[Federal Register Volume 77, Number 234 (Wednesday, December 5, 2012)]
[Proposed Rules]
[Pages 72278-72283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29307]

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Fiscal Service

31 CFR Part 356

[Docket No. BPD-2012-0002]

Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, 
and Bonds

AGENCY: Office of the Assistant Secretary for Financial Markets; Fiscal 
Service, Treasury.

ACTION: Advance Notice of Proposed Rulemaking.


SUMMARY: The Department of the Treasury (``Treasury'') intends to issue 
a new type of marketable security with a floating rate interest 
payment. We are issuing this Advance Notice of Proposed Rulemaking to 
solicit comments on the design details, terms and conditions, and other 
features of this new type of security. We also invite other comments 
relevant to the issuance of this new security.

DATES: Submit comments on or before January 22, 2013.

ADDRESSES: Comments may be submitted electronically through the Federal 
eRulemaking Portal at http://www.regulations.gov, in accordance with 
the instructions. Comments will be available at http://www.regulations.gov as submitted, unless modified for technical 
reasons. Accordingly, your comments will not be edited to remove any 
identifying or contact information. You may download this notice from 
http://www.regulations.gov or the Bureau of the Public Debt's Web site 
at http://www.treasurydirect.gov. Questions about submitting comments 
should be directed to Lori Santamorena at (202) 504-3632. You may also 
send paper comments to Bureau of the Public Debt, Government Securities 
Regulations Staff, 799 9th Street NW., Washington, DC 20239-0001. 
Comments received will be available for public inspection and copying 
at the Treasury Department Library, Main Treasury Building, 1500 
Pennsylvania Avenue NW., Washington, DC 20220. To visit the library, 
call (202) 622-0990 for an appointment. In general, comments received, 
including attachments and other supporting materials, are part of the 
public record and are available to the public. Do not submit any 
information in your comments or supporting materials that you consider 
confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: Colin Kim, Director, Office of Debt 
Management, Office of the Assistant Secretary for Financial Markets, at 
[email protected].

SUPPLEMENTARY INFORMATION: The Secretary of the Treasury is authorized 
under chapter 31 of title 31, United States Code, to issue United 
States obligations and to offer them for sale under such terms and 
conditions as the Secretary may prescribe. The Uniform Offering 
Circular, in conjunction with the announcement for each auction, 
provides the terms and conditions for the sale and issuance of 
marketable Treasury bills, notes, and bonds in an auction to the 

    \1\ The Uniform Offering Circular is codified at 31 CFR part 

    Treasury intends to issue a new type of marketable security with a 
floating rate interest payment. We are currently considering two Index 
Rates \2\ for this purpose, a Treasury bill rate and a Treasury general 
collateral repurchase agreement rate. Through this notice, we are 
soliciting comments on the design details of the planned floating rate 
security and which index (those mentioned above or another index) 
should result in Treasury attaining the lowest borrowing cost over time 
for government financing needs. At the end of this notice is a 
hypothetical term sheet (Appendix A) and a link to proposed formulas 
(Appendix B) applicable to the structure being considered.

    \2\ All capitalized, italicized words are defined in the 

    This Advance Notice of Proposed Rulemaking is not an offering of 
securities and any of the currently contemplated features of floating 
rate securities described in this notice may change. The terms and 
conditions of particular securities that Treasury may offer will be 
provided in the Uniform Offering Circular and the applicable offering 
    Treasury intends to issue floating rate securities to assist us in 
our mission of borrowing at the lowest cost over time, as well as to 
manage the maturity profile of our marketable debt outstanding, expand 
the investor base, and provide a financing tool that gives debt 
managers additional flexibility. We plan to integrate floating rate 
securities into our ongoing efforts to extend the maturity profile of 
our marketable debt. We decided to establish a floating rate securities 
program after carefully considering the long-term supply and demand 
dynamics for floating rate securities and with significant consultation 
with market participants.\3\

    \3\ In its February and May 2012 Quarterly Refunding Statements, 
Treasury requested input on the potential issuance of floating rate 
securities. In addition, Treasury has discussed the topic with the 
Treasury Borrowing Advisory Committee, which is a federal advisory 
committee sponsored by the Securities Industry and Financial Markets 
Association, and with the primary dealers. The primary dealers serve 
as trading counterparties of the Federal Reserve Bank of New York in 
its implementation of monetary policy. Primary dealers are also 
required to participate in all Treasury marketable securities 

