Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and Bonds, 46425-46445 [2013-18178]
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Vol. 78
Wednesday,
No. 147
July 31, 2013
Part II
Department of the Treasury
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Fiscal Service
31 CFR Part 356
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and
Bonds; Final Rule
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Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 356
[Docket No. Fiscal–BPD–2013–0001]
Sale and Issue of Marketable BookEntry Treasury Bills, Notes, and Bonds
Fiscal Service, Treasury.
Final rule.
AGENCY:
ACTION:
This final rule amends
Treasury’s marketable securities auction
rules to accommodate the public
offering of a new type of marketable
security with a floating rate interest
payment. In addition, the amendment
makes certain technical clarifications
and conforming changes.
DATES: Effective July 31, 2013.
ADDRESSES: Treasury has established a
docket for this action under Docket ID
Number Fiscal–BPD–2013–0001 in the
www.regulations.gov Web site. This
final rule is available for downloading
from www.treasurydirect.gov. It is also
available for public inspection and
copying at the Treasury Library, 1500
Pennsylvania Avenue NW., Annex,
Room 1020, Washington, DC 20220. To
visit the library, call (202) 622–0990 for
an appointment.
FOR FURTHER INFORMATION CONTACT: Lori
Santamorena, Executive Director, or
Chuck Andreatta, Associate Director,
Government Securities Regulations
Staff, Bureau of the Fiscal Service,
Department of the Treasury, (202) 504–
3632.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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I. Background
The Department of the Treasury
(‘‘Treasury’’) is issuing an amendment
to 31 CFR part 356 1 (the ‘‘Uniform
Offering Circular’’) to accommodate
offerings of a new type of marketable
security, referred to as a Treasury
floating rate note, whose index rate will
be indexed to 13-week Treasury bill
auction rates. Treasury views issuance
of floating rate notes as consistent with
its mission to borrow at the lowest cost
over time, manage the maturity profile
of our marketable debt outstanding,
expand the Treasury investor base, and
provide a financing tool that gives debt
managers additional flexibility.
Treasury decided to establish a floating
1 31 CFR part 356 is generally referred to as the
Uniform Offering Circular (UOC). The UOC,
together with the auction announcement for each
Treasury securities auction, sets out the terms and
conditions for the sale and issuance by Treasury to
the public of marketable Treasury bills, notes, and
bonds.
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rate note program after carefully
considering the long-term supply and
demand dynamics for these securities
and with significant consultation with
market participants.
Treasury floating rate notes will be
indexed to the most recent 13-week
Treasury bill auction High Rate 2 (stop
out rate), and converted to a simpleinterest money market yield computed
on an actual/360 basis, subject to an
appropriate lockout period,3 which
initially will be two business days (see
appendix D). In its May 2013 Quarterly
Refunding Statement, Treasury
announced its intention to begin
auctioning floating rate notes in either
the fourth quarter of 2013 or the first
quarter of 2014.4 Treasury’s initial
auction will be of two-year floating rate
notes. Treasury will announce specific
terms and conditions of each issue, such
as the auction date, issue date, and
public offering amount, prior to each
auction. Over time, Treasury may
consider offering additional maturities
of floating rate notes.
II. Consultation and Request for
Comments
Treasury announced at its February
2012 Quarterly Refunding that it was
studying the possibility of issuing a
floating rate note with an interest rate
that is indexed and periodically reset.5
In determining the final terms and
conditions for a floating rate note,
Treasury sought input from a wide
range of participants, particularly
concerning the demand for the product,
how the security should be structured,
its liquidity, the most appropriate index,
and operational issues that should be
considered related to the issuance of
this type of debt.
On March 19, 2012, Treasury issued
a Notice and Request for Information
(RFI) to the public with a closing date
for comments of April 18, 2012.6
Treasury received 14 comment letters in
2 The High Rate is the highest accepted discount
rate in a marketable Treasury bill auction and is
announced on the auction results press release.
Treasury awards securities in Treasury bill auctions
at the price that corresponds to the High Rate.
3 A lockout period for floating rate notes is a
period of time prior to the auction settlement or
payment of interest. Any 13-week Treasury bill
auction that takes place during this period will be
excluded from the calculation of accrued interest
for determining the settlement or interest payment
amount.
4 The May 2013 Quarterly Refunding Statement,
dated May 1, 2013, can be accessed at: https://
www.treasury.gov/press-center/press-releases/
Pages/jl1921.aspx.
5 The February 2012 Quarterly Refunding
Statement, dated February 1, 2012, can be accessed
at: https://www.treasury.gov/press-center/pressreleases/Pages/tg1405.aspx.
6 77 FR 16116 (March 19, 2012).
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response to the RFI.7 Commenters
broadly supported issuance of this type
of security. Based on the response to the
RFI and additional feedback, Treasury
announced in its August 2012 Quarterly
Refunding Statement that it planned to
develop a floating rate note program to
complement the existing suite of
securities issued and to support its
broader debt management objectives.8
On December 5, 2012, Treasury issued
an Advance Notice of Proposed
Rulemaking (ANPR) to invite public
comment on the design details, terms
and conditions, and other features
relevant to the sale and issuance of this
new type of security.9 The closing date
for comments was January 22, 2013.
III. Comments Received in Response to
the Advance Notice of Proposed
Rulemaking
Treasury received 16 comment letters
in response to the ANPR 10—one from a
securities industry trade association,
eight from primary dealers, two from
private citizens, and one each from a
non-primary dealer, a derivatives
clearing house, a derivatives exchange,
an investment manager, and an advisory
service. Overall, there was a consensus
on many features of the security as
proposed in the ANPR, including the
reset frequency, frequency of interest
payments, interest rate determination,
initial maturity range, and auction
technique. There was also an expressed
belief that, if appropriately structured, a
Treasury floating rate note would be an
attractive investment for a broad base of
institutional investors including money
market funds, securities lenders,
corporations, and foreign central banks.
Regarding the index rate, the ANPR
specifically requested comments on the
use of either (1) the 13-week Treasury
bill auction High Rate (stop out rate)
converted into a simple actual/360
interest rate, or (2) a Treasury general
collateral overnight repurchase
agreement rate (the ‘‘Treasury GC
Rate’’). All but one of the commenters
addressed this issue, with nine favoring
some form of repurchase agreement rate,
and six preferring an index based on 137 The comment letters are available to the public
for inspection and downloading at the
TreasuryDirect Web site. https://
www.treasurydirect.gov/instit/statreg/auctreg/
auctreg_comltr_td_floating rate note.htm.
8 The August 2012 Quarterly Refunding
Statement, dated August 1, 2012, can be accessed
at: https://www.treasury.gov/press-center/pressreleases/Pages/tg1663.aspx.
9 77 FR 72278 (December 5, 2012).
10 The comment letters are available to the public
for inspection and downloading at the
TreasuryDirect Web site. https://
www.treasurydirect.gov/instit/statreg/auctreg/
auctreg_advance_floating_rate.htm.
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week Treasury bills. Commenters
preferring the Treasury bill index also
preferred the actual/360 basis over any
other method for converting the auction
High Rate.
Most commenters preferred that the
index rate be reset daily, and that
interest payments be made quarterly.
Commenters also widely supported
having a new issue of floating rate notes
every quarter with two subsequent
monthly reopenings. Regarding the
timing of settlement, a large majority
who expressed a preference favored
mid-month settlement over end-ofmonth settlement. There was also
general consensus that the interest rate
should be floored at zero percent.
In the ANPR, Treasury stated that it
intends to start the floating rate note
program with a two-year maturity. Most
commenters agreed that this was a good
maturity to start with, and suggested
eventual expansion to longer maturities
of up to 10 years.
Regarding the lockout periods, the
ANPR noted that the current convention
in the floating rate note market is for
interest payments to be set five business
days in advance of their payment dates.
This standard practice dates from the
late 1980s and was put in place for
operational reasons. The ANPR stated
that, given technological advancements,
Treasury believes that one-business-day
notice of interest payments should
suffice. Four commenters stated that one
business day was sufficient. One
commenter stated that no lockout period
was needed. Two commenters said that
two business days was the most
beneficial, while another commenter
suggested two to three days ‘‘for
maximum operational clarity.’’ One
commenter advocated seven business
days.
A commenter stated that, ‘‘at least
initially, a two-day lockout period
would be optimal for operational
efficiency. The benefit of an initial twoday lockout period is that it would
accommodate both the firms that are
currently able to absorb a shorter
lockout period in their current
operational flow, as well as firms that
would have to make operational
adjustments. In addition, buyside
members also indicated that a two-day
lockout period would be optimal to
achieve operational efficiency.’’
IV. Summary of Terms, Conditions, and
Features
After taking into consideration the
comments received, Treasury is
adopting as a final rule this amendment
to the Uniform Offering Circular setting
out the terms, conditions, and features
of Treasury floating rate notes.
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Floating rate notes will be issued with
maturities of at least one year, but not
more than ten years. Floating rate notes
may be sold at discount, par, or
premium, and will pay interest
quarterly on the last calendar day of the
month.
Auctions of Treasury floating rate
notes will generally be conducted in the
same manner as other marketable
Treasury securities auctions. The
auctions will be conducted as singleprice auctions in which competitive
bidders will bid in terms of a desired
discount margin (positive, negative, or
zero), expressed as a percentage with
three decimals, e.g., 1.230 percent. The
spread on the first issuance of a
particular floating rate note will be set
at the highest accepted discount margin
in that auction. Auctions will include
both competitive and noncompetitive
bidding, a minimum purchase amount
of $100, a maximum noncompetitive bid
amount of $5 million, and a 35-percent
maximum award limitation. The award
methodology will be the same as for
other Treasury marketable securities
auctions.11
Reopening auctions will be conducted
in the same manner as new issuances,
except that the spread on a floating rate
note offered in a reopening auction will
be the spread determined in the first
auction of that security. Bidders in
reopening auctions will bid on a
discount margin basis and those who
are awarded securities will be required
to pay accrued interest from the dated
date, or last interest payment date, to
the reopening issue date.
The index for floating rate notes will
be the weekly High Rate (stop out rate)
of 13-week Treasury bill auctions. The
interest rate will be the spread plus the
index rate, which will reset daily based
on the most recent auction of 13-week
bills and will be subject to a minimum
daily interest accrual rate of zero
percent. After analyzing the comments
received, Treasury determined that a
minimum spread was unnecessary. The
use of a zero-percent minimum daily
interest accrual rate will prevent
floating rate note investors from having
to remit an interest payment to Treasury
during unusual interest rate
environments, including those with
expectations for deeply negative interest
rates.
Treasury carefully considered the
ANPR responses related to the selection
of an index rate. While a majority of
respondents favored using a repurchase
agreement rate, Treasury weighed that
input against the benefits of indexing to
the established, well-understood, and
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11 See
§ 356.20(a).
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highly liquid 13-week Treasury bill
market. At this time, Treasury believes
that using the 13-week Treasury bill
auction rate as the index will best
achieve the goal of funding the
government at the lowest possible cost
over time. However, the selection of the
13-week Treasury bill auction rate as the
index does not preclude Treasury from
amending the Uniform Offering Circular
in the future to provide for a floating
rate note issuance that uses an
alternative index.
Although the index rate will reset
daily, given the current 13-week
Treasury bill auction schedule, the rate
will effectively change once a week. The
index rate will change on the day
following a 13-week bill auction
regardless of whether that day is a
business day or a non-business day.
Interest on floating rate notes will
accrue daily throughout the interest
payment period. In general, the interest
accrual for a particular calendar day in
an accrual period will be the spread
determined at the time of a new floating
rate note auction plus the index rate.
The index rate is computed from the
most recent 13-week Treasury bill
auction High Rate that has been
translated into a simple-interest money
market yield computed on an actual/360
basis and rounded to nine decimal
places. If, however, the most recent 13week bill auction occurred during a
lockout period for the applicable
floating rate note, then the index rate is
computed from the most recent 13-week
bill auction that occurred prior to the
lockout period. As previously
mentioned, the minimum daily interest
accrual rate will be zero percent.
