Bureau of the Public Debt, Fiscal Service, Department of the Treasury.
Advance notice of proposed rulemaking.
The Department of the Treasury (“Treasury,” “We,” or “Us”) is issuing this Advance Notice of Proposed Rulemaking to solicit comments on potential modifications to the timing of the calculation and reporting of the net long position (“NLP”) in marketable Treasury securities auctions. In addition, we are asking for comments on the application of the 35 percent award limit and on a potential change in the NLP reporting threshold. The purpose of any such modifications would be to more effectively meet the objectives of these two areas of the auction rules while ensuring that participation in Treasury securities auctions remains both strong and broad, with minimal compliance costs for participants. Realization of these goals will help us attain the lowest possible borrowing costs over time. We are specifically interested in comments on alternatives that change the time as of which the NLP is calculated (the “NLP as-of time”) and the NLP reporting deadline, as well as alternatives that would permit us to replace or eliminate the NLP reporting requirement.
Submit comments on or before June 28, 2002.
You may send hard copy comments to: Government Securities Regulations Staff, Bureau of the Public Debt, 999 E Street NW., Room 315, Washington, DC 20239. You may also Start Printed Page 20935send us comments by e-mail at email@example.com. When sending comments by e-mail, please use an ASCII file format and provide your full name and mailing address. You may download this advance notice, and review the comments we receive, from the Bureau of the Public Debt's website at www.publicdebt.treas.gov. The advance notice and comments will also be available for public inspection and copying at the Treasury Department Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. To visit the library, call (202) 622-0990 for an appointment.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Lori Santamorena (Executive Director), Chuck Andreatta (Senior Financial Advisor), or Lee Grandy (Associate Director), Bureau of the Public Debt, Government Securities Regulations Staff, (202) 691-3632.End Further Info End Preamble Start Supplemental Information
The Uniform Offering Circular, in conjunction with the offering announcement for each auction, provides the terms and conditions for the sale and issuance of marketable Treasury bills, notes and bonds to the public. One of these terms (rules) is the requirement that a bidder in an auction report its net long position (“NLP”) if its NLP in the security being auctioned plus its bids in the auction meet or exceed a certain dollar-amount threshold stated in the auction offering announcement. The reporting dollar-amount threshold currently is $1 billion for Treasury bills and $2 billion for Treasury notes and bonds. Currently, a bidder must determine its NLP as of one-half hour prior to the deadline for receipt of competitive bids; if it meets or exceeds the reporting threshold as of that time, the bidder must report its NLP by the competitive bidding deadline.
A bidder's reported NLP is a component of our auction award limit, which is 35 percent of the offering amount less the bidder's reported NLP. For example, assume a bidder has an NLP of $2 billion, and the 35 percent award limit for a particular auction is $4 billion. If the bidder is successful in the auction and as a result of its bids alone would receive $4 billion, its award will be cut back to $2 billion.
In this notice, we first describe these rules and their rationale, and why we are considering a change. Then we describe various alternatives on which we are seeking comment.
I. The 35 Percent Limit and Net Long Position Reporting
The 35 percent rule limits auction awards for any one competitive bidder to 35 percent of the total amount offered to the public in a particular auction, less the bidder's reported NLP. This rule ensures that awards in our auctions are distributed to a number of auction participants. This goal of broad distribution is intended to encourage participation by a significant number of competitive bidders in each auction. Broad participation keeps our borrowing costs to a minimum, helps ensure that Treasury auctions are fair and competitive, and makes it less likely that ownership of Treasury securities will become overly concentrated.
A key component of the 35 percent award limit is the NLP calculation. If a bidder has a reportable NLP, we subtract it from the 35 percent award limit in determining the bidder's maximum award amount for the auction.
The NLP is generally the amount of the security being auctioned that a bidder has obtained, or has arranged to obtain, outside of the auction in the secondary market. The term “net long” refers to the extent to which an investor has bought (or has agreed to buy) more of a security than it has sold (or has agreed to sell). For example, if an investor has bought $900 million of a security in the when-issued market, and it has sold $300 million of the same security in the when-issued market, it has a net long position of $600 million in that security, assuming it has no other positions. The components of the NLP are intended to capture the various ways that a bidder can acquire a Treasury security.
