3114 Federal Register / Vol. 65, No. 12 / Wednesday, January 19, 2000 / Rules and Regulations

1A Treasury security is ‘‘on-the-run’’ when it is

the newest security issue of its maturity (e.g., in

October the two-year note issued September 30

would be on the run‘‘ while the two-year note

issued August 31 would be ‘‘off-the-run’’). An onthe-run security is normally the most liquid issue

for that maturity.

2The comment letters are available for

downloading on the Internet and for inspection and

copying at the Treasury Department Library at the

addresses provided earlier in this rule.

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 375

Marketable Treasury Securities

Redemption Operations

AGENCY: Bureau of the Public Debt,

Fiscal Service, Department of the

Treasury.

ACTION: Final rule.

SUMMARY: The Department of the

Treasury (‘‘Treasury,’’ ‘‘We,’’ or ‘‘Us’’) is

issuing rules in final form setting out

the terms and conditions by which we

may redeem outstanding, unmatured

marketable Treasury securities. We are

establishing a new part in the Code of

Federal Regulations for this purpose.

Redemption operations (‘‘buybacks’’)

will help us better manage our financing

needs, promote more efficient capital

markets, and may lower financing costs

for taxpayers.

EFFECTIVE DATE: January 19, 2000.

ADDRESSES: You may download this

final rule from the Bureau of the Public

Debt’s Internet site at the following

address: www.publicdebt.treas.gov. It is

also available for public inspection and

copying at the Treasury Department

Library, Room 5030, Main Treasury

Building, 1500 Pennsylvania Avenue,

N.W., Washington, D.C. 20220. To visit

the library, call (202) 622–0990 for an

appointment.

FOR FURTHER INFORMATION CONTACT: Lori

Santamorena (Executive Director) or

Chuck Andreatta (Senior Financial

Advisor), Bureau of the Public Debt,

Government Securities Regulations

Staff, (202) 691–3632.

SUPPLEMENTARY INFORMATION:

I. Background

The government’s improved fiscal

position has caused Treasury’s

borrowing needs to decline

significantly, and we have been

adjusting the government’s borrowing

program accordingly. Our adjustments

to date have distributed the required

cuts in market borrowing across all

maturity areas. In this environment, we

began examining the concept of

purchasing outstanding Treasury

securities in the market.

Buybacks will provide us with greater

flexibility to manage the government’s

debt and to respond to our improved

fiscal condition. First, buybacks will

enhance market liquidity by allowing us

to maintain regular issuances of new

benchmark securities across the

maturity spectrum, in greater volume

than would otherwise be possible. Over

the long term, this enhanced liquidity

could reduce the government’s interest

expense and promote more efficient

capital markets.

Second, buybacks will enhance our

ability to exert greater control over the

maturity structure of the outstanding

debt. Without a buyback program,

further reductions in Treasury new

issue sizes and frequencies could be

necessary. A buyback program,

however, will provide us the option of

managing the maturity structure of the

debt by selectively targeting the

maturities of debt to be repurchased.

Third, buybacks will provide an

additional cash management tool,

absorbing excess cash in periods when

tax revenues usually exceed immediate

spending needs.

In addition, although not a primary

reason for conducting buybacks, we may

occasionally be able to reduce the

government’s interest expense by

purchasing ‘‘off-the-run’’ debt and

replacing it with lower-yield ‘‘on-therun’’ debt.1

On August 5, 1999 (64 FR 42626), we

published proposed rules for public

comment that laid out the proposed

terms and conditions by which we

would conduct buybacks. The closing

date for comments was October 4, 1999.

As explained in more detail below, after

considering the comments provided, we

have decided to adopt the proposed

methodology for conducting buybacks.

II. Comments Received in Response to

the Proposed Rule

We received 13 comment letters on

the proposed rule 2—five from securities

firms, four from individuals, and one

each from a major trade association, the

Treasury advisory committee of a major

trade association, a futures exchange,

and a Federal Reserve Bank. Overall

these commenters were supportive of

the proposal. No commenters opposed

the proposal. As explained below, the

comments raised a series of policy or

technical issues related to

implementation.

