LIST OF COMMENTERS
                        responding to the
       PROPOSED TREASURY INFLATION-INDEXED SECURITIES RULE
                September 27, 1996 (61 FR 50924)

COMMENTERS

APEX Investment Associates, Inc.
L. Napoleon Cooper
Louis Crandall, Wrightson Associates
Robert L. Elgin
HSBC Securities, Inc.
PSA The Bond Market Trade Association
Reed Smith Shaw & McClay

* * * * * * * * * *

COMMENT LETTERS BEGIN HERE.

* * * * * * * * * * *

APEX Investment Associates, Inc.
4001 West Devon Avenue
Chicago, Illinois 60646-4523

September 26, 1996

Ms. Darcy Bradbury
Deputy Assistant Secretary for Finance
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Dear Ms. Bradbury:

Congratulations - Your "Inflation-Indexed Notes" will be a great
success.

In fairness to investors, the capital appreciation should be
treated as capital gain.  If this is not feasible, then the tax
on the capital portion should be paid at time of redemption, or
sale by the investor.

Sincerely,

Alexander A. Lothan
President
APEX Investment Associates, Inc.
4001 West Devon Avenue
Chicago, Illinois 60646-4523

CC:  Mr. Robert Rubin

P.S.  In future years, these notes will be considered one of Mr.
Rubin's greatest contributions to this administration.

* * * * * * * * * *

L. Napoleon Cooper
2400 16th Street, N.W., Suite 545
Washington, D.C.  20009

October 23, 1996

Copy for Government Securities Regulations Staff
The Honorable Robert E. Rubin, Secretary
U.S. Department of the Treasury -- Room 3330
Washington, D.C. 20220

Re:  A Formal Petition Calling For the Secretary of the Treasury
to Authorize for 1997, Under 31 CFR Part 340 (7-1-95 Edition), An
Initial Trial $20-Billion-Par-Amount Issuance of An Additional
Inflation-Indexed Federal Security that will Facilitate Seed
Capital Formation In the Non-Profit Sector--A Unique New Series
of Federal Debt that - Among Its Distinctions Would Mandate A
Minimum 50 Basis Points Reduction In Taxpayer Financed Interest
Expenses (Versus A Like Amount and Maturity of Conventional
Treasury Bonds).  And, Subject to A Successful Trial, A Reduction
that If Extended Across Our Total National Debt, Would Equal An
Annual $25 Billion Federal Budget Cost Savings for Taxpayers

Dear Secretary Rubin:

Owing entirely to the structure adopted by the Department for its
January 15, 1997 issuance of new inflation-protection notes under
31 CFR Part 356 (versus 31 CFR Part 340--the basis of this
Petition incorporating our comments concerning that proposed
amendment to Part 356); the insurmountable obstacle that that
strippable, structure represents for us; and the business, trust
indenture and fiduciary responsibilities unique to our not-for-
profit entity's existing debt (which must be collateralized by 30
year maturity Treasury obligations), Project 76--An American
Affair, Inc., will not be participating with that auction of 10
year I-P Notes, nor with any of the Department's subsequent
auctions of other maturities based upon that same I-P security
structure.

Project 76 may, however, be expected - given no other alternative
- to invest in conventional non-indexed 30 year maturity Treasury
securities in order to meet its collateral obligation to its
creditors.  That is, they would comply with its debt's strict
indenture requirements.  But the structurally suitable
conventional Treasury bond's lack of inflation protection will
prohibit Project 76's officers and directors from allowing it to
offer Treasury the minimum 50 basis points interest expense
reduction for U.S. taxpayers that Project 76's purchases of I-P
securities would otherwise generate (the fiduciary obstacle).

Finally, in this connection, should our request be denied that
the issuance of Part 340 inflation-indexed securities be
authorized, absent the domestic and virtually unlimited potential
taxable investor demand for Part 356 inflation-indexed Treasury
securities represented by Project 76's requirement and that of
other taxable American investors (a result of the structure
already decided upon by the Department for January 15, 1997, Part
356 securities), our Nation's federal budget will be exposed
unnecessarily to the risk of potentially massive outflows of U.S.
taxpayer funds to foreign governments and other tax-exempt
purchasers of U.S. inflation-protection securities without
Americans ever receiving the promised and\or justifying benefit
of reduced borrowing costs (an important area of likely focus for
any post auction Congressional hearings).

Accordingly, this Petition is submitted to the Secretary of the
Treasury.

The 31 CFR Ch.II Part 340 (7-1-95 Edition)
(Regulations Governing the Sale of Treasury Bonds Through
Competitive Bidding)

Authority:  Sec. 8, 50 Stat. 48 1, as amended; R.S. 3706; secs.
1, 4, 18, 5, 40 Stat. 288, as amended, 290, as amended, 1309, as
amended, 290, as amended; secs. 19, 20, 48 Stat. 343, as amended;
31 U.S.C. 738a, 739, 752, 752a, 753, 754, 754a, 754b.

Source:  27 FR 12481, Dec. 18, 1962.

Section 340.0  Authority for sale of Treasury bonds through
competitive bidding.

"(a) The Secretary of the Treasury may, from time to time, by
public notice, offer Treasury bonds for sale and invite bids
therefor.  The bonds so offered and the bids made will be subject
to the terms and conditions and the rules and regulations ... set
forth [in the CFR], except as they may be modified in the public
notice or notices; issued by the Secretary in connection with
particular offerings.  The bonds will be subject also to the
general rules and regulations of the Treasury Department, now or
hereafter prescribed, governing United States securities.  They
will be issued pursuant to the authority of the Second Liberty
Bond Act, as amended.

(b) The terms public notice, notices, or announcement as used in
[Part 340 of the CFR] mean the Public Notice of Invitation to Bid
on Treasury bonds and any supplementary or amendatory notices or
announcements with respect thereto, including, but not limited to
any statement released to the press by the Secretary of the
Treasury and notices sent to those who have filed notices of
intent to bid or who have filed bids."

Section 340.1  Public notice-description of bonds-terms of offer.

"When bonds are offered for sale through competitive bidding,
bids therefor will be invited through the form of a public notice
or notices issued by the Secretary of the Treasury.  The notice
or notices will either fix the coupon rate of interest to be
borne by the bonds or prescribe the conditions under which
bidders may specify the late and will set forth the terms and
conditions of the bonds, including maturities ... [and] the terms
and conditions of the offer, including the amount of the issue
for which bids are invited....

This Petition as submitted to the Secretary requests that the
Secretary utilize the authority granted him under Chapter 31 of
Title 31, United States Code, to authorize an initial minimum $20
billion U.S. trial issuance by the Department for the year 1997
(for the Charitable Bond(Tm) program and for other purposes,
including sale to the general public), of additional inflation-
protection bonds inclusive of both the structure and maturity
specified by the Respondent in his July 31, 1996, letter attached
(including related attachments and exhibits), as submitted to the
Secretary and to the Government Securities Regulation Staff of
the Bureau of the Public Debt, in connection with Treasury's
Assistant Secretary for Financial Markets' 31 CFR Part 356,
Advanced Notice of Proposed Rulemaking and Request for Comment,
concerning Treasury's intention to issue Inflation-Protected
federal securities.

Further, the Petition requests that the Secretary's initial
authorization provide therein, subject only to a successful trial
offering of such securities on the terms and conditions approved
by the Secretary (including the mandated 50 basis points cost
savings for U.S. taxpayers), for a regular schedule for the
offering of such securities at whatever level the Secretary may
then deem appropriate and in the public interest.  And, it
incorporates herewith the Respondent's comments concerning the
Department's proposed January 15, 1997 issuance of Inflation-
Protection Notes under 31 CFR Part 356.

Our 31 CFR Part 340 Inflation-Protection Treasury Bond (For an
outline of key departures from Treasury's 31 CFR Part 356 version
to be auctioned on January 15, 1997, see enclosures.)

Finally, we continue to advocate a Department examination of the
relevant legal, regulatory and tax issues, as well as a cost-
benefit-analysis of the cost to/savings for taxpayers; other
public-interest benefits (including Project 76's ability to help
facilitate up-to $300 billion in new capital formation over the
next decade for pump priming private-non-profit-sector investment
in improving:

.  public education, including public libraries, recreational
facilities and the depressed neighborhoods around them,

.  public broadcasting, including real-time-broadband-satellite
telecommunications infrastructure,

.  and public housing and nutrition assistance); as well as

in determining the true potential for measurably expanding the
domestic taxable-investor-market for U.S. Treasury securities; as
well as in assessing what would be a prudent level of on-going
Department oversight of Project 76 and related Charitable
Bond(Tm) program activities.  Such an examination is in the
public interest and should be conducted by the appropriate
divisions of the U.S. Department of the Treasury.

