65214 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

1For a discussion of the events that gave rise to

the establishment of large position reporting

authority, see the Joint Report on the Government

Securities Market, Department of the Treasury,

Securities and Exchange Commission and Board of

Governors of the Federal Reserve System, (1992);

Salomon Brothers Inc. Press Releases dated August

9 and 14, 1991; S. Rep. No. 103–109 (July 27, 1993);

H.R. Rep. No. 103–255 (September 23, 1993); and

60 FR 4576 (January 24, 1995).

2Pub. L. No. 103–202, 107 Stat. 2344 (1993).

3 15 U.S.C. 78o-5.

4Pub. L. No. 103–202, Sec. 104; 107 Stat. 2344,

2346–2348; 15 U.S.C. 78o-5(f).

5 60 FR 4576 (January 24, 1995).

6 60 FR 20065 (April 24, 1995).

DEPARTMENT OF THE TREASURY

Office of the Under Secretary for

Domestic Finance

17 CFR Parts 400 and 420

RIN: 1505–AA53

Government Securities Act

Regulations: Large Position Rules

AGENCY: Office of the Under Secretary

for Domestic Finance, Treasury.

ACTION: Proposed rule.

SUMMARY: The Department of the

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

is publishing for comment proposed

rules that would establish a new Part

420 providing recordkeeping and

reporting requirements pertaining to

large positions in certain Treasury

securities. The proposed regulations are

being issued pursuant to the

Government Securities Act

Amendments of 1993, which authorized

the Secretary of the Treasury to

prescribe rules requiring persons

holding, maintaining or controlling

large positions in to-be-issued or

recently-issued Treasury securities to

keep records and file reports of such

large positions.

The proposed recordkeeping rules

require any person or entity that

controls a position equal to or greater

than $2 billion in a Treasury security to

maintain and preserve certain records

that enable the entity to record, compile,

aggregate and report large position

information. The proposed reporting

rules require entities to file a large

position report with the Federal Reserve

Bank of New York if their reportable

position equals or exceeds the large

position threshold in a particular

Treasury security as specified by the

Treasury in a notice requesting large

position information. The Department’s

proposed large position rules are

intended to provide the Treasury and

other securities regulators with

information on concentrations of control

that would enable them to better

understand the possible reasons for

apparent significant price distortions

and the causes of market shortages in

certain Treasury securities.

DATES: Comments must be received on

or before February 16, 1996.

ADDRESSES: Comments should be sent

to: Government Securities Regulations

Staff, Bureau of the Public Debt,

Department of the Treasury, 999 E

Street, N.W., Room 515, Washington,

D.C. 20239–0001. Comments received

will be 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.

FOR FURTHER INFORMATION CONTACT: Ken

Papaj, Director, or Don Hammond,

Assistant Director, Government

Securities Regulations Staff, at 202–

219–3632. (TDD for the hearing

impaired is 202–219–3988.)

SUPPLEMENTARY INFORMATION:

I. Background

Statutory Authority

In response to certain events that

occurred in the government securities

market in 1990–1991—short squeezes in

the two-year Treasury notes issued in

April and May 1991 and bidding

improprieties in several auctions of

Treasury securities in 1990–1991 1—

Congress included in the Government

Securities Act Amendments of 1993

(GSAA) 2 a provision granting the

Department the authority to write rules

for large position reporting in certain

Treasury securities. Specifically,

Section 104 of the GSAA, which

amended Section 15C of the Securities

Exchange Act of 1934,3 authorizes the

Treasury to adopt rules requiring

specified persons holding, maintaining

or controlling large positions in to-beissued or recently-issued Treasury

securities to maintain records and file

reports regarding such positions.4 This

provision is intended to improve the

information available to the Treasury

and other regulators regarding very large

positions of recently-issued Treasury

securities held by market participants

and to ensure that regulators have the

tools necessary to monitor the Treasury

securities market.

The GSAA gave the Department wide

latitude and discretion in determining

several key features and conditions that

would form the underpinnings of the

large position recordkeeping and

reporting rules. Among the most

significant of these features were:

defining which persons (individually or

as a group) hold, maintain or control

large positions; determining the

minimum size of positions to be

reported; determining what constitutes

‘‘control’’ for the purposes of the rules;

prescribing the manner in which

positions and accounts are to be

aggregated; identifying the types of

positions to be reported; determining

the securities that would be subject to

the rules; and developing the form,

manner and timing of reporting. The

proposed rules address these points.

Participation in Rulemaking Process/

Solicitation of Comments

In formulating the process to be used

to develop large position rules, the

Department, early on, made a decision

to obtain the views of the market

participants who would be directly

affected by such regulations. We also

decided that it would be useful to

explain the Department’s initial

thoughts on the structure and purposes

of the rules, to explore various

conceptual approaches to designing a

large position recordkeeping and

reporting system and to obtain industry

comment and feedback before actually

drafting proposed rules. We believed

that market participant involvement in

the rulemaking initiative from its outset

would facilitate greater understanding

of, and support for, the final rules when

implemented.

Accordingly, in order to involve

market participants and other interested

parties at the earliest phase of the

rulemaking process, the Department

issued an Advance Notice of Proposed

Rulemaking (ANPR) on January 24,

1995.5 The ANPR addressed several key

issues, concepts and approaches to be

considered in developing large position

recordkeeping and reporting rules, and

solicited comments, suggestions and

recommendations regarding how the

requirements should be structured.

Rather than repeating that information

here, readers are encouraged to review

the ANPR to familiarize themselves

with these issues. The ANPR also

contains a detailed historical

background that provides a fuller

understanding of the events and

circumstances that resulted in the

establishment of this regulatory

authority, the purposes and objectives to

be achieved from large position rules,

and the Congressional intent behind this

legislation.

The 90-day comment period on the

ANPR was extended, in response to an

industry request, for an additional 30

days through May 24, 1995.6 In

response to the ANPR, the Department

received seven comment letters which

are summarized in the next section of

the preamble.
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65215

7Uniform Offering Circular for the Sale and Issue

of Treasury Bills, Notes and Bonds, 31 CFR Chapter

II, Subchapter B, Part 356.

8 5 U.S.C. 552(b)(3)(B).

9Public Securities Association, Investment

Company Institute, Chemical Securities Inc., the

Federal Reserve Bank of New York, the Board of

Governors of the Federal Reserve System, Chemical

Bank, and CNA Insurance Companies, respectively.

In addition to considering the views

expressed by the commenters to the

ANPR, Department staff has also

consulted with various regulatory

agencies (i.e., staff of the Securities and

Exchange Commission (SEC), the

Commodities Futures Trading

Commission, the Board of Governors of

the Federal Reserve System and the

Federal Reserve Bank of New York

(FRBNY)) in developing this proposal.

We intend to continue to involve

interested market participants and the

regulatory agencies in the development

of the large position regulations through

the completion of the rulemaking

process. Accordingly, the Department

welcomes and strongly encourages

market participants to submit comments

on the proposed rules and any

suggestions for reducing burdens on the

industry while still achieving the

objectives of the rules.

Balancing of Regulatory and Market

Needs

The Department has attempted to

strike a balance between achieving the

purposes and objectives of the statute

and minimizing costs and burdens to

those entities affected by the

regulations. For the following reasons,

we believe that the rules being proposed

successfully achieve this balance.

First, the proposed rules envision

reports to be submitted only in response

to a specific request by the Treasury for

large position information on a

particular Treasury security issue.

Under this approach, reporting should

be an infrequent event required

primarily in response to pricing

anomalies in a specific Treasury

security rather than a regular, on-going

process resulting from a certain predetermined large position threshold

being exceeded in a broader range of

securities.

Second, the proposed rules establish

a minimum large position threshold of

$2 billion below which the Treasury

would not request large position reports.

As a result, we believe that very few

entities would be required to file large

position reports.

Third, the recordkeeping

requirements would generally not apply

to any reporting entity (as defined in the

rules) that did not control a position

that equalled or exceeded $2 billion in

a Treasury security.

Fourth, for those entities currently

subject to recordkeeping rules of the

SEC, the Treasury or the bank regulatory

agencies, the proposed rules impose

only minor additional recordkeeping

requirements and only if certain

conditions are present. Finally, the

proposed rules adopt several concepts

from the Treasury’s auction rules (e.g.,

positions to be included in a reportable

large position, definition of a reporting

entity and method of aggregating

positions) which have been in effect

since March 1993 and are understood by

many of the major participants in the

Treasury securities market.7 This should

reduce the time and costs that affected

entities will need for training their

employees on the large position rules.

Scope of Large Position Rules

It is important for all market

participants to recognize that large

position rules create a requirement to

maintain records and report information

about such positions. However, these

requirements only apply to entities that

hold or control (i.e., exercise investment

discretion) large positions, as

determined by the Department, in

specific Treasury security issues.

Accordingly, there is no obligation on

executing brokers and dealers to report

large trades nor is there an affirmative

duty to inform their customers of the

large position recordkeeping and

reporting requirements being proposed

as part of this rulemaking.

The Department reiterates that large

positions are not inherently harmful and

there is no presumption of manipulative

or illegal intent on the part of the

controlling entity merely because a

position is large enough to be subject to

the Treasury rules. In addition, the

proposed rules do not establish trading

or position limits or require the

identification of large traders or the

reporting of large trades. Finally, the

GSAA specifically provides that the

Department shall not be compelled to

disclose publicly any information

required to be kept or reported for large

position reporting. In particular, such

information is exempt from disclosure

under the Freedom of Information Act.8

II. Comments Received in Response to

ANPR

Seven comment letters were received

in response to the ANPR. The letters

were submitted by two trade

organizations, one primary dealer, a

Federal Reserve Bank, a bank regulatory

agency, a commercial bank and an

insurance company.9 While all

comments are summarized below, each

letter did not necessarily address all

aspects of the ANPR.

Six commenters were largely

supportive of a large position reporting

system provided that such a reporting

system would not be overly burdensome

for market participants. However, one

commenter opposed the concept of large

position reporting entirely. This party

believed that ‘‘the current auction

reporting rules have already addressed

adequately the prior problems with

market manipulation,’’ and that an

unintended consequence of large

position rules could be fewer

participants in the government

securities market, which, in turn, would

result in higher borrowing costs.

On-Demand vs. Automatic Reporting

Five commenters supported an ondemand reporting system which would

be triggered by specific requests from

the Treasury for large position

information on a particular Treasury

security. One respondent, however,

favored an automatic, regular reporting

system triggered whenever a reporting

entity’s holdings in a security reached a

certain threshold.

The primary reason expressed by

those commenters favoring an ondemand reporting system was that this

approach would be significantly less

burdensome and costly than an

automatic reporting system. Many

commenters noted that an automatic

reporting method would impose more

complex systems development

requirements and greater operational

costs due to the need for daily

monitoring of positions across multiple

securities. In addition, automatic

reporting could create a disincentive to

buy and hold large positions that exceed

a fixed reporting threshold. Finally, ondemand reporting was viewed by

several respondents as being better able

to address price distortions and provide

more useful information since the

request for large position information

would be targeted to specific market

situations and security issues.

The respondent favoring an automatic

reporting system argued that on-demand

reporting ‘‘would be difficult and costly

to communicate to all relevant parties.’’

The commenter also felt that on-demand

requests might trigger unwanted market

reactions, while a regular reporting

system ‘‘would provide more consistent

monitoring of the market and would be

less confusing to the market over time.’’

