58756 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 

DEPARTMENT OF THE TREASURY

Fiscal Service 

31 CFR Part 344

[Department of the Treasury Circular, Public 

Debt Series No. 3–72] 

U.S. Treasury Securities—State and 

Local Government Series

AGENCY: Bureau of the Public Debt, 

Fiscal Service, Treasury.

ACTION: Notice of proposed rulemaking 

with request for comments. 

SUMMARY: The Department of the 

Treasury (Treasury) is issuing this 

Notice of Proposed Rulemaking (NPRM) 

to revise the regulations governing State 

and Local Government Series (SLGS) 

securities. SLGS securities are nonmarketable Treasury securities that are 

only available for purchase by issuers of 

tax-exempt securities. The NPRM deals 

with certain practices of issuers that in 

effect use the SLGS program as a costfree option and which Treasury 

considers to be contrary to the purpose 

of the SLGS program. These practices 

also create volatility in Treasury’s cash 

balances, make cash balance forecasting 

more difficult, and increase Treasury’s 

borrowing costs. We are proposing 

changes to eliminate these practices. We 

are also proposing other changes that 

are designed to improve the 

administration of the SLGS program.

DATES: To be considered, comments 

must be received on or before November 

1, 2004.

ADDRESSES: You may submit comments, 

identified by Docket Number BPD–02–

04, by any of the following methods: 

• Federal eRulemaking Portal:

<http://www.regulations.gov>. Follow 

the instructions for submitting 

comments. 

• Agency Web Site: <http://

www.publicdebt.treas.gov>. Follow the 

instructions for submitting comments 

via e-mail to <opda-sib@bpd.treas.gov>. 

• E-mail: <opda-sib@bpd.treas.gov>. 

Include Docket Number BPD–02–04 in 

the subject line of the message. 

• Fax: 304–480–5277. 

• Mail: Keith Rake, Deputy Assistant 

Commissioner, Bureau of the Public 

Debt, Department of the Treasury, P.O. 

Box 396, Parkersburg, WV 26101–0396, 

or Edward Gronseth, Deputy Chief 

Counsel, Elizabeth Spears, Senior 

Attorney, or Brian Metz, AttorneyAdviser, Office of the Chief Counsel, 

Bureau of the Public Debt, Department 

of the Treasury, P.O. Box 1328, 

Parkersburg, WV 26106–1328. 

• Hand Delivery/Courier: Keith Rake, 

Deputy Assistant Commissioner, Office 

of the Assistant Commissioner, Bureau 

of the Public Debt, Department of the 

Treasury, 200 3rd St., Parkersburg, WV 

26101, or Edward Gronseth, Deputy 

Chief Counsel, Elizabeth Spears, Senior 

Attorney, or Brian Metz, AttorneyAdviser, Office of the Chief Counsel, 

Bureau of the Public Debt, Department 

of the Treasury, 200 3rd St., 

Parkersburg, WV 26101. 

Instructions: All submissions received 

must be addressed to the Bureau of the 

Public Debt and include the Docket 

Number for this NPRM, BPD–02–04. All 

comments received will be posted 

without change to <http://

www.publicdebt.treas.gov>. The posting 

will include any personal information 

that you provide in the submission.

FOR FURTHER INFORMATION CONTACT:

Keith Rake, Deputy Assistant 

Commissioner, Office of the Assistant 

Commissioner, Bureau of the Public 

Debt, 200 3rd St., P.O. Box 396, 

Parkersburg, WV 26106–0396, (304) 

480–5101, or by e-mail at <opdasib@bpd.treas.gov> or Edward Gronseth, 

Deputy Chief Counsel, Elizabeth Spears, 

Senior Attorney, or Brian Metz, 

Attorney-Adviser, Office of the Chief 

Counsel, Bureau of the Public Debt, 

Department of the Treasury, P.O. Box 

1328, Parkersburg, WV 26106–1328.

SUPPLEMENTARY INFORMATION: 

I. Practices and Regulatory Proposals 

Treasury offers SLGS securities to 

issuers of tax-exempt securities. The 

purpose of the SLGS program is to assist 

state and local government issuers in 

complying with yield restriction and 

rebate requirements applicable to taxexempt securities under the Internal 

Revenue Code. 

In 1996, Treasury revised the 

regulations governing SLGS securities to 

make the program a more flexible and 

competitive investment vehicle for 

issuers in a manner that was intended 

to be cost effective. 61 FR 55690 

(October 28, 1996). The regulations were 

revised to eliminate a number of 

requirements, including a requirement 

that issuers provide certain 

certifications as a condition to 

purchasing SLGS securities. In addition, 

the regulations were changed to permit 

an issuer to subscribe for SLGS 

securities and subsequently cancel the 

subscription, without a monetary 

penalty, under certain circumstances. 

In 1997, Treasury amended the 

regulations to clarify that certain 

transactions in which issuers use SLGS 

securities to provide a cost-free interest 

rate hedge or option are prohibited. 62 

FR 46444 (September 3, 1997). A new 

provision was added (current 

§ 344.2(f)(1), (f)(2)) to the effect that it is 

impermissible to subscribe for SLGS 

securities for deposit in a defeasance 

escrow or fund if (1) the amount of 

SLGS securities subscribed for, plus the 

securities already in the escrow or fund, 

plus the amount the issuer has acquired 

or has a right to acquire for deposit in 

the escrow or fund, exceeds the total 

amount of securities needed to fund 

such escrow or fund and (2) the 

securities in the escrow or fund are 

subject to an agreement conditioned on 

changes in the interest rate on open 

market Treasury securities. Examples of 

acceptable and unacceptable practices 

were also provided (current 

§ 344.2(f)(2)).

Treasury noted that the prices 

established for SLGS securities do not 

include the cost of an option. Treasury 

considered whether it would be 

consistent with the purposes of the 

SLGS securities program to allow SLGS 

securities to serve as options if Treasury 

were appropriately compensated and 

second, if the answer to the first 

question is affirmative, whether there is 

a practical way for the Department to 

charge for the use of SLGS securities as 

options. Neither question was answered 

at that time. Treasury stated that unless 

it determines that it would be both 

advisable and practical to allow SLGS 

securities to serve as options if Treasury 

is appropriately compensated, the use of 

SLGS securities for such purpose would 

continue to be an inappropriate use of 

the SLGS program. We have determined 

at this time that it would not be 

practical to price options. 

Treasury has recently become aware 

of several other practices involving 

SLGS securities that are also 

inappropriate uses of the securities and 

contrary to the purpose of the program. 

Many of these practices are variations 

on the use of SLGS securities as some 

form of a cost-free option. These 

practices also result in volatility in 

Treasury’s cash balances and make 

cash-balance forecasting more difficult. 

Cash balance volatility creates 

uncertainty in the amount of marketable 

Treasury securities Treasury needs to 

issue and results in increased borrowing 

costs. These practices also result in 

higher administrative costs for Treasury. 

A. Redemptions Before Maturity 

Certain participants in the municipal 

bond market have noted that the early 

determination of SLGS rates and 

movements in market prices create 

arbitrage opportunities. Many arbitrage 

transactions have been undertaken as 

escrow restructurings (including 

redemptions of SLGS securities to 

reinvest in SLGS securities or 

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 58757

marketable securities at a higher yield), 

to eliminate ‘‘negative arbitrage.’’

Negative arbitrage occurs when bond 

proceeds are invested at a yield that is 

less than the yield on the issuer’s bond, 

often as a result of market conditions 

where the maximum SLGS rates 

available are lower than what would be 

permissible under the arbitrage 

requirements. Under the current 

regulations, such restructuring 

transactions to reinvest at a higher yield 

generally are not prohibited. 

Treasury has concluded, however, 

that the practice of requesting 

redemption of SLGS securities before 

maturity to take advantage of relatively 

infrequent SLGS pricing is an 

inappropriate use of SLGS securities. 

Even if undertaken to eliminate negative 

arbitrage, Treasury considers this 

practice to be a cost-free option and 

inconsistent with the purpose of the 

program. There is a direct cost to 

Treasury in that Treasury is not being 

compensated for the value of the option. 

This practice also results in volatility in 

Treasury’s cash balances and increases 

the difficulty of cash balance forecasting 

and thereby increases Treasury’s 

borrowing costs. All redemptions before 

maturity also create administrative 

costs. 

In this NPRM, we propose several 

changes to eliminate this practice and 

similar practices. 