A competitive bidder is required to report its NLP if the sum of its bids plus its NLP equals or exceeds the NLP reporting threshold, currently $2 billion for Treasury notes and bonds and $1 billion for Treasury bills  (unless otherwise stated in the offering announcement). In addition, if the sum of its bids equals or exceeds the NLP reporting threshold, but it has no position or has a net short position, it must report a zero.
A bidder must determine its NLP as of one-half hour (e.g., 12:30 p.m.) prior to the competitive bidding deadline (e.g., 1 p.m.). This is a “snapshot” or point-in-time measurement. If a bidder's position changes during the final half-hour period before the auction, this does not affect the amount to be reported under our rules. Currently, we give bidders 30 minutes to calculate and report their NLPs primarily because of the operational complexities involved in aggregating this information when a bidder has numerous affiliates.
The NLP reporting requirement is not fully effective in encouraging broad distribution of Treasury securities, however, because of this half-hour time lag between the NLP as-of time and the competitive bidding deadline. Because a bidder's NLP can change significantly during this time period, the reported NLP may not provide an accurate, or even approximate, measure of a bidder's position at the time that a bidder actually submits its bids. As a result, a bidder's award may be cut back to the 35 percent limit based on NLP information that no longer reflects the bidder's actual NLP. Conversely, a bidder's award may not be cut back if it builds a large position in the security being auctioned between the NLP as-of time and the competitive bidding deadline.
Moreover, our experience with the NLP rule in general is that participants occasionally have operational difficulties in compiling and reporting NLPs. There may be other ways to achieve the goals of the rule while reducing these difficulties. For this reason, we are also more fundamentally reconsidering the rule.
We asked the Treasury Borrowing Advisory Committee of The Bond Market Association  to consider an alternative to address this issue in January 2002. The alternative was to separate NLP reporting from auction bidding by having bidders determine their NLPs as of the competitive bidding deadline, usually 1 p.m., and report them after the close of the auction. Under this scenario, Treasury would base its auction awards solely on the amounts bid, and bidders would be responsible for ensuring that their bids, combined with their NLPs, did not result in their exceeding the 35 percent award limit.
The Committee responded that this alternative, “while somewhat more burdensome to the bidder,” was “manageable practically,” but was concerned about shifting the burden of Start Printed Page 20936enforcing the 35 percent award limit from the Treasury to bidders. Under this “self policing” scenario, the Committee contended, bidders would be likely to reduce the amount of their auction bids leading to smaller bid/cover ratios and possibly weaker auction results.
We also invited suggestions from the public during the February 2002 quarterly refunding announcement on ways to improve the NLP rule. In addition to separating the NLP reporting from auction bidding, we stated that we were also considering moving the NLP as-of time closer to the competitive bidding deadline.
We received one response on this topic, from The Bond Market Association. The Association recommended, among other things, that Treasury refrain from making any major modifications to the current NLP reporting requirements. Nevertheless, the Association suggested that we consider three relatively “minor” rule changes: “(i) increasing the current NLP reporting threshold to 35 percent of the issuance amount; (ii) requiring bidders to calculate their NLP as of 12:40 p.m. rather than 12:30 p.m.; and (iii) instructing bidders not to report any NLP when they are above the applicable reporting threshold but their NLP is either zero or a negative number.” We also received other responses, but not on this topic.
We are considering, and inviting public comments on, four alternatives to reach our goal of maintaining strong and broad participation in fair and competitive Treasury auctions while minimizing the costs of compliance with the auction rules. Realization of this goal will help us attain the lowest possible borrowing costs over time. In addition, we are inviting comments on potential changes to the NLP reporting threshold amount.
Substantive rule changes (timing or fundamental). The first two alternatives maintain the requirement to report the NLP, but modify the time that it must be determined or reported, or both, to make the reporting process more effective. The third alternative would eliminate the NLP reporting requirement, and the last would keep it as it is.
Alternative 1. Reduce the half-hour interval between the NLP as-of time and the competitive bidding deadline. For example, would the NLP reporting rule be more effective if the as-of time were moved closer to the competitive bidding deadline (e.g., 1:00), such as 12:40 or 12:45? Would this modification be feasible operationally? We specifically invite comments on the optimal NLP determination time.