Definition of Reporting Entity

Six commenters were in agreement

that the definition of ‘‘reporting entity’’

should conform with the definition of

‘‘bidder’’ as defined in the uniform
65216 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

10 31 CFR 356.2 and Appendix A.

11 31 CFR 356.13(a).

12A Treasury security is considered to be ‘‘on-therun’’ 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-therun’’). An on-the-run security is normally the most

liquid issue for that maturity.

13When securities are ‘‘on special,’’ market

participants desiring to borrow the particular

security must accept an interest rate significantly

lower than the prevailing repo rate for unspecified

collateral. Conversely, the owners of the securities

can finance their position at exceptionally low

interest rates. 14 31 CFR 356.13(b).

offering circular.10 The aggregation rule

with regard to affiliates, for example, is

a concept with which many market

participants are already familiar and

provides an appropriate model for a

large position reporting rule. Similarly,

the commenters supported a process,

similar to the ‘‘separate bidder’’ process

provided for in the uniform offering

circular, by which separately managed

entities within a corporate or

partnership structure can request that

Treasury recognize them as separate

reporting entities.

Definition of ‘‘Control’’

There was similar concurrence on the

definition of ‘‘control.’’ Nearly all

parties that addressed this issue

expressed the view that control should

be evidenced by either proprietary

ownership or investment discretion over

a Treasury security. The commenters

were in similar agreement that the

concept of ‘‘control’’ should not be

extended to merely beneficial

ownership or custodians. Specifically,

the commenters held that entities acting

as custodians should not be required to

report positions in Treasury securities

over which they have no investment

discretion.

Definition of ‘‘Large’’ Position

The commenters generally felt that

the large position threshold should be

large enough to both detect

concentrations of control and avoid

overly burdensome, frequent reporting

by market participants. Opinions were

fairly evenly divided on whether a

securities position should be defined as

‘‘large’’ based on a percentage of the

total outstanding issue size or a specific

dollar amount.

Those preferring a percentage

standard commented that this method is

a better indicator of concentration of

control than a straight dollar standard,

given the large range of issue sizes

among various maturities. Suggested

percentages ranged from 10 percent to

25 percent of a particular issue. One

commenter felt that, if an automatic

reporting system is implemented, the

percentage should be consistent with

the Treasury’s auction rules, i.e., ‘‘large’’

should be defined as 35 percent of the

securities awarded in an auction.

Those favoring a fixed-dollar

threshold did so on the basis of clarity,

ease of administration, and,

consequently, improved compliance.

Suggested dollar thresholds ranged from

$2 billion, to correspond to the net long

position reporting threshold for

auctions,11 to $4–5 billion. Some

commenters also expressed the view

that the threshold should be larger

under an automatic reporting system

than under an on-demand system to

minimize the compliance burden

associated with automatic reporting.

One commenter said that there is no

need to define ‘‘large position’’ in

advance under an on-demand reporting

system (the large position threshold

would be specified in the Treasury

notice requesting large position reports),

and there may be no ‘‘one-size-fits-all’’

threshold.

Definition of ‘‘Recently-Issued’’

The scope of Treasury’s large position

reporting authority is limited to

recently-issued and to-be-issued

Treasury securities. Discretion to define

the term ‘‘recently-issued’’ was given to

the Treasury. Although the commenters

differed somewhat on the specifics of

the preferred meaning of ‘‘recentlyissued,’’ all agreed that it should

include the ‘‘on-the-run’’ 12 (mostrecently issued) security of a particular

type. Opinions were fairly evenly

divided on whether ‘‘recently-issued’’

also should include only the most

recent ‘‘off-the-run’’ issue or the two

most recent ‘‘off-the-run’’ issues. One

commenter said that there is no need to

define ‘‘recently-issued’’ under an ondemand reporting system.

Types of Securities Covered

Based largely upon the presumption

that Treasury note and bond issues are

more likely to be ‘‘on special’’ 13 (in

short supply) than bills, two

commenters said that bills should be

excluded from large position reporting.

One such commenter also cited the

complexity, burdens and costs

‘‘associated with implementing systems

to track positions on weekly-issued

securities * * *.’’ One commenter,

however, said that all types of Treasury

securities (bills, notes and bonds)

should be eligible for reporting, ‘‘since

any type of Treasury security could be

the subject of a concentration of

control.’’ Another commenter took a

more neutral position, saying that

excluding bills may be appropriate, ‘‘but

a good case will need to be made that

short interest is always small relative to

the net supply, or that supply

conditions and price movements

preclude sustained and possibly

injurious squeezes.’’

Components of a Position

The four commenters addressing this

issue agreed as a starting point that net

long settled cash positions should be

included in a ‘‘large position.’’

Two commenters said that the

definition of ‘‘large position’’ should be

consistent with the definition of ‘‘net

long position’’ in the uniform offering

circular.14 Both felt that financing

transactions (repos, securities borrowed,

etc.) should be excluded from the large

position calculation since it is too

difficult to apply the concept of control

to securities used in such transactions.

Calculating a net financing position is

particularly difficult, according to one

of the commenters. Examples provided

included the problems of differentiating

deliver-out from hold-in-custody and

tri-party repurchase agreements, and of

separating overnight repos from term

repos, particularly those with

mandatory substitution provisions. Both

of these commenters, however, could

support a requirement to report

financing transactions on a gross basis if

Treasury believes financings need to be

included.

The other two commenters felt that

financing transactions should be

included in the definition of a

reportable position to encompass a

wider range of transactions from which

an entity can exert immediate control

over a Treasury security. Both

advocated reporting such transactions

on a gross basis. One commenter noted

that a position that might look flat on a

net basis may in fact be exposed if fails

become a problem. Moreover, the

commenter contended, matched-book

and tri-party repo activity might result

in a small net position, and yet be used

as a tool to achieve a short squeeze.

Recordkeeping Requirements

The issue of what records should be

kept by reporting entities was largely

unaddressed except that the

commenters felt that these records, and

their associated retention periods,

should closely correspond to records

already required to be maintained by

reporting entities under existing

securities and banking laws. Most

respondents stated that reporting

entities should not be required to keep

records in electronic form, since such a
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65217

15H.R. Rep. 103–255, September 23, 1993, at pg.

25.

16 139 Cong. Rec. H–10967 (daily ed. November

22, 1993) Statement of Chairman Dingell on S. 422.

17The Federal Reserve Banks maintain book-entry

security accounts for depository institutions and

other entities such as government and international

agencies and certain foreign central banks. In their

book-entry accounts at the Federal Reserve, the

depository institutions may maintain their own

security holdings and holdings for customers,

which may include other depository institutions,

dealers, brokers, institutional investors and

individuals. In turn, the depository institution’s

customers may maintain accounts for their

customers. This creates a tiered chain of custodial

relationships.

requirement could be burdensome for

entities that do not have systems for

electronic recordkeeping.

III. Section-by-Section Analysis of

Proposed Regulations

A. Section 400.1. Scope of Regulations

A new paragraph is proposed to be

added to Part 400 to describe the

statutory basis for the large position

rules. The paragraph also states that the

large position rules are located in Part

420.

B. Part 420. Large Position Reporting

1. Section 420.1

Applicability. This section sets out

the scope of the large position

recordkeeping and reporting rules by

identifying the types of Treasury

securities covered and by defining the

universe of entities potentially affected.

Section 420.1 reflects the Department’s

initial determination that all marketable

Treasury securities—bills, notes and

bonds—should be included within the

scope of the rules. However, arguments

have been made that features and

characteristics of the bill market, such

as the frequency of issues (i.e., weekly)

and reopenings, the size of bill auctions

and the availability of several

instruments that are close substitutes for

bills (e.g., various money market

instruments), make it more difficult to

accumulate concentrations of ownership

of Treasury bills. Comments are

specifically requested on whether

Treasury bills should be included in the

large position recordkeeping and

reporting rules.

On its face, part 420 applies to any

type of entity, foreign or domestic, that

might control a large position in a

specific Treasury security. This broad

construct of potential application is

consistent with the statutory purpose:

‘‘Large position reporting also would be

useful in assuring that regulators can

monitor the positions of major market

participants other than government

securities brokers or dealers under

certain circumstances. In particular, it

will provide assurance that the

government can compel disclosure of

position information when necessary

from all large market participants,

including a group of relatively

unregulated entities called ‘hedge

funds.’ ’’ 15 As described in the preamble

discussion of sections 420.3 and 420.4,

the number of entities that may actually

be affected by large position rules is

significantly narrowed when the

minimum size for a large position is

applied.

We believe it is appropriate to

exclude certain entities from the

application of the rules based on the

existing availability of position

information on these organizations and/

or concerns about the confidentiality of

this information. Accordingly,

paragraphs (b) and (c) of section 420.1

provide exemptions from part 420 to the

holdings of foreign central banks,

foreign governments, international

monetary authorities and Federal

Reserve Banks (FRBs). The exemptions

for the foreign entities are limited to

their respective positions maintained at

the FRBNY. The exemptions are also

consistent with the position expressed

by the Senate and House during

consideration of the legislation.16

One commenter, responding to the

ANPR, expressed concern about

granting exemptions specifically to

these foreign entities. However, the

Department believes the proposed

approach is appropriate since the

exemptions are limited in their scope by

applying only to the portion of the

organization’s position that is

maintained at the FRBNY. Any

positions held by the exempt entities at

locations other than the FRBNY are not

exempted and will be subject to the

large position recordkeeping and

reporting rules. The proposed

exemption for those Treasury securities

that FRBs hold and control for their own

accounts is also based on the

Department’s access to this information.

The Department recognizes that on

rare occasions it may be necessary to

request large position information on

Treasury securities that are not within

the parameters of the proposed

definition of recently-issued (paragraph

420.2(g)) but that are within the scope

of the intent of the statute. For example,

in August 1991, Treasury might have

sought large position information on the

April 1991 two-year note, given that the

security was still ‘‘on special’’ in the

repurchase agreement market and there

was a significant concentration of

ownership. While this security, at that

time, would have been outside the

scope of the currently proposed

definition, the Department believes it is

necessary to reserve the right to collect

large position information in such

circumstances. Accordingly, we have

included within the rule a reservation to

request information on additional

Treasury security issues consistent with

the purposes of the GSAA.

2. Section 420.2

Definitions. This section provides for

the definitions of terms that are integral

to the large position rules. Unless

otherwise defined in this section, terms

used in part 420 have the same

meanings provided in section 400.3.

‘‘Control’’—The concept of control

revolves around three elements:

beneficial ownership, possession

(custody) and investment discretion.

The beneficial owner is the party with

the actual ownership interest in the

Treasury security. The beneficial owner

may or may not always be aware of its

ownership position in a given security

if it does not manage its own

investments and it may not have

possession of the Treasury securities

even if it makes its own investment

decisions (especially likely with bookentry Treasury securities). Possession or

custody is evidenced by an

organization’s ability to service the

securities directly (e.g., transfer the

securities, receive interest and principal

payments). The beneficial owner may

perform this function for its own

holdings, but the mechanics of bookentry Treasury securities require that a

depositary institution act in this

capacity on behalf of others at some

level in the custody chain for all

Treasury securities. Additionally, bookentry Treasury securities may involve

more than one custodian in the holding

of a specific security entitlement.17

Investment discretion is the authority to

make and execute decisions about the

purchase, sale and retention of

securities. In the institutional market for

Treasury securities, which is of critical

importance in developing large position

reporting rules, the granting of

investment discretion to an investment

adviser to manage all or some portion of

an entity’s portfolio is common.