And, the conclusions you will be able to reach will thereafter,
more than justify an accommodation by your office of this
Petition calling for an authorization of a trial issuance for the
year 1997 of our required inflation-indexed security structure.

(To examine a would-be 5.5 percent example of how our requested
30-year maturity inflation-indexed security structure would
actually appear in a 6 percent 30-year maturity conventional
Treasury bond environment, see the "List of Exhibits" to the
attached copy of the July 31, 1996, letter addressed to the
Honorable Robert E. Rubin (at Exhibit 1)).

Again, we welcome an early meeting with the appropriate
authorities of the Department to not only arrive at a thorough
understanding of all matters relating to this Petition, but to
agree on the array of information, talent and expertise both
sides will need to bring to bear to manage successfully the
historic challenge before us.

May we hear from you or your designate at your earliest
convenience?

Thank you for your consideration.

Sincerely,

Enclosures:

Comments Concerning Proposed CFR Part 340 Security's Key
Departures from Part 356 Version Being Auctioned January 15, 
1997

Copy of July 31, 1996, Letter to the Secretary of the Treasury, 
Including Its List of Exhibits and 11 Exhibits

NOTE:  ENCLOSURES/EXHIBITS ARE NOT DUPLICATED HEREIN --  THEY
WERE PART OF COMMENTER'S SUBMISSION OF JULY 31, 1996, AND CAN BE
OBTAINED FROM THE ANPR DOCUMENTATION FILE.

______

PART TWO OF TWO

Again, owing entirely to the structure adopted by the Department
for its January 15, 1997 issuance of new inflation-protection
notes under 31 CFR Part 356 (versus 31 CFR Part 340-the basis of
the attached letter\Petition incorporating our comments
concerning that proposed amendment to Part 356); the
insurmountable obstacle that strippable structure represents for
us; and the business, trust indenture and fiduciary
responsibilities unique to our not-for-profit entity's existing
debt (which must be collateralized by 30 year maturity Treasury
obligations), Project 76--An American Affair, Inc., will not be
participating with that auction of 10 year I-P Notes, nor with -
an of the Department's subsequent auctions of other maturities
based upon that same I-P security structure.

NOTE:  The following comments distinguish the key aspects of the
trial issuance of inflation-indexed obligations we have
petitioned the Secretary to authorize for issuance and sale
during calendar 1997 (under 31 CFR Part 340), from those the
Department has announced an intention to auction (under 31 CFR
Part 356), effective January 15, 1997.

Also, we will have no further comment with respect to whether or
not a market currently exists for Treasury's Canadian model 31
CFR Part 356 inflation-protection notes, including, as to whether
or not Treasury will be able to achieve through its 31 CFR Part
356 initiative either of its stated objectives:  1) a "50 basis
points" or greater reduction in borrowing costs for U.S.
taxpayers or 2) a significant expansion of the domestic market
for Treasury securities.  We, however, do believe that on the
merits we can demonstrate that a trial issuance of securities
such as we have requested under 31 CFR 340 is in the public, as
well as national interest.

COMMENT CONTEXT - Again, the following comments are made on
behalf of two separate and distinct, yet unopposed interests and,
as such, reflect the views and concerns of both entities. 
Specifically, I am commenting:

.  first, as an officer of Project 76 - An American Affair, Inc.,
an exempt entity that has an existing primarily "buy-and-hold"
requirement, in connection with collateralizing restructured
versions of its own debt, to purchase inflation indexed federal
securities such as we have petitioned the Secretary to authorize
under Chapter 31 Title 31 of the United States Code (31 CFR 340)
(purchases over the next 10 to 15 year period of portfolios of
such obligations on virtually any scale the Treasury is
interested in issuing them); and,

.  second, I am commenting as the principal of the for-profit
entity that has an existing plan for packaging the restructured
and partially collateralized securities of that not-for-profit
entity, into two unit-investment-trust-intermediary-product
formats, for ultimate distribution to individual and corporate
investors, and in a unique tax-advantaged, as well as non-tax-
advantaged form (the income from which, "would not receive [or
require] special tax treatment requiring a change in current
Federal income tax laws").

TOPICS SELECTED FOR COMMENT

SCHEDULE - Our proposed trial issuance of inflation-indexed
securities under the 31 CFR Part 340 can rely equally well on a
quarterly auction as the Department has decided upon for its
Canadian model being auctioned under modifications to the 31 CFR
at Part 356 on January 15, 1997.

A more regular auction may be justified for 1998 and beyond
depending upon the results of the requested 1997, $20 billion,
initial trial offering (which we hope will commence in the second
quarter of 1997, at some point after the regular April offering
of conventional 30-year maturity Treasury bonds but before the
anticipated April 15 offering of 31 CFR Part 356 Canadian-Model
Inflation-protection bonds).

STRUCTURE AND INDEX - Our proposed trial issuance of inflation-
indexed securities under the CFR Part 340 would be based on a
modified, current pay structure where all the inflation
compensation and real interest is paid out and\or accrues
semiannually.  Modified that is, in that our 30 year maturity
effectively floating rate security would pay only accrual
interest through year 10 and distribute cash interest coupons
during years 11 through maturity.  For an actual example of this
structure, see "List of Exhibits" (at Exhibit 1) to the attached
copy of our July 31, 1996, letter to the Secretary.

The index to be used to measure inflation for our proposed
structure also will be the nonseasonally adjusted Consumer Price
Index for all Urban Consumers or the CPI-U.

MATURITY - A 30-year bond with coupons (40, beginning in year 11)
and a 30 year "zero-coupon" bond.

INDEXING METHODOLOGY - For our proposed structure, the inflation
component of the coupon's "constant yield" will be adjusted for
inflation every six months.  The "constant yield" will include
both "real" return and inflation compensation components, and be
based on the investor's "bid" and initial "cost basis."  The
initial "real" yield component of the "constant yield"
determination will be made by the Secretary based on the then
current yield payable on 30 year maturity conventional Treasury
bonds (minus no less than 50 basis points).  The Secretary's
yield announcement will reflect that 50 basis points discount
from like maturity conventional Treasury bond yields.  The
investor's ultimate "constant yield" could reflect more of a
discount, depending on actual winning-competitive-bid auction
results).  The inflation component of the "constant yield" will
be adjusted every six months and the initial "real" return
component of the "constant yield" will remain constant through
maturity.

BIDDING RESTRICTIONS - There will be no percentage-of-the-total-
offering limitation placed on awards to bidders, so long as the
yield bid does not exceed the total yield announced by the
Secretary (including the mandated 50 basis points cost savings
for U.S. taxpayers).

MINIMUM GUARANTEE - NONE.

INDEX RATIO - Reference CPI applicable to the original issue
date.

REFERENCE CPI - Same as inflation-protection Treasury securities
to be issued under 31 CFR Part 356.

PAYMENT DATES - Adjusted inflation plus real return components
will be paid and/or accrue semiannually.

STRIPS - N/A That is, due to the unique structure of the coupon
components of our proposed 31 CFR Part 340 30 year maturity
inflation-indexed obligation, separating or stripping interest
from principal cash-flow streams would not be possible or useful
to investors.  And, subject to the discretion of the Secretary,
an ability to separate and trade individual coupon components
(including real interest, the inflation compensation and the
principal or proportion of the "cost-basis") would be useful (see
BOOK-ENTRY SYSTEMS below).

TAXATION - The current federal income tax treatment for "original
issue discount" securities will apply to the inflation-indexed
securities that are the subject of our petition calling for their
trial issuance under the 31 CFR Part 340.  Otherwise, income from
the bonds would not receive special tax treatment requiring a
change in current federal income tax laws.

AUCTION TECHNIQUE - Multiple-price auction.  That is, an auction
in which each successful bidder pays the price equivalent to the
"constant yield" or rate that it bid (based on that bidders "cost
basis" therein).

MINIMUMS AND MULTIPLES TO BID, HOLD AND TRANSFER - The minimum to
bid, hold and transfer is an original "cost basis" of $1,000. 
Larger amounts will be multiples of $1,000.

BOOK-ENTRY SYSTEMS - 31 CFR Part 340 inflation-indexed securities
will be held and transferred in either of two book-entry systems:
"TRADES" and "TREASURY DIRECT."  The securities will be
maintained and transferred at their original "cost basis," not at
their value based on inflation-adjusted "constant yield."
Individual coupon components, (made up of the real return and
inflation-compensation interest components plus the appropriate
O.I.D tax regulation determined proportion of the security's
"cost-basis") may be maintained and transferred subject to a
determination by the Secretary.