Treasury will provide notice of
interest payments two business days
prior to each interest payment date. For
purposes of calculating auction
settlement amounts and quarterly
interest payments, floating rate notes
will initially have a two-business-day
lockout period prior to their auction
settlement date or an interest payment
date. Therefore, a 13-week Treasury bill
auction that takes place during the
lockout period will be excluded from
the calculation of accrued interest for
purposes of determining that settlement
amount or interest payment. Any
changes in the index rate that would
otherwise have occurred during the
lockout period will occur on the first
calendar day following the end of the
lockout period. We will provide
sufficient notice if we change the length
of the lockout period for future floating
rate note issuances.
Although most commenters preferred
mid-month settlement, the issue date for
newly issued Treasury floating rate
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notes will normally be on the last
calendar day of a month because this
timing better accommodates Treasury’s
financing needs. Reopening issuances of
floating rate notes will occur on the last
Friday of a month. In both cases, if the
regular issue day is a non-business day,
issuance will occur on the next business
day. The auction announcement for
each floating rate note will contain the
specific details of that offering.
Floating rate notes will not be eligible
for stripping.12 The notes will be
eligible, however, to serve as collateral
for Treasury’s Fiscal Service collateral
programs.
This final rule makes the necessary
revisions to accommodate the sale and
issuance of floating rate notes.
Accordingly, Treasury is amending
sections 356.2; 356.5; 356.12; 356.14;
356.15; 356.20; 356.21; 356.23; 356.30,
356.31, 356.32; Appendix A, Section II;
Appendix B, Sections I and IV;
Appendix C, Section II; and Appendix
D, Section II of 31 CFR 356.
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V. Section by Section Summary
Section 356.2 has been amended by
adding definitions of 13-week bill,
Discount margin, Index rate, and
Spread. The definition of Index has
been amended to add that, in addition
to the term meaning the Consumer Price
Index for inflation protected securities,
Index also means the High Rate on
auctions of 13-week Treasury bills for
floating rate notes. The definition of
Interest rate has been expanded to
define how the interest rate is
determined for floating rate notes.
Conforming changes have also been
made to the definitions of Competitive
bid, Multiple-price auction,
Noncompetitive bid, Single-price
auction, and Weighted-average to add
discount margin as an allowable basis
for bidding in addition to discount rate
and yield.
Section 356.5 has been amended by
adding a new paragraph (b)(3) to add
floating rate notes as a new type of
security that Treasury auctions. The
footnote to this section has also been
amended by changing the term ‘‘fixedprincipal’’ to ‘‘non-indexed’’ to
distinguish regular Treasury notes and
bonds from inflation-protected
securities and floating rate notes. The
term ‘‘fixed-principal’’ has been
changed to ‘‘non-indexed’’ throughout
this entire part.
Section 356.12 has been amended by
adding a new subparagraph (c)(1)(iv) to
12 Stripping means separating a security’s interest
and principal components so they can be traded
separately.
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provide the competitive bidding format
for floating rate notes.
Section 356.20 has been amended to
create a new paragraph (c) that explains
how interest rates for floating rate notes
are determined.
Section 356.30 has been amended to
allow for quarterly interest payments,
since all other Treasury notes, bonds,
and inflation-protected securities pay
interest semiannually.
Section 356.31 has been amended to
make it clear that floating rate notes are
not eligible for stripping.
Section 356.32 has been amended by
adding a new paragraph (c) to provide
a brief mention of special federal
income tax rules for floating rate notes.
Appendix B, Section I has been
reorganized to add a new subsection C
that describes the indexing and interest
payment processes for floating rate
notes, how the interest rate is
determined, how interest accrues, and
various floating rate index
contingencies. New subsection D has
been amended to add a new paragraph
6 that directs readers to section IV,
paragraphs C and D of the appendix for
discussion of how accrued interest is
calculated for floating rate notes. A new
Section IV has been added that provides
the formulas for converting discount
margins to equivalent prices for floating
rate notes.
A new Section II has been added to
Appendix C to address various
investment considerations for Treasury
floating rate notes. Specifically, Section
II discusses interest variability,
secondary market trading, tax
considerations, and indexing issues.
Appendix D has been amended to
revise the title, designate the current
text as Section I, and add a new Section
II that adds a description of the floating
rate note index.
Conforming changes are also made to
paragraphs 356.12(c)(2); 356.14(d);
356.15(e); 356.20(a)(1) and (a)(2) and
new paragraphs (d)(1) and (d)(2);
356.21(a) and (b); 356.23(b)(2); and
Appendix A, Section II, paragraph (d)(1)
to add discount margin as an allowable
basis for bidding.
VI. Procedural Requirements
Executive Order 12866. This final rule
is not a ‘‘significant regulatory action’’
pursuant to Executive Order 12866.
Administrative Procedure Act (APA).
Because this rule relates 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,
pursuant to 5 U.S.C. 553(a)(2).
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Regulatory Flexibility Act. As no
notice of proposed rulemaking is
required, the provisions of the
Regulatory Flexibility Act (5 U.S.C. 601,
et seq.) do not apply.
Paperwork Reduction Act. There is no
new collection of information contained
in this final rule, and, therefore, the
Paperwork Reduction Act does not
apply. The Office of Management and
Budget has approved the collections of
information already contained in 31
CFR part 356, under control number
1535–0112. Under the Paperwork
Reduction Act, an agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a valid
OMB control number.
List of Subjects in 31 CFR Part 356
Bonds, Federal Reserve System,
Government Securities, Securities.
For the reasons set forth in the
preamble, amend 31 CFR part 356 as
follows:
PART 356—SALE AND ISSUE OF
MARKETABLE BOOK-ENTRY
TREASURY BILLS, NOTES, AND
BONDS (DEPARTMENT OF THE
TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 1–93)
1. The authority citation for part 356
continues to read as follows:
■
Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et
seq.; 12 U.S.C. 391.
2. In 31 CFR part 356, wherever it
appears:
■ a. Remove ‘fixed-principal’ and add in
its place ‘non-indexed’;
■ b. Remove ‘Fixed-principal’ and add
in its place ‘Non-indexed’; and
■ c. Remove ‘FIXED-PRINCIPAL’ and
add in its place ‘NON-INDEXED’.
■
Subpart A—General Information.
3. Amend § 356.2 by:
a. Adding definitions in alphabetical
order for 13-week bill, Discount margin,
Index rate, and Spread; and
■ b. Revising the definitions of
Competitive bid, Index, Multiple-price
auction, Noncompetitive bid, Singleprice auction, and Weighted-average.
The additions and revisions read as
follows:
■
■
§ 356.2 What definitions do I need to know
to understand this part?
13-week bill means a Treasury bill
where the security description is ‘‘13Week Bill’’ as referenced on the
Treasury auction announcement.
*
*
*
*
*
Competitive bid means a bid to
purchase a stated par amount of
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securities at a specified yield, discount
rate, or discount margin.
*
*
*
*
*
Discount margin means the margin
over the index that equates the present
values of the assumed cash flows on a
floating rate note to the sum of the price
of and accrued interest on the floating
rate note. The assumed cash flows are
calculated based upon the index rate
applicable to the dated date. Bidders in
floating rate note auctions bid on the
basis of discount margin. (See appendix
B.)
*
*
*
*
*
Index means the Consumer Price
Index for inflation-protected securities.
For floating rate notes, the index is the
highest accepted discount rate on 13week bills determined by Treasury
auctions of those securities.
Index rate means the simple-interest
money market yield, computed on an
actual/360 basis and rounded to nine
decimal places, from the highest
accepted discount rate of a 13-week bill
auction as announced in the Treasury
auction results press release. (See
appendix B for methods and examples
for computing the index rate.)
*
*
*
*
*
Interest rate means the annual
percentage rate of interest paid on the
par amount (or the inflation-adjusted
principal) of a specific issue of notes or
bonds. For floating rate notes, the
interest rate is the spread plus the index
rate, which resets daily based on the
most recent auction of 13-week bills,
and is subject to a minimum daily
interest accrual rate of zero percent. (See
appendix B for methods and examples
of interest calculations.)
*
*
*
*
*
Multiple-price auction means an
auction in which each successful
competitive bidder pays the price
equivalent to the yield, discount rate, or
discount margin that it bid.
Noncompetitive bid means, for a
single-price auction, a bid to purchase a
stated par amount of securities at the
highest yield, discount rate, or discount
margin awarded to competitive bidders.
For a multiple-price auction, a
noncompetitive bid means a bid to
purchase securities at the weighted
average yield, discount rate, or discount
margin of awards to competitive
bidders.
*
*
*
*
*
Single-price auction means an auction
in which all successful bidders pay the
same price regardless of the yields,
discount rates, or discount margins they
each bid.
Spread means the fixed amount over
the life of a floating rate note that is
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added to the index rate in order to
determine the interest rate of the
floating rate note. The spread will be
determined in the auction of a new
floating rate note and is expressed in
tenths of a basis point (i.e., to three
decimals). Additionally, the spread will
be equal to the high discount margin at
the time a new floating rate note is
auctioned.
*
*
*
*
*
Weighted-average means the average
of the yields, discount rates, or discount
margins at which we award securities to
competitive bidders in multiple-price
auctions weighted by the par amount of
securities allotted at each yield,
discount rate, or discount margin.
*
*
*
*
*
4. In § 356.5, in paragraph (b)(1),
revise referenced footnote 1 and add
paragraph (b)(3) to read as follows:
■
§ 356.5 What types of securities does the
Treasury auction?
*
*
*
*
*
(b) * * *
(1) * * *
1 We use the term ‘‘non-indexed’’ in
this part to distinguish such notes and
bonds from ‘‘inflation-protected
securities’’ and ‘‘floating rate notes.’’ We
refer to non-indexed notes and nonindexed bonds as ‘‘notes’’ and ‘‘bonds’’
in official Treasury publications, such
as auction announcements and auction
results press releases, as well as in
auction systems.
*
*
*
*
*
(3) Treasury floating rate notes. (i) Are
issued with a stated spread to be added
to the index rate for daily interest
accrual throughout each interest
payment period;
(ii) Have a zero-percent minimum
daily interest accrual rate;
(iii) Have interest payable quarterly;
(iv) Are redeemed at their par amount
at maturity;
(v) Are sold at discount, par, or
premium depending on the auction
results (See appendix B for price and
interest payment calculations and
appendix C for Investment
Considerations.); and
(vi) Have maturities of at least one
year, but not more than ten years.
*
*
*
*
*
Subpart B—Bidding, Certifications,
and Payment.
5. In § 356.12, add paragraph (c)(1)(iv)
and revise paragraph (c)(2) to read as
follows:
■
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46429
§ 356.12 What are the different types of
bids and do they have specific
requirements or restrictions?
*
*
*
*
*
(c)(1) * * *
(iv) Treasury floating rate notes. A
competitive bid must show the discount
margin bid, expressed as a percentage
with three decimals, for example, 0.290
percent. We will treat any missing
decimals as zero, for example, a bid of
0.29 will be treated as 0.290. The
discount margin bid may be positive,
negative, or zero.
(2) Maximum recognized bid. There is
no limit on the maximum dollar amount
that you may bid for competitively,
either at a single yield, discount rate, or
discount margin, or at different yields,
discount rates, or discount margins.
However, a competitive bid at a single
yield, discount rate, or discount margin
that exceeds 35 percent of the offering
amount will be reduced to that amount.
For example, if the offering amount is
$10 billion, the maximum bid amount
we will recognize at any one yield,
discount rate, or discount margin from
any bidder is $3.5 billion. (See § 356.22
for award limitations.)
*
*
*
*
*
6. In § 356.14, revise the first sentence
of paragraph (d) to read as follows:
■
§ 356.14 What are the requirements for
submitting bids for customers?
*
*
*
*
*
(d) Competitive customer bids. For
each customer competitive bid, the
submitter must provide the customer’s
name, the amount bid, and the yield,
discount rate, or discount margin. * * *
*
*
*
*
*
7. In § 356.15, revise the first sentence
of paragraph (e) to read as follows:
■
§ 356.15 What rules apply to bids
submitted by investment advisors?
*
*
*
*
*
(e) Proration of awards. Investment
advisers that submit competitive bids in
the names of controlled accounts are
responsible for prorating any awards at
the highest accepted yield, discount
rate, or discount margin using the same
percentage that we announce. * * *
*
*
*
*
*
Subpart C—Determination of Auction
Awards; Settlement.
8. In § 356.20, revise paragraph (a)(1)
and (2), redesignate paragraph (c) as
paragraph (d), add a new paragraph (c),
and revise newly redesignated
paragraphs (d)(1) and (2) to read as
follows:
■
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§ 356.20 How does the Treasury determine
auction awards?