First, for SLGS securities subscribed 

for on or after the date of publication of 

the final rule, it would be impermissible 

to invest any amount received from the 

redemption before maturity of a SLGS 

Time Deposit security at a yield that 

exceeds the yield used to determine the 

amount of redemption proceeds for such 

Time Deposit security. It would also be 

impermissible to purchase a SLGS 

security with any amount received from 

the sale or redemption (at the option of 

the holder) before maturity of any 

marketable security, if the yield on such 

SLGS security being purchased exceeds 

the yield at which such marketable 

security is sold or redeemed. These 

impermissible practices would be added 

to § 344.2(f)(1), with conforming 

changes to the examples in proposed 

§ 344.2(f)(2)(ii) and (iii). 

In addition, as set forth in proposed 

§ 344.2(e)(3)(i), upon starting a 

subscription for a SLGS security, a 

subscriber would be required to certify 

that: (A) If the issuer is purchasing a 

SLGS security with the proceeds of the 

sale or redemption (at the option of the 

holder) before maturity of any 

marketable security, the yield on such 

SLGS security does not exceed the yield 

at which such marketable security was 

sold or redeemed; and (B) if the issuer 

is purchasing a SLGS security with 

proceeds of the redemption before 

maturity of a Time Deposit security, the 

yield on the SLGS security being 

purchased does not exceed the yield 

used to determine the amount of 

redemption proceeds for such redeemed 

Time Deposit security. 

Upon submission of a request for 

redemption before maturity of a Time 

Deposit security, the issuer would be 

required to certify that no amount 

received from the redemption will be 

invested at a yield that exceeds the yield 

used to determine the amount of 

redemption proceeds for such Time 

Deposit security. § 344.2(e)(3)(ii). 

These certifications would be made 

electronically through SLGSafe 

(Treasury’s web-based service through 

which subscribers submit SLGS 

securities transactions). SLGSafe is 

administered by the Bureau of the 

Public Debt (BPD). 

We are proposing a definition of 

‘‘yield’’ in § 344.1 that would apply to 

the certifications. The definition would 

require that, in comparing the yield of 

a SLGS security to the yield of a 

marketable debt instrument, the yield of 

the marketable debt instrument would 

be computed using the same 

compounding intervals and financial 

conventions used to compute interest on 

the SLGS security. The certifications do 

not contemplate any adjustment for 

credit quality in determining yield in 

the event that the marketable securities 

are other than U.S. Treasury securities 

(e.g., securities of a governmentsponsored enterprise). We concluded 

that it would not be practical to 

determine the portion of yield 

differentials that is attributable to 

differences in credit. 

The certifications refer to sales or 

redemptions of securities ‘‘before 

maturity;’’ they do not cover 

redemptions of securities at maturity. 

The proposal in this NPRM limits the 

yield on reinvestment of proceeds of 

SLGS redeemed before maturity. The 

proposal does not prohibit 

restructurings of an existing escrow to 

enhance the efficiency of the escrow, so 

long as the transaction complies with 

the yield limitations in the NPRM.

The yield certification for 

subscriptions would apply to 

subscriptions submitted on or after the 

effective date of the final rule. The yield 

certification for redemptions before 

maturity would apply to requests for 

redemption of Time Deposit securities 

subscribed for on or after the effective 

date of the final rule. We anticipate that 

the effective date of the final rule will 

be the date of publication of the final 

rule. In our discretion, however, we may 

determine that the effective date for 

some or all of the regulations will be at 

some later date, but the effective date 

will be no earlier than the date of 

publication of the final rule. 

Second, we propose to reduce the 

number of hours during which SLGSafe 

subscriptions, requests for early 

redemption of Time Deposit securities, 

and requests for redemptions of Demand 

Deposit securities will be received to 

business days from 10 a.m. to 6 p.m., 

Eastern time. The 6 p.m. closing-time 

generally corresponds to when trading 

in the over-the-counter market in 

marketable securities declines in New 

York. We selected an eight-hour time 

frame in an effort to allow sufficient 

time for issuers, including those on the 

West coast, to complete their pricing 

and verification procedures. § 344.3(g). 

Access to SLGSafe for other functions, 

such as viewing account balances and 

obtaining statements of accounts, would 

be provided during existing operational 

hours, 8 a.m. to 10 p.m., Eastern time. 

All changes to a Time Deposit 

subscription would have to be made by 

3 p.m., Eastern Time, on the issue date. 

We are not proposing any change to the 

requirement that payment on SLGS 

securities must be submitted by 4 p.m., 

Eastern time, on the issue date. 

§ 344.2(g). 

Third, we plan to implement a nonregulatory change to make the rates 

specified in the daily SLGS rate table 

more current. As provided in 

§ 344.4(b)(1) of the current regulations, 

the SLGS rate table will be released to 

the public by 10 a.m., Eastern time, each 

business day. In the rare instances when 

we are unable to post the current day’s 

SLGS rates by 10 a.m., the SLGS rate 

table for the previous business day will 

apply. 

Fourth, we propose to add a new 

provision in § 344.2(f)(1)(iv) making it 

impermissible to purchase a SLGS 

security with a maturity longer than is 

reasonably necessary to accomplish a 

governmental purpose of the issuer. A 

new example would also be added in 

proposed § 344.2(f)(2)(v). 

B. Cancellations 

We receive a large volume of 

cancellations of SLGS subscriptions 

submitted for the apparent purpose of 

re-subscribing at a higher yield. Issuers 

also have submitted multiple initial 

subscriptions for a single issue date and 

have later canceled some of those 

subscriptions, apparently because of 

reductions in the size of advance 

refunding transactions due to changes in 

market conditions. Some investors have 

subscribed for SLGS securities, later 

canceling the subscription or amending 

58758 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 

the size when rates move favorably or 

unfavorably. In still other cases, 

subscriptions have been canceled 

because agents have subscribed for 

SLGS securities even though the issuer 

has not authorized the issuance of 

municipal bonds. 

The ability of a SLGS investor to 

freely cancel a subscription is a cost-free 

option. The current regulations, 

however, permit an issuer to obtain a 

higher yield by canceling a SLGS 

subscription within the specified period 

and resubscribing. This provision 

provides a feature that is not available 

for marketable securities and results in 

hidden costs to the Federal taxpayer. 

The practice of canceling subscriptions 

also makes Treasury’s cash balance 

forecasting more difficult and increases 

Treasury’s borrowing costs. Treasury 

believes that the flexibility and 

efficiency associated with an issuer’s 

ability to select maturities and interest 

payment dates, make SLGS securities a 

competitive investment vehicle, even 

without the cancellation option. For 

these reasons, we propose several 

changes including prohibiting 

cancellations. 

First, cancellations of SLGS 

subscriptions would be prohibited 

unless the subscriber establishes, to the 

satisfaction of Treasury, that the 

cancellation is required for reasons 

unrelated to the use of the SLGS 

program to create a cost-free option. 

§ 344.5(c), 344.8(c). The example in 

§ 344.2(f)(3)(iv) of the current 

regulations, which permits cancellation 

and resubscription at a higher rate, 

would be eliminated. The examples in 

current (i), (ii), (iii) and (v) also would 

be modified to conform with this 

proposal. The applicable SLGS rate 

table would be the table in effect on the 

business day in which the subscription 

process was begun. The penalty for an 

impermissible failure to take delivery of 

SLGS securities would remain 

unchanged—the municipality (or, if 

applicable, the conduit borrower) would 

be ineligible to subscribe for SLGS 

securities for six months. § 344.2(h). 

Second, for all subscriptions 

submitted for Time and Demand 

Deposit securities on or after the date of 

publication of the final rule, we propose 

to amend the regulations to permit a 

change in the aggregate principal 

amount originally specified in the 

subscription of no more than ten 

percent. § 344.5(d)(2), § 344.8(d). 

Currently, subscribers for Time Deposit 

securities may change the aggregate 

principal amount specified in the initial 

subscription up to $10 million or ten 

percent, whichever is greater. 

§ 344.5(b)(4)(ii). There is currently no 

such requirement for Demand Deposit 

securities; the principal amount on 

Demand Deposit securities may be 

changed without penalty under the 

current regulations. § 344.8(b)(3). 

Third, we propose that once an issuer 

selects an issue date for Time and 

Demand Deposit securities, the 

subscription cannot be amended to 

change the issue date. § 344.5(a), 

§ 344.8(a). Under the current 

regulations, investors are allowed to 

amend their Time Deposit subscription 

by extending the issue date up to seven 

days after the originally specified issue 

date. § 344.5(b)(4)(i). The current 

regulations do not permit the issue date 

on Demand Deposit securities to be 

amended, although typically the issue 

date for Demand Deposit securities is 

not amended because they are one-day 

certificates of indebtedness that are 

automatically rolled over each day 

unless redemption is requested. § 344.7. 