* * * * * * * * * * *

Louis Crandall
Wrightson Associates
99 Wall St, 17th Floor
New York, NY 10005

October 21, 1996

Topic:    Proposed changes in uniform offering circular regarding
          inflation-protection bonds

The Treasury has emphasized its intention to enhance the
liquidity of its new index-linked (I/L) bonds by reopening them
as often as possible.  The fact that stripped coupons from
different I/L bonds are not interchangeable makes it extremely
important to consolidate I/L debt into as few separate issues as
possible.

Unfortunately, the Treasury is not always able to reopen bonds as
frequently as it would like.  The OID tax-code restrictions on
deep discounts often prevent reopenings of conventional bonds
that would otherwise be desirable.  The same may be true for I/L
bonds.  This will be more problematic for I/L bonds because the
importance of consolidating issues is much greater than it is for
conventional bonds.

The Treasury could address this problem in one of two ways. 
First, it could relax the OID restrictions for I/L bonds.  As a
general matter, the Treasury has insisted that the I/L bond
program should stand on its own without special concessions from
the tax code.  Relaxing the OID rules seems a very minor
concession, however.

An alternative solution would be to make a minor adjustment to
the auction procedure.  The Treasury currently plans to use the
standard single-price auction format, in which the coupon on a
newly issued note is rounded down to the next eighth of a
percent.  This results in an initial price that is always at or
below par.  If the Treasury rounded the coupon up instead of
down, the initial price would always be at or above par.  In
other words, the new I/L bond would start life that much farther
above the OID floor, increasing the odds that it will be a
candidate for a reopening in the future.  This would make little
difference for a 30-year I/L bond, but it would give the Treasury
valuable leeway with a 10-year note.

The traditional objection to rounding the coupon up rather than
down is that investors may end up having to pay more than they
anticipate for a security priced above par.  Since the Treasury
expects to do as many I/L reopenings as possible, it is already
prepared to sell these securities at a premium.

There is a precedent for rounding coupons up rather than down.  I
believe that REFCORP coupons in the late 1980s and early 1990s
were rounded to the closest eighth of a percent, which led to a
mixture of issue prices above and below par.

Louis Crandall
Wrightson Associates
99 Wall St, 17th Floor
New York, NY 10005

* * * * * * * * * * *

Bob Elgin
7261 Kingsbury Blvd.
St. Louis, MO 63130-4141

October 25, 1996

Mr. Kenneth Papaj
Government Securities Regulations Staff
Bureau of Public Debt
999 E Street N.W., Room 515
Washington, DC 20239-0001

Dear Sir:

Congratulations on your imminent introduction of
inflation-protection securities.  Having followed the decade-long
failure of HUD to institute Price Level Adjusted Mortgages, I
realize that your progress has been a real challenge.

These comments are too late to be part of your general
solicitation of May 20, 1996.  These comments are too radical to
be germane to your specific proposals of September 27, 1996.  
These comments are most relevant to your future solicitation
about Savings Bonds to be issued in 1998, but can benefit from at
least a year's lead time, so I am requesting that they be
processed within the current comment period.  

I have read through the comments that you received last summer
and found them most edifying in their breadth and knowledge. 
However, the majority of them were from "middlemen", who want to
reprocess these issues for sale to the general public.  There is
an inherent conflict of interest here.  If you want to minimize
the cost to the taxpayer and maximize the benefits to the
ultimate purchaser, then you must minimize the profits to the
middlemen.  If practicable, you want to do away with the
middleman altogether.  Merrill Lynch, Vanguard, even TIAA, et al 
are not going to give you the best advice on how to do this!

To my great surprise, I did find one commentator who beat me to
the punch in his very timely comment last May 17.  (Comment
Letter 16 in your internet file.)  Mr. Roland G. Caldwell of
Caldwell Trust Company, Venice, Florida simply suggests:

     "Next, if you really want to save dollars and give
     investors protection, simply issue debt without
     maturities.  All debt of the greatest nation on earth
     should be repayable upon demand; the interest rate paid
     daily would be set by the marketplace.  If you need
     more money, raise it.  If you want to pay some debt
     off, lower it.  As you above all should know, markets
     are very efficient and can set the rate for you."

Perhaps his presentation was too succinct to make any impression,
for I see minimal progress towards your oft stated goals of
simplicity, ease of understanding, liquidity, reduced risk, and
reduced cost to the treasury.  At this point, your greatest risk
is that this new issue will become a footnote in the history of
finance (as the Gilts are in the UK), when it could have been the
opening shot in a revolutionary improvement in economic
efficiency.   Hoping the you will take a second look, I am
fleshing out his comment with a concrete proposal in the format
of your September 25, 1996 presentation to the press.  Thank you
for your interest.

Sincerely,

Robert L. Elgin

Proposed Description of new UNITED STATES SAVINGS BILLS

SCHEDULE - The first auction will be on Monday January 5, 1998. 
The Bills will be auctioned and issued weekly thereafter, i.e.
January 12, January 20, January 26, February 2, February 9,
February 17,...

STRUCTURE - The Savings Bills' structure will be based on Dollar
Bills, with one modification:  their value will be determined by
integration of the weekly auction bid rate.

MATURITY - None.  A Bill may be redeemed at any auction date
after it has been issued.

INDEXING METHODOLOGY - The principal of the Savings Bill will be
indexed to the "Savings Index."  To calculate the dollar value
for a particular auction date, the par value at issuance is
multiplied by the value of the "Savings Index" on that auction
date.

MINIMUM GUARANTEE - None.  The value of Savings Bills will
increase every week.

INDEX RATIO - None.  The "Savings Index" is used directly without
reference to the issue date of a particular Bill.

REFERENCE "SAVINGS INDEX" - The reference "Savings Index" for
Monday, the fifth day of January, 1998 will have a value of
1.000000.  Its value will be incremented each day to effectuate
the yield bid accepted at the most recent Savings Bill auction.  
The Treasury will include these index values in the press release
announcing each auction result and publish them with its other
interest data.

PAYMENT DATES - None.  No cash transactions occur until the
customer elects to redeem a Bill.

STRIPS - None.  Savings Bills will be the ultimate stable store
of value.  No one strips a gold bar.

TAXATION - None.

AUCTION TECHNIQUE - The Treasury will offer Savings Bills through
a uniform price auction.  Bidders will bid a nominal yield and
the Savings Index will increment to deliver this nominal yield
until the next weekly auction.  Amounts bid will be in terms of
the par value back on the Index starting date of January 5, 1998. 
Settlement amounts are determined by formulas below.

MINIMUMS AND MULTIPLES TO BID, HOLD, AND TRANSFER - The minimum
to actively bid to buy, hold, or transfer is a par value of
$1,000 or multiples thereof.  However, smaller denominations down
to $50 par are allowed for noncompetitive purchases and
redemptions.

BOOK-ENTRY SYSTEMS - Treasury Savings Bills may be held and
transferred in either of two book-entry systems:  the commercial
book-entry system (TRADES) and TREASURY DIRECT.  The securities
will be maintained and transferred at their par value, before
application of the Savings Index.

IN ADDITION, Savings Bills will be issued in the form of Bearer
Bonds in various denominations down to a par value of $50.

FORMULAS

Definitions
P    =  par  or face value of the Savings Bill
PA   =  purchase amount paid for the Bill
SA   =  settlement amount received on redemption
i    =  nominal yield in decimals at the most recent auction date
SI   =  Savings Index

Formulas:
    SI(January 5, 1998)  =  1.000000
    SI(date)  =  SI(date - 1) x (1 + i(date-1)/365)  
    PA  =  P x SI(purchase date)
    SA  =  P x SI(settlement date)

Discussion of the Proposed Description

This proposal is certainly much simpler - the formulas even
transmit perfectly on the internet.  It provides the ultimate in
liquidity.  It assures current market earnings at no risk to
principal (aside from Federal default).  It can save the Treasury
tens of billions of dollars each year.

This proposal would also triple M2 leading to hyperinflation,
require an absolute dictator to reform the tax system, and cause
massive layoffs in the financial sector leading to a Depression. 
O well, nobody's perfect!  Seriously, there are many problems to
be worked out, but they are not as intractable as they may appear
at first glance.  I visit each of the sections for comments
below.