It is our view that, for the purposes of

large position reporting, the most

important criterion in the definition of

control is that of investment discretion.

While beneficial owners receive the

economic benefit of holding a Treasury

security, frequently, they do not make

the decision to purchase/sell/retain the

Treasury security and, as mentioned,

may not, on a day to day basis, be aware
65218 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

18Treasury intends to clarify this treatment in a

proposed rule in the near future. 19See supra note 10.

20A reportable position for the purposes of the

large position rules differs from a reportable

position for purposes of the uniform offering

circular. In the uniform offering circular, a

reportable net long position is a position that has

met the necessary criteria to be reported on a

tender. In the context of the large position rules, a

reportable position defines the components of a

potential large position.

21See supra note 14.

of their ownership interest. Since a

purpose of large position reporting is to

understand better any pricing anomalies

for a particular Treasury security issue

in a timely fashion, defining control

based on beneficial ownership would

not be particularly useful because a

reporting entity could have difficulty

assembling the information needed to

file a large position report and would be

potentially unaware of the reasons why

the security involved was purchased.

Likewise, custody (without

investment discretion) does not provide

a good basis for determining control. A

definition based on custody would most

certainly involve multiple reporting of

the same security position since each

tier in the custody chain would be

required to report. This approach would

diminish the value of any large position

reports received. Also, because under

these circumstances the custodian

would not be a party to the investment

decision, reporting on the positions held

in safekeeping would shed very little

light on the objectives of the investor.

Therefore, Treasury has decided to

define control as the authority to

exercise investment discretion. This

definition is supported in six of the

seven comment letters. Investment

discretion can be exercised by the

beneficial owner, a custodian or an

investment adviser. The party

responsible for making investment

decisions, regardless of where it is in

the tiered system, is the most relevant

reporting entity for large position

reporting since the actions and

objectives of the decision maker are

what we are trying to determine. A

single party exercising investment

discretion for multiple beneficial

owners could control a potentially large

amount of Treasury securities without

any single beneficial owner having a

reportable position. Additionally, such

investment advisers could possibly

distribute custody of the securities in a

manner that would keep any individual

custodian below the reporting

threshold. However, using the exercise

of investment discretion as a measure of

control, an investment adviser’s

aggregate positions would be reportable

regardless of the number of beneficial

owners or custodians involved and

would be treated separately from any

positions over which the beneficial

owners had retained investment

discretion. Finally, a definition of

control based on investment discretion

is consistent with the treatment of

investment advisers under the uniform

offering circular.18

Following this definition, an investor

would only be responsible for reporting

its proprietary holdings if it retained

investment discretion over the

positions. This approach would avoid

double reporting of these positions.

Additionally, a custodian would only

have responsibility for reporting on any

large positions for which it had

investment discretion. A custodian

would not have any obligation to report

on positions for which it maintained

securities solely in a safekeeping

capacity.

‘‘Reporting Entity’’—This term is

defined to be consistent with the

definition of a bidder in the uniform

offering circular.19 This concept

provides for the treatment of all

affiliated entities as a single entity for

purposes of determining the quantity of

Treasury securities controlled.

Additionally, the definition permits

specific affiliates to be treated separately

or ‘‘carved-out’’ from the reporting

entity based on stated principles of

separateness.

Applying this approach, a ‘‘reporting

entity’’ will aggregate each of the

positions in a specific Treasury security

that is held by itself and all affiliates

that control positions, and will report a

single position to the FRBNY. Any

affiliate that exercises independent

investment discretion, and whose

position information is not available to

other affiliates, will be permitted to

report separately from the overall entity

provided it has requested such a ‘‘carveout’’ and received written recognition

from the Treasury. Merely establishing

‘‘Chinese walls’’ or similar procedures is

not sufficient. If an entity has already

received such written recognition under

the uniform offering circular, it will not

have to reapply for the purposes of large

position reporting.

Defining the term ‘‘reporting entity’’

based on the bidder concept from the

auction rules has the advantage of

relying on an existing body of

regulations, thus minimizing confusion

and the need for market participants to

learn new rules. The bidder definition is

well known to most large participants in

the Treasury market (from their auction

participation) and has functioned

effectively since March 1993 when the

rules were implemented. This approach

was also endorsed in four comment

letters.

This definition also introduces a new

term, ‘‘aggregating entity,’’ which is

defined separately. An aggregating

entity is a single legal entity (e.g., a

parent company or affiliate within a

reporting entity) that may control

elements of a large position. If an

aggregating entity has no affiliates, then

it is also a reporting entity. Each

component of a reporting entity is

individually an aggregating entity.

‘‘Reportable Position’’ 20—The scope

of the definition of reportable position

directly affects the complexity of

calculating such a position and the

amount of time needed to file a large

position report. The definition of a

reportable position should be broad

enough to encompass the most

significant ways that an investor may

control a Treasury security issue,

balanced against the difficulty and cost

of compiling the information.

Additionally, because of the complexity

in defining this term, it is useful to base

the definition, to the maximum extent

feasible, on concepts familiar to market

participants.

For participants in the Treasury

securities market, a familiar concept is

that of ‘‘net long position’’ in the

uniform offering circular.21 The uniform

offering circular definition includes the

par amount of: (1) Immediate (cash)

positions; (2) when-issued positions for

to-be-issued and reopened issues; (3)

forward settling positions; (4) positions

in futures contracts requiring delivery of

the specific security; and (5) STRIPS

(Separate Trading of Registered Interest

and Principal of Securities) principal

components of the specific security.

This is an appropriate place to begin

development of a reportable position

because it is not only familiar to many

market participants but also includes

the most common elements of control in

the cash market. The combination of

these five elements is defined as the net

trading position—the first component of

a reportable position.

The Department is requesting that

commenters specifically address the

treatment of forward positions. While

forward positions are a component of

the net long position defined in the

uniform offering circular, there may be

reasons to exclude them from the

definition of reportable position because

forward positions may be less effective

in controlling a security or may act to

conceal settled positions. For example,

the proposed large position rules permit

a reporting entity to reduce the size of

its settled position by the amount of a
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65219

22 17 CFR Parts 15 to 18.

23See supra note 15 at pg. 44.

short forward settling position. Should

this treatment be permitted? Treasury

especially welcomes the views of

market participants on this subject.

Options and certain futures contracts

(i.e., cash-settled or those requiring

delivery of securities other than the

specific security that is the focus of

large position reporting) continue to be

excluded because they do not provide

the holder with either immediate

control or an effective way to

manipulate the price of a specific

security. For options, an entity would

only gain control of the security at the

time the position is exercised, at which

time the security would become a

component of a reportable position.

Large positions in the excluded futures

contracts are already reported to the

Commodity Futures Trading

Commission.22 Thus, this information

will be available to the Department and

other regulatory agencies, if needed,

without imposing additional reporting

requirements.

Financing transactions are proposed

to be included in a reportable position

because of the important influence they

have on the available supply of a

Treasury security. The legislative

history behind the large position

reporting authority supports the

inclusion of financings, especially

repurchase agreements.23 The approach

for including financing transactions is

addressed below in the definition of a

gross financing position. The gross

financing position is the second

component of a reportable position.

Finally, the Department believes that

a third component—‘‘fails’’—should be

included in the definition of reportable

position. An investor’s net fails position

(fails to receive less fails to deliver)

indicates ownership rights to a security

without the cost of financing. All fail

positions should be included without

differentiating between types of

counterparties (i.e., broker-dealers,

customers). A large ‘‘fail-to-receive’’

position may exacerbate, or benefit

from, a squeeze by maintaining high

demand for a specific security. In

analyzing existing market

discontinuities, the knowledge of the

existence of any large net fail-to-receive

positions could help determine the

cause and potential resolution of a tight

supply condition.

Commenters are also requested to

address the treatment of fails.

Specifically, the Department is

interested in receiving comments on

whether the proposed treatment of fails

positions is more appropriate than

excluding fails from the determination

of a large position and instead requiring

submitters of large position reports to

disclose information about fails as a

memorandum entry. Since a position

that remains unsettled after its

scheduled settlement date is not

included in the computation of a net

trading position, including fails may act

to artificially increase the size of the

reported position. This result is

apparent if fails-to-deliver were to be a

positive addition to a reportable

position since a past settlement date

short trade, unlike a short forward

position, would not reduce the size of

an entity’s reportable position.

Additionally, commenters are asked to

consider whether fails should be treated

differently from forwards given their

similarities.

The sum of the net trading position,

gross financing position and the net fails

position is a reporting entity’s total

reportable position.

‘‘Gross Financing Position’’—To

achieve the statutory intent, financing

transactions should be included in a

reportable position. The more difficult

question is how to include them. Within

the generic construct of financing

transactions, there are multiple types of

transactions including: repurchase and

reverse repurchase agreements,

securities borrowed and loaned,

securities pledged and received in

pledge, and any other form of credit

collateralized by Treasury securities.

Since the intent of large position

reporting is to obtain information about

the control of Treasury security

positions, an effective approach for

incorporating financing transactions is

to include them on a gross basis (no

netting) in the reportable position of the

entity that has received the securities.

Under this approach, the seller/lender

of the securities would not include the

financing transaction in its calculation

of the gross financing position since it

would already have reflected the

positions that provided it with control

of the securities (i.e., cash positions,

reverse repos) in the calculation.

Reporting in this manner would provide

regulators with information about the

broader universe of market participants

that had possible control of the Treasury

security, regardless of how they might

have subsequently financed or

transferred it.

No differentiation is made in the

computation between the types of

financing transactions (e.g., repos,

securities lending) since, despite

different legal frameworks, they are

generally equally effective ways of

obtaining control. The first part of the

gross financing position computation

also does not differentiate between

types of repos (e.g., overnight, term). As

an example, a security that has been

received through a reverse repo and

contemporaneously repoed out to a

third party will be included at the gross

par amount of the reverse in the entity’s

long position. Gross reporting yields

this result even though the security was

no longer in the possession of the

reporting entity since it had been

contemporaneously repoed out. The

proposed approach will result in the

potential for multiple entities including

a position for the same specific Treasury

security in their respective

computations and reportable positions.

However, the resultant double counting

is not considered to be a problem

because it provides additional

information about entities that have

various legal claims to the security and

that may potentially benefit from any

possible market disruptions.

An optional exclusion is proposed

that will permit a reporting entity to

voluntarily exclude from the

computation of its gross financing

position certain securities received

through financing transactions. This

exclusion would apply to situations in

which the securities received were

subject to a right of substitution on

behalf of the delivering counterparty,

tri-party custodial relationships, or

custody of the securities being retained

by the party granting the legal interest

in the securities (hold-in-custody).

These Treasury securities would be

eligible for exclusion based on a

presumption that the receiving

organization did not have effective

control of the securities despite having

‘‘received’’ them. The exclusion is

optional because its use, while

benefiting the entity taking advantage of

it, does not diminish the usefulness of

the resultant large position reports. If it

were made mandatory, many potential

reporting entities might find it too costly

and burdensome to differentiate

information on financings at this level

of detail. If the amount excluded is large

enough to cause the reporting entity to

fall below the reporting threshold, then

a report should not be filed.