Fourth, we propose to require that a 

subscriber certify, upon starting a SLGS 

subscription, that the issuer has 

authorized the issuance of the state or 

local bonds. § 344.2(e)(2). In addition, a 

description of the municipal bond issue 

must be provided in SLGSafe (for 

example, ‘‘Water and Sewer Revenue 

Bonds Series 2004’’). In the case of a 

false certification, Treasury could 

exercise its reserved right to revoke the 

issuance of the SLGS securities. 

§ 344.2(m)(4).

II. Administrative Changes 

We have also taken this opportunity 

to review other aspects of the SLGS 

program. We are proposing several 

changes to better administer the 

program. 

A. Pricing Longer-Dated SLGS Securities 

As of October 31, 2001, Treasury 

discontinued issuing 30-year marketable 

bonds. As a result of the shrinking 

supply of long-dated marketable 

securities, Treasury is evaluating its 

ability to estimate the long end of the 

Treasury yield curve and the SLGS rates 

that are derived from the Treasury yield 

curve. Under the current regulations, 

Time Deposit securities are offered out 

to 40-year maturities (based on the 

longest Treasury rate). § 344.4(a). 

Treasury proposes to revise the SLGS 

regulations to allow us to establish 

better pricing methods if it becomes 

necessary at some point in the future. 

The current regulations provide that 

‘‘current Treasury borrowing rate’’

means the ‘‘the prevailing market rate, 

as determined by Treasury, for a 

Treasury security with the specified 

period to maturity.’’ § 344.1. The 

definition of ‘‘SLGS rate’’ is the ‘‘current 

Treasury borrowing rate’’ minus five 

basis points. § 344.1. Treasury plans to 

broaden the definition of ‘‘current 

Treasury borrowing rate.’’ We propose 

that in the case where SLGS rates are 

needed for maturities currently not 

issued by the Treasury, we would have 

the option of establishing the SLGS rates 

by using suitable proxies and/or a 

different rate-setting methodology. We 

do not anticipate revising our SLGS rate 

methodology at this time. At any time 

that the Secretary determines that the 

methodology should be revised, we will 

provide notice of such change. 

B. Notices of Redemption 

There currently is a 10-day advance 

notice requirement for SLGS investors 

to redeem their Time Deposit securities 

early. § 344.6(c). We propose to increase 

the notification period to 14 days to 

improve our cash forecasting. This 

provision would not apply to Demand 

Deposit securities. 

C. Mandating SLGSafe Transactions 

We propose to make SLGSafe 

mandatory for all transactions. Under 

this proposal, all transactions must flow 

exclusively through SLGSafe, including: 

Certifications, confirmations, 

subscriptions, and redemptions. 

§ 344.3(b). 

There are tremendous operational 

efficiencies to be gained from mandating 

the use of existing web-based 

technology for processing SLGS 

transactions. We first addressed the 

concept of electronic subscriptions in a 

Proposed Rule published in the Federal 

Register, 61 FR 39228, 39230 (Jul. 26, 

1996). In the interim rule that 

introduced SLGSafe, we stated our goal 

of having 100% electronic transactions 

by September 2002. Federal Register, 65 

FR 55399, Sept. 13, 2000. We did not 

receive any comments on the interim 

rule. 

To improve the ease of use, we 

improved the sign-on procedures for 

SLGSafe. In a Final Interim Rule, 

effective on August 11, 2004, we 

changed the method of access to 

SLGSafe. Federal Register, 69 FR 41756, 

Jul. 12, 2004 at § 344.3(g)(1). We did not 

receive any comments on the interim 

rule. Therefore, it is now possible to 

access SLGSsafe with a log-on ID and 

password instead of using a digital 

certificate. The log-on ID and password 

access information is now contained in 

the SLGSafe Application for Internet 

Access, PD F 4144–5. § 344.3(c)(1). The 

application is downloadable from BPD’s 

Web site. 

Because manual subscriptions would 

no longer be accepted, we propose to 

remove the references in the regulations 

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 58759

to our fax number and mailing address. 

Submission of subscriptions by fax or 

mail would only be permitted to the 

extent it is established to the satisfaction 

of BPD that good cause exists to submit 

subscriptions by other means. 

§ 344.3(f)(3). The SLGS rate table will 

continue to be published on BPD’s Website. § 344.4(b)(3). If the SLGS rate table 

is not available by 10 a.m., the SLGS 

rate table for the preceding day applies. 

In the event of a prolonged disruption, 

we will provide additional information 

on how to conduct SLGS transactions. 

Notification on how to submit 

subscriptions manually and lock-in a 

SLGS rate will be given. § 344.2(l), 

§ 344.3(f)(4). 

In addition, we propose to remove 

references to all paper and electronic 

forms, except the SLGSafe Application 

for Internet Access, which SLGSafe 

users will continue to submit in paper 

form to BPD. 

We anticipate that use of the SLGSafe 

service will become mandatory on or 

after the date of publication of the final 

rule. We recommend that all subscribers 

who are not currently SLGSafe service 

users submit an application for SLGSafe 

access to BPD as soon as possible. 

D. Miscellaneous Changes 

This NPRM includes miscellaneous 

other minor or technical changes. See, 

e.g., proposed §§ 344.0(a), 344.0(b), 

344.1, 344.2(d), 344.2(h)(2), 344.2(i), 

344.2(m)(5), 344.3(d), 344.3(f), 344.3(g), 

344.4(a), 344.5, 344.6(a), 344.6(c), 

344.6(f), 344.7(a), 344.9(a), 344.9(c), 

344.11. Some of these changes are noted 

below. 

Current § 344.0(a) provides that 

issuers of tax-exempt securities may 

purchase SLGS securities from any 

amounts that: (1) Constitute gross 

proceeds of an issue (as defined in 26 

CFR § 1.148–1(b)); or (2) assist in 

complying with applicable provisions of 

the Internal Revenue Code relating to 

the tax exemption. To clarify the scope 

of permissible sources of funds for 

purchasing SLGS securities, we propose 

to amend the regulations to provide that 

SLGS securities may be purchased only 

from amounts that constitute gross 

proceeds of an issue. 

Under current § 344.2(h)(2), late 

payment assessments, which include a 

$100 administrative fee, are due on 

demand. We propose to revise this 

provision to state that SLGS securities 

will not be issued until such time as we 

receive payment of the assessments. In 

addition, we have added language to 

allow us to publish a notice in the 

Federal Register if we determine the 

administrative fee should be changed. 

We do not anticipate raising the amount 

of the administrative fee at this time. 

Current § 344.2(m) sets forth some of 

the rights Treasury reserves in 

administering the SLGS program. We 

propose to add a new § 344.2(m)(5) 

which would clarify that Treasury may 

review any transaction to ensure 

compliance with this part, including 

requiring an issuer to provide us with 

additional information relating to SLGS 

transactions, and determine an 

appropriate remedy under the 

circumstances. 

We are proposing a number of 

technical changes to make the 

regulations consistent with current 

SLGSafe procedures and terminology, 

and to conform to other changes in this 

NPRM. In § 344.5, we have eliminated 

terminology referring to ‘‘initial’’ and 

‘‘final’’ subscriptions because SLGSafe 

does not distinguish between ‘‘initial’’

and ‘‘final’’ subscriptions. Instead of 

submitting an ‘‘initial’’ subscription, the 

issuer would start the subscription 

process by entering certain information 

in required data fields in SLGSafe. A 

subscriber would complete the 

subscription by furnishing additional 

information in the designated required 

data fields in SLGSafe.

In proposed § 344.11, we have 

clarified that the early redemption 

provisions for the existing regulations 

apply to special zero interest securities. 

Issuance of special zero interest 

securities was discontinued on October 

28, 1996. The proposals in this NPRM 

do not apply to these outstanding SLGS 

securities. 

III. Procedural Requirements 

A. Executive Order 12866 

This notice of proposed rulemaking is 

not a significant regulatory action as 

defined in E.O. 12866, dated September 

30, 1993, and is not a major rule under 

5 U.S.C. 804. Therefore, a regulatory 

assessment of anticipated benefits, 

costs, and regulatory alternatives is not 

required. 