A. Debt Management Policy Issues

Two commenters expressed concern

that the budget accounting treatment of

any premiums that Treasury would pay

to buy back Treasury securities could

limit the size of the buyback program.

Both commenters suggested a budget

accounting policy change—that these

premiums be amortized over the

remaining life of the security bought

back.

We consider this issue to be outside

the scope of these regulations, which set

out the terms and conditions of

redemption operations.

Several comment letters made

recommendations on the scheduling of

redemption operations. Two

commenters wanted them to be held in

conjunction with the regular Treasury

quarterly refunding auctions in

February, May, August, and November.

Another commenter recommended that

redemption operations be held close to

auctions of Treasury securities of

similar maturity, while another

commenter suggested only a regular

schedule of redemption operations. Two

commenters preferred that redemption

operations not be conducted near

potential delivery dates for Treasury

futures contracts.

Commenters recommended a variety

of maturity ranges to buy back. For

example, one commenter advocated that

securities with 15 to 25 years remaining

to maturity were the best candidates for

the Treasury to purchase, while another

commenter recommended that Treasury

buy back debt within the two-year to

five-year maturity range to minimize

any effects on the average length of the

debt outstanding. Another commenter

suggested that Treasury avoid buying

back those securities that are the

‘‘cheapest-to-deliver’’ for Treasury

futures contracts.

Two commenters expressed concern

about the effect that redemption

operations may have on the remaining

liquidity of off-the-run issues. Both

suggested limiting redemption

operations for a particular security to 10

percent of its outstanding amount. One

of these commenters also suggested that

at least $1 billion of a security always

remain outstanding. On the other hand,

one commenter advocated that ‘‘issues

with less than $2 billion outstanding

should be removed from the market,’’

while another commenter saw ‘‘no

reason to state a limit on the specific

amount of any given security that the

Treasury can purchase.’’

The issues of the scheduling of

redemption operations, the maturities to

redeem, and the remaining supply of

securities redeemed are not addressed

in the final rule. For each operation we

will first announce when the operation

will occur and which maturity sector or

sectors will be eligible for redemption.

We will determine the amount of any

particular security to redeem during the

Federal Register / Vol. 65, No. 12 / Wednesday, January 19, 2000 / Rules and Regulations 3115

redemption operation consistent with

our debt management goals.

B. Technical/Operational Issues

Two commenters recommended that

we issue redemption operation

announcements several days in advance

of the redemption operations. They

contended that a relatively long notice

period would give securities dealers

more time to prepare for the redemption

operation, to canvass their customers to

determine their levels of interest, and

that it would aid price discovery. One

commenter, however, preferred ‘‘a

relatively short lead time * * * , not

unlike the process for a Federal Reserve

coupon pass.’’

We are not addressing the notice

period in the final rule so that we can

retain flexibility in the timing of

announcements.

Opinion was fairly evenly divided on

the issue of whether Treasury should

announce the specific securities that are

eligible for redemption or merely

announce a particular range of

maturities that will be purchased. Those

who favored announcing specific issues

primarily argued that this would help

dealers add eligible securities to their

inventories prior to the redemption

operation. Commenters preferring

announcing a range of securities

contended that participants would have

greater flexibility to decide which

securities to offer, and Treasury would

have greater flexibility to decide which

securities to purchase. One commenter

also predicted that announcing a

maturity range would mitigate the

‘‘announcement effect’’ of the prices of

specific issues increasing as a direct

result of the announcement.

The announcement will provide the

maturity sector or sectors that will be

eligible for redemption. It will also

provide descriptions of each security

within those maturity sectors including

the CUSIP number, interest rate,

maturity date, and the amount

outstanding.

One commenter recommended that

we use a proprietary electronic system

for processing offers different from the

Federal Reserve Bank of New York’s.

We will use the Federal Reserve Bank of

New York’s system, however, because it

is already in place at the location where

offers will be received and it meets our

processing needs.

