35782 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations

1The Uniform Offering Circular was published as

a final rule on January 5, 1993 (58 FR 412). The

circular, as amended, is codified at 31 CFR Part 356.

2 62 FR 846 (January 6, 1997).

3See 31 CFR 356.31(f).

4 62 FR 846, 848 (January 6, 1997).

5 62 FR 64528 (December 8, 1997).

6See letter from Ms. Paula H. Simpkins, Vice

President and Assistant General Counsel, The Bond

Market Association (dated February 6, 1998). This

letter is available to the public for inspection and

downloading on the Internet, at the address

provided earlier in this rule, and for inspection and

copying at the Treasury Department Library, at the

address provided earlier.

DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 356

Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds

(Department of the Treasury Circular,

Public Debt Series No. 1–93)

AGENCY: Bureau of the Public Debt,

Fiscal Service, Department of the

Treasury.

ACTION: Final rule.

SUMMARY: The Department of the

Treasury (‘‘Treasury’’ or ‘‘Department’’)

is issuing in final form an amendment

to 31 CFR Part 356 (Uniform Offering

Circular for the Sale and Issue of

Marketable Book-Entry Treasury Bills,

Notes, and Bonds). This amendment

includes changes necessary to make

fungible stripped interest components

for Treasury inflation-indexed

securities, which the Department began

issuing in January 1997. In addition, the

amendment makes certain technical

clarifications and conforming changes.

EFFECTIVE DATE: March 31, 1999.

ADDRESSES: This final rule is available

for downloading 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, FOIA Collection, Room 5030,

Main Treasury Building, 1500

Pennsylvania Avenue, N.W.,

Washington, D.C., 20220. Persons

wishing to visit the library should call

(202) 622–0990 for an appointment.

FOR FURTHER INFORMATION CONTACT:

Kerry Lanham (Acting Director), Chuck

Andreatta or Kurt Eidemiller

(Government Securities Specialists),

Bureau of the Public Debt, Government

Securities Regulations Staff, (202) 219–

3632.

SUPPLEMENTARY INFORMATION:

I. Background

The Uniform Offering Circular (31

CFR Part 356) sets out the terms and

conditions for the sale and issuance by

the Department of the Treasury to the

public of marketable Treasury bills,

notes, and bonds. The Uniform Offering

Circular, in conjunction with offering

announcements, represents a

comprehensive statement of those terms

and conditions.1

In January 1997, the Department

began issuing a new type of marketable

security, referred to as a Treasury

inflation-indexed security, whose

principal value is adjusted for inflation

as measured by the Bureau of Labor

Statistics of the U.S. Department of

Labor.2 The Department believes the

issuance of these new securities will

reduce interest costs to the Treasury

over the long term and broaden the

types of debt instruments available to

investors in U.S. financial markets.

Treasury inflation-indexed securities

have been eligible for the STRIPS

(Separate Trading of Registered Interest

and Principal of Securities) program

since Treasury began issuing the new

securities. STRIPS is the Department’s

program under which eligible securities

are authorized to be separated into

principal and interest components

(interest components are also referred to

as ‘‘TINTS’’). Such components are

maintained in book-entry accounts, and

transferred separately in the Treasury/

Reserve Automated Debt Entry System

(‘‘TRADES’’ or the commercial bookentry system). Unlike TINTS from

Treasury fixed-principal securities,

TINTS stripped from an inflationindexed security are currently not

fungible (i.e., they are not

interchangeable) with TINTS stripped

from a different inflation-indexed

security, even if the components have

the same maturity (payment) date.3

In the preamble to the final rule

amendments to accommodate the

issuance of inflation-indexed securities,

the Department stated that it would

‘‘continue to work on making interest

components fungible in a manner that is

operationally feasible.’’ 4 The

Department recognizes that making

stripped inflation-indexed interest

components fungible is important to

developing a liquid market for these

components. The Department has

worked with market participants to

develop a methodology that will

accomplish this goal.