B. Regulatory Flexibility Act 

Although this notice of proposed 

rulemaking is being issued in proposed 

form to secure the benefit of public 

comment, it relates to matters of public 

contract and procedures for United 

States securities. Therefore, the notice 

and public procedure requirements of 

the Administrative Procedure Act, 5 

U.S.C. 553(a)(2), are inapplicable. Since 

a notice of proposed rulemaking is not 

required, the provisions of the 

Regulatory Flexibility Act, 5 U.S.C. 601 

et seq., do not apply. 

C. Paperwork Reduction Act 

The collection of information 

contained in this proposed rule has 

been submitted to the Office of 

Management and Budget (OMB) for 

review under the requirements of the 

Paperwork Reduction Act, 44 U.S.C. 

3507(d). An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by OMB. 

Organizations and individuals 

desiring to submit comments 

concerning the collection of information 

in the proposed rule should direct them 

to the Desk Officer for the Department 

of the Treasury, Office of Information 

and Regulatory Affairs, Office of 

Management and Budget, Washington, 

DC 20503 (preferably by FAX to 202–

395–6974, or by e-mail to 

jlackeyj@omb.eop.gov). A copy of the 

comments should also be sent to the 

Bureau of the Public Debt at the 

addresses previously specified. 

Comments on the collection of 

information should be received by 

November 1, 2004. 

Treasury specifically invites 

comments on: (a) Whether the proposed 

collection of information is necessary 

for the proper performance of the 

mission of Treasury, and whether the 

information will have practical utility; 

(b) the accuracy of the estimate of the 

burden of the collections of information 

(see below); (c) ways to enhance the 

quality, utility, and clarity of the 

information collection; (d) ways to 

minimize the burden of the information 

collection, including through the use of 

automated collection techniques or 

other forms of information technology; 

and (e) estimates of capital or start-up 

costs and costs of operation, 

maintenance, and purchase of services 

to maintain the information. 

The collections of information in this 

proposed regulation are in sections 

344.3(f)(3), 344.5(c), and 344.8(c). This 

information is required by the Bureau of 

the Public Debt (1) to determine 

whether there is good cause for an 

investor to submit subscriptions by fax 

or mail rather than electronically in 

SLGSafe and (2) to establish that a 

cancellation of a subscription is 

required for reasons unrelated to the use 

of the SLGS Program to create a cost-free 

option. This information will be used to 

determine whether exceptions will be 

granted to permit submission of 

subscriptions by fax or mail and 

cancellations of subscriptions. The 

likely respondents are state or local 

governments. 

58760 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 

Because of the limited number of 

instances when a waiver may be sought, 

a ‘‘best estimate’’ has been developed 

based on the considered judgment of 

Treasury. This estimate has 1000 

investors each requesting an average of 

one waiver per annum for a total of 1000 

waiver requests annually. 

The information required by Treasury 

in connection with a request for a 

waiver of the requirements under the 

regulations in sections 344.3(f)(3), 

344.5(c), and 344.8(c) is similar to the 

type of information currently received 

by Treasury when an investor seeks 

relief from a provision of the current 

regulations. Because of the familiarity of 

SLGS investors with the current 

procedures for waivers and the 

infrequency of the instances in which 

these new waivers may be sought, the 

burden associated with compiling and 

submitting such information to Treasury 

is relatively modest. Accordingly, 

Treasury estimates that the proposed 

rule will impose .25 hours of burden 

with respect to each request with the 

total estimated annual burden of the 

proposed rule being 250 hours. 

Estimated total annual reporting and/

or recordkeeping burden: 250 hours. 

Estimated average annual burden 

hours per respondent and/or 

recordkeeper: .25 hours. 

Estimated number of respondents 

and/or recordkeepers: 1000.

List of Subjects in 31 CFR Part 344 

Bonds, Government Securities, 

Securities.

For the reasons set forth in the 

preamble, we propose to amend 31 CFR 

part 344 by revising subparts A through 

D to read as follows (Appendixes A and 

B to part 344 remain unchanged):

PART 344—U.S. TREASURY 

SECURITIES—STATE AND LOCAL 

GOVERNMENT SERIES

Subpart A—General Information 

Sec. 

344.0 What does this part cover? 

344.1 What special terms do I need to know 

to understand this part? 

344.2 What general provisions apply to 

SLGS securities?

SLGSafeSM Service 

344.3 What provisions apply to the SLGSafe 

Service?

Subpart B—Time Deposit Securities 

344.4 What are Time Deposit securities? 

344.5 What other provisions apply to 

subscriptions for Time Deposit 

securities? 

344.6 How do I redeem a Time Deposit 

security before maturity?

Subpart C—Demand Deposit Securities 

344.7 What are Demand Deposit securities? 

344.8 What other provisions apply to 

subscriptions for Demand Deposit 

securities? 

344.9 How do I redeem a Demand Deposit 

security?

Subpart D—Special Zero Interest Securities 

344.10 What are Special Zero Interest 

securities?

344.11 How do I redeem a Special Zero 

Interest security before maturity? 

Appendix A to Part 344—Early Redemption 

Market Charge Formulas and Examples 

for Subscriptions from December 28, 

1976, through October 27, 1996. 

Appendix B to Part 344—Formula for 

Determining Redemption Value for 

Securities Subscribed for and EarlyRedeemed on or after October 28, 1996.

Authority: 26 U.S.C. 141 note; 31 U.S.C. 

3102, 3103, 3104, and 3121.

Subpart A—General Information

§ 344.0 What does this part cover? 

(a) What is the purpose of the SLGS 

securities offering? The Secretary of the 

Treasury (the Secretary) offers for sale 

non-marketable State and Local 

Government Series (SLGS) securities to 

provide issuers of tax-exempt securities 

with investments from any amounts that 

constitute gross proceeds of an issue. 

(b) What types of SLGS securities are 

governed by this part? This part governs 

the following SLGS securities: 

(1) Time Deposit securities—may be 

issued as:

(i) certificates of indebtedness; 

(ii) notes; or 

(iii) bonds. 

(2) Demand Deposit securities—may 

be issued as certificates of indebtedness. 

(3) Special Zero Interest securities.

Special Zero Interest securities, which 

were discontinued on October 28, 1996, 

were issued as:

(i) certificates of indebtedness; or 

(ii) notes. 

(c) In what denominations are SLGS 

securities issued? SLGS securities are 

issued in the following denominations: 

(1) Time Deposit securities—a 

minimum amount of $1,000, or in any 

larger whole dollar amount; and 

(2) Demand Deposit securities—a 

minimum amount of $1,000, or in any 

larger amount, in any increment. 

(d) How long is the offering in effect?

The offering continues until terminated 

by the Secretary.

§ 344.1 What special terms do I need to 

know to understand this part? 

As appropriate, the definitions of 

terms used in this part are those found 

in the relevant portions of the Internal 

Revenue Code and the Income tax 

regulations. 

Bond equivalent yield means the 

annualized yield computed by doubling 

the semiannual yield. 

BPD’s website refers to <http://

www.slgs.gov>.

Business day(s) means Federal 

business day(s). 

Current Treasury borrowing rate

means the prevailing market rate, as 

determined by Treasury, for a Treasury 

security with the specified period to 

maturity. In the case where SLGS rates 

are needed for maturities currently not 

issued by Treasury, at our discretion, 

suitable proxies for Treasury securities 

and/or a rate setting methodology, as 

determined by the Secretary, may be 

used to derive a current Treasury 

borrowing rate. At any time that the 

Secretary establishes such proxies or a 

rate-setting method or determines that 

the methodology should be revised, we 

will make an announcement. 

Day(s) means calendar day(s). 

Issuer refers to the Government body 

that issues state or local government 

bonds described in section 103 of the 

Internal Revenue Code. 

SLGS rate means the current Treasury 

borrowing rate, less five basis points, as 

released daily by Treasury in a SLGS 

rate table. 

SLGS rate table means a compilation 

of SLGS rates available for a given day. 

‘‘We,’’ ‘‘us,’’ or ‘‘the Secretary’’ refers 

to the Secretary and the Secretary’s 

delegates at the Department of the 

Treasury (Treasury), Bureau of the 

Public Debt (BPD). The term also 

extends to any fiscal or financial agent 

acting on behalf of the United States 

when designated to act by the Secretary 

or the Secretary’s delegates. 

Yield of a debt instrument is the 

discount rate that, when used in 

computing the present value of all 

principal and interest payments 

remaining to be made under the debt 

instrument, produces an amount equal 

to the price of the debt instrument. In 

comparing the yield of a SLGS security 

to the yield of a marketable debt 

instrument, the yield of the marketable 

debt instrument must be computed 

using the same compounding intervals 

and financial conventions used to 

compute interest on the SLGS security, 

as specified in § 344.4(c) of this part. 