(a) Determining the range and amount
of accepted competitive bids—(1)
Accepting bids. First we accept in full
all non-competitive bids that were
submitted by the noncompetitive
bidding deadline. After the closing time
for receipt of competitive bids we start
accepting those at the lowest yields,
discount rates, or discount margins,
through successively higher yields,
discount rates, or discount margins, up
to the amount required to meet the
offering amount. When necessary, we
prorate bids at the highest accepted
yield, discount rate, or discount margin
as described below. If the amount of
noncompetitive bids would absorb all or
most of the offering amount, we will
accept competitive bids in an amount
sufficient to provide a fair
determination of the yield, discount
rate, or discount margin for the
securities we are auctioning.
(2) Accepting bids at the high yield,
discount rate, or discount margin.
Generally, the total amount of bids at
the highest accepted yield, discount
rate, or discount margin exceeds the
offering amount remaining after we
accept the noncompetitive bids and the
competitive bids at the lower yields,
discount rates, or discount margins. In
order to keep the total amount of awards
as close as possible to the announced
offering amount, we award a percentage
of the bids at the highest accepted yield,
discount rate, or discount margin. We
derive the percentage by dividing the
remaining par amount needed to fill the
offering amount by the par amount of
the bids at the high yield, discount rate,
or discount margin and rounding up to
the next hundredth of a whole
percentage point, for example, 17.13%.
*
*
*
*
*
(c) Determining the interest rate for
floating rate notes. The interest rate will
be the spread plus the index rate (as it
may be adjusted on the calendar day
following each auction of 13-week bills)
subject to a minimum daily interest
accrual rate of zero percent.
(d) * * *
(1) Single-price auctions. We award
securities to both noncompetitive and
competitive bidders at the price
equivalent to the highest accepted yield,
discount rate, or discount margin at
which bids were accepted. For inflationprotected securities, the price for
awarded securities is the price
equivalent to the highest accepted real
yield.
(2) Multiple-price auctions—(i)
Competitive bids. We award securities
to competitive bidders at the price
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equivalent to each yield, discount rate,
or discount margin at which their bids
were accepted.
(ii) Noncompetitive bids. We award
securities to noncompetitive bidders at
the price equivalent to the weighted
average yield, discount rate, or discount
margin of accepted competitive bids.
■ 9. In § 356.21, revise the section
heading, the first three sentences of
paragraph (a), and the last sentence of
paragraph (b) to read as follows:
§ 356.21 How are awards at the high yield,
discount rate, or discount margin
calculated?
(a) Awards to submitters. We
generally prorate bids at the highest
accepted yield, discount rate, or
discount margin under § 356.20(a)(2) of
this part. For example, if 80.15% is the
announced percentage at the highest
yield, discount rate, or discount margin,
we award 80.15% of the amount of each
bid at that yield, discount rate, or
discount margin. A bid for $100 million
at the highest accepted yield, discount
rate, or discount margin would be
awarded $80,150,000 in this example.
* * *
(b) Awards to customers. * * * For
example, if 80.15% is the announced
percentage at the highest yield, discount
rate, or discount margin, then each
customer bid at that yield, discount rate,
or discount margin must be awarded
80.15%.
■ 10. In § 356.23, revise paragraph (b)(2)
to read as follows:
§ 356.23 How are the auction results
announced?
*
*
*
*
*
(b) * * *
(2) The range of accepted yields,
discount rates, or discount margins.
*
*
*
*
*
Subpart D—Miscellaneous Provisions.
11. In § 356.30, revise the fourth
sentence of paragraph (a) to read as
follows:
■
§ 356.30 When does the Treasury pay
principal and interest on securities?
(a) * * * Interest is payable on a
semiannual or quarterly basis on the
interest payment dates specified in the
auction announcement through the
maturity date. * * *
*
*
*
*
*
■ 12. In § 356.31, revise the first
sentence of paragraph (a) and the
paragraph (b) heading to read as follows:
§ 356.31
work?
How does the STRIPS program
(a) General. Notes or bonds (other
than Treasury floating rate notes) may
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be ‘‘stripped’’—divided into separate
principal and interest components.
* * *
(b) Treasury non-indexed securities
(notes and bonds other than Treasury
inflation-protected securities or
Treasury floating rate notes) * * *
■ 13. In § 356.32, add paragraph (c) to
read as follows:
§ 356.32
What tax rules apply?
*
*
*
*
*
(c) Treasury floating rate notes.
Special federal income tax rules for
floating rate notes are set forth in
Internal Revenue Service regulations.
■ 14. In Appendix A to Part 356, Section
II, revise paragraph (d)(1) to read as
follows:
Appendix A to Part 356—Bidder
Categories
*
*
*
*
*
II. How to Obtain Separate Bidder
Recognition
*
*
*
*
*
(d) * * *
(1) Exchanging any of the following
information with any other part of the
corporate [partnership] structure: (a) Yields,
discount rates, or discount margins at which
it plans to bid; (b) amounts of securities for
which it plans to bid; (c) positions that it
holds or plans to acquire in a security being
auctioned; and (d) investment strategies that
it plans to follow regarding the security being
auctioned, or
*
*
*
*
*
15. In Appendix B to Part 356:
a. Amend the introductory listing of
sections by redesignating sections IV
and V as sections V and VI, and adding
new section IV;
■ b. In section I., redesignate subsection
C as subsection D and add new
subsection C;
■ c. In newly redesignated subsection D,
add paragraph 6;
■ d. Redesignate sections IV and V as
sections V and VI; and
■ e. Add new section IV.
The additions read as follows:
■
■
Appendix B to Part 356—Formulas and
Tables
*
*
*
*
*
IV. Formulas for Conversion of Floating Rate
Note Discount Margins to Equivalent Prices
*
*
*
*
*
I. Computation of Interest on Treasury
Bonds and Notes
*
*
*
*
*
C. Treasury Floating Rate Notes
1. Indexing and Interest Payment Process.
We issue floating rate notes with a daily
interest accrual feature. This means that the
interest rate ‘‘floats’’ based on changes in the
representative index rate. We pay interest on
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a quarterly basis. The index rate is the High
Rate of the 13-week Treasury bill auction
announced on the auction results press
release that has been converted into a simpleinterest money market yield computed on an
actual/360 basis and rounded to nine decimal
places. Interest payments are based on the
floating rate note’s variable interest rate from,
and including, the dated date or last interest
payment date to, but excluding, the next
interest payment or maturity date. We make
quarterly interest payments by accruing the
daily interest amounts and adding those
amounts together for the interest payment
period.
2. Interest Rate. The interest rate on
floating rate notes will be the spread plus the
index rate (as it may be adjusted on the
calendar day following each auction of 13week bills).
3. Interest Accrual. In general, accrued
interest for a particular calendar day in an
accrual period is calculated by using the
index rate from the most recent auction of 13week bills that took place before the accrual
day, plus the spread determined at the time
of a new floating rate note auction, divided
by 360, subject to a zero-percent minimum
daily interest accrual rate. However, a 13-
week bill auction that takes place in the twobusiness-day period prior to a settlement date
or interest payment date will be excluded
from the calculation of accrued interest for
purposes of the settlement amount or interest
payment. Any changes in the index rate that
would otherwise have occurred during this
two-business-day period will occur on the
first calendar day following the end of the
period.
4. Index Contingencies.
(i) If Treasury were to discontinue auctions
of 13-week bills, the Secretary has authority
to determine and announce a new index for
outstanding floating rate notes.
(ii) If Treasury were to not conduct a 13week bill auction in a particular week, then
the interest rate in effect for the notes at the
time of the last 13-week bill auction results
announcement will remain in effect until
such time, if any, as the results of a 13-week
Treasury auction are again announced by
Treasury. Treasury reserves the right to
change the index rate for any newly issued
floating rate note.
Example:
The purpose of this example is to
demonstrate how a floating rate note price is
derived at the time of original issuance.
Additionally, this example depicts the
association of the July 31, 2012 issue date
and the two-business-day lockout period. For
a new two-year floating rate note auctioned
on July 25, 2012, and issued on July 31, 2012,
with a maturity date of July 31, 2014, and an
interest accrual rate on the issue date of
0.215022819% (index rate of 0.095022819%
plus a spread of 0.120%), solve for the price
per 100 (P). This interest accrual rate is used
for each daily interest accrual over the life of
the security for the purposes of this example.
In a new issuance (not a reopening) of a
floating rate note, the discount margin
determined at auction will be equal to the
spread.
*
*
*
*
*
D. Accrued Interest
*
*
*
*
*
46431
6. For a floating rate note, if accrued
interest covers a portion of a full quarterly
interest payment period, we calculate
accrued interest as shown in section IV,
paragraphs C and D of this appendix.
*
*
*
*
*
IV. Formulas for Conversion of Floating Rate
Note Discount Margins to Equivalent Prices
Definitions for Newly Issued Floating Rate
Notes
P = the price per $100 par value.
T0 = the issue date.
N = the total number of quarterly interest
payments.
i and k = indexes that identify the sequence
of interest payment dates.
Ti = the ith quarterly interest payment date.
Ti ¥ Ti-1 = the number of days between the
interest payment date Ti and the
preceding interest payment date.
TN = the maturity date.
r = the index rate applicable to the issue date.
s = the spread.
m = the discount margin.
A. For newly issued floating rate notes
issued at par:
Formula:
Definitions:
T0 = July 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.095022819%.
s = 0.120%.
m = 0.120%.
As of the issue date the latest 13-week bill,
auctioned at least two days prior, has the
following information:
TABLE 1—13-WEEK BILL AUCTION DATA
Issue date
Maturity date
Auction
clearing price
Auction high rate
Index rate
7/23/2012
7/26/2012
10/25/2012
99.975986
0.095%
0.095022819%
The rationale for using a 13-week bill
auction that has occurred at least two days
prior to the issue date is due to the twobusiness-day lockout period. This lockout
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period applies only to the issue date and
interest payment dates, thus any 13-week bill
auction that occurs during the two-day
lockout period is not used for calculations
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related to the issue date and interest payment
dates. The following sample calendar depicts
this relationship for the floating rate note
issue date.
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Auction date
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Computing the Projected Cash Flows
The following table presents the future
interest payment dates and the number of
days between them.
TABLE 2—PAYMENT DATES
....................................
T1 ¥ T0 = 92
T2 ¥ T1 = 92
T3 ¥ T2 = 89
T4 ¥ T3 = 92
T5 ¥ T4 = 92
T6 ¥ T5 = 92
T7 ¥ T6 = 89
T8 ¥ T7 = 92
Let
ai = 100 × max(r + s,0)/360
and
Ai = ai × (Ti ¥ Ti¥1) + 100 × 1{i=8}
ai represents the daily projected interest, for
a $100 par value, that will accrue between
the future interest payment dates Ti¥1 and Ti,
where i = 1,2, . . . ,8. ai’s are computed using
the spread s = 0.120% obtained at the
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auction, and the fixed index rate of r =
0.095022819% applicable to the issue date
(7/31/2012). For example:
a1 = 100 × max(0.00095022819 + 0.00120,0)/
360 = 0.000597286
Ai represents the projected cash flow the
floating rate note holder will receive, for a
$100 par value, at the future interest payment
date Ti, where i = 1,2, . . . ,8. Ti ¥ Ti¥1 is
the number of days between the future
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interest payment dates Ti¥1 and Ti. To
account for the payback of the par value, the
variable 1{i=8} takes the value 1 if the
payment date is the maturity date, or 0
otherwise. For example:
Ai = 92 × 0.000597286 = 0.054950312
and
A8 = 92 × 0.000597286 + 100 =
100.054950312
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Days between dates
Issue Date: T0 = 7/31/2012 .....................................................................................................................................................
1st Interest Date: T1 = 10/31/2012 ..........................................................................................................................................
2nd Interest Date: T2 = 1/31/2013 ...........................................................................................................................................
3rd Interest Date: T3 = 4/30/2013 ...........................................................................................................................................
4th Interest Date: T4 = 7/31/2013 ............................................................................................................................................
5th Interest Date: T5 = 10/31/2013 ..........................................................................................................................................
6th Interest Date: T6 = 1/31/2014 ............................................................................................................................................