The Department published for public

comment a proposed amendment to the

Uniform Offering Circular on December

8, 1997,5 which laid out the proposed

methodology for making TINTS stripped

from different Treasury inflationindexed securities fungible. The closing

date for comments was February 6,

1998. As explained in more detail

below, after considering the comments

provided, Treasury has decided to adopt

the proposed methodology for making

TINTS stripped from different inflationindexed securities fungible. This

methodology will remain unchanged

from its description in the proposed

rule. However, in order to provide

market participants sufficient time to

make any necessary automated systems

changes, the effective date of this final

rule will be delayed until March 31,

1999.

II. Comments Received in Response to

the Proposed Rule

The Department received one

comment letter on the proposed rule,

which was from The Bond Market

Association (‘‘Association’’).6 In

developing the final rule, the

Department took the issues raised in

this comment letter into consideration,

as well as input received during

discussions with various active

Treasury securities market participants.

The Association generally supported

the Department’s efforts to make TINTS

of inflation-indexed securities fungible.

The Association, however, cited its

members’ concern with ‘‘the significant

modifications needed for their

operational systems to accommodate the

trading and maintenance of the adjusted

value of stripped interest components to

the penny.’’ The Association said its

members believe ‘‘that it will require

approximately six to nine months to

both make and test the appropriate

system changes before they can begin

trading the new stripped securities.’’

Association members, the commenter

said, also expressed concerns that these

system changes could complicate efforts

already underway to make operational

system adjustments to prepare for the

year 2000, the European Monetary Unit

and the General Collateral Finance Repo

product of the Government Securities

Clearing Corporation. Similar concerns

were expressed to the Department in

discussions with various active

Treasury market participants. The

Association suggested that Treasury

consider truncating the pennies from

the adjusted values, so that the adjusted

values would be maintained in accounts

and transferred in whole dollars.

The Association supported

establishing a conversion factor between

securities issued under different CPI

base reference periods if the Consumer

Price Index’s base reference period is

changed. Such a factor would enable

TINTS from inflation-indexed securities

issued during different CPI base
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations 35783

7As of May 31, 1998, none of the currently

outstanding inflation-indexed securities has been

stripped.

8 62 FR 64528, 64530 (December 8, 1997).

reference periods to be fungible.

However, the Association recommended

that the conversion be done on a

voluntary basis so investors could

decide whether the benefits outweigh

the associated costs of conversion. The

Association also recommended the

creation of an additional conversion

factor that would allow TINTS of

inflation-indexed securities issued

during a more-recent base period to be

converted to an older base period. This

additional convertibility, the commenter

asserted, would further increase the

marketability of the TINTS.

After taking the comments and views

received into consideration, the

Department is issuing a final rule that

adopts the proposed rule without any

significant changes. The suggestion to

truncate the pennies from the

calculation of adjusted values was not

adopted because of the resulting

payment differences to holders of

inflation-indexed TINTS as compared

with holders of unstripped inflationindexed securities, particularly for

smaller holders. However, in order to

provide market participants with

sufficient time to make any automated

systems changes necessary for

maintaining accounts and transferring

adjusted values in pennies, Treasury has

decided to adopt the recommendation of

The Bond Market Association to delay

the effective date. Accordingly, the

effective date of this final rule will be

delayed until March 31, 1999. In

delaying the effective date, the

Department recognizes the significant

efforts of market participants in making

systems changes for the year 2000 and

the European Monetary Unit.

No changes are being proposed at this

time to the current STRIPS program for

fixed-principal securities. However, as

stated in the preamble to the proposed

rule, the Department will consider at a

later date the desirability of making

changes to the minimum and multiple

requirements for fixed-principal TINTS

similar to the requirements for inflationindexed TINTS, i.e., discontinuing the

$1,000 minimum-to-hold and multiple

requirement, and permitting fixedprincipal TINTS to be held in amounts

to the penny.