When comparing the yield of a SLGS 

note or bond to the yield of a marketable 

debt instrument, use the bond 

equivalent yield. When comparing the 

yield of a SLGS certificate of 

indebtedness to the yield of a 

marketable debt instrument, use the 

simple annual yield. 

You or your refers to a SLGSafe 

service user or a potential SLGSafe 

service user.

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 58761

§ 344.2 What general provisions apply to 

SLGS securities? 

(a) What other regulations apply to 

SLGS securities? SLGS securities are 

subject to:

(1) The electronic transactions and 

funds transfers provisions for United 

States securities, part 370 of this 

subchapter, ‘‘Electronic Transactions 

and Funds Transfers Related to U.S. 

Securities’’; and 

(2) The Appendix to subpart E to part 

306 of this subchapter, for rules 

regarding computation of interest. 

(b) Where are SLGS securities held?

SLGS securities are issued in book-entry 

form on the books of BPD. 

(c) Besides BPD, do any other entities 

administer SLGS securities? The 

Secretary may designate selected 

Federal Reserve Banks and Branches, as 

fiscal agents of the United States, to 

perform services relating to SLGS 

securities. 

(d) Can SLGS securities be 

transferred? No. SLGS securities issued 

as any one type, i.e., Time Deposit, 

Demand Deposit, or Special Zero 

Interest, cannot be transferred for other 

securities of that type or any other type. 

Transfer of securities by sale, exchange, 

assignment, pledge, or otherwise is not 

permitted. 

(e) What certifications must the issuer 

or its agent provide?

(1) Agent Certification. When a 

commercial bank or other agent submits 

a subscription on behalf of the issuer, it 

must certify that it is acting under the 

issuer’s specific authorization. 

Ordinarily, evidence of such authority is 

not required. 

(2) Municipal Bond Issuance 

Certification. Upon starting a 

subscription, the subscriber must certify 

that the issuer has authorized the 

issuance of the state or local bonds. 

(3) Yield Certifications.

(i) Upon starting a subscription for a 

SLGS security, a subscriber must certify 

that: 

(A) If the issuer is purchasing a SLGS 

security with proceeds of the sale or 

redemption (at the option of the holder) 

before maturity of any marketable 

security, the yield on such SLGS 

security does not exceed the yield at 

which such marketable security was 

sold or redeemed; and 

(B) If the issuer is purchasing a SLGS 

security with proceeds of the 

redemption before maturity of a Time 

Deposit security, the yield on the SLGS 

security being purchased does not 

exceed the yield that was used to 

determine the amount of redemption 

proceeds for such redeemed Time 

Deposit security. 

(ii) Upon submission of a request for 

redemption before maturity of a Time 

Deposit security subscribed for on or 

after the date of publication of the final 

rule, the issuer must certify that no 

amount received from the redemption 

will be invested at a yield that exceeds 

the yield that is used to determine the 

amount of redemption proceeds for such 

Time Deposit security. 

(f) What are some practices involving 

SLGS securities that are not permitted?

(1) In General. For SLGS securities 

subscribed for on or after the date of 

publication of the final rule, it is 

impermissible: 

(i) To use the SLGS program to create 

a cost-free option; 

(ii) To purchase a SLGS security with 

any amount received from the sale or 

redemption (at the option of the holder) 

before maturity of any marketable 

security, if the yield on such SLGS 

security exceeds the yield at which such 

marketable security is sold or redeemed; 

(iii) To invest any amount received 

from the redemption before maturity of 

a Time Deposit security at a yield that 

exceeds the yield that is used to 

determine the amount of redemption 

proceeds for such Time Deposit 

security; or 

(iv) To purchase a SLGS security with 

a maturity longer than is reasonably 

necessary to accomplish a governmental 

purpose of the issuer. 

(2) Examples.

(i) Simultaneous Purchase of 

Marketable and SLGS Securities. In 

order to fund an escrow for an advance 

refunding, the issuer simultaneously 

enters into a purchase contract for 

marketable securities and subscribes for 

SLGS securities, such that either 

purchase is sufficient to pay the cash 

flows on the outstanding bonds to be 

refunded, but together, the purchases 

are greatly in excess of the amount 

necessary to pay the cash flows. The 

issuer plans that, if interest rates decline 

during the period between the date of 

starting a SLGS subscription and the 

requested date of issuance of SLGS 

securities, the issuer will enter into an 

offsetting agreement to sell the 

marketable securities and use the bond 

proceeds to purchase SLGS securities to 

fund the escrow. If, however, interest 

rates do not decline in that period, the 

issuer plans to use the bond proceeds to 

purchase the marketable securities to 

fund the escrow and cancel the SLGS 

securities subscription. This practice 

violates the prohibition on cancellation 

under § 344.5(c) or § 344.8(c), and no 

exception or waiver would be granted 

under this part because the ability to 

cancel in these circumstances would 

result in the SLGS program being used 

to create a cost-free option. In addition, 

this practice is prohibited under 

paragraph (f)(1)(i). 

(ii) Sale of Marketable Securities 

Conditioned on Interest Rates. The 

existing escrow for an advance 

refunding contains marketable securities 

which produce a negative arbitrage. In 

order to reduce or eliminate this 

negative arbitrage, the issuer subscribes 

for SLGS securities at a yield higher 

than the yield on the existing escrow, 

but less than the permitted yield. At the 

same time, the issuer agrees to sell the 

marketable securities in the existing 

escrow to a third party and use the 

proceeds to purchase SLGS securities if 

interest rates decline between the date 

of subscribing for SLGS securities and 

the requested date of issuance of SLGS 

securities. The marketable securities 

would be sold at a yield which is less 

than the yield on the SLGS securities 

purchased. The issuer and the third 

party further agree that if interest rates 

increase during this period, the issuer 

will cancel the SLGS securities 

subscription. This practice violates the 

prohibition on cancellation under 

§ 344.5(c) or § 344.8(c), and no 

exception or waiver would be granted 

under this part because the ability to 

cancel in these circumstances would 

result in the SLGS program being used 

to create a cost-free option. In addition, 

this practice is prohibited under 

paragraphs (f)(1)(i) and (ii). 

(iii) Sale of Marketable Securities Not 

Conditioned on Interest Rates. The facts 

are the same as in paragraph (f)(2)(ii) of 

this section, except that in this case, the 

agreement entered into by the issuer 

with a third party to sell the marketable 

securities in order to obtain funds to 

purchase SLGS securities is not 

conditioned upon changes in interest 

rates on Treasury securities. This 

practice violates the yield gain 

prohibition in paragraph (f)(1)(ii) and is 

prohibited. 

(iv) Simultaneous Subscription for 

SLGS Securities and Sale of Option to 

Purchase Marketable Securities. The 

issuer holds a portfolio of marketable 

securities in an account that produces 

negative arbitrage. In order to reduce or 

eliminate this negative arbitrage, the 

issuer subscribes for SLGS securities for 

purchase in sixty days. At the same 

time, the issuer sells an option to 

purchase the portfolio of marketable 

securities. If interest rates increase, the 

holder of the option will not exercise its 

option and the issuer will cancel the 

SLGS securities subscription. On the 

other hand, if interest rates decline, the 

option holder will exercise the option 

and the issuer will use the proceeds to 

purchase SLGS securities. This practice 

58762 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 

violates the prohibition on cancellation 

under § 344.5(c) or § 344.8(c), and no 

exception or waiver would be granted 

under this part because the ability to 

cancel in these circumstances would 

result in the SLGS program being used 

to create a cost-free option. In addition, 

this practice is prohibited under 

paragraphs (f)(1)(i).

(v) Purchase of SLGS Securities with 

a Maturity Longer than Reasonably 

Necessary. An issuer issues bonds to 

finance a construction project. The 

issuer reasonably expects to spend all of 

the proceeds of the bonds on the project 

within three years after the bonds are 

issued. Nevertheless, on the issue date 

of the bonds, the issuer invests all of the 

bond proceeds in SLGS securities with 

a 20-year maturity. The issuer expects to 

redeem all of the SLGS securities during 

the three-year construction period. The 

issuer expects that interest rates will 

decline substantially during that threeyear period and, as a result, the issuer 

will realize a substantial profit from 

redeeming the SLGS securities before 

maturity. The issuer’s purchase of the 

SLGS securities violates paragraph 

(f)(1)(iv) because the 20-year maturity is 

longer than is reasonably necessary to 

accomplish the issuer’s governmental 

purpose of constructing its project. 