    We issued a Notice and Request for Information \4\ on March 19, 
2012, to solicit market input on a possible floating rate security, 
particularly concerning the demand for the product, how the security 
should be structured, its liquidity, the most appropriate index, and 
any operational issues that should be considered relating to the 
issuance of this type of debt. Based on the responses to that notice, 
Treasury announced in its August 2012 Quarterly Refunding Statement 
that it plans to develop a floating rate securities program to 
complement the existing suite of securities it issues and to support 
our broader debt management objectives. The first floating rate 
securities auction is estimated to be at least one year away. This 
timeframe reflects our best estimate for implementing required auction 
regulations and computer systems modifications.

    \4\ 77 FR 16116 (March 19, 2012).

    Index Rate: No consensus exists among market participants on the 
ideal index for Treasury's floating rate securities program. Many 
believe, however, that the Index Rate should reference a liquid, traded 
rate with transparent pricing.
    We are requesting comments on which Index Rate should result in 
Treasury attaining the lowest cost of financing over time. 
Specifically, we are considering (1) the 13-week Treasury bill auction 
High Rate (stop out rate) converted into a simple ACT/360 interest rate 
\5\ (the ``Treasury Bill Yield'') and (2) a Treasury general collateral 
overnight repurchase agreement rate (the ``Treasury GC Rate''). We also 
request comments on whether another index would better serve the 
desired purpose.

    \5\ An example of this conversion is provided in Appendix B.

    If Treasury's floating rate securities program were to be indexed 
to the Treasury Bill Yield, it would reference the converted auction 
stop out rate of 13-week Treasury bills, currently auctioned weekly. 
Under the current auction schedule, the Index Rate would change weekly, 
on Thursday, which is the settlement day for 13-week Treasury bills 
(non-Business Days excepted). Treasury requests comments on whether the 
conversion of the High Rate should be done on an ACT/360, ACT/365 or

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some other basis. Treasury would also appreciate comments on whether 
the Treasury Bill Yield should reference a Treasury bill maturity other 
than the 13-week bill.
    The other Index Rate we are considering for our floating rate 
securities program is a Treasury General Collateral (GC) Rate. 
Currently, approximately $650 billion \6\ of Treasury securities are 
used as collateral in tri-party overnight loans each day. Money is lent 
to borrowers, collateralized by Treasury securities, at the overnight 
Treasury GC Rate. This rate represents transactions in a highly liquid 
market. While a Treasury GC Rate representing all tri-party repurchase 
agreement (repo) transactions currently is not published, the 
Depository Trust & Clearing Corporation (DTCC) publishes the Treasury 
General Collateral Finance (GCF) rate,\7\ which represents a subset of 
tri-party Treasury GC repo transactions. Please comment on the relative 
merits of using a broader tri-party Treasury GC rate as compared to a 
narrower subset, such as DTCC's Treasury GCF index, as the Index Rate. 
Please note that we are not considering the use of an index that 
represents tri-party repo transactions in any collateral other than 
Treasury securities.

    \6\ This amount is derived from publicly available tri-party 
repo statistics from the Federal Reserve Bank of New York. It is the 
approximated sum of volumes of U.S. Treasury securities collateral 
(including Strips) and Treasury GCF (adjusted for double-counting).
    \7\ For more information on the DTCC Treasury GCF rate please go 
to http://www.dtcc.com/products/fi/gcfindex/.