The suggestions to make conversions

of adjusted values from less-recent CPI

base reference periods to more-recent

base reference periods voluntary, and to

create an additional conversion factor to

facilitate conversions of adjusted values

from more-recent periods to less-recent

periods, were also not adopted. The

Department believes that these

suggestions, had they been adopted,

would have been operationally very

complicated. They also would have

continued to make inflation-indexed

TINTS not fungible to the extent that, in

either case, there would have to be

different CUSIP numbers for TINTS that

have the same maturity (payment) date.

The rule has been amended, therefore,

so that in the event that the CPI is

rebased, conversion to the most-recent

base reference period will be

mandatory. At such time, Treasury will

publish information specifying the

manner in which this conversion will be

accomplished. In addition, any new

TINTS created from a security that was

issued during a prior base reference

period will be issued with adjusted

values calculated using reference CPIs

under the most-recent base reference

period.

The only other change in the final

rule from the proposed rule is to

provide for mandatory conversion to

fungible TINTS of any TINTS created

prior to March 31, 1999.7 Treasury

stated in the preamble to the proposed

rule that this conversion would occur

because of the Department’s goal, where

possible, to make all TINTS from

inflation-indexed securities fungible.8

Also as stated in the preamble to the

proposed rule, Treasury will provide

public notice, if necessary, informing

participants of the effective conversion

date, along with detailed instructions

regarding the conversion to fungible

STRIPS.

III. Procedural Requirements

This final rule does not meet the

criteria for a ‘‘significant regulatory

action’’ pursuant to Executive Order

12866. Although this rule was issued

initially in proposed form to secure the

benefit of public comment, the notice,

public comment, and delayed effective

date provisions of the Administrative

Procedure Act are inapplicable,

pursuant to 5 U.S.C. 553(a)(2).

As no notice of proposed rulemaking

is required, the provisions of the

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

et seq.) do not apply.

There is no new collection of

information contained in this final rule

and, therefore, the Paperwork Reduction

Act does not apply. The collections of

information in 31 CFR Part 356 have

been previously approved by the Office

of Management and Budget under

section 3507(d) of the Paperwork

Reduction Act of 1995 (44 U.S.C.

Chapter 35) under control number

1535–0112. Under this Act, 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 OMB control number.

List of Subjects in 31 CFR Part 356

Bonds, Federal Reserve System,

Government securities, Reporting and

recordkeeping requirements, Securities.

For the reasons set forth in the

preamble, 31 CFR Chapter II,

Subchapter B, Part 356, is amended as

follows:

PART 356—SALE AND ISSUE OF

MARKETABLE BOOK-ENTRY

TREASURY BILLS, NOTES, AND

BONDS (DEPARTMENT OF THE

TREASURY CIRCULAR, PUBLIC DEBT

SERIES NO. 1–93)

1. The authority citation for part 356

continues to read as follows:

Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et

seq.; 12 U.S.C. 391.

2. Section 356.2 is amended by

adding in alphabetical order the

definition of ‘‘Adjusted value’’ to read

as follows:

§ 356.2 Definitions.

* * * * *

Adjusted value means, for an interest

component stripped from an inflationindexed security, an amount derived by

multiplying the semiannual interest rate

by the par amount and then multiplying

this value by 100 divided by the

Reference CPI of the original issue date

(or dated date, when the dated date is

different from the original issue date).

(See Appendix B, Section IV to this part,

for an example of how to calculate the

adjusted value for interest components

stripped from an inflation-indexed

security.)

* * * * *

3. Section 356.31 is revised to read as

follows:

§ 356.31 STRIPS.

(a) General. A note or bond may be

designated in the offering

announcement as eligible for the

STRIPS program. At the option of the

holder, and generally at any time from

its issue date until its call or maturity,

any such security may be ‘‘stripped,’’

i.e., divided into separate principal and

interest components. A short or long

first interest payment and all interest

payments within a callable period are

not eligible to be stripped from the

principal component. The CUSIP

numbers and payment dates for the

principal and interest components are

provided in the offering announcement

if not previously announced.