SCHEDULE - The auctions were set weekly, because that is the
highest frequency presently used for any denomination of federal
securities.  Ultimately, as suggested by Mr. Caldwell, the rates
should adjust daily, or even continuously on an electronic world
exchange.  Thus, although the settlement price is technically
guaranteed only on auction days, this would eventually give the
true price at all times.

STRUCTURE - What is a structure based on Dollar Bills?  By this I
mean that a Savings Bill will just exist like a Dollar Bill - it
will never expire, it will never result in coupon payments, no
taxes will be due while it is held or when it is redeemed, it
will just be a store of value.  This value is determined by the
formulas given above.

MATURITY - The Savings Bills must have no maturity so that they
are all indistinguishable except by their size (par value).  This
means the Treasury don't really need to buy any back.  So long as
the Treasury is doing any net financing, the purchasers won't
know or care whether they are receiving a brand new Bill or one
just redeemed by a previous owner.  Thus the value of an old Bill
will be identical to that of a new Bill.  So, "no maturity"
guarantees "arbitrary maturity" at the election of the holder.

INDEXING METHODOLOGY - The par value must refer to the very first
issue date (assumed to be 01/05/98) rather than to the issue date
of a particular Bill both for simplicity and to maintain
indistinguishability (see MATURITY).

MINIMUM GUARANTEE - Unlike inflation, interest rates cannot go
below zero in general practice.  Why would anyone want to buy a
Savings Bill that had a negative interest rate this week, when
they can just hold cash until next week when they can use it to
buy a larger Bill?  Thus, the Savings Index, by its method of
construction, will never fall.  So the purchaser is automatically
assured of getting back not only his initial principal, but any
increment that he/she has earned in previous weeks.

INDEX RATIO - Again, for all Savings Bills to be
indistinguishable, the value must be calculable directly from its
par value and the current level of the Savings Index, without
reference to its own issue date.  Thus an "index ratio", giving
the increase in value since the issue date is not needed for
buying, selling, or taxes.

REFERENCE "SAVINGS INDEX" - This is the heart of the entire
proposal.  The "Savings Index" overcomes all the common drawbacks
associated with indexing a financial instrument to inflation.  It
has no lags;  it is not dependent on government definitions and
revisions;  it is easily compared to yields on other instruments.

But, does the Savings Index measure inflation?  Yes and no.  Over
the long term, nobody can measure inflation!  How many hundred
percent has our income increased over that of a cave man?  It is
only when we compare similar lifestyles that we can get
approximate agreement on a measure of inflation.  No one will
ever have a scientific "proof" that the current CPI exaggerates
inflation by 0.5% or 1.5% because it is precisely the invention
of new products that create new "needs" that cause the most
uncertainty in the current index.

The Savings Index certainly will not always track closely to the
CPI.  It was already mentioned that it cannot go negative.  On
the other hand, especially for the last 10 years, most of the
first world nations have real returns after taxes on government
debt that were a percent or two above zero.  The high liquidity
of Savings Bonds will cause them to have lower returns than other
federal debt and they are tax-free.  So, it is plausible to
expect them to yield within a percent or so of the CPI, at least
under common economic conditions.

The flip side of the relationship between the Savings Index and
inflation is the conventional wisdom that investments in
government securities in a taxed account do not keep up with
inflation in the long run.  If that remains true, it will mean
that the Savings Index will provide a slight underestimate of
inflation.  However, it will still be a much safer investment
than assets with fixed nominal returns.

Since the Savings Index will be created by the Treasury auctions,
it will need to be responsible for keeping both historical and
current values accessible to the general public.

PAYMENT DATES - No further comment.

STRIPS - Of course, someone will want to apply STRIPS to Savings
Bills.  Although there are no coupons, there is nominal
appreciation.  The main point is that Savings Bills maintain
constant value better than almost any other asset, so that for
ordinary investors they are the last item in their portfolio that
needs hedging against.

TAXATION - Taxation is the second most important point of the
entire proposal.  It is not necessary that Savings Bills be
uniquely tax-exempt, only that the Savings Index is not
significantly impacted by tax effects.
The simplest political expedient would be to institute 28%
withholding on Savings Bills along with capital gains
classification so that the great majority of taxable investors
would never see the withheld funds.  The Savings Index would give
the value after withholding.  More complicated calculations than
are shown here would apply after final redemption for those in a
different bracket.  (Even your current proposal for
Inflation-Protection Savings Bonds includes deferral of tax
impacts until redemption.)

However, this still violates the principal that old and new
Savings Bills should be indistinguishable and would encourage
anyone in a lower bracket to constantly churn his/her holdings to
get the tax refunds.  A better solution would be to get this
particular type of issue declared tax-free.  It is not a question
of being fair or unfair to other investors.  As several other
commentators have noted, the tax status of federal debt has
little impact on other taxpayers because the interest rate
accepted by the market takes the tax impacts into account and
nearly compensates.

The best long-term solution is to declare that ALL investment
earnings up to the earnings received with Savings Bills are
tax-free.  This provides a particularly elegant way to index
capital gains and thus could be at the heart of a thoroughgoing
tax reform program.  Notice that the Savings Index is available
on a daily and timely basis, so it is a simple matter to divide
all financial transactions by the value of the savings index on
the same day in order to put everything on a "real" basis and
then calculate taxes based on the "real" investment income.  [The
Savings Index could be defined constant before 1998, or
synthesized, by the Treasury, from other interest rate records
should the reformers wish to make the benefits retroactive.]  One
could even extend the treatment to wages and other income so that
taxes would also be paid in "real" terms, thus automatically
charging or crediting interest at the Savings Index rate on early
or late tax payments.  The possibilities here are intriguing -
but I am digressing.

AUCTION TECHNIQUE - It might not be entirely clear just what the
bidders are bidding on in a Savings Bill auction.  What they are
really saying is that this is the annual yield required to make
them part with their money for ONE week.  If they actually redeem
at the next auction, their settlement amount will have increased
by the amount of change in the Savings Index, which was based on
their previous bid, so that they will receive the earnings that
they desired.  The great majority of purchasers will keep most of
their investment from week to week and their earning may increase
or decrease from their original bid.  By definition, most of
these changes will be satisfactory to most investors, even if not
anticipated, because any attempt by most of them to leave will
cause the next bid to rise by enough to dissuade most of them. 
In effect, although the rates may fluctuate widely at times, the
Treasury will appear to read their mind even when they are not
bidding.

If the bidding ever becomes continuous, then investors will be
indicating the rates necessary to part with their funds for just
the next few minutes.

MINIMUMS AND MULTIPLES TO BID, HOLD, AND TRANSFER - I see no
reason to change the size limits for active participants, but
there needs to be some provision to handle the small
denominations that have always been important for many Savings
Bond investors.

BOOK-ENTRY SYSTEMS - What are "Bearer Bonds"?  By this I just
mean that purchasers can have actual certificates that can be
passed freely from person to person without re-registering. 
(Perhaps with optional registering if theft is expected to be a
problem.)  These should be not that different from Federal
Reserve Notes (ordinary currency), so that they can be hidden in
the mattress, put in a safe deposit box, or whatever, just like
money.  Such flexibility would greatly increase the incentive for
the poor to save, since they could thus earn about the same
return on their investment as a millionaire using a money market
account.  It would also facilitate demand from oversees
investors, drug runners, etc.

Oops!  Yes, I suppose international crime would be interested. 
But not to worry.  As long as Savings Bills were not available in
much larger denominations than Federal Reserve Notes, money
laundering would not be facilitated by much.  Money market rates
are peanuts in that world.

FORMULAS - Perhaps the SI formula needs to be explained in
English as well.  The formula in terms of (date) and (date-1) is
meant to be applied recursively, that is, repeatedly, in order to
calculated the value of the Savings Index for any future date. 
The interest rate to be used will be repeated seven days in a row
until the next auction.  If auctions are held daily, then the
interest rate would also be changed daily.  For a continuous
auction, the Savings Index formula would be an integration.

Final Discussion

Some other topics that didn't come up in the above sections:

Won't indexing income amount to a massive tax cut and increase
the deficit?  We need to consider the whole package.  Many of the
benefits of indexing have already been enacted into the tax law
as special favors - capital gains top rate, housing rollover,
mortgage interest deduction, etc.  These would need to be
repealed or modified to avoid double counting many benefits. 
Also, the lower interest payments on the federal deficit would be
an important counterbalance.  Presumable the existing rate
structure will also be flattened more so there won't be any
"other things held equal" comparison.