7th Interest Date: T7 = 4/30/2014 ............................................................................................................................................
8th Interest & Maturity Dates: T8 = 7/31/2014 ........................................................................................................................
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Dates
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Let
Bi = 1 + (r + m) × (Ti ¥ Ti ¥ 1)/360
Bi represents the projected compound factor
between the future dates Ti¥1 and Ti, where
i = 1,2, . . . ,8. All Bi’s are computed using
the discount margin m = 0.120% (equals the
spread determined at the auction), and the
fixed index rate of r = 0.095022819%
applicable to the issue date (7/31/2012). For
example:
B3 = 1 + (0.00095022819 + 0.00120) × 89/360
= 1.000531584.
The following table shows the projected daily
accrued interest values for $100 par value
(ai’s), cash flows at interest payment dates
(Ai’s), and the compound factors between
payment dates (Bi’s).
TABLE 3—PROJECTED CASH FLOWS AND COMPOUND FACTORS
i
1
2
3
4
5
6
7
8
ai
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
Ai
0.000597286
0.000597286
0.000597286
0.000597286
0.000597286
0.000597286
0.000597286
0.000597286
0.054950312
0.054950312
0.053158454
0.054950312
0.054950312
0.054950312
0.053158454
100.054950312
Bi
1.000549503
1.000549503
1.000531584
1.000549503
1.000549503
1.000549503
1.000531584
1.000549503
Computing the Price
The price is computed as follows:
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Formula:
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B. For newly issued floating rate notes
issued at a premium:
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Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
Example:
The purpose of this example is to
demonstrate how a floating rate note auction
can result in a price at a premium given a
negative discount margin and spread at
auction. For a new two-year floating rate note
auctioned on July 25, 2012, and issued on
July 31, 2012, with a maturity date of July 31,
2014, solve for the price per 100 (P). In a new
issue (not a reopening) of a floating rate note,
the discount margin established at auction
will be equal to the spread. In this example,
the discount margin determined at auction is
¥0.150%, but the floating rate note is subject
to a daily interest rate accrual minimum of
0.000%.
Definitions:
T0 = July 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.095022819%.
s = ¥0.150%.
m = ¥0.150%.
As of the issue date the latest 13-week bill,
auctioned at least two days prior, has the
following information:
TABLE 1—13-WEEK BILL AUCTION DATA
Auction date
Issue date
Maturity date
Auction
clearing price
Auction high rate
Index rate
7/23/2012
7/26/2012
10/25/2012
99.975986
0.095%
0.095022819%
Computing the Projected Cash Flows
The following table presents the future
interest payment dates and the number of
days between them.
TABLE 2—PAYMENT DATES
Issue Date: T0 = 7/31/2012 .....................................................................................................................................................
1st Interest Date: T1 = 10/31/2012 ..........................................................................................................................................
2nd Interest Date: T2 = 1/31/2013 ...........................................................................................................................................
3rd Interest Date: T3 = 4/30/2013 ...........................................................................................................................................
4th Interest Date: T4 = 7/31/2013 ............................................................................................................................................
5th Interest Date: T5 = 10/31/2013 ..........................................................................................................................................
6th Interest Date: T6 = 1/31/2014 ............................................................................................................................................
7th Interest Date: T7 = 4/30/2014 ............................................................................................................................................
8th Interest & Maturity Dates: T8 = 7/31/2014 ........................................................................................................................
....................................
T1 ¥ T0 = 92
T2 ¥ T1 = 92
T3 ¥ T2 = 89
T4 ¥ T3 = 92
T5 ¥ T4 = 92
T6 ¥ T5 = 92
T7 ¥ T6 = 89
T8 ¥ T7 = 92
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Days between dates
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Dates
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Let
ai = 100 × max(r + s,0)/360
and
Ai = ai × (Ti ¥ Ti ¥ 1) + 100×1{i=8}
ai Represents the daily projected interest, for
a $100 par value, that will accrue between
the future interest payment dates Ti ¥ 1 and
Ti where i = 1,2, . . . ,8. ai’s are computed
using the spread s = ¥ 0.150%, and the fixed
index rate of r = 0.095022819% applicable to
the issue date (7/31/2012). For example:
ai = 100 × max(0.00095022819¥0.00150,0)/
360 = 100 × 0/360 = 0.000000000
Ai represents the projected cash flow the
floating rate note holder will receive, for a
$100 par value, at the future interest payment
date Ti, where i = 1,2, . . ., 8. Ti – Ti¥1 is
the number of days between the future
interest payment dates Ti¥1 and Ti. To
account for the payback of the par value, the
variable 1{i=8} takes the value 1 if the
payment date is the maturity date, or 0
otherwise. For example:
A1 = 92 × 0.000000000 = 0.000000000
and
A8 = 92 × 0.000000000 + 100 =
100.000000000
Let
Bi = 1 + (r + m) × (Ti–Ti¥1)/360
Bi represents the projected compound
factor between the future dates Ti¥1 and Ti,
where i = 1,2, . . ., 8. All Bi’s are computed
using the discount margin m = ¥0.150%
(equals the spread obtained at the auction),
and the fixed index rate of r = 0.095022819%
applicable to the issue date (7/31/2012). For
example:
B3 = 1 + (0.00095022819¥0.00150) × 89/360
= 0.999864084.
The following table shows the projected
daily accrued interests for $100 par value
(ai’s), cash flows at interest payment dates
(Ai’s), and the compound factors between
payment dates (Bi’s).
TABLE 3—PROJECTED CASH FLOWS AND COMPOUND FACTORS
i
1
2
3
4
5
6
7
8
ai
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
Ai
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
0.000000000
100.000000000
Bi
0.999859503
0.999859503
0.999864084
0.999859503
0.999859503
0.999859503
0.999864084
0.999859503
ehiers on DSK2VPTVN1PROD with RULES_2
Definitions for Reopenings of Floating Rate
Notes and Calculation of Interest Payments
IPi = the quarterly interest payment at date
Ti.
PD = the price that includes the accrued
interest per $100 par value as of the
reopening issue date.
AI = accrued interest per $100 par value as
of the reopening issue date.
PC = the price without accrued interest per
$100 par value as of the reopening issue
date.
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T¥1 = the dated date if the reopening occurs
before the first interest payment date, or,
otherwise, the latest interest payment
date prior to the reopening issue date.
T0 = the reopening issue date.
N = the total number of remaining quarterly
interest payments as of the reopening
issue date.
i and k = indexes that identify the sequence
of interest payment dates relative to the
issue date. For example T1, T2, and T3
represent the first, second, and the third
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interest payment dates after the issue
date respectively, while T¥1 represents
the preceding interest payment date
before the issue date.
j = an index that identifies days between
consecutive interest payment dates.
Ti = the ith remaining quarterly interest
payment date.
Ti ¥ Ti¥1 = the number of days between the
interest payment date Ti and the
preceding interest payment date.
TN = the maturity date.
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Computing the Price
The price is computed as follows:
46436
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
rj’s = the effective index rates for days
between the last interest payment date
and the reopening issue date.
r = the index rate applicable to the reopening
issue date.
s = the spread.
m = the discount margin.
C. Pricing and accrued interest for
reopened floating rate notes
Formula:
Example:
The purpose of this example is to
determine the floating rate note prices with
and without accrued interest at the time of
the reopening auction. For a two-year floating
rate note that was originally auctioned on
July 25, 2012, with an issue date of July 31,
2012, reopened in an auction on August 30,
2012 and issued on August 31, 2012, with a
maturity date of July 31, 2014, solve for
accrued interest per 100 (AI), the price with
accrued interest per 100 (PD) and the price
without accrued interest per 100 (PC). Since
this is a reopening of an original issue from
the prior month, Table 2 as shown in the
example is used for accrued interest
calculations. In the case of floating rate note
reopenings, the spread on the security
remains equal to the spread that was
established at the original auction of the
floating rate notes.
Definitions:
T¥1 = July 31, 2012.
T0 = August 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.105027876%.
s = 0.120%.
m = 0.100%.
The following table shows the past results
for the 13-week bill auction.
TABLE 1—13-WEEK BILL AUCTION DATA
Issue date
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7/23/2012 .............................................................................
7/30/2012 .............................................................................
8/6/2012 ...............................................................................
8/13/2012 .............................................................................
8/20/2012 .............................................................................
8/27/2012 .............................................................................
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Maturity date
7/26/2012
8/2/2012
8/9/2012
8/16/2012
8/23/2012
8/30/2012
Fmt 4701
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10/25/2012
11/1/2012
11/8/2012
11/15/2012
11/23/2012
11/29/2012
Auction
clearing
price
99.975986
99.972194
99.974722
99.972194
99.973167
99.973458
E:\FR\FM\31JYR2.SGM
31JYR2
Auction
high rate
(percent)
0.095
0.110
0.100
0.110
0.105
0.105
Index rate
(percent)
0.095022819
0.110030595
0.100025284
0.110030595
0.105028183
0.105027876
ER31JY13.006</GPH>
Auction date
46437
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
The following table shows the index rates
applicable for the accrued interest.
TABLE 2—APPLICABLE INDEX RATE
Accrual starts
Accrual ends
7/31/2012 .........................................................................................................
8/1/2012 ...........................................................................................................
8/7/2012 ...........................................................................................................
8/14/2012 .........................................................................................................
8/21/2012 .........................................................................................................
8/28/2012 .........................................................................................................
Computing the Accrued Interest
The accrued interest as of the new issue
date (8/31/2012) for a $100 par value is:
AI = 1 × 100 × max (0.00095022819 +
0.00120,0)/360
+ 6 × 100 × max (0.00110030595 +
0.00120,0)/360
+ 7 × 100 × max (0.00100025284 +
0.00120,0)/360
7/31/2012
8/6/2012
8/13/2012
8/20/2012
8/27/2012
8/30/2012
+ 7 × 100 × max (0.00110030595 +
0.00120,0)/360
+ 7 × 100 × max (0.00105028183 +
0.00120,0)/360
+ 3 × 100 × max (0.00105027876 +
0.00120,0)/360
AI = 1×0.000597286
+ 6×0.000638974
+ 7×0.000611181
+ 7×0.000638974
Applicable floating rate
Number of
days in accrual period
Auction date
1
6
7
7
7
3
7/23/2012
7/30/2012
8/6/2012
8/13/2012
8/20/2012
8/27/2012
Index rate
(percent)
0.095022819
0.110030595
0.100025284
0.110030595
0.105028183
0.105027876
+ 7×0.000625078
+ 3×0.000625077
AI = 0.000597286 + 0.003833844 +
0.004278267 + 0.00472818 +
0.004375546 + 0.001875231
AI = 0.019432992 = $0.019433
Computing the Projected Cash Flows
The following table presents the future
interest payment dates and the number of
days between them.
TABLE 3—PAYMENT DATES
....................................
T0 ¥ T¥1 = 31
T1 ¥ T0 = 61
T2 ¥ T1 = 92
T3 ¥ T2 = 89
T4 ¥ T3 = 92
T5 ¥ T4 = 92
T6 ¥ T5 = 92
T7 ¥ T6 = 89
T8 ¥ T7 = 92
Let
a1 = 100 × max(r + s, 0)/360
and
Ai = ai × (Ti ¥ Ti¥1) + 100×1{i=8}
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a1 represents the daily projected interest,
for a $100 par value, that will accrue between
the future interest payment dates Ti¥1 and
T1, where i=1,2,...,8. ai’s are computed using
the spread s = 0.120% obtained at the
original auction, and the fixed index rate of
PO 00000
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r = 0.105027876% applicable to the new
issue date (8/31/2012). For example:
ai = 100 × max(0.00105027876 + 0.00120,0)/
360 = 0.000625077
Ai represents the projected cash flow the
floating rate note holder will receive, less
E:\FR\FM\31JYR2.SGM
31JYR2
ER31JY13.007</GPH>
Days between dates
Original Issue Date: T¥1 = 7/31/2012 .....................................................................................................................................
New Issue Date: T0 = 8/31/2012 .............................................................................................................................................
1st Interest Date: T1 = 10/31/2012 ..........................................................................................................................................
2nd Interest Date: T2 = 1/31/2013 ...........................................................................................................................................
3rd Interest Date: T3 = 4/30/2013 ...........................................................................................................................................
4th Interest Date: T4 = 7/31/2013 ............................................................................................................................................