Another commenter suggested that

Treasury consider using a single-price

rather than a multiple-price auction

mechanism. This commenter suggested

that submitters may make more

aggressive offers in a single-price

format.

Redemption operations will at least

initially be a multiple-price process in

which successful offerors will receive

the price at which they offered

securities. Multiple-price redemption

operations will allow us to make

immediate use of the Federal Reserve

Bank of New York’s electronic system

for executing open market operations.

At some future time, however, we might

want to evaluate the potential merits of

a single-price process.

One commenter noted that the

proposed rule was silent on the length

of time between the closing time for

submission of offers and the time that

confirmations will be provided to

submitters. The commenter stressed that

this time period should be as short as

possible because of the submitting

dealers’ exposure to market risk during

this timeframe.

We will provide confirmations

(results messages) to submitters, and

issue a redemption operation results

press release, as quickly as possible

following the deadline for submitting

offers.

In the preamble to the proposed rule,

we indicated that settlement would

occur on the day after the redemption

operation in conformance with the

market’s next-day settlement convention

for other Treasury securities

transactions. We specifically requested

comment, however, on settlementrelated issues. Two commenters

recommended that there be at least two

days between a redemption operation

and settlement, primarily to inform any

customers that their offers had been

accepted and to facilitate timely

delivery of customer securities. Another

commenter specifically urged a threeday settlement timeframe because that is

the settlement standard for corporate

debt.

We will initially provide a minimum

of two days between a redemption

operation and settlement. This

timeframe, however, is not stated in the

final rule. Rather, the redemption

operation and settlement dates will be

provided in the redemption operation

announcement.

We also received a comment that the

definition of ‘‘accrued interest’’ should

be revised to clarify that the time period

covered in the accrued interest

calculation includes the settlement date.

We agree with this recommendation.

One comment letter expressed

confusion over whether participation in

redemption operations would be

voluntary and concern that the Treasury

might purchase, or a securities dealer

might offer to sell, a Treasury security

without the permission of its owner.

In response, we want to emphasize

that participation in a Treasury

redemption operation will be entirely

voluntary and that securities industry

rules for dealing fairly with customers

prohibit securities dealers from

conducting unauthorized customer

transactions.

Finally, one comment letter consisted

of a series of questions regarding various

aspects of the redemption program, but

made no recommendations.

III. Changes From the Proposed Rule

After taking the comments we

received into consideration, we are

adopting this final rule setting out the

terms and conditions by which we may

redeem outstanding, unmatured

marketable Treasury securities. The

final rule adopts the proposed rule

without significant changes. The only

changes that have been made are in the

definitions of ‘‘Accrued interest,’’

‘‘Price,’’ and ‘‘Privately held amount’’

(§ 375.2), and in the descriptions of the

redemption operation announcement

(§ 375.10), how to submit an offer

(§ 375.12), and who is responsible for

delivering securities (§ 375.15).

The description of the redemption

operation announcement was revised to

add the range of maturities of eligible

securities as one of the details that we

will provide.

The description of how to submit an

offer was revised to provide us greater

flexibility in which electronic system

we will use for receiving offers. The

proposed rule specified the Federal

Reserve Bank of New York’s Trading

Room Automated Processing System

(TRAPS) as the system through which

submitters must submit offers. While

TRAPS is the system through which

submitters will submit offers,

eliminating specific mention of this

system in the final rule allows for a

different system to be used at some

future date.

The description of who is responsible

for delivering securities was revised to

clarify that submitters are responsible

for delivering all securities we accept in

a redemption operation, including any

securities for which they submitted

offers on behalf of others.

In addition, we eliminated the

paragraphs on the maximum amount

offered (§ 375.13) and deliveries of

definitive securities (§ 375.23). We

removed the limit on the maximum

amount of a particular security that a

submitter may offer because it is not

necessary operationally. The Federal

Reserve Bank of New York’s electronic

system will accept the correct amount of

an offer, even if the offer exceeds the

security’s amount outstanding.