How will Savings Bills impact inflation?  Liquidity seemed to be
a common goal among the commentator and the Treasury.  This was
not true when Savings Bonds (War Bonds) were invented.  Then they
were designed specifically to soak up cash and transform it into
a long-term investment with early withdrawal penalties.  If the
Treasury really wanted liquidity, it could just issued currency
equal to the entire national debt and its interest costs would
disappear, but we would have wild inflation.  Savings Bills would
be almost as liquid, but there would be much more incentive to
hold them as they earn interest.  So their velocity would be much
lower and more could safely be issued.  A lot more could be
issued if the reserve ratio were changed at the same time. 
Remember that the reserve ratio was invented because there was
not enough gold to go around, so we had to have money in some
multiple of the precious metal base.  If Savings Bills are as
good a store of value as gold, then we have potentially a much
bigger monetary base, so we don't need to multiply the money
supply so much through the reserve ratio.  It appears that there
is plenty of room to issue enough Savings Bills to save
substantially on interest payments without necessarily increasing
inflation.

Is there more to this comparison of Savings Bills and gold?  Yes,
indeed.  Gold was once the medium of international exchange.  The
gold standard allowed trade between developed nations to proceed
without any uncertainty in exchange rates, because both
currencies were nominally convertible into gold and therefore
really convertible at a fixed rate into each other.  Savings
Bills could reinstitute a gold-like standard.  Assume the British
issue their own Savings Bills as a substantial fraction of their
national debt.  Then let us say that the two nations agree that a
par $1,600 American Savings Bill will be freely exchangeable for
a par 1,000 pounds U.K. Savings Bill.  This will set the exchange
rate between dollar and pounds, but will not hold it fixed. 
Instead, the exchange rate will drift at exactly the annual rate
of the difference between the interest rates on the two types of
Savings Bills.  What is the advantage of that?  A tremendous
reduction in the daily fluctuations in the exchange rates. 
Currently a half percent change in one day is not uncommon.  For
that to happen with the Savings Bills locked together, the
interest rates would need to differ by 183%!  So the exchange
rates would drift almost imperceptible in any one day, but could
easily shift by several percent over the course of a year.  This
could be the key to the "firm, but flexible" exchange rates that
the Europeans have been trying to institute in recent years.

In conclusion, Savings Bills could be a key ingredient in a major
reformation of the international economic system.  Eliminating
the need for any cash payout of interest on the National Debt is
just the beginning.  Or they could become a footnote.  The choice
is up to you.

Background
Dr. Robert L. Elgin received a Ph.D. in Physics from Caltech in
1973.  A considerable number of physicists have gone into finance
in the last 20 years as funds for basic physics research have
dwindled.  They usually bring with them a high level of
competence in mathematics and a distinctive method of problem
solving.  They tend to look for a few simple principles that can
explain a mass of data.  They take special pains to make accurate
measurements and worry about the stability of their measuring
sticks.  It is only natural for them to take exception to
calculations based on an instrument as unstable as the dollar and
to look for a more invariant statistic. Sometimes they even bring
in strange concepts from their major such as
indistinguishability.  I hope you have enjoyed following my own
explorations and perhaps found some suggestions of interest to
you among the many oversimplifications.

Copyright 1996 Robert L. Elgin

PS to the email version.  I   am mailing a hardcopy today, but
since your are planning to put comments back on the internet, I
am sending you this copy as well, already in internet format.

* * * * * * * * * *

HSBC Securities, Inc,,
140 Broadway
New York, NY 10005

October 25, 1996

Mr. Kenneth J. Papaj, Director 
Government Securities Regulations Staff 
Bureau of the Public Debt
999 E Street, NW
Washington, DC 20239

Re:  Proposed Rule:  Inflation-protection Securities

Dear Mr. Papaj:

HSBC Securities Inc. appreciates the opportunity to comment on
the Proposed Rule issued by the Department of the Treasury
regarding inflation-protection securities.  Clearly, the Treasury
has gone to great lengths to work with financial market
participants in the design and implementation of these
securities, reading our comments and, wherever possible, making
decisions so that the needs of the market place are met.  As a
result, we have great confidence that a vibrant market in
inflation-protection securities will develop in very short order.

As far as the securities themselves are concerned, there is
little or nothing we would care to ask be changed.  However,
there is one issue that we think should be considered further: 
Inflation-protection Strips.

The proposed design of inflation-protection strips is a balance
of two fundamental goals that were discussed repeatedly
throughout the development process:

    Keep the structure as simple as possible.

    The best way to achieve simplicity is to keep the structure
as near to that of the conventional securities market as
possible.

In the strips market, then, as in the broad market, the goal was
simplicity first, familiarity second.  But the reason people
advocated these two points in their comment letters was to
encourage the rapid development of a liquid market.  A healthy,
liquid market, after all, will develop fastest if the greatest
pool of investors understand the structure rapidly and are
willing to invest quickly.

In the case of the strips market, there were two regular features
of conventional strips that are incompatible with each other in
real return strips:  1) Strips are sold in $1000 increments, and
2) Strips are fungible.  Apparently, a decision was made to
sacrifice fungibility in order to maintain the simplicity of
regular strips denomination.

Unfortunately, this decision may very well mean that the liquid
market that simplicity is intended to foster will never develop. 
Virtually every strips trader recalls when the first stripped
securities were not fungible.  Failed trades when a particular
maturity was on special or pieces of a security tied up in
defeasance deals that simply could not be undone were frequent. 
The result was a small, illiquid market.

Treasury has proposed getting around this problem by reopening
issues that are in short supply.  Unfortunately, that's unlikely
to solve all the problems.

There is another way.  HSBC Securities strongly recommends that
the Treasury consider the attached description of an inflation-
protection strip that would be entirely fungible with other
inflation-protection strips.  It is somewhat more complicated in
nominal terms than the model proposed by the Treasury, most
notably in that the stripped pieces might not always have values
equal to $1000.  Instead, the securities are divided into pieces
of equal real value.  This is a workable system that would result
in a fungible market.  Without fungibility, traders fear that
these new securities will be strippable in name only.

If you are interested in pursuing this issue in more detail, I
would be happy to send Robin Grieves and Christopher Low to
Washington for further discussion.  Please call me on my direct
line (212) 825-9477.

Sincerely,

Robert D. Sbarra
Executive Managing Director
Chief Operating Officer - Fixed Income
HSBC Securities, Inc,,
140 Broadway
New York, NY 10005

-----

STRIPS for inflation-protection bonds and notes

Creating STRIPS from the proposed inflation protected bonds
presents no insurmountable obstacles provided the rule that
coupon STRIPS be created in $1000 increments is relaxed.  It is
simply a matter of defining the cash payment for STRIPS on
different dates and recognizing that the par value of STRIPS
created from a bond will not necessarily match the par value of
the coupons within a bond.  Stripping would be simplified if the
cash payments for all STRIPS are defined with the same index
date.

For now suppose that only 30-year bonds are issued.  For the
first bond, we will see 60 coupon STRIPS and one principal
STRIPS.  If the coupon rate is 3%, the payments to the coupons
will be .015 x 1,000,000 x (Index end/Index begin).  If the
beginning index date for the STRIPS is set equal to the beginning
index of the first inflation protected bond, then the nominal
amount of each of the STRIPS will be $15,000.  But different
beginning index dates for the STRIPS are possible.  For example,
STRIPS payments could be PAR x (Index end/100).  In that case,
each coupon STRIPS from the first bond would have a par value of
$15,000 x (100/Index begin).  Further, one would use an annuity
of less than $15,000 per period to reconstitute the bond.

Now, let a second bond on the same payment cycle be issued two
years later.  Suppose the coupon rate on the second bond is also
3.0%.  Then the payments will be for .015 x 1000 x (Index
end/Index begin+2).  In this case, even though the coupon stream
within the bond appears to be the same at $15,000 every six
months, the par amount of the STRIPS from the bond would be
smaller (assuming the beginning index is higher).  The par amount
of the STRIPS from the second bond will be $15,000 x (100/Index
begin+2).  To reconstitute the first bond with STRIPS from the
second, a greater par value of the second bond must be stripped. 
Nevertheless, the calculations are simple and straightforward.

The only fly in the ointment is the $1000 par rule for coupon
STRIPS.  It would be easy enough to impose on the first bond, but
would interfere with stripping the appropriate amount of other
issues.  A more specific example follows:

A Simple Example of Fungible STRIPS from Inflation Protection
Bonds

Example
Suppose the 3s of 1/15/27 begin with an initial pricing CPI of
158.0 and that the CPI for determining the coupon payment one
year later is 162.7.  Then, the second coupon payment will be
$15,000 * (162.7/158.0) = $15,446.20 per million.  If the pricing
CPI two years later is 167.6, the coupon payment will be $15,000
* (167.6/158.0) = $15,911.39 per million.