5th Interest Date: T5 = 10/31/2013 ..........................................................................................................................................
6th Interest Date: T6 = 1/31/2014 ............................................................................................................................................
7th Interest Date: T7 = 4/30/2014 ............................................................................................................................................
8th Interest & Maturity Dates: T8 = 7/31/2014 ........................................................................................................................
ehiers on DSK2VPTVN1PROD with RULES_2
Dates
46438
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
accrued interest, for a $100 par value, at the
future interest payment date Ti, where
i=1,2,...,8. Ti¥1 is the number of days
between the future interest payment dates
Ti¥1 and Ti. To account for the payback of
the par value, the variable 1{i=8} takes the
value 1 if the payment date is the maturity
date, or 0 otherwise. For example:
Ai = 61×0.000625077 = 0.038129697
and
A8 = 92×0.000625077 + 100 = 100.057507084
Let
Bi = 1 + (r + m)×(Ti¥1)/360
Bi represents the projected compound
factor between the future dates Ti¥1 and Ti,
where i=1,2,...,8. All Bi’s are computed using
the discount margin m = 0.100% obtained at
the reopening auction, and the fixed index
rate of r = 0.105027876% applicable to the
new issue date (8/31/2012). For example:
B3 = 1 + (0.00105027876 + 0.00100)×89/360
= 1.000506874
The following table shows the projected
daily accrued interests for $100 par value
(ai’s), cash flows at interest payment dates
(Ai’s), and the compound factors between
payment dates (Bi’s).
TABLE 4—PROJECTED CASH FLOWS AND COMPOUND FACTORS
i
1
2
3
4
5
6
7
8
ai
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
Ai
0.000625077
0.000625077
0.000625077
0.000625077
0.000625077
0.000625077
0.000625077
0.000625077
0.038129697
0.057507084
0.055631853
0.057507084
0.057507084
0.057507084
0.055631853
100.057507084
Bi
1.000347408
1.000523960
1.000506874
1.000523960
1.000523960
1.000523960
1.000506874
1.000523960
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E:\FR\FM\31JYR2.SGM
31JYR2
ER31JY13.008</GPH>
ehiers on DSK2VPTVN1PROD with RULES_2
Computing the Price
The price with accrued interest is
computed as follows:
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
46439
D. For calculating interest payments:
Example:
For a new issue of a two-year floating rate
note auctioned on July 25, 2012, and issued
on July 31, 2012, with a maturity date of July
31, 2014, and a first interest payment date of
October 31, 2012, calculate the quarterly
interest payments (IPI) per 100. In a new
issuance (not a reopening) of a new floating
rate note, the discount margin determined at
auction will be equal to the spread. The
interest accrual rate used for this floating rate
note on the issue date is 0.215022819%
(index rate of 0.095022819% plus a spread of
0.120%) and this rate is used for each daily
interest accrual over the life of the security
for the purposes of this example.
Example 1: Projected interest payment as
of the original issue date.
T0 = July 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.095022819%.
s = 0.120%.
m = 0.120%.
As of the issue date the latest 13-week bill,
auctioned at least two days prior, has the
following information:
TABLE 1—13-WEEK BILL AUCTION DATA
Auction date
Issue date
Maturity date
Auction
clearing price
Auction high
rate
Index rate
7/23/2012 .............................................................................
7/26/2012
10/25/2012
99.975986
0.095%
0.095022819%
Computing the Projected Cash Flows
The following table presents the future
interest payment dates and the number of
days between them.
TABLE 2—PAYMENT DATES
Issue Date: T0 = 7/31/2012 .....................................................................................................................................................
1st Interest Date: T1 = 10/31/2012 ..........................................................................................................................................
2nd Interest Date: T2 = 1/31/2013 ...........................................................................................................................................
3rd Interest Date: T3 = 4/30/2013 ...........................................................................................................................................
4th Interest Date: T4 = 7/31/2013 ............................................................................................................................................
5th Interest Date: T5 = 10/31/2013 ..........................................................................................................................................
6th Interest Date: T6 = 1/31/2014 ............................................................................................................................................
7th Interest Date: T7 = 4/30/2014 ............................................................................................................................................
8th Interest & Maturity Dates: T8 = 7/31/2014 ........................................................................................................................
....................................
T1 ¥ T0 = 92
T2 ¥ T1 = 92
T3 ¥ T2 = 89
T4 ¥ T3 = 92
T5 ¥ T4 = 92
T6 ¥ T5 = 92
T7 ¥ T6 = 89
T8 ¥ T7 = 92
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E:\FR\FM\31JYR2.SGM
31JYR2
ER31JY13.011</GPH>
Days between dates
ER31JY13.010</GPH>
ehiers on DSK2VPTVN1PROD with RULES_2
Dates
46440
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
Using the spread s = 0.120%, and the fixed
index rate of r = 0.095022819% applicable to
the issue date (7/31/2012), the first and
seventh projected interest payments are
computed as follows:
IP1 = 92×[100×max(0.00095022819 +
0.00120,0)/360]
IP1 = 92×0.000597286 = 0.054950312
IP7 = 89×[100×max(0.00095022819 +
0.00120,0)/360]
IP7 = 89×0.000597286 = 0.053158454
The following table shows all projected
interest payments as of the issue date.
TABLE 3—PROJECTED INTEREST
PAYMENTS
i
1 ................
2 ................
3 ................
Dates
10/31/2012
1/31/2013
4/30/2013
IPi
0.054950312
0.054950312
0.053158454
of an original issue from 31 days prior, Table
5 as shown in the example is used for
accrued interest calculations. For a two-year
floating rate note originally auctioned on July
25, 2012 with an original issue date of July
31, 2012, reopened by an auction on August
30, 2012 and issued on August 31, 2012, with
a maturity date of July 31, 2014, calculate the
quarterly interest payments (IPI) per 100. T¥1
is the dated date if the reopening occurs
before the first interest payment date, or
otherwise the latest interest payment date
prior to the new issue date.
T¥1 = July 31, 2012.
T0 = August 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.105027876%.
s = 0.120%.
m = 0.100%.
The following table shows the past results
for the 13-week bill auction.
TABLE 3—PROJECTED INTEREST
PAYMENTS—Continued
i
4
5
6
7
8
................
................
................
................
................
Dates
IPi
7/31/2013
10/31/2013
1/31/2014
4/30/2014
7/31/2014
0.054950312
0.054950312
0.054950312
0.053158454
0.054950312
Example 2: Projected interest payment as
of the reopening issue date (intermediate
values, including rates in percentage terms,
are rounded to nine decimal places).
This example demonstrates the
calculations required to determine the
interest payment due when the reopened
floating rate note is issued. This example also
demonstrates the need to calculate accrued
interest at the time of a floating rate
reopening auction. Since this is a reopening
TABLE 4—13-WEEK BILL AUCTION DATA
Auction date
Issue date
7/23/2012 .............................................................................
7/30/2012 .............................................................................
8/6/2012 ...............................................................................
8/13/2012 .............................................................................
8/20/2012 .............................................................................
8/27/2012 .............................................................................
Maturity date
7/26/2012
8/2/2012
8/9/2012
8/16/2012
8/23/2012
8/30/2012
10/25/2012
11/1/2012
11/8/2012
11/15/2012
11/23/2012
11/29/2012
Auction
clearing price
99.975986
99.972194
99.974722
99.972194
99.973167
99.973458
Auction
high rate
(percent)
0.095
0.110
0.100
0.110
0.105
0.105
Index rate
(percent)
0.095022819
0.110030595
0.100025284
0.110030595
0.105028183
0.105027876
The following table shows the index rates
applicable for the accrued interest.
TABLE 5—APPLICABLE INDEX RATE
Accrual ends
7/31/2012 .........................................................................................................
8/1/2012 ...........................................................................................................
8/7/2012 ...........................................................................................................
8/14/2012 .........................................................................................................
8/21/2012 .........................................................................................................
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Number of
days in
accrual period
7/31/2012
8/6/2012
8/13/2012
8/20/2012
8/27/2012
E:\FR\FM\31JYR2.SGM
1
6
7
7
7
31JYR2
Applicable floating rate
Auction date
7/23/2012
7/30/2012
8/6/2012
8/13/2012
8/20/2012
Index rate
(percent)
0.095022819
0.110030595
0.100025284
0.110030595
0.105028183
ER31JY13.012</GPH>
ehiers on DSK2VPTVN1PROD with RULES_2
Accrual starts
46441
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
TABLE 5—APPLICABLE INDEX RATE—Continued
Accrual starts
Accrual ends
8/28/2012 .........................................................................................................
Computing the accrued interest
The accrued interest as of 8/31/2012 for a
$100 par value is:
AI = 1 × 100 × max (0.00095022819 +
0.00120,0)/360
+ 6 × 100 × max (0.00110030595 +
0.00120,0)/360
+ 7 × 100 × max (0.00100025284 +
0.00120,0)/360
Number of
days in
accrual period
8/30/2012
3
Applicable floating rate
Index rate
(percent)
Auction date
8/27/2012
0.105027876
+ 7 × 0.000625078
+ 3 × 0.000625077
AI = 0.000597286 + 0.003833844 +
0.004278267 + 0.004472818 +
0.004375546 + 0.001875231
AI = 0.019432992 = $0.019433
The following table presents the future
interest payment dates and the number of
days between them.
+ 7 × 100 × max (0.00110030595 +
0.00120,0)/360
+ 7 × 100 × max (0.00105028183 +
0.00120,0)/360
+ 3 × 100 × max (0.00105027876 +
0.00120,0)/360
AI = 1 × 0.000597286
+ 6 × 0.000638974
+ 7 × 0.000611181
+ 7 × 0.000638974
TABLE 6—PAYMENT DATES
Dates
Days between dates
Original Issue Date: T¥1 = 7/31/2012 .....................................................................................................................................
New Issue Date: T0 = 8/31/2012 .............................................................................................................................................
1st Interest Date: T1 = 10/31/2012 ..........................................................................................................................................
2nd Interest Date: T2 = 1/31/2013 ...........................................................................................................................................
3rd Interest Date: T3 = 4/30/2013 ...........................................................................................................................................
4th Interest Date: T4 = 7/31/2013 ............................................................................................................................................
5th Interest Date: T5 = 10/31/2013 ..........................................................................................................................................
6th Interest Date: T6 = 1/31/2014 ............................................................................................................................................
7th Interest Date: T7 = 4/30/2014 ............................................................................................................................................
8th Interest & Maturity Dates: T8 = 7/31/2014 ........................................................................................................................
Using the original spread s = 0.120%
(obtained on 7/25/2012), and the fixed index
rate of r = 0.105027876% applicable to the
new issue date (8/31/2012), the first and
eighth projected interest payments are
computed as follows:
IP1 = 0.019432992 + 61 × [100 × max
(0.00105027876 + 0.00120,0)/360]
IP1 = 0.019432992 + 61 × 0.000625077
IP1 = 0.019432992 + 0.038129697 =
0.057562689
and
IP8 = 92 × [100 × max (0.00105027876 +
0.00120,0)/360]
IP8 = 92 × 0.000625077 = 0.057507084
The following table shows all projected
interest payments as of the new issue date.
TABLE 7—PROJECTED INTEREST
PAYMENTS
i
ehiers on DSK2VPTVN1PROD with RULES_2
1 ................
VerDate Mar<15>2010
Dates
10/31/2012
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IPi
0.057562689
Jkt 229001
TABLE 7—PROJECTED INTEREST
PAYMENTS—Continued
i
2
3
4
5
6
7
8
................
................
................
................
................
................
................
Dates
1/31/2013
4/30/2013
7/31/2013
10/31/2013
1/31/2014
4/30/2014
7/31/2014
IPi
0.057507084
0.055631853
0.057507084
0.057507084
0.057507084
0.055631853
0.057507084
Definitions for Newly Issued Floating Rate
Notes with an Issue Date that Occurs after
the Dated Date
PD = the price that includes accrued interest
from the dated date to the issue date per
$100 par value as of the issue date.
AI = the accrued interest per $100 par value
as of the issue date.
PC = the price without accrued interest per
$100 par value as of the issue date.
T¥1 = the dated date.