The gross financing position is then

combined with the other two

components of a reportable position to

determine the total reportable position

held by a reporting entity. For purposes

of the calculation, all positions would

be valued at the par amount of the

securities involved.

‘‘Large Position Threshold’’—The

large position threshold is the dollar

amount of a reportable position at or

above which the requirement to file a

large position report is triggered. Since
65220 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

24See supra note 5.

the large position rules take an ‘‘ondemand’’ approach to reporting, the

specific large position threshold for any

given Treasury security issue may vary.

However, since the threshold would not

be known in advance, we believe that it

will be beneficial to provide some

certainty to market participants by

setting a minimum dollar amount

(‘‘floor’’)—$2 billion—below which

reports would not be requested.

Establishing a floor should minimize

compliance costs. For example, many

entities, based on this level of the floor,

may decide that no modifications would

be needed to their computer systems or

trading strategies since the rule would

not apply to them (i.e., the firms would

not expect their positions ever to reach

the floor amount). Of the six

commenters who addressed this issue,

three endorsed a variable threshold

method (one respondent actually

supported a fixed percentage method,

which would lead to a variable dollar

level since it would be based on the

amount issued of a specific security).

‘‘Recently-Issued’’—Despite the

determination that any large position

reporting would be done on an ondemand basis, the Department believes

that it is useful to set out a general

description of which Treasury securities

would be within the scope of the rule.

For convenience, the definition of

recently-issued includes when-issued

securities from the time of

announcement of the issue. Thus, whenissued securities would be considered

the most recent issue of a security type.

In response to the commenters and in

consideration of the Treasury securities

that could be of most interest to

regulators, we have proposed that as a

regular matter, recently-issued would be

limited to the three most recent issues

of a Treasury security (bill, note or

bond) if issued quarterly or more

frequently and the two most recent

issues if issued less frequently.

Currently, this latter condition exists

only for the 30-year bond. The

definition of recently-issued for this

security, which is currently issued semiannually, was limited to the two most

recent issues because a three-mostrecent definition would have, on a

regular basis, encompassed a time

period of nearly a year and a half. As

discussed earlier, the Department

intends to reserve the right to broaden

the scope of this definition, on a limited

exception basis, consistent with the

purposes of the GSAA.

3. Section 420.3

Reporting. The provisions of this

section require large position reports to

be filed by the designated filing entity

of any reporting entity that has a

reportable position that equals or

exceeds the large position threshold in

a particular Treasury security issue as

specified by the Department. This

section also specifies the method by

which Treasury will provide notice to

the marketplace requesting large

position reports, the specific

information that must be provided on

the large position reports, where they

must be filed and the time frame for

their submission. This section also

permits either the Treasury or the

FRBNY, acting as the Treasury’s agent,

to request additional information from a

reporting entity if either organization,

after analyzing the large position

reports, requires further data to gain a

more complete understanding of the

extent and nature of the concentration

of positions in a particular Treasury

security. A sample reporting format for

large position information is illustrated

in Appendix B to the rule.

Analysis of Alternative Reporting

Methods

The method of reporting large

positions is a central issue in the

development of large position rules,

since the method selected will

significantly affect the compliance

burdens of, and costs incurred by, the

entities subject to the large position

regulations.

The Department evaluated two

distinct approaches for reporting large

position information: an ‘‘automatic’’ or

regular reporting method and an ‘‘ondemand’’ reporting method. Under an

automatic, regular reporting process,

large position reports would be required

to be filed whenever a reporting entity

equalled or exceeded the large position

threshold stated in the rules for any

covered Treasury security. Depending

upon the particular method used in a

regular reporting system, reports could

either be required on a one-time basis or

they could continue to be required each

day the entity exceeded the large

position threshold and would cease

only when its positions in the Treasury

security fell below the threshold level.

In contrast, in an on-demand reporting

system, reports would be triggered by a

notice from the Treasury requesting

large position information on a specific

issue of a Treasury security from those

reporting entities whose positions at

that time equalled or exceeded the large

position threshold specified in the

notice.

In evaluating the method of reporting

that should be employed, the

Department took into consideration the

events that gave rise to Congress’ grant

of authority to prescribe large position

reporting rules as well as the purposes

and objectives of the statutory authority

underlying such rules. The main focus

of our analysis involved selecting the

approach that best balanced the

purposes of the statute and any new

regulatory burdens that would be

created. (Readers are referred to the

ANPR for a more detailed discussion of

these issues and other background

information pertaining to large position

reporting.) 24

The primary purpose of any large

position reporting system is to enable

the Treasury and the other regulators to

understand better the possible reasons

for apparent significant price distortions

and the causes of market shortages in

certain Treasury securities. Large

position reports are also intended to

provide regulators with information on

concentrations of control for market

surveillance purposes and for

enforcement of the securities laws, as

well as to enable Treasury policy

makers to make better decisions

concerning any possible government

actions that might be taken in response

to apparent price anomalies. A critical

factor in evaluating the two alternative

large position reporting methods was

the extent to which they would meet the

overriding legislative and policy

objective of strengthening the ability of

the regulatory agencies to deter possible

manipulation of the Treasury securities

market.

On-Demand Reporting System

The requirements outlined in

paragraph 420.3(a) reflect the

Department’s decision to propose an ondemand reporting system for large

position information. Reports would be

required in response to a specific

request, issued by the Treasury, for large

position information.

An on-demand reporting approach

will enable the Department to target

large position reporting to a specific

issue of a Treasury security in response

to particular circumstances or unusual

market activity. This would ensure the

availability of information for market

surveillance and enforcement purposes

in those specific instances where it is

most needed, thus satisfying the

primary objective of this regulatory

authority, while obviating the need to

collect information on securities that are

not of interest. In contrast, under a

regular reporting system, reports would

be required when the large position

threshold had been exceeded; therefore,

reports would be filed even in situations

where there were no price distortions,

anomalies or evidence of possible
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65221

25The CUSIP number is the unique identifying

number assigned to each separate security issue and

each separate STRIPS component.

26To understand the price and supply dynamics

of the security under scrutiny better, the Treasury

reserves the right to request that entities submit

positions covering a multi-day, historical time

frame rather than just one day.

market manipulation. This would result

in unnecessary costs for, and burdens

on, both market participants and the

government. In addition, a regular

reporting method could increase the

possibility that investors would take

deliberate actions to reduce their

holdings of Treasury securities to avoid

exceeding the ‘‘large’’ position reporting

threshold. This could result in

decreased market participation, reduced

liquidity and increased borrowing costs.

An on-demand reporting system

would avoid the need to set a uniform

large position threshold that would

apply to some or all Treasury issues as

would be required under an automatic

reporting approach. The Treasury would

have the flexibility and latitude to

establish a tailor-made large position

threshold each time it requests large

position reports. This permits a large

position threshold to be based on the

latest supply of, and market conditions

for, a specific Treasury security, which

can vary considerably.

On-demand reporting should be less

onerous and costly for market

participants. Any modifications to

existing computer systems to compile,

summarize, compare and report the

positions would be less complex than

for the required continual review of

multiple securities positions under a

regular reporting method. Under a

regular reporting approach, firms would

need to modify existing computer

systems or develop entirely new

systems to continuously collect, monitor

and report positions in when-issued and

recently-issued Treasury securities.

Since reports would need to be filed

whenever positions equalled or

exceeded the large position threshold,

the systems would have to be designed

to compute the overall positions in a

large number of separate Treasury

security issues (approximately 23

separate CUSIPs 25 based on the

definition of recently-issued in

paragraph 420.2(g)) and then compare

the amount of the positions to the large

position threshold on a daily basis to

determine if reports would have to be

produced. There would be an even

greater burden on those entities that

would manually compile this

information.

Recognition of the costs that would be

imposed on market participants has

been a critical consideration in our

attempt to develop large position rules

that strike a balance between regulatory

oversight and market efficiency. We

believe that an on-demand reporting

system significantly minimizes the

regulatory costs and burdens on market

participants compared to those that

would be incurred if the Treasury were

to require regular reporting.

In analyzing the different reporting

models, the Treasury also took into

consideration the fact that a large

segment of market participants who are

likely to be subject to Treasury’s large

position reporting rules—the 37 primary

dealers—already submit regular position

reports to the FRBNY on a voluntary

basis for on-the-run Treasury notes and

bonds. By adopting an on-demand

reporting system, we have attempted to

minimize, as much as possible, any

duplicate reporting by these entities.

Triggering Event: Treasury Request for

Information

The provisions of paragraph 420.3(a)

propose that the requirement to report

large position information would be

triggered by a notice issued by the

Treasury specifically requesting such

information. The notice would identify

the specific Treasury security issue to be

reported, the applicable large position

threshold (in no case less than $2

billion) for that issue and the date or

dates 26 as of which the large position

information must be reported.

The notice requesting large position

reports would be communicated by

issuing a press release and subsequently

publishing the notice in the Federal

Register. Given the relatively short

reporting deadline in the proposed

rules, this two-pronged notice approach

satisfies the dual objectives of

operational efficiency and legal

sufficiency. A Treasury press release has

the advantage of achieving wide, timely

distribution of the notice without a

significant time lag. Although this

approach relies on third-party services

over which the Treasury has no control,

it is reasonable to expect that the major

news and financial publications and the

various electronic financial wire

services (e.g., Telerate, Reuters,

Bloomberg, Knight-Ridder) would

disseminate the Treasury notice as

quickly as their respective technological

capabilities allow. The electronic

financial wire services and news

publications can also be relied upon to

accurately present the Treasury’s

request for large position information.

We believe that any market participant,

including a foreign entity, that may

control a large position in a Treasury

security is likely to subscribe, or have

access, to one or more of the electronic

financial wire services. Thus, the

likelihood that the Treasury notice

requesting large position reports would

fail to come to the attention of a

potential reporting entity is extremely

remote.

The press release would include

information about how to obtain a

sample large position report and the

name and telephone number of a

Departmental contact person to answer

questions about the report.

Since the Federal Register is the

designated federal publication for

providing official notice, publishing the

Treasury notice in that document is

legally sufficient for ‘‘constructive

notice’’ of the request despite lagging

the issuance of the press release.

Designated Filing Entity

Under paragraph 420.3(b), the

designated filing entity is responsible

for preparing and submitting the large

position reports on behalf of a reporting

entity in response to a Treasury notice

requesting large position information.

The identity of the designated filing

entity must be given on any large

position report submitted.

Each reporting entity, as defined in

paragraph 420.2(i), whose reportable

position equals or exceeds the large

position threshold, must have one, and

only one, designated filing entity. A

reporting entity that consists of only one

component is the designated filing

entity. For those reporting entities that

consist of multiple affiliates or

aggregating entities, one entity must be

selected to be the designated filing

entity. That entity is responsible for

receiving and compiling the large

position information from each of the

aggregating entities, computing the

reportable position and preparing and

filing the large position report.

An official authorized to file reports

on behalf of the designated filing entity

shall sign the large position report and

certification attesting to the accuracy,

completeness and reliability of the

information being reported. This official

must be one of the following: the chief

financial officer, the chief operating

officer, the chief executive officer, or the

managing partner or equivalent of the

designated filing entity. The contact

person named on the large position

report should also be a representative of

the designated filing entity but need not

be the authorized official.