Now suppose that the 4s of 1/15/28 are issued on the first
anniversary of the 3s of 1/15/27.  Its pricing CPI will be 162.7
at the outset and its second coupon payment will be $20,000 *
(167.6/162.7) = $20,602.34 per million.

Let's make a stripping rule such that all STRIPS pay as if their
initial CPI equals 100.  This rule will not change any cashflows
from any bond.  It only acts as a translator to put all STRIPS on
an equal footing.  All that happens is the par amounts of the
STRIPS differ from the par amount of the coupon payments within
the bonds.

When we strip the 3s of 1/15/27, instead of getting $15,000 par
of each coupon of the STRIPS per million of the bond, we will get
$15,000 * (100/158.0) = $9493.67.  But, what payment will we
receive from the stripped coupon of 1/15/98?  We will get
$9493.67 * (162.7/100) = $15,446.20 --just as we ought.  And on
1/15/99 we will receive $9493.67 * (167.6/100) = $15,911.39 --
again, just right.

When the 4s of 1/15/28 get stripped, the coupons will all be for
$20,000 * (100/162.7) = $12,292.56.  We can either hold the
1/15/99 coupon STRIPS until it pays the $20,602.34 per million or
we can use $9493.67 of it to reconstitute the 3s of 1/15/27.  The
STRIPS can be fungible easily.

Robin Grieves
HSBC Securities
212-825-3571

* * * * * * * * * *

PSA The Bond Market Trade Association
40 Broad Street
New York, NY 10004-2373

November 6, 1996

Mr. Kenneth Papaj, Director
Government Securities Regulations Staff
Bureau of the Public Debt
Department of the Treasury
999 E Street, N.W., Room 515
Washington, D.C. 20239-0001

Re:  Proposed Rule:  Inflation Protection Securities

Dear Mr. Papaj:

     PSA The Bond Market Trade Association ("PSA")1 appreciates
the opportunity to comment on the proposed amendment to the
Uniform Offering Circular for the Sale and Issue of Marketable
Book-Entry Treasury Bills, Notes and Bonds (the "Proposal")
issued by the Department of the Treasury (the "Treasury") to
accommodate the public offering of inflation protection
securities.  In PSA's view, Treasury has been very responsive to
many of the concerns and issues raised by PSA in its comment
letter2 on the Advance Notice of Proposed Rulemaking ("ANPR") 3
regarding the design details and structure for the new
securities.  In particular, PSA is supportive of Treasury's
decision to model the new securities on Canada's Real Return
Bonds and the choice of the CPI-U as the inflation index.  PSA
also appreciates Treasury's efforts to conform the new
securities, operationally and with respect to the auction
technique, to the extent possible, to other fixed principal
Treasury securities.  Finally, subject to certain caveats
discussed below, PSA is supportive of Treasury's decision to make
the new securities available for stripping.

     Notwithstanding the foregoing, PSA believes that there are a
number of market practice, regulatory, operational and technical
issues which must be resolved in order to foster a smooth and
orderly auction and efficient secondary market for the new
securities in January.  In this regard, foremost among concerns
raised by PSA members is the issue of timing.  The inflation
protection securities are scheduled to be issued in mid-January
1997.  Yet there are many unanswered questions regarding certain
material aspects of the new securities, such as industry
conventions regarding the manner in which the securities will be
priced and quoted, the valuation of stripped interest components,
the manner in which the securities will be treated under numerous
regulatory regimes, and significant operational concerns related
to all of these issues.  While PSA is continues to work closely
with member firms to resolve some of the market-related issues,
it is unclear whether all of the foregoing issues will be
resolved in the coming weeks.  In addition, the resolution of
some issues is beyond the purview or control of market
participants, such as the regulatory treatment for the new
securities.  Finally, even assuming the foregoing trading, market
practice and regulatory issues can be resolved in the coming
weeks, firms will have to make significant changes to their
internal trading, trade processing, settlement, risk management,
accounting, regulatory and tax reporting systems, among others,
leaving market participants little time to build, test and
implement such internal systems changes before trading in the new
securities commences in January.

     Additionally, while PSA members are supportive of Treasury's
decision to make the new securities available for the STRIPS4
program, market participants are extremely concerned about the
lack of fungibility of stripped interest components.  Treasury
recognized this concern in the Proposal and indicated that it may
reopen issues to alleviate lack of liquidity in the strips
market.  However, PSA members are concerned that reopenings may
not be an effective solution to the lack of fungibility since
Treasury would only be able to reopen issues on a limited basis. 
Market participants have also indicated a concern with the lack
of any industry convention, such as a factor or formula, for
purposes of valuing stripped interest components for trading,
trade settlement, accounting and tax reporting purposes.  

     Finally, member firms have recommended that Treasury include
in the final rules additional hypotheticals and examples for
calculating accrued interest and inflation-adjusted principal for
the new securities and strips under different scenarios.  Such
examples and hypotheticals would be extremely helpful for market
participants and would provide a valuable benchmark for firms as
they implement changes to their internal auction, trading, trade
processing, settlement, risk management, accounting, regulatory
and tax reporting systems, among others, to accommodate the new
securities.

     In the first part of this comment letter, PSA will address
in greater detail the industry's central concerns which have been
highlighted above.  In the second part of this letter, PSA will
offer certain additional technical comments and recommendations.

I.   PSA's Central Concerns Regarding the Proposal

A.   Timing

     The first issuance of 10-year inflation protection notes is
scheduled for mid-January 1997.  Yet, as noted above, there are
still many unanswered questions regarding certain market
practice, regulatory, technical and operational aspects of the
new securities that are still in the process of being resolved by
market participants and regulators.  With respect to the market
practice issues, at Treasury's suggestion, PSA has formed an
Inflation Bond Trading Practices Task Force and other working
groups and subcommittees, comprised of representatives of
trading, operations, research and compliance professionals at PSA
member firms, to address many of the trading and market practice
issues.  While these industry task forces and working groups will
address, on an accelerated basis, how the new securities and
stripped components will be quoted and priced, such issues may
not be completely resolved until, at the earliest, mid-November. 
Moreover, many of the market practice issues that will be
addressed by the PSA task forces and industry working groups will
have significant impact on, and may in fact dictate, the changes
that will be required to be made to internal trading, clearance
and settlement systems at broker-dealers and other market
participants.  Unfortunately, with the January issuance several
weeks away, dealers and other market participants will have
little time following resolution of these significant market
practice issues to design specifications for, implement and test
the necessary systems changes. 5  As Treasury may recall, PSA
members previously indicated that they would need approximately
six months from publication of the final rules to prepare for
trading, clearance and settlement of the new securities.

     Additionally, as discussed in more detail below, many
questions have been asked regarding the manner in which the new
securities will be required to be treated under numerous
regulatory regimes, including federal securities, banking, tax
and accounting regulations.  For example, it is unclear whether
the securities will be required to be reported and carried at the
original face amount or at an inflation-adjusted principal amount
under various regulatory regimes, such as for regulatory capital
and margin purposes and for broker-dealer reporting purposes. 
Resolution of these issues, which is not within the control of
market participants, will significantly impact numerous internal
systems changes at broker-dealers and other regulated market
participants.  Moreover, it is presently unclear whether
securities, banking and accounting regulatory agencies, among
others, have begun to consider how the inflation protection
securities will be treated under their respective regulations and
whether such issues will be resolved before January.

     As an adjunct to the issue of timing, many firms have
indicated a reluctance to begin implementing the numerous systems
and corresponding procedural and recordkeeping changes until (i)
the market practice issues are resolved and (ii) Treasury and the
Internal Revenue Service ("IRS") have published final rules for
the new securities (which are expected to be published in early
December).  Thus, while many firms are closely analyzing the
Proposal and determining which systems will be impacted, many are
hesitant to begin significant and costly systems changes until
they are assured that both market practice issues and regulations
governing the new securities have been finalized.6  This is not
to suggest that market participants will wait until the last
moment to begin making the necessary systems changes for the new
securities; however, the implementation processes will not be
completed by many firms until they are assured that no further
changes will be made to the Proposal.

     Finally, of related concern with respect to the timing of
the first issuance, is the fact that the Proposal will be
finalized in December, a time of year when senior management at
many market participants and institutional investors will be
required to focus their time and resources on internal year-end
accounting, profit and loss and budget analyses.  As a practical
matter, it will be extremely difficult for such entities to focus
on marketing and investing in a new product at the end of the
calendar year.  Additionally, as Treasury is aware, the Boskin
Commission is expected to publish its report in December on the
methodology used by the Bureau of Labor Statistics to calculated
the CPI index.  While PSA agrees with Treasury's choice of the
CPI-U index for the inflation protection securities, market
participants have indicated that they would prefer to have
additional time to analyze such report before the first issuance
of the new securities in January.