(g) When and how do I pay for SLGS 

securities? You must submit full 

payment for each subscription to BPD 

no later than 4 p.m., Eastern time, on 

the issue date. Submit payments by the 

Fedwire funds transfer system with 

credit directed to the Treasury’s General 

Account. For these transactions, BPD’s 

ABA Routing Number is 051036476. 

(h) What happens if I need to make 

an untimely change or do not settle on 

a subscription? An untimely change can 

only be made in accordance with 

§ 344.2(n) of this part. The penalty 

imposed for failure to make settlement 

on a subscription that you submit will 

be to render you ineligible to subscribe 

for SLGS securities for six months 

beginning on the date the subscription 

is withdrawn, or the proposed issue 

date, whichever occurs first. 

(1) Upon whom is the penalty 

imposed? If you are the issuer, the 

penalty is imposed on you unless you 

provide the Taxpayer Identification 

Number of the conduit borrower that is 

the actual party failing to make 

settlement of a subscription. If you 

provide the Taxpayer Identification 

Number for the conduit borrower, the 

six-month penalty will be imposed on 

the conduit borrower. 

(2) What occurs if Treasury exercises 

the option to waive the penalty? If you 

settle after the proposed issue date and 

we determine that settlement is 

acceptable on an exception basis, we 

will waive, under § 344.2(n), the sixmonth penalty under paragraph (h) of 

this section. You shall be charged a late 

payment assessment. The late payment 

assessment equals the amount of 

interest that would have accrued on the 

SLGS securities from the proposed issue 

date to the date of settlement plus an 

administrative fee of $100 per 

subscription, or such other amount as 

we may publish in the Federal Register. 

We will not issue SLGS securities until 

we receive the late payment assessment, 

which is due on demand. 

(i) What happens at maturity? Upon 

the maturity of a security, we will pay 

the owner the principal amount and 

interest due. A security scheduled for 

maturity on a non-business day will be 

redeemed on the next business day. 

(j) How will I receive payment? We 

will make payment by the Automated 

Clearing House (ACH) method for the 

owner’s account at a financial 

institution as designated by the owner. 

We may use substitute payment 

procedures, instead of ACH, if we 

consider it to be necessary. Any such 

action is final. 

(k) How do I contact BPD? BPD’s 

contact information is posted on BPD’s 

Web site. 

(l) Will the offering be changed during 

a debt limit or disaster contingency? We 

reserve the right to change or suspend 

the terms and conditions of the offering 

(including provisions relating to 

subscriptions for, and issuance of, SLGS 

securities; interest payments; early 

redemptions; and rollovers) at any time 

the Secretary determines that the 

issuance of obligations sufficient to 

conduct the orderly financing 

operations of the United States cannot 

be made without exceeding the statutory 

debt limit, or that a disaster situation 

exists. We will announce such changes 

by any means that the Secretary deems 

appropriate. 

(m) What are some of the rights that 

Treasury reserves in administering the 

SLGS program? We may decide, in our 

sole discretion, to take any of the 

following actions. Such actions are 

final. Specifically, Treasury reserves the 

right: 

(1) To reject any SLGSafe Application 

for Internet Access; 

(2) To reject any electronic message or 

other message or request, including 

requests for subscription and 

redemption, that is inappropriately 

completed or untimely submitted; 

(3) To refuse to issue any SLGS 

securities in any case or class of cases; 

(4) To revoke the issuance of any 

SLGS securities and to declare the 

subscriber ineligible thereafter to 

subscribe for securities under the 

offering if the Secretary deems that such 

action is in the public interest and any 

security is issued on the basis of an 

improper certification or other 

misrepresentation (other than as the 

result of an inadvertent error) or there 

is an impermissible transaction under 

§ 344.2(f); or 

(5) To review any transaction for 

compliance with this part, including 

requiring an issuer to provide additional 

information, and to determine an 

appropriate remedy under the 

circumstances.

(n) Are there any situations in which 

Treasury may waive these regulations?

We reserve the right, at our discretion, 

to waive or modify any provision of 

these regulations in any case or class of 

cases. We may do so if such action is 

not inconsistent with law and will not 

subject the United States to substantial 

expense or liability. 

(o) Are SLGS securities callable by 

Treasury? No. Treasury cannot call a 

SLGS security for redemption before 

maturity. 

SLGSafeSM Service

§ 344.3 What provisions apply to the 

SLGSafe Service? 

(a) What is the SLGSafe Service?

SLGSafe is a secure Internet site on the 

World Wide Web through which 

subscribers submit SLGS securities 

transactions. SLGSafe Internet 

transactions constitute electronic 

messages under 31 CFR part 370. 

(b) Is SLGSafe use mandatory? Yes. 

You must submit all transactions 

through SLGSafe. 

(c) What terms and conditions apply 

to SLGSafe? The terms and conditions 

contained in the following documents, 

which may be downloaded from BPD’s 

Web site and which may change from 

time to time, apply to SLGSafe 

transactions: 

(1) SLGSafe Application for Internet 

Access and SLGSafe User 

Acknowledgment; and 

(2) SLGSafe User’s Manual. 

(d) Who can apply for SLGSafe 

access? If you are an owner of SLGS 

securities or act as a trustee or other 

agent of the owner, you can apply to 

BPD for SLGSafe access. Other potential 

users of SLGSafe include, but are not 

limited to, underwriters, financial 

advisors, and bond counsel. 

(e) How do I apply for SLGSafe 

access? Submit to BPD a completed 

SLGSafe Application for Internet 

Access. The form is found on BPD’s 

Web site. 

(f) What are the conditions of SLGSafe 

use? If you are designated as an 

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 58763

authorized user, on a SLGSafe 

application that we’ve approved, you 

must: 

(1) Assume the sole responsibility and 

the entire risk of use and operation of 

your electronic connection; 

(2) Agree that we may act on any 

electronic message to the same extent as 

if we had received a written instruction 

bearing the signature of your duly 

authorized officer; 

(3) Submit electronic messages and 

other transaction requests exclusively 

through SLGSafe, except to the extent 

you establish to the satisfaction of BPD 

that good cause exists for you to submit 

such subscriptions and requests by 

other means; and 

(4) Agree to submit transactions 

manually if we notify you that due to 

problems with hardware, software, data 

transmission, or any other reason, we 

are unable to send or receive electronic 

messages through SLGSafe. 

(g) When is the SLGSafe window 

open? All SLGSafe subscriptions, 

requests for early redemption of Time 

Deposit securities, and requests for 

redemption of Demand Deposit 

securities must be received by BPD on 

business days no earlier than 10 a.m. 

and no later than 6 p.m., Eastern time. 

The official time is the date and time as 

shown on BPD’s application server. 

Except as otherwise provided in 

§ 344.5(d) and § 344.8(d), all other 

functions may be performed during the 

extended SLGSafe hours, from 8 a.m. 

until 10 p.m., Eastern time.

Subpart B—Time Deposit Securities

§ 344.4 What are Time Deposit securities? 

Time Deposit securities are issued as 

certificates of indebtedness, notes, or 

bonds. 

(a) What are the maturity periods?

The issuer must fix the maturity periods 

for Time Deposit securities, which are 

issued as follows: 

(1) Certificates of indebtedness that 

do not bear interest. For certificates of 

indebtedness that do not bear interest, 

the issuer can fix a maturity period of 

not less than fifteen days and not more 

than one year. 

(2) Certificates of indebtedness that 

bear interest. For certificates of 

indebtedness that bear interest, the 

issuer can fix a maturity period of not 

less than thirty days and not more than 

one year. 

(3) Notes. For notes, the issuer can fix 

a maturity period of not less than one 

year and one day, and not more than ten 

years. 

(4) Bonds. For bonds, the issuer can 

fix a maturity period of not less than ten 

years and one day, and not more than 

forty years. 

(b) How do I select the SLGS rate? For 

each security, the issuer shall designate 

an interest rate that does not exceed the 

maximum interest rate shown in the 

daily SLGS rate table as defined in 

§ 344.1. 

(1) When is the SLGS rate table 

released? We release the SLGS rate table 

to the public by 10 a.m., Eastern time, 

each business day. If the SLGS rate table 

is not available at that time on any given 

business day, the SLGS rate table for the 

preceding business day applies.

(2) How do I lock-in a SLGS rate? The 

applicable daily SLGS rate table for a 

SLGSafe subscription is the one in effect 

on the business day that you start the 

subscription process. This table is 

shown on BPD’s Application server. 