    Reset Frequency: With either Index Rate, we would structure the 
floating rate security with daily resets. If we were to select a rate 
indexed to the 13-week Treasury bill, the rate would reset daily but, 
given the current auction schedule, the rate would actually change no 
more than once a week, generally on Thursday. We would want to allow 
the Index Rate to reset daily to maintain flexibility in our future 
auction schedule.
    If we were to select a Treasury GC Rate as the Index Rate, the 
daily Reset Frequency would have a Determination Date of one Business 
Day prior. Given that most Treasury securities trade in the secondary 
market for settlement the next Business Day, referencing the previous 
Business Day would allow the accrued interest to be known at the time 
of the trade versus only on the settlement date.
    Regardless of choice of index, any forward trades settling beyond 
one business day could have unknown accrued interest. Please comment on 
whether this would present problems for market participants.
    Frequency of Interest Payments: Treasury would make Interest 
payments on its floating rate securities quarterly. This payment cycle 
is a departure from our semi-annual payment cycle. Most existing 
floating rate securities pay a quarterly interest payment and, given 
the non-compounding interest calculation currently being considered, a 
quarterly paying security seems to be the preferred structure. We 
welcome comments on a quarterly versus semi-annual, or other, payment 
    Lock Out Periods: The current convention in the floating rate 
securities market is for interest payments to be set five business days 
in advance of the Payment Dates. This standard practice dates back to 
the late 1980s. Investors requested the five business-day notice for 
operational purposes. Given technological advancements, we believe one 
Business Day notice of interest payments should suffice. Please comment 
on the appropriate length of the lock out period.
    Interest Rate: The Interest Rate on the floating rate securities 
would be the Index Rate plus the Spread.
    Minimum Interest Rate: The floating rate securities would have a 
Minimum Interest Rate of zero. A negative Interest Rate could lead to 
an interest payment by the investor to Treasury, which could have 
operational and tax consequences. This Minimum Interest Rate feature 
could increase the value of these securities in certain interest rate 
environments. We could capture this value at auction by allowing 
floating rate securities to be issued at a premium.8 9

    \8\ An example of this premium calculation can be found in 
Appendix B.
    \9\ Treasury announced at the August 2012 Quarterly Refunding 
that it is in the process of building the operational capabilities 
to allow for negative rate bidding in Treasury bill auctions, should 
we make the determination to allow such bidding in the future. No 
such determination has yet been made.

    We would like commenters to address the potential need for a 
Minimum Interest Rate of zero percent (or some other level). Treasury 
would also appreciate comments on whether there is an alternative to 
the Minimum Interest Rate structure that would be preferable.
    Minimum Spread: Treasury would set a Minimum Spread of zero on the 
floating rate securities to ensure that they are issued at a premium in 
certain interest rate environments. We would like comments on whether 
some other level is the appropriate Minimum Spread.
    Interest Accrual: Interest will accrue on floating rate securities 
at the Interest Rate, with a daily Reset Frequency, during the Accrual 
Period. The interest rate for a non-Business Day will be based on the 
most recent interest rate observed for the prior Business Day.
    Auction Technique: We would offer floating rate securities through 
a single-price auction. Competitive bids would be accepted in the form 
of a negative or positive Spread, expressed in one-tenth of one basis 
point,\10\ to be added to the Index Rate. The securities would settle 
at par, provided that the auction clears above the Minimum Spread. If 
the auction clears below the Minimum Spread of zero, then the Spread on 
the floating rate security becomes zero and the auction clearing spread 
is used as the Discount Margin for determining the settlement 

    \10\ A basis point is equal to one hundredth of a percentage 
    \11\ An example of this premium calculation can be found in 
Appendix B.

    Treasury bill competitive bids are expressed as a discount rate, in 
increments of one-half of a basis point. However, these securities have 
maturities of one year or shorter. Accepting bids in increments of one-
tenth of a basis point would be more reflective of our fixed rate 
notes, bonds, and TIPS programs, which are similar to the expected 
maturities of floating rate securities. We are interested in input from 
potential auction participants, as well as others, on this subject.
    All other auction rules for floating rate securities would be 
consistent with current rules. Please comment on any problems that 
could arise from using the same rules.
    Auction Frequency and Settlement: We contemplate issuing floating 
rate securities on a regular quarterly cycle, with potentially two re-
openings in subsequent months following the original quarterly auction. 
We would appreciate comments on whether the floating rate securities 
should settle mid-month (like the three-year and ten-year Treasury 
notes and the 30-year Treasury bond) or end-of-month (similar to the 
two-year, five-year, and seven-year Treasury notes). We believe that 
auctioning and settling floating rate securities in the same week as 
similar maturity fixed rate securities, such as the two-year note, may 
provide greater transparency for market participants seeking 
comparative pricing between floating rate and fixed rate securities. On 
the other hand, a mid-month settlement might be preferable to cash 
management investors as well as corporations with mid-month tax