3116 Federal Register / Vol. 65, No. 12 / Wednesday, January 19, 2000 / Rules and Regulations

We eliminated the paragraph that

would have permitted deliveries of

definitive securities because developing

a process for timely definitive deliveries

would have been too complex

operationally in relation to any

participation we might expect from

holders of definitive securities.

Relatively few Treasury securities

continue to be held in definitive form.

Those still holding definitive securities

can easily convert them to book-entry

securities if they wish to participate in

any future redemption operations.

A summary of the main features of the

final rule that remain unchanged from

the proposed rule are:

(1) We will issue an announcement of

an upcoming redemption operation,

including the expected maximum

amount of the operation;

(2) Offers will be competitive, on the

basis of price, to three decimals;

(3) Redemption operations will be a

multiple-price process in which

successful offerors receive the price at

which they offered securities;

(4) Only primary dealers as

designated by the Federal Reserve Bank

of New York will be allowed to submit

offers for themselves or others, enabling

use of the Bank’s existing electronic

systems; and

(5) There will be no limits on the

number of offers per security or on the

total number of offers from a particular

submitter.

IV. Procedural Requirements

This final rule is not a ‘‘significant

regulatory action’’ under Executive

Order 12866. Although we issued this

rule in proposed form to benefit from

public comment, the notice and public

procedures and delayed effective date

requirements of the Administrative

Procedure Act do not apply, under 5

U.S.C. 553(a)(2).

Since no notice of proposed

rulemaking was required, the provisions

of the Regulatory Flexibility Act (5

U.S.C. 601 et seq.) do not apply.

List of Subjects in 31 CFR Part 375

Bonds, Federal Reserve System,

Government securities, Securities.

For the reasons stated in the

preamble, part 375 is added to 31 CFR

chapter II to read as follows:

PART 375—MARKETABLE TREASURY

SECURITIES REDEMPTION

OPERATIONS

Subpart A—General Information

Sec.

375.0 What authority does the Treasury

have to redeem its securities?

375.1 Where are the rules for the

redemption operation located?

375.2 What special definitions apply to this

rule?

375.3 What is the role of the Federal

Reserve Bank of New York in this

process?

Subpart B—Offering, Certifications, and

Delivery

375.10 What is the purpose of the

redemption operation announcement?

375.11 Who may participate in a

redemption operation?

375.12 How do I submit an offer?

375.13 What requirements apply to offers?

375.14 Do I have to make any certifications?

375.15 Who is responsible for delivering

securities?

Subpart C—Determination of Redemption

Operation Results; Settlement

375.20 When will the Treasury decide on

which offers to accept?

375.21 When and how will the Treasury

announce the redemption operation

results?

375.22 Will I receive confirmations and, if

I am submitting offers for others, do I

have to provide confirmations?

375.23 How does the securities delivery

process work?

Subpart D—Miscellaneous Provisions

375.30 Does the Treasury have any

discretion in this process?

375.31 What could happen if someone does

not fully comply with the redemption

operation rules or fails to deliver

securities?

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

12 U.S.C. 391.

Subpart A—General Information

§ 375.0 What authority does the Treasury

have to redeem its securities?

Section 3111 of Title 31 of the United

States Code authorizes the Secretary of

the Treasury to use money received

from the sale of an obligation and other

money in the general fund of the

Treasury to buy, redeem, or refund, at

or before maturity, outstanding bonds,

notes, certificates of indebtedness,

Treasury bills, or savings certificates of

the United States Government. For the

purposes of this part, we will refer to

these outstanding obligations as

‘‘securities.’’

§ 375.1 Where are the rules for the

redemption operation located?

The provisions in this part and the

redemption operation announcement

govern the redemption of marketable

Treasury securities under 31 U.S.C.

3111. (See § 375.10.)

§ 375.2 What special definitions apply to

this rule?

The definitions in 31 CFR part 356

govern this part except as follows:

Accrued interest means an amount

payable by the Treasury as part of the

settlement amount for the interest

income earned between the last interest

payment date up to and including the

settlement date.

Bank means the Federal Reserve Bank

of New York.