PO 00000
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¥ T¥1
T1 ¥ T0
T2 ¥ T1
T3 ¥ T2
T4 ¥ T3
T5 ¥ T4
T6 ¥ T5
T7 ¥ T6
T8 ¥ T7
T0
=
=
=
=
=
=
=
=
=
31
61
92
89
92
92
92
89
92
T0 = the issue date.
N = the total number of remaining quarterly
interest payments as of the new issue
date.
i and k = indexes that identify the sequence
of interest payment dates.
j = an index that identifies days between the
dated date and the issue date.
Ti = the ith quarterly future interest payment
date.
Ti ¥ Ti¥1 = the number of days between the
interest payment date Ti and the
preceding interest payment date.
TN = the maturity date.
rj’s = the effective index rates for days
between the dated date and the issue
date.
r = the index rate applicable to the issue date.
s = the spread.
m = the discount margin.
E. Pricing and accrued interest for new
issue floating rate notes with an issue date
that occurs after the dated date
Formula:
E:\FR\FM\31JYR2.SGM
31JYR2
46442
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
Example:
The purpose of this example is to
demonstrate how a floating rate note can
have a price without accrued interest of less
than $100 par value when the issue date
occurs after the dated date. An original issue
two-year floating rate note is auctioned on
December 29, 2011, with a dated date of
December 31, 2011, an issue date of January
3, 2012, and a maturity date of December 31,
2013.
Definitions:
Dated date = 12/31/2011.
Issue date = 1/3/2012.
Maturity date = 12/31/2013.
Spread = 1.000% at auction.
Discount margin = 1.000%.
As of the issue date the latest 13-week bill,
auctioned at least two days prior, has the
following information:
TABLE 1—13-WEEK BILL AUCTION DATA
Auction date
Issue date
Maturity date
Auction
clearing price
Auction high
rate
Index rate
12/27/2011 ...........................................................................
12/29/2011
3/29/2012
99.993681
0.025%
0.025001580%
The following table shows the index rates
applicable for the accrued interest.
Accrual ends
12/31/2011 .......................................................................................................
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1/2/2012
Number of
days in
accrual period
Auction date
Index rate
3
12/27/2011
0.025001580%
E:\FR\FM\31JYR2.SGM
31JYR2
Applicable floating rate
ER31JY13.014</GPH>
Accrual starts
ER31JY13.013</GPH>
ehiers on DSK2VPTVN1PROD with RULES_2
TABLE 2—APPLICABLE INDEX RATE
46443
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
Computing the accrued interest
The accrued interest as of the new issue
date (1/3/2012) for a $100 par value is:
AI = 3 × 100 × max (0.00025001580 +
0.01000,0)/360
AI = 3 × 0.002847227
AI = 0.008541681 = $0.008542
Computing the Projected Cash Flows
The following table presents the future
interest payment dates and the number of
days between them.
TABLE 3—PAYMENT DATES
Dates
Days between dates
Dated Date: = T¥1 = 12/31/2011 ............................................................................................................................................
Issue Date: T0 = 1/3/2012 .......................................................................................................................................................
1st Interest Date: T1 = 3/31/2012 ............................................................................................................................................
2nd Interest Date: T2 = 6/30/2012 ...........................................................................................................................................
3rd Interest Date: T3 = 9/30/2012 ...........................................................................................................................................
4th Interest Date: T4 = 12/31/2012 ..........................................................................................................................................
5th Interest Date: T5 = 3/31/2013 ............................................................................................................................................
6th Interest Date: T6 = 6/30/2013 ............................................................................................................................................
7th Interest Date: T7 = 9/30/2013 ............................................................................................................................................
8th Interest & Maturity Dates: T8 = 12/31/2013 ......................................................................................................................
Let
ai = 100 × max(r + s, 0)/360
and
Ai = ai × (Ti ¥ Ti¥1) + 100 × 1{i=8}
ai represents the daily projected interest,
for a $100 par value, that will accrue between
the future interest payment dates Ti¥1 and Ti,
where i = 1,2,...,8. ai’s are computed using the
spread s = 1.000% obtained at the auction,
and the fixed index rate of r = 0.025001580%
applicable to the issue date (1/3/2012). For
example:
a1 = 100 × max(0.00025001580 + 0.01000,0)/
360 = 0.002847227
Ai represents the projected cash flow the
floating rate note holder will receive, less
accrued interest, for a $100 par value, at the
future interest payment date Ti, where i =
1,2,...,8. Ti ¥ Ti¥1 is the number of days
between the future interest payment dates
Ti¥1 and T1. To account for the payback of
the par value, the variable 1{i=8} takes the
value 1 if the payment date is the maturity
date, or 0 otherwise. For example:
A1 = 88 × 0.002847227 = 0.250555976
and
A8 = 92 × 0.002847227 + 100 =
100.261944884
Let
Bi = 1 + (r + m) × (Ti ¥ Ti¥1)/360
T0 ¥ T¥1 = 3
T1 ¥ T0 = 88
T2 ¥ T1 = 91
T3 ¥ T2 = 92
T4 ¥ T3 = 92
T5 ¥ T4 = 90
T6 ¥ T5 = 91
T7 ¥ T6 = 92
T8 ¥ T7 = 92
Bi represents the projected compound
factor between the future dates Ti¥1 and Ti,
where i = 1,2,...,8. All Bi’s are computed
using the discount margin m = 1.000%
(equals the spread obtained at the auction),
and the fixed index rate of r = 0.025001580%
applicable to the issue date (1/3/2012). For
example:
B3 = 1 + (0.00025001580 + 0.01000) × 92/360
= 1.002619448
The following table shows the projected
daily accrued interests for $100 par value
(ai ’s), cash flows at interest payment dates
(Ai ’s), and the compound factors between
payment dates (Bi’s).
TABLE 4—PROJECTED CASH FLOWS AND COMPOUND FACTORS
i
1
2
3
4
5
6
7
8
ai
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
...................................................................................................
Ai
0.002847227
0.002847227
0.002847227
0.002847227
0.002847227
0.002847227
0.002847227
0.002847227
0.250555976
0.259097657
0.261944884
0.261944884
0.256250430
0.259097657
0.261944884
100.261944884
ehiers on DSK2VPTVN1PROD with RULES_2
Computing the price
The price with accrued interest is
computed as follows:
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15:04 Jul 30, 2013
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Bi
1.002505559
1.002590976
1.002619448
1.002619448
1.002562504
1.002590976
1.002619448
1.002619448
46444
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
B. Trading in the Secondary Market
*
*
*
*
■ 16. In Appendix C, add Section II to
read as follows:
Appendix C to Part 356—Investment
Considerations
*
*
*
*
*
ehiers on DSK2VPTVN1PROD with RULES_2
II. Floating Rate Notes
A. Interest Variability
An investment in securities with interest
determined by reference to a 13-week
Treasury bill index involves risks not
associated with an investment in a fixed
interest rate security. Such risks include the
possibility that:
• Changes in the index may or may not
correlate to changes in interest rates generally
or with changes in other indexes;
• any given interest payment may be more
or less than the amount paid on prior interest
payment dates;
• the resulting interest payments may be
greater or less than those payable on other
securities of similar maturities, and
• in the event of sustained falling interest
rates, the amount of the quarterly interest
payments will decrease.
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C. Tax Considerations
The Treasury securities market is the
largest and most liquid securities market in
the world. The market for Treasury floating
rate notes, however, may not be as active or
liquid as the market for Treasury nonindexed securities or Treasury inflationprotected securities. In addition, Treasury
floating rate notes may not be as widely
traded or as well understood as these other
types of Treasury marketable securities.
Prices for floating rate notes may not
fluctuate in reaction to interest rate
movements in the same manner as other
Treasury securities. Lesser liquidity and
fewer market participants may result in larger
spreads between bid and asked prices for
Treasury floating rate notes than the bidasked spreads for other Treasury marketable
securities with the same time to maturity.
Larger bid-asked spreads normally result in
higher transaction costs and/or lower overall
returns. The liquidity of a Treasury floating
rate note may be enhanced over time as we
issue additional amounts or more entities
participate in the market.
Treasury floating rate notes are subject to
specific tax rules provided by Treasury
regulations issued under section 1275(d) of
the Internal Revenue Code of 1986, as
amended.
PO 00000
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D. Indexing Issues
The Bureau of the Fiscal Service publishes
the High Rate immediately following a 13week bill auction as part of the auction
results. The 13-week bill is generally
auctioned once per week. Treasury retains
the flexibility to increase or decrease the
frequency of 13-week bill auctions, which
would affect the frequency of index rate
resets. The High Rate is subject to various
interest rate and market environments over
which Treasury has no control. For a
discussion of actions that Treasury would
take in the event auctions of 13-week bills are
discontinued or delayed, see appendix B,
section I, paragraph C.4 of this part.
17. In Appendix D, revise the heading,
designate the current text as section I.
Consumer Price Index, and add section
II to read as follows:
■
E:\FR\FM\31JYR2.SGM
31JYR2
ER31JY13.015</GPH>
*
Federal Register / Vol. 78, No. 147 / Wednesday, July 31, 2013 / Rules and Regulations
Appendix D to Part 356—Description of
the Indexes
I. Consumer Price Index
*
*
*
*
*
II. Floating Rate Note Index
The floating rate note index is the 13-week
Treasury bill auction High Rate (stop out
rate), and converted to the simple-interest
money market yield computed on an actual/
360 basis.
Richard L. Gregg,
Fiscal Assistant Secretary.
[FR Doc. 2013–18178 Filed 7–30–13; 8:45 am]
ehiers on DSK2VPTVN1PROD with RULES_2
BILLING CODE 4810–39–P
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]]>Agencies
[Federal Register Volume 78, Number 147 (Wednesday, July 31, 2013)]
[Rules and Regulations]
[Pages 46425-46445]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18178]
[[Page 46425]]
Vol. 78
Wednesday,
No. 147
July 31, 2013
Part II
Department of the Treasury
-----------------------------------------------------------------------
Fiscal Service
-----------------------------------------------------------------------
31 CFR Part 356
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes, and
Bonds; Final Rule
Federal Register / Vol. 78 , No. 147 / Wednesday, July 31, 2013 /
Rules and Regulations
[[Page 46426]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 356
[Docket No. Fiscal-BPD-2013-0001]
Sale and Issue of Marketable Book-Entry Treasury Bills, Notes,
and Bonds
AGENCY: Fiscal Service, Treasury.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule amends Treasury's marketable securities
auction rules to accommodate the public offering of a new type of
marketable security with a floating rate interest payment. In addition,
the amendment makes certain technical clarifications and conforming
changes.
DATES: Effective July 31, 2013.
ADDRESSES: Treasury has established a docket for this action under
Docket ID Number Fiscal-BPD-2013-0001 in the www.regulations.gov Web
site. This final rule is available for downloading from
www.treasurydirect.gov. It is also available for public inspection and
copying at the Treasury Library, 1500 Pennsylvania Avenue NW., Annex,
Room 1020, Washington, DC 20220. To visit the library, call (202) 622-
0990 for an appointment.
FOR FURTHER INFORMATION CONTACT: Lori Santamorena, Executive Director,
or Chuck Andreatta, Associate Director, Government Securities
Regulations Staff, Bureau of the Fiscal Service, Department of the
Treasury, (202) 504-3632.
SUPPLEMENTARY INFORMATION:
I. Background
The Department of the Treasury (``Treasury'') is issuing an
amendment to 31 CFR part 356 \1\ (the ``Uniform Offering Circular'') to
accommodate offerings of a new type of marketable security, referred to
as a Treasury floating rate note, whose index rate will be indexed to
13-week Treasury bill auction rates. Treasury views issuance of
floating rate notes as consistent with its mission to borrow at the
lowest cost over time, manage the maturity profile of our marketable
debt outstanding, expand the Treasury investor base, and provide a
financing tool that gives debt managers additional flexibility.
Treasury decided to establish a floating rate note program after
carefully considering the long-term supply and demand dynamics for
these securities and with significant consultation with market
participants.
---------------------------------------------------------------------------
\1\ 31 CFR part 356 is generally referred to as the Uniform
Offering Circular (UOC). The UOC, together with the auction
announcement for each Treasury securities auction, sets out the
terms and conditions for the sale and issuance by Treasury to the
public of marketable Treasury bills, notes, and bonds.