Alternative 2. Make the NLP as-of time the same as the competitive bidding deadline, with the NLP reporting time to follow (for example, one-half hour later). Bidders would be responsible for ensuring that their bids plus their positions, if they are net long, do not exceed the 35 percent award limit. For example, the NLP as-of time and the competitive bidding deadline could both be set at 1:00, with NLPs to be reported by 1:30. Violations of the rule could be handled as follows. First, to encourage aggressive bidding and to alleviate bidder concerns about accidental breaches of the NLP rule, in the case of most minor or technical errors there would be minimal or no sanction. Second, we would promulgate a new rule to handle more serious rule violations, namely those with a potential impact on the liquidity of the Treasury securities market (e.g., significantly exceeding the 35 percent limit). The NLP rule is premised on the conviction that one bidder's taking the bulk of an auction may discourage other bidders from bidding aggressively in future auctions, or even from bidding at all. In either case, the liquidity of Treasury securities would diminish, and Treasury's long-term borrowing costs would rise. This new rule would allow us to impose liquidated damages based on Treasury's increased borrowing costs. Third, in the case of the most serious violations, Treasury would employ existing enforcement mechanisms prohibiting the bidder from participating in future auctions for its own account, for the account of others, or both, as well as pursuing criminal and civil remedies under the Federal securities and other laws.
Alternative 3. Eliminate the NLP reporting requirement, and either maintain or reduce the 35 percent limit. Treasury would rely on its Large Position Reporting rules, and other mechanisms to monitor the market and address concentrations of ownership. This would reduce the operational difficulties and burdens bidders face in reporting their NLPs near the same time that they also are determining the amounts and yields at which they are bidding. The downside for the Treasury market (and thus ultimately for the taxpayer) would be a more limited ability for Treasury to control ownership concentration in the Treasury market through the auction process.
Alternative 4. Retain both the 35 percent limit and the NLP as-of and reporting timeframes as they exist now.
Potential change to NLP reporting threshold amount. Currently a bidder must report its NLP if its bids plus its NLP equals or exceeds $1 billion for bills, or $2 billion for notes and bonds (unless otherwise stated in the auction offering announcement). As noted above, if a bidder either has no position or has a net short position but the total of all of its bids equals or exceeds the NLP threshold amount for a particular auction, the bidder must report a zero as its NLP.
We are considering changing the NLP reporting threshold to equal the actual 35 percent award limit for each auction, which we would provide on the offering announcement. Bidders whose bids plus NLPs equal or exceed the limit would be required to report their positions. For example, if the 35 percent award limit for a particular auction is $3 billion, and the total of a bidder's bids is $2.5 billion and its NLP is $1 billion, the bidder would have to report its $1 billion NLP. Bidders whose bids plus NLPs did not equal or exceed the limit would not be required to report any positions. Bidders whose total bids equal or exceed the limit but either have no position or a net short position would not have to report a zero as their NLP. We are requesting comment on this alternative because we are considering making this change regardless of whether or not we implement any modifications to the NLP as-of or reporting timeframes.
In addition to inviting comments on all of the above alternatives, we also invite comments on any other alternatives.
It has been determined that this is not a significant regulatory action for purposes of Executive Order 12866.Start List of Subjects
List of Subjects in 31 CFR Part 356
- Federal Reserve System
- Government Securities
Dated: April 24, 2002.
Donald V. Hammond,
Fiscal Assistant Secretary.
1. The Uniform Offering Circular was published as a final rule on January 5, 1993 (58 FR 412). The circular, as amended, is codified at 31 CFR part 356.Back to Citation
4. See 31 CFR 356.13(b) for details on the components of the net long position. See also 66 FR 56759 (November 13, 2001), which provided an optional exclusion amount in the NLP calculation for reopenings.Back to Citation
7. The Committee, which is comprised of securities industry representatives, provides periodic advice to Treasury on debt management issues. See, Pub. L. 103-202, Sec. 202, 107 Stat. 2356, 31 U.S.C. 3121 note.Back to Citation
8. Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of The Bond Market Association (dated January 30, 2002). The report is available at www.treas.gov. See also Minutes of the Meeting of the Treasury Borrowing Advisory Committee of The Bond Market Association (January 29, 2002).Back to Citation
9. February 2002 Quarterly Refunding Statement (January 30, 2002).Back to Citation
10. Letter from Eric L. Foster, Vice President and Assistant General Counsel, The Bond Market Association, to Brian C. Roseboro, Assistant Secretary for Financial Markets, dated March 13, 2002. The letter comments on some of the alternatives in this notice. It is available on The Bond Market Association website at www.bondmarkets.com.Back to Citation
[FR Doc. 02-10547 Filed 4-25-02; 10:29 am]
BILLING CODE 4810-39-P