Further, any designated filing entity is

required, under the applicable provision

in section 420.4, to make and maintain
65222 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

27 Since designated filing entities are also

aggregating entities, they would also be required

under §§ 420.4(b) or (c) to maintain records

pertaining solely to their own securities

transactions. 28See supra note 14.

additional records on behalf of the

entire reporting entity.27

Information Required on Large Position

Reports

Paragraph 420.3(c), together with

Appendix B, sets forth the specific

information that must be provided in

the large position report. For those

reporting entities that have a number of

aggregating entities or affiliates, the

amount to be reported for each of the

positions is the total, combined net

amount. All positions are to be reported

as of the close of the business/

transaction day for the date specified. In

those instances where Treasury requests

positions covering multiple dates,

separate reportable position calculations

must be submitted for each date. The

rule does not require, nor does the

Treasury intend, for firms to calculate

their positions as of some specific point

during the trading day. However, in

order to meet the deadline for reporting,

the designated filing entity may need to

determine a cut-off time for foreign

entities.

The following administrative

information must be provided on the

large position report:

(a) The name of the reporting entity;

(b) The address of the principal place

of business of the reporting entity;

(c) The name and address of the

designated filing entity;

(d) The description of the Treasury

security being reported, including the

CUSIP number;

(e) The date or dates for which the

information is being reported (which

should be the same date(s) as that

(those) stated in the Treasury notice

requesting the large position reports);

(f) The date the report was submitted;

(g) The name and telephone number

of a contact person of the designated

filing entity to whom questions can be

directed regarding any information on

the report;

(h) The name and title of the person

authorized to submit the report (as

previously described);

(i) A certification statement attesting

to the accuracy, completeness and

reliability of the information being

submitted; and

(j) The signature of the authorized

official specified in (h).

The following large position

information must be reported in the

exact order as noted:

(a) Line 1, cash/immediate net settled

positions;

(b) Line 2, net when-issued positions

for to-be-issued and reopened issues;

(c) Line 3, net forward settling

positions, including next-day settling

positions;

(d) Line 4, net positions in futures

contracts that require delivery of the

specific security that is the subject of

the large position report (but not futures

contracts for which the security that is

the subject of the large position report

is one of several securities that may be

delivered and not futures contracts that

are cash-settled);

(e) Line 5, net holdings of STRIPS

principal components of the specific

security that is the subject of the large

position report;

(f) Line 6, the gross financing

position, which is the sum of the gross

par amounts of a security issue received

from financing transactions (e.g., reverse

repurchase transactions, bonds

borrowed, securities received in pledge

and collateralized credit extended);

(g) Line 7, net fails position, which is

fails to receive less fails to deliver in the

specific security issue; and

(h) Line 8, Total Reportable Position,

which is the sum of lines 1–7.

All amounts must be reported in

millions at par value. See Appendix B

for a sample reporting format.

The large position report provides for

two memoranda entries. Memorandum

Entry #1 is the sum of the gross par

amounts of a security issue delivered as

part of a financing transaction (e.g.,

repurchase agreements, securities

loaned, securities pledged and

collateralized loans). This amount

should not be included in the gross

financing position (line 6) as noted in

item (f) above. Memorandum Entry #1 is

required.

Memorandum Entry #2 is to be

reported by those entities that take the

voluntary exclusion pursuant to

paragraph 420.2(c) to reduce the gross

financing position reported on line 6.

The amount shown is the amount of

securities received from financing

positions over which the reporting

entity does not have effective control

due to arrangements such as third-party

custodial structures, hold-in-custody

relationships or substitution rights. This

amount should not be included in the

amount reported on line 6.

Lines 1–5 of the large position report

are consistent with the items that

determine the net long position for

auction reporting purposes.28 As with

the auction rules, the amounts to be

reported for each of the items on lines

1–5 are the net of any long and short

positions, so that the entry can be a

positive number (long position), a

negative number (short position), which

should be shown in parentheses, or zero

(flat position). Only securities trades

that have actually settled should be

included in line 1, cash/immediate net

settled positions. Accordingly, auction

purchases that have not yet been settled

or issued should be included in the total

reported on line 2, when-issued

positions.

For line 6, Gross Financing Position,

netting of these positions is not

permitted although certain items may be

excluded. (See paragraph 420.2(c).) For

reporting entities that take advantage of

this limited exclusion, the gross

financing position should not include

the amount of security issues received

from financing positions over which the

reporting entity does not exercise

control. Rather, the amount associated

with the exclusion should be reported

in the Memorandum Entry #2.

Line 7, Net Fails Position, can only be

reported as a positive number (which

indicates fails to receive exceed fails to

deliver) or zero (which reflects fails to

receive are totally offset by, or are less

than, fails to deliver).

Reporting Format

Rather than designing and mandating

a specific reporting form, the Treasury

is proposing to allow the reporting

entities to develop their own large

position reports, provided the reports

contain all of the required information

as prescribed in the rules, in the order

stated in Appendix B. By permitting the

reporting entities to design their own

large position report, firms will be able

to integrate the report into their existing

systems as they see fit and avoid the

unnecessary burden of transferring the

information from internally generated

reports to a Treasury-mandated form.

While firms will have a certain amount

of latitude and discretion in designing a

large position report, the information on

the various positions that constitute the

total reportable position must be

reported in the order shown in

paragraph 420.3(c) and in the sample/

prototype report in Appendix B. This

will facilitate analysis of the data.

Failure to include any of the required

information, including administrative

information, on the large position report

will constitute non-compliance with the

rule.

Filing of Large Position Reports: Where,

When and How

Pursuant to paragraph 420.3(d) the

large position report must be submitted

to the FRBNY. The report must be

received before 12:00 noon, Eastern

time, on the second business day after
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65223

the issuance of the Treasury press

release requesting large position reports.

Given that large position reports would

generally be requested by the

Department in response to certain

market conditions or activity, the

proposed rule has a fairly short response

time for submission of the reports. The

one and one-half day reporting deadline

balances the need for timely information

with the recognition that some time is

required to compile the information.

The reporting time frame should not

present significant problems since the

information would be derived from

records required to be maintained by the

reporting entities. Additionally, we

understand that most large firms

engaged in the securities business

compile their positions on a daily basis.

Finally, since reporting is ‘‘on-demand,’’

the filing of a large position report will

be an exceptional event not requiring

regular preparation.

The Treasury requests comments from

market participants on the proposed

reporting time frame, specifically

concerning any potential obstacles,

burdens or other factors that would

make meeting the deadline problematic,

and the extent of any extra costs that

would be incurred.

The rule, in paragraph 420.3(d), also

provides that the large position report

may be filed in any manner or media

(i.e., hard copy, facsimile or other

electronic transmission) that is

acceptable to the FRBNY. As mentioned

earlier, the reporting entities are

permitted to produce or generate their

own large position reports.

Follow-Up Inquiries

The requirement to file a large

position report in response to a specific

Treasury notice requesting this

information is expected to be an

occasional event. The requirement is

satisfied upon receipt of the report by

the FRBNY within the required time

frame and in the required format as

prescribed in paragraph 420.3. The

proposed rule does not impose a

continuous reporting requirement.

However, the Treasury and the FRBNY

staff may contact a designated filing

entity after receiving a large position

report to discuss any aspect of the

report, seek clarification of the

information provided or request

additional documents or information.

The purpose of such inquiries or

requests for data would be to

understand the concentration of

positions better. The Treasury or the

FRBNY staff may also request further

detail on any position reported, such as

breaking out the gross financing

position into its component parts or

identifying repurchase agreements by

their terms or types (e.g., overnight

repos, term repos, tri-party repos, holdin-custody repos). Reporting entities are

required to make good faith attempts to

respond to inquiries and provide any

additional data requested in an

expeditious manner.

Testing of Large Position Reporting

Systems

The Department wishes to underscore

the importance of accurate, reliable and

timely reporting of large position

information by affected market

participants. As the agency of the

Federal government most concerned

with minimizing the interest cost on the

public debt, the Treasury believes that

the United States is best served by a

liquid and efficient market for Treasury

securities that is not overburdened with

regulation, but, at the same time, is not

viewed as being subject to

manipulation. In developing these

proposed rules, the Treasury has

attempted to pursue a modest approach

that balances the need for additional

regulation with a desire to minimize the

burdens on, and costs to, the industry

and to preserve the efficiency of the

Treasury securities market.

Compliance with these large position

rules—the maintenance of reliable

records and the accurate and timely

reporting of large position information—

is essential to preserving and

strengthening the integrity of the

Treasury securities market. One of the

primary concerns with an on-demand

reporting system is the increased

potential for inaccurate or incomplete

information on large positions due to

unfamiliarity by market participants

with the reporting requirements. Large

position information will be extremely

important for policymakers at Treasury,

in consultation with other regulatory

officials, in determining whether, and

what course of, action should be taken

to alleviate a concentration of control in

a particular Treasury security. Thus, it

is imperative that market participants

fully understand and comply with the

large position recordkeeping and

reporting requirements.

To ensure that market participants

remain knowledgeable about the rules,

specifically how to calculate and report

a reportable position, the Treasury

intends to ‘‘test’’ the reporting system by

requesting large position reports at least

annually, regardless of market

conditions for a particular security. The

Treasury does not intend to notify

market participants that its request for

large position reports is merely a test.

Commenters are asked to address this

proposed treatment of ‘‘test’’ reporting.

The notice and reporting requirements

are proposed to be identical to a call for

large position information in which the

Department is concerned about price

anomalies and concentrated ownership.

‘‘Test’’ reporting is consistent with the

statutory purpose since the Department

believes it is both necessary and

appropriate to help ensure that an ondemand program of large position

reporting is conducted effectively.

4. Section 420.4

Recordkeeping. Section 15C(f)(2) of

the Securities Exchange Act of 1934

authorizes the Secretary to promulgate

rules requiring large position holders to

make and preserve records related to

large position reporting requirements.

Section 420.4 sets forth the proposed

recordkeeping rules supporting large

position reporting under that authority.

The proposed recordkeeping rules are

divided into two classes: (1) records

required for entities that are currently

subject to recordkeeping rules of federal

securities or federal bank regulators

(paragraph 420.4(b)); and (2) records

required for all other entities, such as

hedge funds, insurance companies, and

pension funds (paragraph 420.4(c)).

Under paragraph 420.4(a)(1), the

recordkeeping rules would apply to all

aggregating entities that may control

components of their respective reporting

entity’s reportable position as of the

effective date of the final large position

rules, but only if the aggregating

entities’ respective reporting entity had

a reportable position in any Treasury

security equal to or in excess of $2

billion (the minimum large position

threshold) at any time during the prior

two-year period ending 90 days after

publication of the final rule. Thus, all

reporting entities (through their

respective aggregating entities) will be

responsible for determining whether

they have controlled a reportable

position of at least $2 billion in a

Treasury security during the two-year

period. For some firms, this will

necessitate a thorough review of their

records to determine if their reportable

positions reached that level.