---------------------------------------------------------------------------
Treasury floating rate notes will be indexed to the most recent 13-
week Treasury bill auction High Rate \2\ (stop out rate), and converted
to a simple-interest money market yield computed on an actual/360
basis, subject to an appropriate lockout period,\3\ which initially
will be two business days (see appendix D). In its May 2013 Quarterly
Refunding Statement, Treasury announced its intention to begin
auctioning floating rate notes in either the fourth quarter of 2013 or
the first quarter of 2014.\4\ Treasury's initial auction will be of
two-year floating rate notes. Treasury will announce specific terms and
conditions of each issue, such as the auction date, issue date, and
public offering amount, prior to each auction. Over time, Treasury may
consider offering additional maturities of floating rate notes.
---------------------------------------------------------------------------
\2\ The High Rate is the highest accepted discount rate in a
marketable Treasury bill auction and is announced on the auction
results press release. Treasury awards securities in Treasury bill
auctions at the price that corresponds to the High Rate.
\3\ A lockout period for floating rate notes is a period of time
prior to the auction settlement or payment of interest. Any 13-week
Treasury bill auction that takes place during this period will be
excluded from the calculation of accrued interest for determining
the settlement or interest payment amount.
\4\ The May 2013 Quarterly Refunding Statement, dated May 1,
2013, can be accessed at: https://www.treasury.gov/press-center/press-releases/Pages/jl1921.aspx.
---------------------------------------------------------------------------
II. Consultation and Request for Comments
Treasury announced at its February 2012 Quarterly Refunding that it
was studying the possibility of issuing a floating rate note with an
interest rate that is indexed and periodically reset.\5\ In determining
the final terms and conditions for a floating rate note, Treasury
sought input from a wide range of participants, particularly concerning
the demand for the product, how the security should be structured, its
liquidity, the most appropriate index, and operational issues that
should be considered related to the issuance of this type of debt.
---------------------------------------------------------------------------
\5\ The February 2012 Quarterly Refunding Statement, dated
February 1, 2012, can be accessed at: https://www.treasury.gov/press-center/press-releases/Pages/tg1405.aspx.
---------------------------------------------------------------------------
On March 19, 2012, Treasury issued a Notice and Request for
Information (RFI) to the public with a closing date for comments of
April 18, 2012.\6\ Treasury received 14 comment letters in response to
the RFI.\7\ Commenters broadly supported issuance of this type of
security. Based on the response to the RFI and additional feedback,
Treasury announced in its August 2012 Quarterly Refunding Statement
that it planned to develop a floating rate note program to complement
the existing suite of securities issued and to support its broader debt
management objectives.\8\
---------------------------------------------------------------------------
\6\ 77 FR 16116 (March 19, 2012).
\7\ The comment letters are available to the public for
inspection and downloading at the TreasuryDirect Web site. https://www.treasurydirect.gov/instit/statreg/auctreg/auctreg_comltr_td_floating rate note.htm.
\8\ The August 2012 Quarterly Refunding Statement, dated August
1, 2012, can be accessed at: https://www.treasury.gov/press-center/press-releases/Pages/tg1663.aspx.
---------------------------------------------------------------------------
On December 5, 2012, Treasury issued an Advance Notice of Proposed
Rulemaking (ANPR) to invite public comment on the design details, terms
and conditions, and other features relevant to the sale and issuance of
this new type of security.\9\ The closing date for comments was January
22, 2013.
---------------------------------------------------------------------------
\9\ 77 FR 72278 (December 5, 2012).
---------------------------------------------------------------------------
III. Comments Received in Response to the Advance Notice of Proposed
Rulemaking
Treasury received 16 comment letters in response to the ANPR \10\--
one from a securities industry trade association, eight from primary
dealers, two from private citizens, and one each from a non-primary
dealer, a derivatives clearing house, a derivatives exchange, an
investment manager, and an advisory service. Overall, there was a
consensus on many features of the security as proposed in the ANPR,
including the reset frequency, frequency of interest payments, interest
rate determination, initial maturity range, and auction technique.
There was also an expressed belief that, if appropriately structured, a
Treasury floating rate note would be an attractive investment for a
broad base of institutional investors including money market funds,
securities lenders, corporations, and foreign central banks.
---------------------------------------------------------------------------
\10\ The comment letters are available to the public for
inspection and downloading at the TreasuryDirect Web site. https://www.treasurydirect.gov/instit/statreg/auctreg/auctreg_advance_floating_rate.htm.
---------------------------------------------------------------------------
Regarding the index rate, the ANPR specifically requested comments
on the use of either (1) the 13-week Treasury bill auction High Rate
(stop out rate) converted into a simple actual/360 interest rate, or
(2) a Treasury general collateral overnight repurchase agreement rate
(the ``Treasury GC Rate''). All but one of the commenters addressed
this issue, with nine favoring some form of repurchase agreement rate,
and six preferring an index based on 13-
[[Page 46427]]
week Treasury bills. Commenters preferring the Treasury bill index also
preferred the actual/360 basis over any other method for converting the
auction High Rate.
Most commenters preferred that the index rate be reset daily, and
that interest payments be made quarterly. Commenters also widely
supported having a new issue of floating rate notes every quarter with
two subsequent monthly reopenings. Regarding the timing of settlement,
a large majority who expressed a preference favored mid-month
settlement over end-of-month settlement. There was also general
consensus that the interest rate should be floored at zero percent.
In the ANPR, Treasury stated that it intends to start the floating
rate note program with a two-year maturity. Most commenters agreed that
this was a good maturity to start with, and suggested eventual
expansion to longer maturities of up to 10 years.
Regarding the lockout periods, the ANPR noted that the current
convention in the floating rate note market is for interest payments to
be set five business days in advance of their payment dates. This
standard practice dates from the late 1980s and was put in place for
operational reasons. The ANPR stated that, given technological
advancements, Treasury believes that one-business-day notice of
interest payments should suffice. Four commenters stated that one
business day was sufficient. One commenter stated that no lockout
period was needed. Two commenters said that two business days was the
most beneficial, while another commenter suggested two to three days
``for maximum operational clarity.'' One commenter advocated seven
business days.
A commenter stated that, ``at least initially, a two-day lockout
period would be optimal for operational efficiency. The benefit of an
initial two-day lockout period is that it would accommodate both the
firms that are currently able to absorb a shorter lockout period in
their current operational flow, as well as firms that would have to
make operational adjustments. In addition, buyside members also
indicated that a two-day lockout period would be optimal to achieve
operational efficiency.''
IV. Summary of Terms, Conditions, and Features
After taking into consideration the comments received, Treasury is
adopting as a final rule this amendment to the Uniform Offering
Circular setting out the terms, conditions, and features of Treasury
floating rate notes.
Floating rate notes will be issued with maturities of at least one
year, but not more than ten years. Floating rate notes may be sold at
discount, par, or premium, and will pay interest quarterly on the last
calendar day of the month.
Auctions of Treasury floating rate notes will generally be
conducted in the same manner as other marketable Treasury securities
auctions. The auctions will be conducted as single-price auctions in
which competitive bidders will bid in terms of a desired discount
margin (positive, negative, or zero), expressed as a percentage with
three decimals, e.g., 1.230 percent. The spread on the first issuance
of a particular floating rate note will be set at the highest accepted
discount margin in that auction. Auctions will include both competitive
and noncompetitive bidding, a minimum purchase amount of $100, a
maximum noncompetitive bid amount of $5 million, and a 35-percent
maximum award limitation. The award methodology will be the same as for
other Treasury marketable securities auctions.\11\
---------------------------------------------------------------------------
\11\ See Sec. 356.20(a).
---------------------------------------------------------------------------
Reopening auctions will be conducted in the same manner as new
issuances, except that the spread on a floating rate note offered in a
reopening auction will be the spread determined in the first auction of
that security. Bidders in reopening auctions will bid on a discount
margin basis and those who are awarded securities will be required to
pay accrued interest from the dated date, or last interest payment
date, to the reopening issue date.
The index for floating rate notes will be the weekly High Rate
(stop out rate) of 13-week Treasury bill auctions. The interest rate
will be the spread plus the index rate, which will reset daily based on
the most recent auction of 13-week bills and will be subject to a
minimum daily interest accrual rate of zero percent. After analyzing
the comments received, Treasury determined that a minimum spread was
unnecessary. The use of a zero-percent minimum daily interest accrual
rate will prevent floating rate note investors from having to remit an
interest payment to Treasury during unusual interest rate environments,
including those with expectations for deeply negative interest rates.
Treasury carefully considered the ANPR responses related to the
selection of an index rate. While a majority of respondents favored
using a repurchase agreement rate, Treasury weighed that input against
the benefits of indexing to the established, well-understood, and
highly liquid 13-week Treasury bill market. At this time, Treasury
believes that using the 13-week Treasury bill auction rate as the index
will best achieve the goal of funding the government at the lowest
possible cost over time. However, the selection of the 13-week Treasury
bill auction rate as the index does not preclude Treasury from amending
the Uniform Offering Circular in the future to provide for a floating
rate note issuance that uses an alternative index.
Although the index rate will reset daily, given the current 13-week
Treasury bill auction schedule, the rate will effectively change once a
week. The index rate will change on the day following a 13-week bill
auction regardless of whether that day is a business day or a non-
business day.
Interest on floating rate notes will accrue daily throughout the
interest payment period. In general, the interest accrual for a
particular calendar day in an accrual period will be the spread
determined at the time of a new floating rate note auction plus the
index rate.
The index rate is computed from the most recent 13-week Treasury
bill auction High Rate that has been translated into a simple-interest
money market yield computed on an actual/360 basis and rounded to nine
decimal places. If, however, the most recent 13-week bill auction
occurred during a lockout period for the applicable floating rate note,
then the index rate is computed from the most recent 13-week bill
auction that occurred prior to the lockout period. As previously
mentioned, the minimum daily interest accrual rate will be zero
percent.
Treasury will provide notice of interest payments two business days
prior to each interest payment date. For purposes of calculating
auction settlement amounts and quarterly interest payments, floating
rate notes will initially have a two-business-day lockout period prior
to their auction settlement date or an interest payment date.
Therefore, a 13-week Treasury bill auction that takes place during the
lockout period will be excluded from the calculation of accrued
interest for purposes of determining that settlement amount or interest
payment. Any changes in the index rate that would otherwise have
occurred during the lockout period will occur on the first calendar day
following the end of the lockout period. We will provide sufficient
notice if we change the length of the lockout period for future
floating rate note issuances.
Although most commenters preferred mid-month settlement, the issue
date for newly issued Treasury floating rate
[[Page 46428]]
notes will normally be on the last calendar day of a month because this
timing better accommodates Treasury's financing needs. Reopening
issuances of floating rate notes will occur on the last Friday of a
month. In both cases, if the regular issue day is a non-business day,
issuance will occur on the next business day. The auction announcement
for each floating rate note will contain the specific details of that
offering.
Floating rate notes will not be eligible for stripping.\12\ The
notes will be eligible, however, to serve as collateral for Treasury's
Fiscal Service collateral programs.
---------------------------------------------------------------------------
\12\ Stripping means separating a security's interest and
principal components so they can be traded separately.
---------------------------------------------------------------------------
This final rule makes the necessary revisions to accommodate the
sale and issuance of floating rate notes. Accordingly, Treasury is
amending sections 356.2; 356.5; 356.12; 356.14; 356.15; 356.20; 356.21;
356.23; 356.30, 356.31, 356.32; Appendix A, Section II; Appendix B,
Sections I and IV; Appendix C, Section II; and Appendix D, Section II
of 31 CFR 356.
V. Section by Section Summary
Section 356.2 has been amended by adding definitions of 13-week
bill, Discount margin, Index rate, and Spread. The definition of Index
has been amended to add that, in addition to the term meaning the
Consumer Price Index for inflation protected securities, Index also
means the High Rate on auctions of 13-week Treasury bills for floating
rate notes. The definition of Interest rate has been expanded to define
how the interest rate is determined for floating rate notes. Conforming
changes have also been made to the definitions of Competitive bid,
Multiple-price auction, Noncompetitive bid, Single-price auction, and
Weighted-average to add discount margin as an allowable basis for
bidding in addition to discount rate and yield.
Section 356.5 has been amended by adding a new paragraph (b)(3) to
add floating rate notes as a new type of security that Treasury
auctions. The footnote to this section has also been amended by
changing the term ``fixed-principal'' to ``non-indexed'' to distinguish
regular Treasury notes and bonds from inflation-protected securities
and floating rate notes. The term ``fixed-principal'' has been changed
to ``non-indexed'' throughout this entire part.
