Interest Rate:TheInterest Rateon the floating rate securities would be theIndex Rateplus theSpread.
Minimum Interest Rate:The floating rate securities would have aMinimum Interest Rateof zero. A negativeInterest Ratecould lead to an interest payment by the investor to Treasury, which could have operational and tax consequences. ThisMinimum Interest Ratefeature 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
8An example of this premium calculation can be found in Appendix B.
9Treasury 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 aMinimum Interest Rateof zero percent (or some other level). Treasury would also appreciate comments on whether there is an alternative to theMinimum Interest Ratestructure that would be preferable.
Minimum Spread:Treasury would set aMinimum Spreadof 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 appropriateMinimum Spread.
Interest Accrual:Interest will accrue on floating rate securities at theInterest Rate,with a dailyReset Frequency,during theAccrual Period.The interest rate for a non-Business Daywill be based on the most recent interest rate observed for the priorBusiness 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 positiveSpread,expressed in one-tenth of one basis point,10
to be added to theIndex Rate.The securities would settle at par, provided that the auction clears above theMinimum Spread.If the auction clears below theMinimum Spreadof zero, then theSpreadon the floating rate security becomes zero and the auction clearing spread is used as theDiscount Marginfor determining the settlement price.11
10A basis point is equal to one hundredth of a percentage point.
11An 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 taxliabilities. 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 initialIndex Rateis 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 theSpreadwill have already been established, we anticipate bids in a reopening would be in terms ofDiscount Margin,
as defined in Appendix B, carried out to one-tenth of a basis point. Existing floating rate securities trade on aDiscount Marginbasis in the secondary market. Because reopenings would not settle on a quarterly interestPayment Date,successful bidders in reopening auctions would be required to pay accrued interest. Please comment on any objection to using aDiscount Marginfor auction reopenings or any issues with the proposed pricing formulas found in Appendix B.
12See 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®, 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 securities.
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 security.
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 securitiesStrips Eligible.However, we welcome comments on whether a floating rate interest strip would appeal to investors and how it would be priced.
13Stripping 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.
See26 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).
BILLING CODE 4810-39-P
BILLING CODE 4810-39-C
Appendix B—PRICING FORMULAS AND EXAMPLES
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 establishedSpread.
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.