B.   Strips

     Market participants appear eager to create as liquid a
market as possible for the new securities.  In this regard, PSA
is supportive of Treasury's decision to make the securities
available for stripping.  However, for reasons discussed below,
PSA believes that under the proposed security structure, and
under existing stripping requirements, the availability of
stripped 
interest components for inflation protection securities would not
likely enhance the liquidity of the new securities.  First, of
primary concern to market participants is the lack of fungibility
of stripped interest components.  Second, and of related concern,
is the need for a market convention regarding the appropriate
factor or formula to be used for valuing and pricing strip
interest components.

1.   Fungibility    

     As noted above, market participants have expressed
significant concern with the lack of fungibility of stripped
interest components.  Treasury recognized this concern in the
Proposal and highlighted its ability to increase the amount
outstanding of the stripped interest components through
reopenings of the underlying securities.  PSA member firms,
however, have indicated that reopenings alone would not resolve
the lack of fungibility since Treasury would only be able to
reopen issues on a limited basis.  As an alternative to the use
of reopenings, one PSA member firm has recommended to Treasury
(in a separate comment letter),7 a procedure that it believes
would foster the creation of fungible stripped interest
components.  While the specific details of the recommendation
will not be outlined herein, in general terms it would enable the
strips to have equal real values, thus fostering fungibility,
while not always having nominal values that equal multiples of
$1,000.  In addition, under the recommendation, Treasury would be
required to relax the existing requirement that the par amount of
the security (without the inflation adjustment), must be in an
amount that, based on its interest rate, will produce a
semiannual interest payment in a multiple of $1,000.  Whether or
not this particular recommendation is accepted by Treasury,
market participants believe that in order for the strips program
to be successful from a market perspective, Treasury or market
participants must devise a viable method to create fungible
strips.

2.   Valuation

     Market participants have also expressed concern about the
lack of guidance from Treasury and the present lack of market
consensus regarding the appropriate method for valuing stripped
interest components.  Some PSA members have suggested that
Treasury provide a factor or formula or other guidance to be used
uniformly by market participants to value the strips.  As the
issuer of the securities, Treasury is in the best position to
provide such information and could provide added consistency and
regularity to the market by doing so.  In the event that Treasury
is unwilling to provide such guidance, it will nevertheless be
important for all market participants to apply the same valuation
formula consistently.  A particular need exists for consistency
with respect to trading, trade settlement, regulatory, tax and
accounting treatment, among others.  In this regard, PSA's newly
formed Inflation Bond Trading Practices Task Force will consider
whether PSA, as an industry trade association, would be a proper
source for promulgation of such a factor or formula.  However, as
Treasury is aware, even if PSA were to recommend a specific
valuation methodology, it would only be able to do so on a
completely voluntary basis and could not compel market
participants to follow PSA's recommended guidelines.  In fact,
whenever PSA makes recommendations to the market, especially
regarding market practice issues, it cautions its members to make
an individual determination as to whether such recommendations
are appropriate for the particular firm based on their own facts
and circumstances.

     Nevertheless, if market participants must rely on PSA or
private financial service companies to provide such valuation
guidance, discrepancies and confusion could result if valuation
formulas used by market participants vary from one another.  To
the extent that a standard valuation formula or other guidance
could be provided by Treasury, PSA believes it would minimize
significant uncertainty regarding the strips market and would, in
the long run, benefit the market for inflation protection
securities.  As noted above, market participants believe that a
successful strips program is essential to liquidity.  As a
practical matter, while PSA (and others) would willingly step
into the fold to provide market participants with guidance for
valuing the strips, it is much more likely that market
participants would consistently rely on a formula provided by
Treasury than on formulas provided by PSA or private pricing
services.  Finally, as PSA expressed in the first comment letter,
anything that Treasury can do to minimize uncertainty and
confusion regarding the terms of the new securities will benefit
the market and enhance liquidity.  

II.  Additional Comments on Specific Aspects of the Proposal

A.   Publication of Reference CPI Numbers and Index Ratios

1.   Publication of Reference CPI Numbers

     Treasury requested comment on whether a monthly publication
of the reference CPIs numbers would be useful to market
participants.  PSA strongly recommends that Treasury provide a
monthly publication of the reference CPI numbers for, at a
minimum, the preceding three months.  PSA also recommends that
Treasury maintain a permanent, publicly available record of all
reference CPI numbers used by Treasury in calculating principal
and interest payments.  This is particularly important in light
of Treasury's proposed course of action in the event a previously
reported CPI number is revised or rebased to a different year by
the Department of Labor.  For example, Treasury has proposed that
if a previously reported CPI number is revised, Treasury will
continue to use the previously reported CPI number in calculating
the inflation-adjusted principal and interest payments. 
Similarly, Treasury has proposed that if the CPI number is
rebased to a different year, Treasury will continue to use the
CPI number based on the base reference period in effect when the
security was first issued as long as the CPI continues to be
published.  In each case, market participants will need to have
ready access, throughout the life of all outstanding inflation
protection securities, to the CPI numbers in effect before any
revisions or rebasing takes place.  This is particularly true for
any securities issued in a month for which the reference CPI
number is revised or rebased.

     PSA believes that it would be inappropriate for Treasury to
expect market participants to rely on CPI numbers published
solely by the Department of Labor, especially when such numbers,
after revisions or rebasing, will be different from those used by
Treasury in calculating inflation-adjusted principal and interest
on outstanding inflation protection securities.  As a matter of
clarity and consistency, there is a strong preference among
market participants to refer to one source for reference CPI
numbers, rather than continually reviewing and comparing CPI
numbers announced separately by Treasury and the Department of
Labor.  It would be easier and more practical for market
participants to refer to one primary source for all reference CPI
numbers.  A single reference source for all CPI numbers will also
foster the clearance and trade settlement process in that it will
enable market participants to avoid discrepancies in settlement
amounts potentially arising from nonconforming reference CPI
numbers and index ratios.

     In light of the foregoing, PSA recommends that Treasury
maintain a master list of all reference CPI numbers used by
Treasury for calculating inflation-adjusted principal and
interest on outstanding inflation protection securities and that
such a list be published and made available electronically
through the internet, TAAPS (Treasury Automated Auction
Processing System) and other automated electronic delivery
systems on a monthly basis.  

     Finally, as a practical matter and in light of Treasury's
proposed procedures in the event a CPI number is revised or
rebased, PSA recommends that Treasury clarify in the final rules
that in the event of any inconsistencies or discrepancies between
reference CPI numbers published by Treasury and those published
by the Department of Labor, those published by Treasury will take
precedence. 

2.   Publication of Index Ratios  

     Treasury explained in the Proposal that it does not intend
to publish index ratios because market participants should be
able to make the calculations themselves based on publicly
available CPI numbers.  While this is certainly true, market
participants have indicated a strong preference for Treasury to
publish daily index ratios on a month to month basis.  Even
though PSA believes that many institutional market participants
and large broker-dealers will likely perform their own
calculations, such market participants will benefit from the
ability to check their calculations and systems against the
Treasury numbers to ensure that they conform.  In this regard, a
list of index ratios published by Treasury will provide a
valuable benchmark for even the most sophisticated market
participants to ensure that their own calculations and databases
are in accordance with the numbers being used by Treasury. 
Additionally, smaller market participants and retail investors
who do not have ready access to the necessary systems to perform
the daily index ratio calculations would likely also benefit by
Treasury's publication of such numbers.  As with publication of
the reference CPI numbers, publication by Treasury of the index
ratios on a month-to-month basis will provide consistency to the
comparison and settlement process for the new securities. 
Finally, reliance upon index ratios provided by Treasury will
provide consistency among market participants regarding
compliance with regulatory, tax and accounting issues. 

B.   Minimum Guarantee

     Proposed Section 356.30(b) provides that if at maturity the
inflation-adjusted principal is less than the original par amount
of the security, an additional amount will be paid at maturity so
that the additional amount plus the inflation-adjusted principal
equals the original par amount.  As a technical drafting matter,
PSA suggests that Treasury make clear in Section 356.30(b) its
obligation to pay the greater of the inflation-adjusted principal
amount or original par.  Some market participants found the
current proposed language somewhat unclear in that it focuses
solely on what happens in the event the inflation-adjusted
principal is less than par, while in most cases it is expected
that at maturity the inflation-adjusted principal will be more
than the original par, which is the amount that will be paid by
Treasury. 