In addition, under paragraph

420.4(a)(2), in instances where a

reporting entity controlled a reportable

position of at least $2 billion in a

Treasury security during the two-year

period, its designated filing entity will

be required to submit a letter to the

FRBNY certifying that it has in place, or

will have in place by the effective date

of the final rules, a recordkeeping

system (including policies and

procedures) capable of making,

verifying the accuracy of, and

preserving the requisite records. This
65224 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

29 17 CFR 240.17a–3, 240.17a–4, and 240.17a–7

(for registered brokers and dealers); 17 CFR

275.204–2 (for registered investment advisers); 17

CFR 270.31a–1, 270.31a–2, and 270.31a–3 (for

registered investment companies); 17 CFR 404.2

and 404.3 (for registered government securities

brokers and dealers); 17 CFR 404.4 (for noticed

financial institutions); 17 CFR 450 (for depository

institution custodians that exercise investment

discretion); and 12 CFR Part 12, Part 208, or Part

344 (for banks conducting securities transactions for

customers), respectively.

30Most of the existing recordkeeping rules also

require affected entities to maintain position

records, which provide a composite listing of the

long and short positions in each security for which

the broker-dealer or other entity is responsible.

However, position records do not include

information on positions resulting from certain

unsettled and off-balance sheet transactions (e.g.,

when-issued trades and futures).

31Recordkeeping requirements for depository

institutions acting solely as custodians were not

considered because these entities do not meet the

proposed definition of having control under

paragraph 420.2(b).

letter must be signed by one of the

following officials of the designated

filing entity: the chief financial officer,

the chief operating officer, the chief

executive officer, or the managing

partner or equivalent. The letter must be

received by the FRBNY within 120 days

after publication of the final rule.

The Department believes this

requirement would ensure that entities

having a history of controlling large

Treasury securities positions would

have supporting records in place in the

event their reportable positions reach an

announced large position threshold for

a specific issue, thereby triggering the

submission of a large position report.

These potential large position holders

would have several months to develop

methods to meet the proposed

recordkeeping requirements since there

will be a delayed effective date for the

rules. Subsequent to the effective date of

the rules, aggregating entities within a

reporting entity that had not previously

had a reportable position in a Treasury

security equal to or greater than $2

billion but whose reportable position

reaches or exceeds $2 billion would be

subject to the large position

recordkeeping requirements from that

point forward.

Regardless of the date aggregating

entities become subject to the

recordkeeping rules, their being subject

to the rules is based on whether the

reportable position of their reporting

entity reaches the large position

threshold, not on whether the position

of the aggregating entity itself reaches

that threshold. Thus, an aggregating

entity may be subject to the

recordkeeping rules even though its

own position has been substantially

below the threshold.

Entities Subject to Recordkeeping Rules

of Federal Securities or Federal Bank

Regulators (Paragraph 420.4(b))

In developing the proposed

recordkeeping rules, the Department

sought to strike an appropriate balance

between ensuring that large position

holders maintain records that document

and facilitate the generation of accurate

reports and minimizing recordkeeping

burdens on large position holders.

Accordingly, the Department examined

existing securities-related recordkeeping

rules of the SEC, the Treasury, and the

bank regulatory agencies to determine if

the records required under those rules

include the type of information

necessary to create large position

reports.

Specifically, the Department

examined the following recordkeeping

regulations: SEC recordkeeping

regulations applicable to registered

broker-dealers, registered investment

advisors, and registered investment

companies; Treasury recordkeeping

rules applicable to registered

government securities broker-dealers,

financial institutions that have filed or

should file notice as government

securities broker-dealers, and depository

institutions that hold government

securities as custodians; and bank

regulatory agency recordkeeping rules

applicable to banks that conduct

securities transactions for customers.29

The Department has determined that

all of these recordkeeping rules require

the affected entities to make and keep

records of original entry (i.e., journals,

blotters, or similar records) containing

itemized records of all of the entities’

securities transactions, including

information pertaining to the amount

and identification of each security or

instrument. Records of original entry are

basic, detailed records that cover,

among other things, all transactions

related to the components of a

reportable position. Most of the existing

regulations of the federal securities and

federal bank regulators also require the

affected entities to maintain order

tickets or memos and various ledgers

containing much of the same

information required in the records of

original entry.30

The proposed treatment of depository

institutions that exercise investment

discretion warrants specific discussion

with respect to recordkeeping

requirements because such entities are

potential reporting entities. Depository

institutions that exercise investment

discretion are generally subject to the

securities recordkeeping requirements

of the bank regulatory agencies (12 CFR

12, 12 CFR 208, or 12 CFR 344),

regardless of whether or not they

exercise investment discretion within

their trust departments.

In addition, for those rare cases in

which depository institutions exercise

investment discretion and act as

custodians of government securities

outside of their trust departments, the

recordkeeping provisions of paragraph

450.4(c) of the GSA regulations also

apply.31 The Department views the

information required by the

recordkeeping rules of paragraph

450.4(c) as comparable to the basic

information required in the records of

original entry under the existing rules of

the SEC, the Treasury, and the bank

regulatory agencies.

The Department believes that

reportable positions can be constructed

relatively easily from the

aforementioned records required by the

federal regulatory agencies. As a result,

the Department has decided, with

respect to large position rules, not to

propose any new recordkeeping rules

for aggregating entities that are: (1)

subject to the existing federal

recordkeeping requirements, and (2) not

designated filing entities.

However, an aggregating entity that is

also a designated filing entity would be

required to maintain specific large

position-related records in addition to

its existing securities-related records.

(Each reporting entity would have only

one designated filing entity.) First, the

designated filing entity would be

required to make and maintain copies of

all of the large position reports it filed.

Also, since the designated filing entity,

in some cases, would have to collect

and combine information received from

other aggregating entities within its

reporting entity, the designated filing

entity would be required to make and

maintain supporting documents or

schedules (e.g., worksheets) that are

used to compute the reportable position

and to prepare large position reports.

The designated filing entity would also

be required to make and keep a chart

showing the organizational entities (e.g.,

aggregating entities, if applicable) whose

data is combined for purposes of

calculating a reportable position.

The Department believes that

requiring supporting schedules would

enhance the ability of the designated

filing entity to produce accurate and

timely large position reports. Moreover,

the retention of supporting schedules

and organizational charts would be

indispensable in responding to followup inquiries from the regulatory

agencies and in the course of any indepth review or reconstruction of a

reporting entity’s reportable position

conducted by the Treasury, the FRBNY,

or the SEC.
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65225

32See supra note 29.

33 5 U.S.C. 601, et seq.

34 44 U.S.C. 3507(d).

Designated filing entities would be

required to retain the additional records

for the same period specified in their

existing securities-related recordkeeping

rules.32 In instances where

recordkeeping rules contain more than

one retention period (e.g., SEC Rule 17a4), paragraph 420.4(b)(4) of the

proposed rule specifies that the longest

retention period will apply.

Other Entities (Paragraph 420.4(c))

Certain entities that have the potential

to control large positions, or portions

thereof, in Treasury securities within a

reporting entity (e.g., hedge funds and

insurance companies) are not currently

subject to federal requirements to make

and preserve securities-related records.

To ensure that such entities make and

preserve records that document and

facilitate the generation of accurate large

position reports—while minimizing the

burden on these entities—the

Department proposes that all

aggregating entities (within their

respective reporting entities) in this

category make and maintain records of

original entry (the equivalent of blotters

or journals). These documents should be

relatively easy for large, sophisticated

investors to implement. In fact, it is our

understanding that most such investors

already produce and maintain such

records as part of their on-going

business and accounting control

systems.

Like the recordkeeping system

applicable to entities that are subject to

federal securities-related recordkeeping

rules, an aggregating entity that is also

a designated filing entity would be

required to make and maintain the

following large position-related records

in addition to its records of original

entry: copies of all of the large position

reports it filed, supporting documents or

schedules (e.g., worksheets) used to

prepare large position reports, and a

chart showing the organizational

entities (e.g., aggregating entities, if

applicable) whose data is aggregated in

order to calculate a reportable position.

Such records would have to be

preserved by the designated filing entity

for at least six years, the first two in an

easily accessible place.

5. Section 420.5

Effective Date. Section 420.5 sets out

the effective date for both the

recordkeeping and reporting provisions

of the large position rules. The rule

provides for a delayed effective date

approximately six months after

publication of the final rule. This period

of time is provided in order to give

affected entities sufficient time to make

the necessary preparations for

compliance. Only subsection 420.4(a) is

not subject to this date but instead

contains its own specific dates for

compliance.

IV. Special Analysis

The proposed rules reflect the

Treasury’s interest in meeting

regulators’ informational needs while

minimizing the costs and burdens on

market participants. The rules propose

to adopt an on-demand reporting

system, which will significantly

minimize operational and compliance

costs for market participants compared

with the costs that would have been

incurred if a regular reporting system

were required. Further, in an effort to

avoid imposing new requirements, the

proposed regulations adopt, for the most

part, existing federal recordkeeping

requirements for the largest segment of

market participants that would be

subject to the rules. The proposal

requires limited records to be

maintained by those entities that are not

currently subject to federal rules to

make and preserve securities-related

records. Additionally, the establishment

of a minimum floor of $2 billion for the

large position threshold will also greatly

reduce the number of market

participants potentially subject to the

proposed rules. Therefore, based on the

very limited impact of the proposal, it

is the Department’s view that the

proposed regulations are not a

‘‘significant regulatory action’’ for the

purposes of Executive Order 12866.

In addition, pursuant to the

Regulatory Flexibility Act,33 it is hereby

certified that the proposed regulations,

if adopted, will not have a significant

economic impact on a substantial

number of small entities since the

proposal establishes a minimum large

position threshold of $2 billion. This

assures market participants that the

Treasury would not request large

position reports for positions below that

minimum amount. The Department

does not believe that small entities will

control positions of $2 billion or greater

in any Treasury security. Accordingly,

the inapplicability of the proposed

regulations to small firms indicates that

there is no significant impact. As a

result, a regulatory flexibility analysis is

not required.

The Paperwork Reduction Act of 1995

requires that collections of information

prescribed in the proposed rules be

submitted to the Office of Management

and Budget for review and approval.34

In accordance with this requirement, the

Department has submitted the collection

of information contained in this notice

of proposed rulemaking for review.

Under the 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. Comments on the

collection of information may be

submitted to the Office of Information

and Regulatory Affairs, Office of

Management and Budget, Attention:

Desk Officer for Department of the

Treasury, Washington, D.C. 20503; and

to the Government Securities

Regulations Staff, Bureau of the Public

Debt, at the address specified at the

beginning of this document.

The collection of information in this

proposed regulation is contained in

proposed §§ 420.3 and 420.4. The

proposed reporting requirements in

§ 420.3 would require the designated

filing entity of any market participant,

whose position equals or exceeds the

announced large position threshold for

a specific issue of a Treasury security,

to report information to FRBNY.

Although the Treasury cannot be certain

of the number of market participants

that would have large reportable

positions for a specific issue on which

information is requested, we believe

that very few entities would likely have

to file reports because the proposed

minimum reporting threshold is $2

billion. Further, Treasury expects that

its requests for information will be

relatively infrequent, and estimates that

there will only be an average of five

reports filed in response to any

particular request.

The proposed recordkeeping

requirements in § 420.4 require any

aggregating entity to make and preserve

certain records as of the effective date,

but only if it has, during a specified

period, controlled a portion of its

reporting entity’s reportable position in

any Treasury security when that

reportable position is equal to or in

excess of the $2 billion minimum large

position threshold specified in

§ 420.2(d). For each reporting entity

subject to the recordkeeping rules as of

the effective date, the designated filing

entity will be required to submit a letter,

on a one-time basis, certifying that it has

in place, or will have in place, a

recordkeeping system capable of

making, verifying the accuracy of, and

preserving the requisite records. As

mentioned above, while Treasury

expects that very few entities would

likely control positions in excess of the

stated threshold that would require

reporting, a larger group of entities will
65226 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

35See supra note 5.

be required to submit the one-time

letter.