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liabilities. Please comment on the relative merits of these settlement 
conventions or whether an alternative convention would be preferable.
    Section 356.24(c) of the Uniform Offering Circular states that, no 
later than the day after the auction, Treasury will provide notice of 
the amount to be charged (in principal and accrued interest) on the 
issue date. If the auction date is more than one day before the issue 
date, the amount of accrued interest for reopenings may not be known. 
That could be problematic if the initial Index Rate is not known by the 
day after the auction. We are considering changing this rule to state 
that we will provide this notification no later than the day before the 
issue date. Please comment on any operational issues this rule change 
might cause.
    Reopenings: As stated above, we may reopen floating rate 
securities, subject to the same Original Issue Discount tax rules that 
apply to existing Treasury securities. A reopening would also be 
accomplished by an auction. Because the Spread will have already been 
established, we anticipate bids in a reopening would be in terms of 
Discount Margin,\12\ as defined in Appendix B, carried out to one-tenth 
of a basis point. Existing floating rate securities trade on a Discount 
Margin basis in the secondary market. Because reopenings would not 
settle on a quarterly interest Payment Date, successful bidders in 
reopening auctions would be required to pay accrued interest. Please 
comment on any objection to using a Discount Margin for auction 
reopenings or any issues with the proposed pricing formulas found in 
Appendix B.

    \12\ See Appendix B.

    Also, we are requesting comments on whether the larger amount 
outstanding per issue that would result from having several reopenings 
is important for market liquidity, or whether it would be more 
important to issue a new floating rate security each month.
    Maturities: We intend to start our floating rate securities program 
with a two-year maturity. We anticipate strong demand from money market 
investors with weighted average portfolio constraints. A two-year 
maturity might also offer an appealing investment alternative for cash 
portfolios. We anticipate eventually issuing longer maturity securities 
and seek comment on the most appropriate maturity for both the initial 
and future phases of the program.
    Offering Amounts: We are requesting comments on the appropriate 
size of the initial floating rate security auctions and potential 
reopenings, and on whether it would be preferable for the initial 
auction size to be larger than reopening offering amounts.
    Book-Entry Form and Systems: The floating rate securities would be 
offered only in book-entry form. They would be issued and maintained in 
the commercial book-entry system operated by the Federal Reserve 
System, acting as fiscal agent for Treasury. We also would make 
floating rate securities available to be purchased through and held in 
TreasuryDirect[supreg], a system designed primarily to enable investors 
to hold their book-entry securities directly with Treasury.
    Eligible amounts for holding and transferring would be in minimums 
and multiples of $100 of original par value for floating rate 
    Eligible Collateral for Banks Holding Treasury Cash Deposits: We 
intend to make floating rate securities eligible as collateral for 
depository institutions that hold Treasury funds. Valuation for 
collateral purposes would depend on the precise structure of the 
    Stripping: Stripping \13\ a floating rate security is different 
from stripping a nominal fixed rate security because the future 
interest payments are unknown. We do not currently plan to make 
floating rate securities Strips Eligible. However, we welcome comments 
on whether a floating rate interest strip would appeal to investors and 
how it would be priced.

    \13\ Stripping means separating a security's interest and 
principal components so they can be traded separately.

    Taxation: Interest payments on floating rate securities would be 
included in the owner's taxable income when received or as accrued, in 
accordance with the owner's method of accounting for tax purposes. In 
general, the tax treatment of floating rate securities would be 
determined under the tax rules applicable to variable rate debt 
instruments.\14\ Relevant tax issues, if any, would be addressed before 
the first auction of these securities.

    \14\ See 26 CFR 1.1275-5.

    We invite comments on any other issues relevant to the sale and 
issuance of floating rate securities. After we consider the responses 
to this Advance Notice of Proposed Rulemaking, we intend to issue a 
final rule amending the Uniform Offering Circular. Because the rule 
would relate to public contracts and procedures for United States 
securities, the notice, public comment, and delayed effective date 
provisions of the Administrative Procedure Act are inapplicable under 5 
U.S.C. 553(a)(2).

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    The Discount Margin is the spread that would return a price of 
par if the existing floating rate security were being auctioned as a 
new issue. It is used to calculate the price (see formula in link 
below) of the floating rate security with an established Spread.
    A link to formulas: http://www.treasurydirect.gov/instit/statreg/auctreg/ANPRFRNformula.pdf.
    A link to examples: http://www.treasurydirect.gov/instit/statreg/auctreg/DMCalc.xlsm.
    Please note: These examples are for illustrative purposes only 
and are not meant to convey any decision with respect to rounding 
and/or truncation.

Matthew S. Rutherford,
Assistant Secretary for Financial Markets.

[FR Doc. 2012-29307 Filed 12-4-12; 8:45 am]