(b) Treasury fixed-principal

securities—(1) Minimum par amounts
35784 Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations

required for STRIPS. For a fixedprincipal security to be stripped into the

components described above, the par

amount of the security must be in an

amount that, based on its interest rate,

will produce a semiannual interest

payment in a multiple of $1,000. Exhibit

C to this part provides the minimum par

amounts required to strip a fixedprincipal security at various interest

rates, as well as the corresponding

interest payments. Amounts greater than

the minimum par amount must be in

multiples of that amount. The minimum

par amount required to strip a particular

security will be provided in the press

release announcing the auction results.

(2) Principal components. Principal

components stripped from fixedprincipal securities are maintained in

accounts, and transferred, at their par

amount. The principal components have

a CUSIP number that is different from

the CUSIP number of the fullyconstituted (unstripped) security.

(3) Interest components. Interest

components stripped from fixedprincipal securities are maintained in

accounts, and transferred, at their

original payment value, which is

derived by applying the semiannual

interest rate to the par amount. When an

interest component is created, the

interest payment date becomes the

maturity date for the component. All

such components with the same

maturity date have the same CUSIP

number, regardless of the underlying

security from which the interest

payments were stripped. All interest

components have CUSIP numbers that

are different from the CUSIP number of

any fully-constituted security and any

principal component.

(c) Treasury inflation-indexed

securities—(1) Minimum par amounts

required for STRIPS. The minimum par

amount of an inflation-indexed security

that may be stripped into the

components described in paragraph (a)

of this section is $1,000. Any par

amount to be stripped above $1,000

must be in a multiple of $1,000.

(2) Principal components. Principal

components stripped from inflationindexed securities are maintained in

accounts, and transferred, at their par

amount. At maturity, the holder will

receive the inflation-adjusted principal

value or the par amount, whichever is

greater. (See § 356.30.) The principal

components have a CUSIP number that

is different from the CUSIP number of

the fully-constituted (unstripped)

security.

(3) Interest components. Interest

components stripped from inflationindexed securities are maintained in

accounts, and transferred, at their

adjusted value, which is derived by

multiplying the semiannual interest rate

by the par amount and then multiplying

this value by 100 divided by the

Reference CPI of the original issue date

(or dated date, when the dated date is

different from the original issue date).

See Appendix B, Section IV to this part,

for an example of how to calculate an

adjusted value. The payment value of

any interest component created prior to

March 31, 1999, will be converted to its

adjusted value. When an interest

component is created, the interest

payment date becomes the maturity date

for the component. All such

components with the same maturity

date have the same CUSIP number,

regardless of the underlying security

from which the interest payments were

stripped. The CUSIP number of any

interest component created prior to

March 31, 1999, will be converted to the

fungible CUSIP number for the same

maturity date. All interest components

have CUSIP numbers that are different

from the CUSIP number of any fullyconstituted security and any principal

component. At maturity, the payment to

the holder will be derived by

multiplying the adjusted value of the

interest component by the Reference CPI

of the maturity date, divided by 100. See

Appendix B, Section IV to this part, for

an example of how to calculate an

actual payment amount from an

adjusted value.

(4) Rebasing of the CPI. In the event

that the CPI is rebased, the adjusted

values of all outstanding inflationindexed interest components will be

converted to adjusted values based on

the new base reference period. At such

time, Treasury will publish information

specifying the manner in which this

conversion will be accomplished.

Subsequent to rebasing, any TINTS

created from a security that was issued

during a prior base reference period will

be issued with adjusted values

calculated using reference CPIs under

the most-recent base reference period.