For aggregating entities currently

subject to, and in compliance with,

recordkeeping rules of federal securities

or federal bank regulators, and subject to

the large position recordkeeping rules,

there are no additional recordkeeping

requirements, with one exception. If the

aggregating entity is the designated

filing entity for its reporting entity, then

it is required to make and maintain

copies of any large position reports

filed; supporting documents or

schedules used to compute data for such

large position reports, including any

information received from aggregating

entities within the reporting entity; and

an organizational chart showing the

entities that are aggregated in

developing a reportable position.

Those aggregating entities that must

comply with the proposed rules but are

not subject to paragraph 420.4(b) must

make and preserve journals, blotters or

other records of original entry

containing an itemized record of all

transactions that fall within the

definition of a reportable position. This

provision accounts for the greatest

percentage of estimated recordkeeping

burden hours. However, this

requirement is significantly less than

the full range of books and records

requirements currently applicable to

entities subject to federal securitiesrelated recordkeeping requirements. If

the aggregating entity is also a

designated filing entity, the

requirements for a designated filing

entity are also applicable.

The collection of information is

intended to enable the Treasury and

other regulators to understand better the

possible reasons for any apparent

significant price distortions and the

possible causes of market shortages in

certain Treasury securities. The

collection of information will help

ensure that the Treasury securities

market remains liquid and efficient, and

is not viewed as subject to

manipulation. The proposed rules apply

to all market participants controlling

large positions, as defined in the rules.

Per paragraph 420.3(c), it is a mandatory

requirement that reporting entities with

reportable positions that equal or exceed

the specified threshold in a Treasury

notice respond through their designated

filing entities by filing a report in the

required format and within the specified

reporting time frame.

In developing the proposed rules, we

have consulted with affected entities

and regulatory agencies, and expect that

this process will continue through the

development of a final rule. As

previously mentioned, Treasury

published an ANPR35 which requested

comments on a number of specific

issues, including the approach and

structure for a large position

recordkeeping and reporting system.

The estimated reporting and

recordkeeping burden hours are based

on a review of tenders submitted in

Treasury auctions, position reports that

primary dealers already complete and

voluntarily submit to FRBNY,

recordkeeping requirements that are

already in place for federally-regulated

participants in the government

securities market and discussions with

the industry and other regulators.

Treasury invites further comments on:

(1) Whether the proposed collection of

information is necessary for the proper

performance of functions of the

Treasury, including the practical utility

of the information; (2) the accuracy of

the Treasury’s estimate of the burden;

(3) enhancement of the quality, utility,

and clarity of information to be

collected; and (4) minimizing the

burden of the collection of information

on respondents, including through the

use of automated collection techniques

or other forms of information

technology.

Estimated total annual reporting and

recordkeeping burden: 4,940 hours.

Estimated annual number of

recordkeepers: 100.

Estimated annual number of

respondents: 10.

Estimated annual frequency of

response: On occasion.

List of Subjects

17 CFR Part 400

Administrative practice and

procedure, Banks, banking, Brokers,

Government securities, Reporting and

recordkeeping requirements.

17 CFR Part 420

Foreign investments in U.S.,

Government securities, Investments,

Reporting and recordkeeping

requirements.

For the reasons set out in the

preamble, 17 CFR Chapter IV,

subchapter A is proposed to be

amended as follows:

PART 400—RULES OF GENERAL

APPLICATION

1. The authority citation for part 400

is revised to read as follows:

Authority: 15 U.S.C. 78o–5.

2. In § 400.1, paragraph (e) is added as

follows:

§ 400.1 Scope of regulations.

* * * * *

(e) Section 104 of the Government

Securities Act Amendments of 1993

(Pub. L. 103–202, 107 Stat. 2344)

amended Section 15C of the Act (15

U.S.C. 78o–5) by adding a new

subsection (f), authorizing the Secretary

of the Treasury to adopt rules to require

specified persons holding, maintaining

or controlling a large position in to-beissued or recently-issued Treasury

securities to report such a position and

make and keep records related to such

a position. Part 420 of this subchapter

contains the rules governing large

position reporting.

* * * * *

3. Part 420 is added to read as follows:

PART 420—LARGE POSITION

REPORTING

Sec.

420.1 Applicability.

420.2 Definitions.

420.3 Reporting.

420.4 Recordkeeping.

420.5 Effective Date.

Appendix A to Part 420—Separate Reporting

Entity

Appendix B to Part 420—Sample Large

Position Report

Authority: 15 U.S.C. 78o–5(f).

§ 420.1 Applicability.

(a) This part, including the

Appendices, is applicable to all persons

that participate in the government

securities market, including, but not

limited to, government securities

brokers and dealers, depository

institutions, registered investment

companies, registered investment

advisers, pension funds, hedge funds

and insurance companies, that may

control a reportable position in a

recently-issued Treasury bill, note or

bond as those terms are defined in

§ 420.2.

(b) Notwithstanding paragraph (a) of

this section, foreign central banks,

foreign governments and international

monetary authorities are exempt from

this part for the portion of any

reportable position they control that is

held at the Federal Reserve Bank of New

York.

(c) Notwithstanding paragraph (a) of

this section, Federal Reserve Banks are

exempt from this part for the portion of

any reportable position they control for

their own account.

(d) Notwithstanding the definition of

recently-issued, the Department reserves

the right to collect large position

information on Treasury security issues

that are older than those specified,

provided that such action is consistent
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65227

with the purposes of the Act (15 U.S.C

78o–5(f)).

§ 420.2 Definitions.

For the purposes of this part:

(a) ‘‘Aggregating entity’’ means a

single entity (e.g., a parent company or

affiliate) that is combined with other

entities, as specified in paragraph (i) of

this section, to form a reporting entity.

In those cases where an entity has no

affiliates, the aggregating entity is the

same as the reporting entity.

(b) ‘‘Control’’ means having the

authority to exercise investment

discretion over the purchase, sale,

retention or financing of specific

Treasury securities. Only one entity

should be considered to have

investment discretion over a particular

position.

(c) ‘‘Gross financing position’’ is the

sum of the gross par amounts of a

security issue received from financing

transactions, including, but not limited

to, reverse repurchase transactions,

bonds borrowed, securities received in

pledge, and collateralized credit

extended. In calculating the gross

financing position, a reporting entity

may not net its positions against

repurchase transactions, securities

loaned, securities pledged or other

deliveries of the security issue.

However, a reporting entity may elect to

reduce its gross financing position by

the par amount of the security received

in transactions: in which the

counterparty retains the right to

substitute securities; that are subject to

third party custodial relationships; or

that are hold-in-custody reverse

repurchase agreements.

(d) ‘‘Large position threshold’’ means,

with respect to a reportable position, the

dollar par amount such position must

equal or exceed in order for a reporting

entity to be required to submit a large

position report. The large position

threshold will be announced by the

Department and may vary with each

notice of request to report large position

information and with each specified

Treasury security. However, under no

circumstances will a large position

threshold be less than $2 billion.

(e) ‘‘Net fails position’’ is the net par

amount of ‘‘fails to receive’’ less ‘‘fails

to deliver’’ in the same security. The net

fails position, as reported, may not be

less than zero.

(f) ‘‘Net trading position’’ is the net

sum of the following respective

positions in the specific security issue:

(1) Cash/immediate net settled

positions;

(2) Net when-issued positions;

(3) Net forward positions, including

next-day settling;

(4) Net futures contract positions that

require delivery of the specific security;

and

(5) Net holdings of STRIPS principal

components of the security.

(g) ‘‘Recently-issued’’ means:

(1) With respect to Treasury securities

that are issued quarterly or more

frequently, the three most recent issues

of the security (e.g., in early April, the

January, February, and March 2-year

notes).

(2) With respect to Treasury securities

that are issued less frequently than

quarterly, the two most recent issues of

the security.

(3) With respect to a reopened

security, the entire issue of a reopened

security (older and newer portions)

based on the date the reopened security

is reissued by the Department (or

scheduled to be reissued for whenissued securities).

(4) For all Treasury securities, a

security announced to be issued or

auctioned but unissued (when-issued),

starting from the date of the issuance

announcement. The most recent issue of

the security is the one most recently

announced.

(h) ‘‘Reportable position’’ is the sum

of the net trading positions, gross

financing positions and net fails

positions in a specified issue of

Treasury securities collectively

controlled by a reporting entity.

(i) ‘‘Reporting entity’’ means any

corporation, partnership, person or

other entity and its affiliates. For the

purposes of this definition, an affiliate

is any: entity that is more than 50%

owned, directly or indirectly, by the

aggregating entity or by any other

affiliate of the aggregating entity; person

or entity that owns, directly or

indirectly, more than 50% of the

aggregating entity; person or entity that

owns, directly or indirectly, more than

50% of any other affiliate of the

aggregating entity; or entity, a majority

of whose board of directors or a majority

of whose general partners are directors

or officers of the aggregating entity or

any affiliate of the aggregating entity.

(1) Subject to the conditions

prescribed in Appendix A, one or more

aggregating entities, either separately or

together with one or more other

aggregating entities, may be recognized

as a separate reporting entity. Any entity

that previously has received recognition

from the Treasury as a separate bidder

in Treasury auctions pursuant to

Appendix A of 31 CFR Part 356 is also

recognized as a separate reporting entity

without further action.

(2) Notwithstanding this definition,

any persons or entities that intentionally

act together with respect to the investing

in, retention of, or financing of,

Treasury securities are considered,

collectively, to be one reporting entity.

§ 420.3 Reporting.

(a) A reporting entity is subject to the

reporting requirements of this section

only when its reportable position equals

or exceeds the large position threshold

specified by the Department for a

specific Treasury security issue. The

Department shall provide notice of such

threshold by issuance of a press release

and subsequent publication of the

notice in the Federal Register. Such

notice will identify the Treasury

security issue to be reported; the date or

dates (as of close of business) for which

the large position information must be

reported; and the applicable large

position threshold for that issue. It is the

responsibility of a reporting entity to

take reasonable actions to be aware of

such a notice.

(b) A reporting entity shall select one

entity from among its aggregating

entities (i.e., the designated filing entity)

as the entity designated to compile and

file a report on behalf of the reporting

entity. The designated filing entity shall

be responsible for filing any large

position reports in response to a notice

issued by the Department and for

maintaining the additional records

prescribed in the applicable paragraph

of § 420.4.

(c) (1) In response to a notice issued

under paragraph (a) of this section

requesting large position information, a

reporting entity with a reportable

position that equals or exceeds the

specified large position threshold stated

in the notice shall compile and report

the amounts of the reporting entity’s

reportable position, as follows:

(i) net trading position comprising:

(A) cash/immediate net settled

positions,

(B) net when-issued positions,

(C) net forward positions, including

next-day settling,

(D) net futures contracts that require

delivery of the specific security, and

(E) net holdings of STRIPS principal

components of the security;

(ii) gross financing position; and

(iii) net fails position.