C.   Hypotheticals

     Market participants have strongly recommended that
additional hypotheticals be provided by Treasury in the
Appendices to the Uniform Offering Circular.  Additional
hypotheticals would be extremely useful for market participants
as they develop, implement and test systems changes to
accommodate the new securities.  For example, market participants
have suggested that Treasury provide sample calculations of
adjusted principal and accrued interest for a 10-year inflation
protection note during the course of several specific days,
including the day before the interest payment date, the interest
payment date, and the day following the interest payment date. 
In addition, PSA members have suggested that Treasury provide
sample calculations for redemption amounts at maturity in the
event the inflation-adjusted principal is less than the original
par amount in order to illustrate the minimum guarantee.  Sample
calculations of accrued interest and interest payments during
periods of deflation would also be helpful.  Finally, sample
calculations of adjusted principal and accrued interest on
when-issued trades for newly issued and reopened securities would
be useful.  The foregoing additional sample calculations would
provide a valuable benchmark for broker-dealers and other market
participants, such as the clearing banks and clearing
corporations in developing, implementing and testing systems
changes.

D.   Securities Clearance, Auction Takedown and Trade Comparison

     As PSA discussed in its prior comment letter on the ANPR,
member firms have indicated a strong preference for the new
securities to be eligible for processing and netting by
registered clearing corporations, such as the Government
Securities Clearing Corporation and Delta Clearing Corp.  This
would enable clearing corporation participants to take advantage
of available auction takedown, trade comparison and netting
services.  PSA understands that such clearing corporations are in
the process of updating their systems in order to accommodate the
new securities.  However, as with many of the other operational
issues that must be resolved before the January 1997 issuance,
PSA believes that the clearing corporations and other similar
organizations will be coordinating their systems changes with
market participants to reflect, if possible, market consensus
regarding trading and valuation conventions.  As explained above,
PSA is in the process of actively meeting with dealers, the
clearing corporations and the clearing banks to reach consensus
and establish guidelines regarding some of these trading and
related market issues.  

E.   Regulatory Reporting Issues

     Many questions have been raised by PSA member firms
regarding the manner in which the inflation protection securities
will be required to be treated for regulatory reporting purposes. 
As Treasury is aware, the key issue is whether the securities
should be reported at the original face amount or the
inflation-adjusted principal amount.  For example, firms have
inquired whether for purposes of large position reporting, the
reportable position should reflect original par amount or the
inflation-adjusted par amount.  This example is particularly
relevant since market participants are in the process of making
systems changes to prepare for large position reporting and
recordkeeping which will go into effect in March 1997. 
Similarly, firms have inquired whether for valuation reporting
purposes, such as for purposes of determining regulatory capital
and margin amounts, the securities should be valued at the
original face amount or an inflation-adjusted principal amount. 
Additional regulatory issues involve the primary dealer position
reports submitted to the FRBNY, compliance with regulatory
capital requirements, and disclosure obligations, such as
customer confirmations.8  While representatives of Treasury and
the FRBNY have informally addressed some of these regulatory
issues, PSA believes that market participants would benefit
significantly if formal guidance could be provided by Treasury
and other regulators with respect to the manner in which such
securities are required to be valued, recorded and reported under
different regulatory regimes.  In this regard, PSA urges Treasury
to provide guidance both to market participants and to other
regulators regarding the manner in which the inflation protection
securities are carried and reported for regulatory purposes,
including, without limitation, under securities, tax and
accounting regulations.  PSA will be pleased to assist Treasury
in any way possible in providing industry guidance and input on
any of these regulatory issues.

     Finally, as has been noted throughout this comment letter,
the manner in which the inflation protection securities will be
required to be valued, recorded and reported under different
regulatory regimes will have significant impact on systems
changes at PSA member firms.  As Treasury is aware, many of these
reporting systems are currently automated.  To the extent that
all regulators can agree on a consistent approach and reporting
treatment for the inflation protection securities, it would
simplify the required systems changes and reduce market confusion
regarding compliance.

     PSA appreciates the opportunity to comment on the Proposal
and looks forward to continuing the exchange of ideas between
Treasury and market participants as the issue date for inflation
protection securities approaches.  Any questions regarding this
letter may be directed to the undersigned, or Stephanie S. Wolf,
Vice President and Assistant General Counsel of PSA at (212)
440-9431.

Sincerely yours,

Edwin F. Payne, Chairman
PSA Government and Federal Agency Division
40 Broad Street
New York, NY 10004-2373

cc:  Stephanie S. Wolf, PSA

1 PSA The Bond Market Trade Association represents securities
firms and banks that underwrite, trade and sell debt securities,
both domestically and internationally.  Its members include all
of the primary dealers recognized by the Federal Reserve Bank of
New York, as well as other government securities dealers.

2 Letter to Kenneth Papaj, Director, Government Securities
Regulation Staff, Bureau of the Public Debt, dated July 12, 1996,
from Edwin F. Payne, Chairman, PSA Government and Federal Agency
Division.

3 61 FR 25164 (May 20, 1996).

4 Separate Trading of Registered Interest and Principal
Securities ("STRIPS").

5 In addition to internal auction, trading, trade processing,
settlement, risk management, accounting, and tax reporting
systems, numerous internal regulatory reporting systems will be
affected by the introduction of inflation protection securities. 
Such systems include internal valuation systems for purposes of
calculating margin and regulatory capital amounts, systems that
generate customer confirmations, systems designed to capture
information for the primary dealer reports submitted to the
Federal Reserve Bank of New York ("FRBNY"), and systems that
capture information for broker-dealer regulatory reports, such as
FOCUS reports.

6 Unfortunately, many market participants point to the fact that
shortly after publication of the Proposal in September 1996,
Treasury published certain technical and typographical
corrections to the proposed formulas on October 2, 1996 (61 FR
194 (October 4, 1996)), as an indication that their concern is
justified.

7 Letter dated October 25, 1996, to Kenneth J. Papaj, Director,
Government Securities Regulations Staff, Bureau of the Public
Debt, from Robert D. Sbarra, Chief Operating Officer, Fixed
Income, HSBC Securities, Inc.

8 For example, firms have questioned how they will comply with
the obligation to disclose yield to maturity on customer
confirmations which is required under SEC Rule 10b-10.

* * * * * * * * * *

Reed Smith Shaw & McClay
1301 K Street, N.W.
Suite 1100, East Tower
Washington, D.C.  20006-3317

September 27, 1996

Darcy E. Bradbury, Assistant Secretary--Financial Markets
U S Treasury Department
1500 Pennsylvania Avenue, NW
Room 2334
Washington DC 20220

Dear Assistant Secretary Bradbury:

IRS Notice 96-51 (9/25/96) discloses a serious gap in the
Treasury Department's plan to broadly market inflation-indexed
securities.

An inflation-indexed Debt Instrument is an obligation that
clearly delineates that portion of a payment representing the
payment of interest and that portion of a payment to the holder
of the obligation that represents an amount identical to the
amount loaned in real rather than nominal dollars.  Where such a
repayment scheme is separately and clearly delineated, the
rationale for treating transfers of such nominal amounts as
taxable income is an issue that should be addressed as part of
the plan to offer such securities.

I am not aware of any existing statutory authority that would
permit the IRS, on its own, to conclude that the transfer of
nominal amounts as inflation adjustments to holders of new
inflation-indexed Treasury securities are not subject to Federal
income tax.

On the other hand, it seems to me that before such an investment
is offered for sale to the general public, as a suitable
investment for other than tax exempt entities, including
qualified plans, etc., the Treasury has an obligation to put
forward a legislative proposal for Congressional consideration
that would provide an exclusion under the tax law for the
inflation compensating payments made in connection with these
obligations.

As it now stands, investors are to be offered a below market rate
of return in exchange for inflation protection that, by the way,
will be reduced by the imposition of income tax on the nominal
amount of each semi-annual inflation adjustment to principal. 
That, it seems to me, represents less than full inflation
protection for a taxable, individual investor.  That type of
investor, if there is to be no change in the proposed tax
treatment for inflation-adjustment payments, should be fully
informed of the potential "tax detriment" accompanying these
newly proposed Treasury securities.

Thank you for taking the time to review these comments.

Sincerely yours,

William Morris
Reed Smith Shaw & McClay
1301 K Street, N.W.
Suite 1100, East Tower
Washington, D.C.  20006-3317