(3) Where can I find the SLGS rate 

table? The SLGS rate table can be 

obtained at BPD’s Web site. 

(c) How are interest computation and 

payment dates determined? Interest on 

a certificate of indebtedness is 

computed on an annual basis and is 

paid at maturity with the principal. 

Interest on a note or bond is paid semiannually. The issuer specifies the first 

interest payment date, which must be at 

least thirty days and less than or equal 

to one year from the date of issue. The 

final interest payment date must 

coincide with the maturity date of the 

security. Interest for other than a full 

interest period is computed on the basis 

of a 365-day or 366-day year (for 

certificates of indebtedness) and on the 

basis of the exact number of days in the 

half-year (for notes and bonds). See the 

Appendix to subpart E to part 306 of 

this subchapter for rules regarding 

computation of interest.

§ 344.5 What other provisions apply to 

subscriptions for Time Deposit securities? 

(a) When is my subscription due? The 

subscriber must fix the issue date of 

each security in the subscription. The 

issue date cannot be changed. The issue 

date must be a business day. The issue 

date cannot be more than sixty days 

after the date BPD receives the 

subscription. If the subscription is for 

$10 million or less, BPD must receive a 

subscription at least five days before the 

issue date. If the subscription is for over 

$10 million, BPD must receive the 

subscription at least seven days before 

the issue date. 

EXAMPLE to paragraph (a): If SLGS 

securities totaling $10 million or less 

will be issued on November 16th, BPD 

must receive the subscription no later 

than November 11th. If SLGS securities 

totaling more than $10 million will be 

issued on November 16th, BPD must 

receive the subscription no later than 

November 9th. In all cases, if SLGS 

securities will be issued on November 

16th, BPD will not accept the 

subscription before September 17th. 

(b) How do I start the subscription 

process? A subscriber starts the 

subscription process by entering into 

SLGSafe the following information: 

(1) The issue date; 

(2) The total principal amount; 

(3) The issuer’s name and Taxpayer 

Identification Number; 

(4) The title of an official authorized 

to purchase SLGS securities; 

(5) A description of the municipal 

bond issue; 

(6) The certification required by 

§ 344.2(e)(1), if the subscription is 

submitted by an agent of the issuer; and 

(7) The certification required by 

§ 344.2(e)(2) (relating to authorization of 

the state or local bonds). 

(c) Under what circumstances can I 

cancel a subscription? You cannot 

cancel a subscription unless you 

establish, to the satisfaction of Treasury, 

that the cancellation is required for 

reasons unrelated to the use of the SLGS 

program to create a cost-free option. 

(d) How do I change a subscription?

You can change a subscription on or 

before 3 p.m., Eastern time, on the issue 

date. Changes to a subscription are 

acceptable with the following 

exceptions: 

(1) You cannot change the issue date; 

(2) You cannot change the aggregate 

principal amount originally specified in 

the subscription by more than ten 

percent; and 

(3) You cannot change an interest rate 

to exceed the maximum interest rate in 

the SLGS rate table that was in effect for 

a security of comparable maturity on the 

business day that you began the 

subscription process. 

(e) How do I complete the 

subscription process? The completed 

subscription must: 

(1) Be dated and submitted by an 

official authorized to make the 

purchase; 

(2) Separately itemize securities by 

the various maturities, interest rates, 

and first interest payment dates (in the 

case of notes and bonds); 

(3) Not be more than ten percent 

above or below the aggregate principal 

amount originally specified in the 

subscription; 

(4) Not be paid with proceeds that are 

derived, directly or indirectly, from the 

redemption before maturity of SLGS 

securities subscribed for on or before 

December 27, 1976; 

(5) Include the certifications required 

by § 344.2(e)(3)(i); and 

(6) Include the information required 

under paragraph (b), if not already 

provided. 

58764 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 

(f) When must I complete the 

subscription? BPD must receive a 

completed subscription on or before 3 

p.m., Eastern time, on the issue date.

§ 344.6 How do I redeem a Time Deposit 

security before maturity? 

(a) What is the minimum time a 

security must be held?

(1) Zero percent certificates of 

indebtedness of 16 to 29 days. A zero 

percent certificate of indebtedness of 16 

to 29 days can be redeemed, at the 

owner’s option, no earlier than 15 days 

after the issue date. 

(2) Certificates of indebtedness of 30 

days or more. A certificate of 

indebtedness of 30 days or more can be 

redeemed, at the owner’s option, no 

earlier than 25 days after the issue date. 

(3) Notes or bonds. A note or bond 

can be redeemed, at the owner’s option, 

no earlier than 30 days after the issue 

date. 

(b) Can I request partial redemption of 

a security balance? You may request 

partial redemptions in any whole dollar 

amount; however, a security balance of 

less than $1,000 must be redeemed in 

total. 

(c) Do I have to submit a request for 

early redemption? Yes. An official 

authorized to redeem the securities 

before maturity must submit an 

electronic request in SLGSafe. The 

request must show the Taxpayer 

Identification Number of the issuer, the 

security number, and the dollar amount 

of the securities to be redeemed. Upon 

submission of a request for redemption 

before maturity of a security subscribed 

for on or after the date of publication of 

the final rule, the request must include 

a yield certification under 

§ 344.2(e)(3)(ii). BPD must receive the 

request no less than 14 days and no 

more than 60 days before the requested 

redemption date. You cannot cancel the 

request. 

(d) How do I calculate the amount of 

redemption proceeds for subscriptions 

on or after October 28, 1996? For 

securities subscribed for on or after 

October 28, 1996, the amount of the 

redemption proceeds is calculated as 

follows: 

(1) Interest. If a security is redeemed 

before maturity on a date other than a 

scheduled interest payment date, 

Treasury pays interest for the fractional 

interest period since the last interest 

payment date. 

(2) Redemption value. The remaining 

interest and principal payments are 

discounted by the current Treasury 

borrowing rate for the remaining term to 

maturity of the security redeemed. This 

may result in a premium or discount to 

the issuer depending on whether the 

current Treasury borrowing rate is 

unchanged, lower, or higher than the 

stated interest rate of the earlyredeemed SLGS securities. There is no 

market charge for the redemption of 

zero interest Time Deposit securities 

subscribed for on or after October 28, 

1996. Redemption proceeds in the case 

of a zero-interest security are a return of 

the principal invested. The formulas for 

calculating the redemption value under 

this paragraph, including examples of 

the determination of premiums and 

discounts, are set forth in Appendix B 

of this part. 

(e) How do I calculate the amount of 

redemption proceeds for subscriptions 

from September 1, 1989, through 

October 27, 1996? For securities 

subscribed for from September 1, 1989, 

through October 27, 1996, the amount of 

the redemption proceeds is calculated 

as follows: 

(1) Interest. If a security is redeemed 

before maturity on a date other than a 

scheduled interest payment date, 

Treasury pays interest for the fractional 

interest period since the last interest 

payment date. 

(2) Market charge. An amount shall be 

deducted from the redemption proceeds 

if the current Treasury borrowing rate 

for the remaining period to original 

maturity exceeds the rate of interest 

originally fixed for such security. The 

amount shall be the present value of the 

future increased borrowing cost to the 

Treasury. The annual increased 

borrowing cost for each interest period 

is determined by multiplying the 

principal by the difference between the 

two rates. For notes and bonds, the 

increased borrowing cost for each 

remaining interest period to original 

maturity is determined by dividing the 

annual cost by two. Present value is 

determined by using the current 

Treasury borrowing rate as the discount 

factor. When you request a redemption 

date that is less than thirty days before 

the original maturity date, we will apply 

the rate of a one month security as listed 

on the SLGS rate table issued on the day 

you make a redemption request. The 

market charge under this paragraph can 

be computed by using the formulas in 

Appendix A of this part. 

(f) How do I calculate the amount of 

redemption proceeds for subscriptions 

from December 28, 1976, through 

August 31, 1989? For securities 

subscribed for from December 28, 1976, 

through August 31, 1989, the amount of 

the redemption proceeds is calculated 

as follows: 

(1) Interest. Interest for the entire 

period the security was outstanding 

shall be recalculated if the original 

interest rate of the security is higher 

than the interest rate that would have 

been set at the time of the initial 

subscription had the term of the security 

been for the shorter period. If this 

results in an overpayment of interest, 

we will deduct from the redemption 

proceeds the aggregate amount of such 

overpayments, plus interest, 

compounded semi-annually thereon, 

from the date of each overpayment to 

the date of redemption. The rate used in 

calculating the interest on the 

overpayment will be one-eighth of one 

percent above the maximum rate that 

would have applied to the initial 

subscription had the term of the security 

been for the shorter period. If a bond is 

redeemed before maturity on a date 

other than a scheduled interest payment 

date, no interest is paid for the 

fractional interest period since the last 

interest payment date.