Customer means a person or entity on

whose behalf a submitter has been

directed to submit an offer of a specified

amount of securities in a specific

redemption operation.

Minimum offer amount means the

smallest par amount of a security that

may be offered to the Treasury. We will

state the minimum offer amount in the

redemption operation announcement.

Multiple means the smallest

additional par amount of a security that

may be offered to the Treasury. We will

state the multiple in the redemption

operation announcement.

Offer means an offer to deliver for

redemption a stated par amount of a

specific security to the Treasury at a

stated price.

Price means the dollar amount to be

paid for a security expressed as a

percent of its current par amount.

Privately held amount means the total

amount outstanding of a security less

holdings of the Federal Reserve System

and Federal Government accounts.

Redemption amount means the

maximum par amount of securities that

we are planning to redeem through a

redemption operation. We will state the

redemption amount in the redemption

operation announcement.

Redemption operation means a

competitive process by which the

Treasury accepts offers of marketable

Treasury securities that by their terms

are not immediately payable.

Security means an outstanding

unmatured obligation of the United

States Government that the Secretary is

authorized to buy, redeem or refund

under section 3111 of Title 31 of the

United States Code.

Settlement means full and complete

delivery of and payment for securities

redeemed.

Settlement amount means the par

amount of each security that we redeem,

multiplied by the price we accept in a

redemption operation, plus any accrued

interest.

Settlement date means the date

specified in the redemption operation

announcement on which you must

deliver a security to the Treasury for

payment.

Submitter means an entity submitting

offers directly to the Treasury for its

own account, for the account of others,

or both. (See § 375.11(a).)

Tender means a computer

transmission or document submitted in

a redemption operation that contains

one or more offers.

Federal Register / Vol. 65, No. 12 / Wednesday, January 19, 2000 / Rules and Regulations 3117

We (‘‘us’’) means the Secretary of the

Treasury and his or her delegates,

including the Treasury Department, the

Bureau of the Public Debt, and their

representatives. The term also includes

the Federal Reserve Bank of New York,

acting as fiscal agent of the United

States.

You means a prospective submitter in

a redemption operation.

§ 375.3 What is the role of the Federal

Reserve Bank of New York in this process?

As fiscal agent of the United States,

the Federal Reserve Bank of New York

performs various activities necessary to

conduct a redemption operation under

this part. These activities may include

but are not limited to:

(a) Accepting and reviewing tenders;

(b) Calculating redemption operation

results;

(c) Issuing notices of redemptions;

(d) Accepting deliveries of Treasury

securities at settlement; and

(e) Processing the Treasury payment

for securities delivered at settlement.

Subpart B—Offering, Certifications,

and Delivery

§ 375.10 What is the purpose of the

redemption operation announcement?

We provide public notice that we are

redeeming Treasury securities by

issuing a redemption operation

announcement. This announcement

lists the details of each proposed

redemption operation, including the

maximum redemption amount, the

range of maturities of eligible securities,

descriptions of the securities that fall

within that maturity range, and the

redemption operation and settlement

dates. The redemption operation

announcement and this part specify the

terms and conditions of a redemption

operation. If anything in the redemption

operation announcement differs from

anything in this part, the redemption

operation announcement will apply.

Accordingly, you should read the

applicable redemption operation

announcement along with this part.

§ 375.11 Who may participate in a

redemption operation?

(a) Submitters. To be a submitter, you

must be an institution that the Federal

Reserve Bank of New York has approved

to conduct open market transactions

with the Bank.

(b) Others. A person or entity other

than a submitter may participate only if

it arranges to have an offer or offers

submitted on its behalf by a submitter.

§ 375.12 How do I submit an offer?

As a submitter, you must submit an

offer in a tender to the Treasury via the

Federal Reserve Bank of New York. You

must submit any tenders in an approved

format and the Bank must receive them

prior to the closing time stated in the

redemption operation announcement. If

we do not receive your tenders timely,

we will reject them. Your tenders are

binding on you after the closing time

specified in the redemption operation

announcement. You are responsible for

ensuring that we receive your tenders

on time. We will not be responsible in

any way for any unauthorized tender

submissions or for any delays, errors, or

omissions in submitting tenders.