(d) Reconstituting a security. Stripped

interest and principal components may

be reconstituted, i.e., restored to their

fully-constituted form. A principal

component and all related unmatured

interest components, in the appropriate

minimum or multiple amounts or

adjusted values, must be submitted

together for reconstitution. Interest

components stripped from inflationindexed securities are different from

interest components stripped from

fixed-principal securities and,

accordingly, are not interchangeable for

reconstitution purposes.

(e) Applicable regulations. Unless

otherwise provided in this part, notes

and bonds stripped into their STRIPS

components are governed by Subparts

A, B, and D of Part 357 of this chapter.

4. Appendix B to Part 356 is amended

by revising the list of section headings

at the beginning of the Appendix to read

as follows:

Appendix B to Part 356—Formulas and

Tables

I. Computation of Interest on Treasury Bonds

and Notes.

II. Formulas for Conversion of FixedPrincipal Security Yields to Equivalent

Prices.

III. Formulas for Conversion of InflationIndexed Security Yields to Equivalent

Prices.

IV. Computation of Adjusted Values and

Payment Amounts for Stripped InflationIndexed Interest Components.

V. Computation of Purchase Price, Discount

Rate, and Investment Rate (CouponEquivalent Yield) for Treasury Bills.

* * * * *

5. Appendix B to Part 356 is amended

by redesignating Section IV as Section V

and adding a new Section IV to read as

follows:

* * * * *

IV. Computation of Adjusted Values and

Payment Amounts for Stripped InflationIndexed Interest Components

Note: Valuing an interest component

stripped from an inflation-indexed security at

its adjusted value enables this interest

component to be interchangeable (fungible)

with other interest components that have the

same maturity date, regardless of the

underlying inflation-indexed security from

which the interest components were

stripped. The adjusted value provides for

fungibility of these various interest

components when buying, selling, or

transferring them, or when reconstituting an

inflation-indexed security.

Definitions

C=the regular annual interest rate, payable

semiannually, e.g., .03625 (the decimal

equivalent of a 3–5/8% interest rate)

Par=par amount of the security to be stripped

Ref CPIIssue Date=reference CPI for the original

issue date (or dated date, when the dated

date is different from the original issue

date) of the underlying (unstripped)

security

Ref CPIDate=reference CPI for the maturity

date of the interest component

AV=adjusted value of the interest component

PA=payment amount at maturity by Treasury

Formulas

AV=Par (C/2)(100/Ref CPIIssue Date) (rounded

to 2 decimals with no intermediate

rounding)

PA=AV (Ref CPIDate/100) (rounded to 2

decimals with no intermediate rounding)

Example. A 10-year inflation-indexed note

paying 31⁄2% interest is issued on January 15,

1999, with the second interest payment on

January 15, 2000. The Ref CPI on January 15,

1999 (Ref CPIIssue Date) is 174.62783, and the

Ref CPI on January 15, 2000 (Ref CPIDate) is
Federal Register / Vol. 63, No. 125 /Tuesday, June 30, 1998 /Rules and Regulations 35785

179.86159. Calculate the adjusted value and

the payment amount at maturity of the

interest component.

Definitions

C=.035

Par=$1,000,000

Ref CPIIssue Date=174.62783

Ref CPIDate=179.86159

Resolution

For a par amount of $1 million, the

adjusted value of each stripped interest

component is $1,000,000 (.035/2)(100/

174.62783), or $10,021.31 (no intermediate

rounding).

For an interest component maturing on

January 15, 2000, the payment amount is

$10,021.31 (179.86159/100), or $18,024.49

(no intermediate rounding).

* * * * *

6. Exhibit C to Part 356 is amended

by revising the heading to read as

follows:

Exhibit C to Part 356—Minimum Par

Amounts for Fixed-Principal STRIPS

* * * * *

Dated: June 26, 1998.

Donald V. Hammond,

Acting Fiscal Assistant Secretary.

[FR Doc. 98–17525 Filed 6–29–98; 8:45 am]

BILLING CODE 4810–39–P