(2) Market charge. An amount shall be 

deducted from the redemption proceeds 

in all cases where the current Treasury 

borrowing rate for the remaining period 

to original maturity of the security 

prematurely redeemed exceeds the rate 

of interest originally fixed for such 

security. You can compute the market 

charge under this paragraph by using 

the formulas in Appendix A of this part. 

(g) How do I calculate the amount of 

redemption proceeds for subscriptions 

on or before December 27, 1976? For 

bonds subscribed for on or before 

December 27, 1976, the amount of the 

redemption proceeds is calculated as 

follows. 

(1) Interest. The interest for the entire 

period the bond was outstanding shall 

be recalculated if the original interest 

rate at which the bond was issued is 

higher than an adjusted interest rate 

reflecting both the shorter period during 

which the bond was actually 

outstanding and a penalty. The adjusted 

interest rate is the Treasury rate which 

would have been in effect on the date 

of issue for a marketable Treasury bond 

maturing on the semi-annual maturity 

period before redemption reduced by a 

penalty which must be the lesser of: 

(i) One-eighth of one percent times 

the number of months from the date of 

issuance to original maturity, divided by 

the number of full months elapsed from 

the date of issue to redemption; or 

(ii) One-fourth of one percent. 

(2) Deduction. We will deduct from 

the redemption proceeds, if necessary, 

any overpayment of interest resulting 

from previous payments made at a 

higher rate based on the original longer 

period to maturity.

Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 58765

Subpart C—Demand Deposit 

Securities

§ 344.7 What are Demand Deposit 

securities? 

Demand Deposit securities are oneday certificates of indebtedness that are 

automatically rolled over each day until 

you request redemption. 

(a) How are the SLGS rates for 

Demand Deposit securities determined?

Each security shall bear a variable rate 

of interest based on an adjustment of the 

average yield for three-month Treasury 

bills at the most recent auction. A new 

rate is effective on the first business day 

following the regular auction of threemonth Treasury bills and is shown in 

the SLGS rate table. Interest is accrued 

and added to the principal daily. 

Interest is computed on the balance of 

the principal, plus interest accrued 

through the preceding day. 

(1) How is the interest rate calculated?

(i) First, you calculate the annualized 

effective Demand Deposit rate in 

decimals, designated ‘‘I’’ in Equation 1, 

as follows:

r pMTR TAC

y DTM

= 



 



 −

















×− −

100 1 1

/

( ) (Equation 1)

where:

I =Annualized effective Demand Deposit 

rate in decimals. 

P =Average auction price for the most 

recently auctioned 13-week Treasury 

bill, per hundred, to three decimals. 

Y =365 (if the year following issue date 

does not contain a leap year day) or 

366 (if the year following issue date 

does contain a leap year day). 

DTM =The number of days from date of 

issue to maturity for the most recently 

auctioned 13-week Treasury bill. 

MTR =Estimated marginal tax rate, in 

decimals, of purchasers of tax-exempt 

bonds. 

TAC =Treasury administrative costs, in 

decimals.

(ii) Then, you calculate the daily 

factor for the Demand Deposit rate as 

follows:

DDR I y =+ − () ( / 1 1 1 Equation 2)

(2) Where can I find additional 

information? Information on the 

estimated average marginal tax rate and 

costs for administering Demand Deposit 

securities, both to be determined by 

Treasury from time to time, will be 

published in the Federal Register. 

(b) What happens to Demand Deposit 

securities during a Debt Limit 

Contingency? At any time the Secretary 

determines that issuance of obligations 

sufficient to conduct the orderly 

financing operations of the United 

States cannot be made without 

exceeding the statutory debt limit, we 

will invest any unredeemed Demand 

Deposit securities in special ninety-day 

certificates of indebtedness. Funds 

invested in the ninety-day certificates of 

indebtedness earn simple interest equal 

to the daily factor in effect at the time 

Demand Deposit security issuance is 

suspended, multiplied by the number of 

days outstanding. When regular 

Treasury borrowing operations resume, 

the ninety-day certificates of 

indebtedness, at the owner’s option, are: 

(1) Payable at maturity; 

(2) Redeemable before maturity, 

provided funds are available for 

redemption; or 

(3) Reinvested in Demand Deposit 

securities.

§ 344.8 What other provisions apply to 

subscriptions for Demand Deposit 

securities? 

(a) When is my subscription due? The 

subscriber must fix the issue date of 

each security in the subscription. The 

issue date cannot be changed. The issue 

date must be a business day. The issue 

date cannot be more than sixty days 

after the date BPD receives the 

subscription. If the subscription is for 

$10 million or less, BPD must receive 

the subscription at least five days before 

the issue date. If the subscription is for 

more than $10 million, BPD must 

receive the subscription at least seven 

days before the issue date. 

(b) How do I start the subscription 

process? A subscriber starts the 

subscription process by entering into 

SLGSafe the following information: 

(1) The issue date; 

(2) The total principal amount; 

(3) The issuer’s name and Taxpayer 

Identification Number; 

(4) The title of an official authorized 

to purchase SLGS securities; 

(5) A description of the municipal 

bond issue; 

(6) The certification required by 

§ 344.2(e)(1), if the subscription is 

submitted by an agent of the issuer; and 

(7) The certification required by 

§ 344.2(e)(2) (relating to authorization of 

the state or local bonds). 

(c) Under what circumstances can I 

cancel a subscription? You cannot 

cancel a subscription unless you 

establish, to the satisfaction of Treasury, 

that the cancellation is required for 

reasons unrelated to the use of the SLGS 

program to create a cost-free option. 

(d) How do I change a subscription?

You can change a subscription on or 

before 3 p.m., Eastern time, on the issue 

date. You may change the aggregate 

principal amount specified in the 

subscription by no more than ten 

percent, above or below the amount 

originally specified in the subscription. 

(e) How do I complete the 

subscription process? The subscription 

must: 

(1) Be dated and submitted 

electronically by an official authorized 

to make the purchase; 

(2) Include the certifications required 

by § 344.2(e)(3)(i) (relating to yield); and 

(3) Include the information required 

under paragraph (b) of this section, if 

not already provided.

§ 344.9 How do I redeem a Demand 

Deposit security? 

(a) When must I notify BPD to redeem 

a security? A Demand Deposit security 

can be redeemed at the owner’s option, 

if BPD receives a request for redemption 

not less than: 

(1) 1 business day before the 

requested redemption date for 

redemptions of $10 million or less; and 

(2) 3 business days before the 

requested redemption date for 

redemptions of more than $10 million. 

(b) Can I request partial redemption of 

a security balance? You may request 

partial redemptions in any amount. If 

your account balance is less than 

$1,000, it must be redeemed in total. 

(c) Do I have to submit a request for 

redemption? Yes. An official authorized 

to redeem the securities must submit an 

electronic request through SLGSafe. The 

request must show the Taxpayer 

Identification Number of the issuer, the 

security number, and the dollar amount 

of the securities to be redeemed. BPD 

must receive the request by 3 p.m., 

Eastern time on the required day. You 

cannot cancel the request.

Subpart D—Special Zero Interest 

Securities

§ 344.10 What are Special Zero Interest 

securities? 

Special zero interest securities were 

issued as certificates of indebtedness 


EP30SE04.202</MATH> EP30SE04.203</MATH>
58766 Federal Register / Vol. 69, No. 189 / Thursday, September 30, 2004 / Proposed Rules 

and notes. The provisions of subpart B 

of this part (Time Deposit securities) 

apply except as specified in Subpart D 

of this part. Special Zero Interest 

securities were discontinued on October 

28, 1996. The only zero interest 

securities available after October 28, 

1996, are zero interest Time Deposit 

securities that are subject to subpart B 

of this part.

§ 344.11 How do I redeem a Special Zero 

Interest Security before maturity? 

Follow the provisions of § 344.6(a)–(g) 

as published in the Federal Register, 65 

FR 55399, Sept. 13, 2000, except that no 

market charge or penalty will apply 

when you redeem a special zero interest 

security before maturity.

Dated: September 24, 2004. 

Donald V. Hammond, 

Fiscal Assistant Secretary.

[FR Doc. 04–21909 Filed 9–27–04; 11:15 am] 

BILLING CODE 4810–39–P