(2) The large position report should

include the following two additional

items as memoranda:

(i) A total that includes the amounts

of securities delivered through

repurchase agreements, securities

loaned, securities pledged, and

collateralized loans and other securities

deliveries. This total should not be

reflected in the gross financing position;

and

(ii) If the reporting entity has elected

to exercise the option available in
65228 Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules

§ 420.2(c) to reduce the amount of the

gross financing position by the par

amount of securities received but over

which the reporting entity did not have

effective control, the amount not

included. The total amount of reduction

should be deducted from the gross

financing position prior to determining

the reportable position.

(3) An illustration of a sample report

is contained in Appendix B. Each of the

net trading position elements shall be

netted and reported as the applicable

positive or negative number (or zero).

The gross financing position and net

fails position should each be reported as

a single entry. If the amount of the net

fails position is zero or less, report zero.

All of these items should be reported in

the order specified above. All position

amounts and their components should

be reported at par in millions of dollars.

(4) All balances must be reported as

of the close of business of the reporting

date(s) specified in the notice.

(5) Each submitted report must

include the following administrative

information in addition to the reportable

position: the name of the reporting

entity, the address of the principal place

of business, the name and address of the

designated filing entity, the Treasury

security that is being reported, the

CUSIP number, the report date or dates

for which information is being reported,

the date the report was submitted, the

name and telephone number of the

person to contact regarding information

reported, and the name and position of

the authorized individual submitting

this report. The report must also be

signed by the authorized individual,

who must be one of the following: the

chief financial officer, the chief

operating officer, the chief executive

officer, or the managing partner or

equivalent of the designated filing

entity. The designated filing entity must

also include in its report, immediately

preceding the signature, a statement of

certification as follows:

The reporting entity submitting this report

and the person(s) by whom it is executed

hereby certify that all information contained

in the report is accurate and complete and

that the reporting entity is in compliance

with the requirements of 17 CFR Part 420.

(6) The report must be filed before

noon Eastern time on the second

business day following issuance of the

press release.

(d) A report to be filed pursuant to

paragraph (c) will be considered filed

when received by the Federal Reserve

Bank of New York. The report may be

filed in any manner acceptable to the

Federal Reserve Bank of New York.

(e) A reporting entity that has filed a

report pursuant to paragraph (c) shall, at

the request of the Department or the

Federal Reserve Bank of New York,

timely provide any supplemental

information pertaining to such report.

§ 420.4 Recordkeeping.

(a)(1) Notwithstanding the provisions

of paragraphs (b) and (c) of this section,

an aggregating entity must make and

maintain records pursuant to this part as

of its effective date, but only if the

aggregating entity has controlled a

portion of its reporting entity’s

reportable position in any Treasury

security when such reportable position

of the reporting entity has equaled or

exceeded the minimum large position

threshold specified in § 420.2(d) (i.e., $2

billion) during the prior two-year period

ending [90 days after publication of the

final rule]. Subsequent to the effective

date, an aggregating entity that controls

a portion of its reporting entity’s

reportable position in a recently-issued

Treasury security, when such reportable

position of the reporting entity equals or

exceeds the minimum large position

threshold, shall be responsible for

making and maintaining the records

prescribed in this part.

(2) In the case of a reporting entity

whose reportable position in any

Treasury security has equaled or

exceeded the minimum large position

threshold during the prior two-year

period ending [90 days after publication

of the final rule], each such reporting

entity’s designated filing entity shall

submit a letter to the Federal Reserve

Bank of New York certifying that it has

in place, or will have in place by the

effective date, a recordkeeping system

(including policies and procedures)

capable of making, verifying the

accuracy of, and preserving the records

required pursuant to this section.

(3) The letter specified in paragraph

(a)(2) of this section must be signed by

one of the following: the chief financial

officer, the chief operating officer, the

chief executive officer, or the managing

partner or equivalent of the designated

filing entity and must be received by the

Federal Reserve Bank of New York no

later than [120 days after publication of

the final rule].

(b) Records to be made and preserved

by entities that are subject to the

recordkeeping provisions of the

Commission, the Department, or the

appropriate regulatory agencies for

financial institutions. As an aggregating

entity, compliance by a registered

broker or dealer, registered government

securities broker or dealer, noticed

financial institution, depository

institution that exercises investment

discretion, registered investment

advisor, or registered investment

company with the applicable

recordkeeping provisions of the

Commission, the Department, or the

appropriate regulatory agencies for

financial institutions shall constitute

compliance with this section, provided

that if such entity is also the designated

filing entity it:

(1) Makes and keeps copies of all large

position reports filed pursuant to this

part;

(2) Makes and keeps supporting

documents or schedules used to

compute data for the large position

reports filed pursuant to this part;

(3) Makes and keeps a chart showing

the organizational entities that are

aggregated (if applicable) in determining

a reportable position; and

(4) With respect to recordkeeping

preservation requirements that contain

more than one retention period,

preserves records required by

paragraphs (b)(1)-(3) of this section for

the longest record retention period of

applicable recordkeeping provisions.

(c) Records to be made and kept by

other entities. (1) An aggregating entity

that is not subject to the provisions of

paragraph (b) of this section shall make

and preserve a journal, blotter, or other

record of original entry containing an

itemized record of all transactions that

fall within the definition of a reportable

position, including information showing

the account for which such transactions

were effected and the following

information pertaining to the

identification of each instrument: the

type of security, the par amount, the

CUSIP number, the trade date, the

maturity date, the type of transaction

(e.g., a reverse repurchase agreement),

and the name or other designation of the

person from whom sold or purchased.

(2) If such aggregating entity is also

the designated filing entity, then in

addition it shall make and preserve the

following records:

(i) copies of all large position reports

filed pursuant to this part;

(ii) supporting documents or

schedules used to compute data for the

large position reports filed pursuant to

this part; and

(iii) a chart showing the

organizational entities that are

aggregated (if applicable) in determining

a reportable position.

(3) With respect to the records

required by paragraphs (c) (1) and (2) of

this section, each such aggregating

entity shall preserve such records for a

period of not less than six years, the first

two years in an easily accessible place.

If an aggregating entity maintains its

records at a location other than its

principal place of business, the

aggregating entity must maintain an
Federal Register / Vol. 60, No. 242 / Monday, December 18, 1995 / Proposed Rules 65229

index that states the location of the

records, and such index must be easily

accessible at all times.

§ 420.5 Effective Date.

The provisions of this part, except for

§ 420.4(a), shall be first effective on [180

days from the date of publication of the

final rule. If the date does not fall on the

last day of the month, then move the

date to the end of the month.].

Appendix A to Part 420—Separate Reporting

Entity

Subject to the following conditions, one or

more aggregating entity(ies) (e.g., parent or

subsidiary) in a reporting entity, either

separately or together with one or more other

aggregating entity(ies), may be recognized as

a separate reporting entity. All of the

following conditions must be met for such

entity(ies) to qualify for recognition as a

separate reporting entity:

(1) Such entity(ies) must be prohibited by

law or regulation from exchanging, or must

have established written internal procedures

(i.e., Chinese walls) designed to prevent the

exchange of information related to

transactions in Treasury securities with any

other aggregating entity;

(2) Such entity(ies) must not be created for

the purpose of circumventing these large

position reporting rules;

(3) Decisions related to the purchase, sale

or retention of Treasury securities must be

made by employees of such entity(ies).

Employees of such entity(ies) who make

decisions to purchase or dispose of Treasury

securities must not perform the same

function for other aggregating entities; and

(4) The records of such entity(ies) related

to the ownership, financing, purchase and

sale of Treasury securities must be

maintained by such entity(ies). Those records

must be identifiable—separate and apart from

similar records for other aggregating entities.

To obtain recognition as a separate

reporting entity, each aggregating entity or

group of aggregating entities must request

such recognition from the Department

pursuant to the procedures outlined in

§ 400.2(c) of this title. Such request must

provide a description of the entity or group

and its position within the reporting entity,

and provide the following certification:

‘‘[Name of the entity(ies)] hereby certifies

that to the best of its knowledge and belief

it meets the conditions for a separate

reporting entity as described in Appendix A

to 17 CFR part 420. The above named entity

also certifies that it has established written

policies or procedures, including ongoing

compliance monitoring processes, that are

designed to prevent the entity or group of

entities from:

‘‘(1) Exchanging any of the following

information with any other aggregating entity

(a) positions that it holds or plans to acquire

in a Treasury security; (b) investment

strategies that it plans to follow regarding

Treasury securities; and (c) financing

strategies that it plans to follow regarding

Treasury securities, or

‘‘(2) In any way intentionally acting

together with any other aggregating entity

with respect to the purchase, sale, retention

or financing of Treasury securities.

‘‘The above-named entity agrees that it will

promptly notify the Department in writing

when any of the information provided to

obtain separate reporting entity status

changes or when this certification is no

longer valid.’’

Any entity that previously has received

recognition as a separate bidder in Treasury

auctions from the Department pursuant to 31

CFR Part 356 is also recognized as a separate

reporting entity without further action.

Appendix B to Part 420—Sample Large

Position Report.

Formula for Determining a

Reportable Position

[$ Amounts in millions at par value]

Date For Which Information Is

Being Reported: lll

1. Cash/Immediate Net Settled

Positions ................................... $ll

2. Net When-Issued Positions for

To-Be-Issued and Reopened Issues ........................................... +$ll

3. Net Forward Settling Positions

Including Next Day Settling .... +$ll

4. Net Positions in Futures Contracts Requiring Delivery of

the Specific Security ................ +$ll

5. Net STRIPS Principal Components of the Specific Security . +$ll

6. Gross Financing Position (Includes total of securities received through reverse repos,

bonds borrowed, securities received in pledge,

collateralized credit extended.) +$ll

7. Net Fails Position (Fails to Receive less Fails to Deliver. If

equal to or less than 0, report

0.) .............................................. +$ll

8. Total Reportable Position ....... =$ll

Formula for Determining a

Reportable Position—Continued

[$ Amounts in millions at par value]

Memorandum #1: Report one

total which includes the gross

par amounts of securities delivered through repurchase

agreements, securities loaned,

securities pledged, and

collateralized loans. Not included in item #6 (Gross Financing Position) as reported

above. ........................................ $ll

Memorandum #2: If the optional

exclusion was taken to reduce

the amount of the Gross Financing Position by the

amount of securities received

but that the reporting entity

did not have effective control

over (e.g., third party custodial

structures, hold-in-custody relationships, counterparty retained contractual right to substitute), indicate the total

amount of reduction here. Deduct from item #6 (Gross Financing Position). .................... $ll

Administrative Information To Be Provided

in the Report

Name of Reporting Entity:

Address of Principal Place of Business:

Name and Address of the Designated Filing

Entity:

Treasury Security Reported on:

CUSIP Number:

Date or Dates for Which Information Is

Being Reported:

Date Report Submitted:

Name and Telephone Number of Person to

Contact Regarding Information Reported:

Name and Position of Authorized

Individual Submitting this Report (Chief

Financial Officer, Chief Operating Officer,

Chief Executive Officer, or Managing Partner

or Equivalent of Designated Filing Entity):

Statement of Certification: ‘‘The reporting

entity submitting this report and the

person(s) by whom it is executed hereby

certify that all information contained in the

report is accurate and complete and that the

reporting entity is in compliance with the

requirements of 17 CFR Part 420.’’

Signature of Authorized Person Named

Above:

* * * * *

Date:

Darcy Bradbury,

Deputy Assistant Secretary (Federal Finance).

[FR Doc. 95–30766 Filed 12–14–95; 1:59 pm]

BILLING CODE 4810–39–W