. The transaction could 
be accomplished in two ways. Pursuant to Sec. 357.12(c)(1), the 
interest could be created and perfected on the books of a Federal 
Reserve Bank. Such a transaction would take place in the following 
fashion. Bank A could have Dealer A instruct Participant A to 
deposit securities to a pledge account specified by the Federal 
Reserve Bank. The Federal Reserve Bank likely would create an 
account on its books and specify that account to Bank A as the 
account to receive Bank A's interest in Treasury book-entry 
securities. Participant A, upon receiving Dealer A's instructions, 
would then instruct the Federal Reserve Bank to debit its account at 
the Federal Reserve Bank and credit the account created by the 
Federal Reserve Bank. The second way the transaction could take 
place is by any method permitted by the law of Dealer A's (Bank A's 
Securities Intermediary) jurisdiction. This could involve a tri-
party agreement among the Federal Reserve Bank, Dealer A, and Bank 
A. As set forth in Sec. 357.11(b)(1), that agreement likely would 
specify which jurisdiction's law is to govern the transaction and 
could specify that such choice of law supersedes any other choice of 
law agreement previously entered into by Dealer A and Bank A. If 
Dealer A's jurisdiction has not adopted Revised Article 8, the 
applicable law would be the law of Dealer A's jurisdiction as it 
would be amended by Revised Article 8.

    Dated: August 16, 1996.
Gerald Murphy,
Fiscal Assistant Secretary.
[FR Doc. 96-21469 Filed 8-20-96; 1:29 pm]
BILLING CODE 4810-39-P