§ 375.13 What requirements apply to

offers?

(a) General. You may only submit

competitive offers (specifying a price).

All offers must state the security

description, par amount, and price of

each security offered. All offers must

equal or exceed the minimum offer

amount, and be in the multiple, stated

in the redemption operation

announcement.

(b) Price format. You must express

offered prices in terms of price per $100

of par with three decimals, e.g., 102.172.

The first two decimals represent

fractional 32nds of a dollar. The third

decimal represents eighths of a 32nd of

a dollar, and must be a 0, 2, 4, or 6. For

example, an offer of 102.172 means one

hundred two and seventeen 32nds and

two eighths of a 32nd, or in decimals,

102.5390625.

(c) Maximum number of offers. There

is no limit on the number of offers you

may make for each eligible security.

There is also no limit on the number of

eligible securities you may offer.

§ 375.14 Do I have to make any

certifications?

By submitting a tender offering a

security or securities for sale, you certify

that you are in compliance with this

part and the redemption operation

announcement.

§ 375.15 Who is responsible for delivering

securities?

As a submitter, you are responsible

for delivering any securities we accept

in the redemption operation, including

any securities for which you submitted

offers on behalf of others. (See § 375.23.)

All securities you deliver must be free

and clear of all liens, charges, claims,

and any other restrictions.

Subpart C—Determination of

Redemption Operation Results;

Settlement

§ 375.20 When will the Treasury decide on

which offers to accept?

We will determine which offers or

portions of offers to accept after the

closing time for receipt of tenders. All

such determinations will be final.

§ 375.21 When and how will the Treasury

announce the redemption operation

results?

We will make an official

announcement of the redemption

operation results through a press

release. For each security we redeem,

the press release will include such

information as the amounts offered and

accepted, the highest price accepted,

and the remaining privately held

amount outstanding.

§ 375.22 Will I receive confirmations and, if

I am submitting offers for others, do I have

to provide confirmations?

(a) Confirmations to submitters. We

will provide a confirmation of

acceptance or rejection in the form of a

results message to submitters of offers

by the close of the business day of the

redemption operation.

(b) Confirmation of customer offers. If

you submit a successful offer for a

customer, you are responsible for

notifying that customer of the

impending redemption.

§ 375.23 How does the securities delivery

process work?

If any of the offers you submitted are

accepted, you must transfer the correct

book-entry Treasury securities in the

correct par amount against the correct

settlement amount on the settlement

date. You must deliver the securities to

the account specified in the redemption

operation announcement.

Subpart D—Miscellaneous Provisions

§ 375.30 Does the Treasury have any

discretion in this process?

(a) We have the discretion to:

(1) Accept or reject any offers or

tenders submitted in a redemption

operation;

(2) Redeem less than the amount of

securities specified in the redemption

operation announcement;

(3) Add to, change, or waive any

provision of this part; or

(4) Change the terms and conditions

of a redemption operation.

(b) Our decisions under this part are

final. We will provide a public notice if

we change any redemption operation

provision, term or condition.

3118 Federal Register / Vol. 65, No. 12 / Wednesday, January 19, 2000 / Rules and Regulations

§ 375.31 What could happen if someone

does not fully comply with the redemption

operation rules or fails to deliver

securities?

(a) General. If a person or entity fails

to comply with any of the redemption

operation rules in this part, we will

consider the circumstances and take

what we deem to be appropriate action.

This could include barring the person or

entity from participating in future

redemption operations under this part

and future auctions under 31 CFR part

356. We also may refer the matter to an

appropriate regulatory agency.

(b) Liquidated damages. If you fail to

deliver securities on time, we may

require you to pay liquidated damages

of up to 1% of your projected settlement

amount.

Dated: January 13, 2000.

Donald V. Hammond,

Fiscal Assistant Secretary.

[FR Doc. 00–1250 Filed 1–18–00; 8:45 am]

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