Section 356.12 has been amended by adding a new subparagraph
(c)(1)(iv) to provide the competitive bidding format for floating rate
notes.
Section 356.20 has been amended to create a new paragraph (c) that
explains how interest rates for floating rate notes are determined.
Section 356.30 has been amended to allow for quarterly interest
payments, since all other Treasury notes, bonds, and inflation-
protected securities pay interest semiannually.
Section 356.31 has been amended to make it clear that floating rate
notes are not eligible for stripping.
Section 356.32 has been amended by adding a new paragraph (c) to
provide a brief mention of special federal income tax rules for
floating rate notes.
Appendix B, Section I has been reorganized to add a new subsection
C that describes the indexing and interest payment processes for
floating rate notes, how the interest rate is determined, how interest
accrues, and various floating rate index contingencies. New subsection
D has been amended to add a new paragraph 6 that directs readers to
section IV, paragraphs C and D of the appendix for discussion of how
accrued interest is calculated for floating rate notes. A new Section
IV has been added that provides the formulas for converting discount
margins to equivalent prices for floating rate notes.
A new Section II has been added to Appendix C to address various
investment considerations for Treasury floating rate notes.
Specifically, Section II discusses interest variability, secondary
market trading, tax considerations, and indexing issues.
Appendix D has been amended to revise the title, designate the
current text as Section I, and add a new Section II that adds a
description of the floating rate note index.
Conforming changes are also made to paragraphs 356.12(c)(2);
356.14(d); 356.15(e); 356.20(a)(1) and (a)(2) and new paragraphs (d)(1)
and (d)(2); 356.21(a) and (b); 356.23(b)(2); and Appendix A, Section
II, paragraph (d)(1) to add discount margin as an allowable basis for
bidding.
VI. Procedural Requirements
Executive Order 12866. This final rule is not a ``significant
regulatory action'' pursuant to Executive Order 12866.
Administrative Procedure Act (APA). Because this rule relates 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, pursuant to 5 U.S.C.
553(a)(2).
Regulatory Flexibility Act. As no notice of proposed rulemaking is
required, the provisions of the Regulatory Flexibility Act (5 U.S.C.
601, et seq.) do not apply.
Paperwork Reduction Act. There is no new collection of information
contained in this final rule, and, therefore, the Paperwork Reduction
Act does not apply. The Office of Management and Budget has approved
the collections of information already contained in 31 CFR part 356,
under control number 1535-0112. Under the Paperwork Reduction Act, an
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a valid OMB
control number.
List of Subjects in 31 CFR Part 356
Bonds, Federal Reserve System, Government Securities, Securities.
For the reasons set forth in the preamble, amend 31 CFR part 356 as
follows:
PART 356--SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS,
NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 1-93)
0
1. The authority citation for part 356 continues to read as follows:
Authority: 5 U.S.C. 301; 31 U.S.C. 3102, et seq.; 12 U.S.C. 391.
0
2. In 31 CFR part 356, wherever it appears:
0
a. Remove `fixed-principal' and add in its place `non-indexed';
0
b. Remove `Fixed-principal' and add in its place `Non-indexed'; and
0
c. Remove `FIXED-PRINCIPAL' and add in its place `NON-INDEXED'.
Subpart A--General Information.
0
3. Amend Sec. 356.2 by:
0
a. Adding definitions in alphabetical order for 13-week bill, Discount
margin, Index rate, and Spread; and
0
b. Revising the definitions of Competitive bid, Index, Multiple-price
auction, Noncompetitive bid, Single-price auction, and Weighted-
average.
The additions and revisions read as follows:
Sec. 356.2 What definitions do I need to know to understand this
part?
13-week bill means a Treasury bill where the security description
is ``13-Week Bill'' as referenced on the Treasury auction announcement.
* * * * *
Competitive bid means a bid to purchase a stated par amount of
[[Page 46429]]
securities at a specified yield, discount rate, or discount margin.
* * * * *
Discount margin means the margin over the index that equates the
present values of the assumed cash flows on a floating rate note to the
sum of the price of and accrued interest on the floating rate note. The
assumed cash flows are calculated based upon the index rate applicable
to the dated date. Bidders in floating rate note auctions bid on the
basis of discount margin. (See appendix B.)
* * * * *
Index means the Consumer Price Index for inflation-protected
securities. For floating rate notes, the index is the highest accepted
discount rate on 13-week bills determined by Treasury auctions of those
securities.
Index rate means the simple-interest money market yield, computed
on an actual/360 basis and rounded to nine decimal places, from the
highest accepted discount rate of a 13-week bill auction as announced
in the Treasury auction results press release. (See appendix B for
methods and examples for computing the index rate.)
* * * * *
Interest rate means the annual percentage rate of interest paid on
the par amount (or the inflation-adjusted principal) of a specific
issue of notes or bonds. For floating rate notes, the interest rate is
the spread plus the index rate, which resets daily based on the most
recent auction of 13-week bills, and is subject to a minimum daily
interest accrual rate of zero percent. (See appendix B for methods and
examples of interest calculations.)
* * * * *
Multiple-price auction means an auction in which each successful
competitive bidder pays the price equivalent to the yield, discount
rate, or discount margin that it bid.
Noncompetitive bid means, for a single-price auction, a bid to
purchase a stated par amount of securities at the highest yield,
discount rate, or discount margin awarded to competitive bidders. For a
multiple-price auction, a noncompetitive bid means a bid to purchase
securities at the weighted average yield, discount rate, or discount
margin of awards to competitive bidders.
* * * * *
Single-price auction means an auction in which all successful
bidders pay the same price regardless of the yields, discount rates, or
discount margins they each bid.
Spread means the fixed amount over the life of a floating rate note
that is added to the index rate in order to determine the interest rate
of the floating rate note. The spread will be determined in the auction
of a new floating rate note and is expressed in tenths of a basis point
(i.e., to three decimals). Additionally, the spread will be equal to
the high discount margin at the time a new floating rate note is
auctioned.
* * * * *
Weighted-average means the average of the yields, discount rates,
or discount margins at which we award securities to competitive bidders
in multiple-price auctions weighted by the par amount of securities
allotted at each yield, discount rate, or discount margin.
* * * * *
0
4. In Sec. 356.5, in paragraph (b)(1), revise referenced footnote \1\
and add paragraph (b)(3) to read as follows:
Sec. 356.5 What types of securities does the Treasury auction?
* * * * *
(b) * * *
(1) * * *
\1\ We use the term ``non-indexed'' in this part to distinguish
such notes and bonds from ``inflation-protected securities'' and
``floating rate notes.'' We refer to non-indexed notes and non-indexed
bonds as ``notes'' and ``bonds'' in official Treasury publications,
such as auction announcements and auction results press releases, as
well as in auction systems.
* * * * *
(3) Treasury floating rate notes. (i) Are issued with a stated
spread to be added to the index rate for daily interest accrual
throughout each interest payment period;
(ii) Have a zero-percent minimum daily interest accrual rate;
(iii) Have interest payable quarterly;
(iv) Are redeemed at their par amount at maturity;
(v) Are sold at discount, par, or premium depending on the auction
results (See appendix B for price and interest payment calculations and
appendix C for Investment Considerations.); and
(vi) Have maturities of at least one year, but not more than ten
years.
* * * * *
Subpart B--Bidding, Certifications, and Payment.
0
5. In Sec. 356.12, add paragraph (c)(1)(iv) and revise paragraph
(c)(2) to read as follows:
Sec. 356.12 What are the different types of bids and do they have
specific requirements or restrictions?
* * * * *
(c)(1) * * *
(iv) Treasury floating rate notes. A competitive bid must show the
discount margin bid, expressed as a percentage with three decimals, for
example, 0.290 percent. We will treat any missing decimals as zero, for
example, a bid of 0.29 will be treated as 0.290. The discount margin
bid may be positive, negative, or zero.
(2) Maximum recognized bid. There is no limit on the maximum dollar
amount that you may bid for competitively, either at a single yield,
discount rate, or discount margin, or at different yields, discount
rates, or discount margins. However, a competitive bid at a single
yield, discount rate, or discount margin that exceeds 35 percent of the
offering amount will be reduced to that amount. For example, if the
offering amount is $10 billion, the maximum bid amount we will
recognize at any one yield, discount rate, or discount margin from any
bidder is $3.5 billion. (See Sec. 356.22 for award limitations.)
* * * * *
0
6. In Sec. 356.14, revise the first sentence of paragraph (d) to read
as follows:
Sec. 356.14 What are the requirements for submitting bids for
customers?
* * * * *
(d) Competitive customer bids. For each customer competitive bid,
the submitter must provide the customer's name, the amount bid, and the
yield, discount rate, or discount margin. * * *
* * * * *
0
7. In Sec. 356.15, revise the first sentence of paragraph (e) to read
as follows:
Sec. 356.15 What rules apply to bids submitted by investment
advisors?
* * * * *
(e) Proration of awards. Investment advisers that submit
competitive bids in the names of controlled accounts are responsible
for prorating any awards at the highest accepted yield, discount rate,
or discount margin using the same percentage that we announce. * * *
* * * * *
Subpart C--Determination of Auction Awards; Settlement.
0
8. In Sec. 356.20, revise paragraph (a)(1) and (2), redesignate
paragraph (c) as paragraph (d), add a new paragraph (c), and revise
newly redesignated paragraphs (d)(1) and (2) to read as follows:
[[Page 46430]]
Sec. 356.20 How does the Treasury determine auction awards?
(a) Determining the range and amount of accepted competitive bids--
(1) Accepting bids. First we accept in full all non-competitive bids
that were submitted by the noncompetitive bidding deadline. After the
closing time for receipt of competitive bids we start accepting those
at the lowest yields, discount rates, or discount margins, through
successively higher yields, discount rates, or discount margins, up to
the amount required to meet the offering amount. When necessary, we
prorate bids at the highest accepted yield, discount rate, or discount
margin as described below. If the amount of noncompetitive bids would
absorb all or most of the offering amount, we will accept competitive
bids in an amount sufficient to provide a fair determination of the
yield, discount rate, or discount margin for the securities we are
auctioning.
(2) Accepting bids at the high yield, discount rate, or discount
margin. Generally, the total amount of bids at the highest accepted
yield, discount rate, or discount margin exceeds the offering amount
remaining after we accept the noncompetitive bids and the competitive
bids at the lower yields, discount rates, or discount margins. In order
to keep the total amount of awards as close as possible to the
announced offering amount, we award a percentage of the bids at the
highest accepted yield, discount rate, or discount margin. We derive
the percentage by dividing the remaining par amount needed to fill the
offering amount by the par amount of the bids at the high yield,
discount rate, or discount margin and rounding up to the next hundredth
of a whole percentage point, for example, 17.13%.
* * * * *
(c) Determining the interest rate for floating rate notes. The
interest rate will be the spread plus the index rate (as it may be
adjusted on the calendar day following each auction of 13-week bills)
subject to a minimum daily interest accrual rate of zero percent.
(d) * * *
(1) Single-price auctions. We award securities to both
noncompetitive and competitive bidders at the price equivalent to the
highest accepted yield, discount rate, or discount margin at which bids
were accepted. For inflation-protected securities, the price for
awarded securities is the price equivalent to the highest accepted real
yield.
(2) Multiple-price auctions--(i) Competitive bids. We award
securities to competitive bidders at the price equivalent to each
yield, discount rate, or discount margin at which their bids were
accepted.
(ii) Noncompetitive bids. We award securities to noncompetitive
bidders at the price equivalent to the weighted average yield, discount
rate, or discount margin of accepted competitive bids.
0
9. In Sec. 356.21, revise the section heading, the first three
sentences of paragraph (a), and the last sentence of paragraph (b) to
read as follows:
Sec. 356.21 How are awards at the high yield, discount rate, or
discount margin calculated?
(a) Awards to submitters. We generally prorate bids at the highest
accepted yield, discount rate, or discount margin under Sec.
356.20(a)(2) of this part. For example, if 80.15% is the announced
percentage at the highest yield, discount rate, or discount margin, we
award 80.15% of the amount of each bid at that yield, discount rate, or
discount margin. A bid for $100 million at the highest accepted yield,
discount rate, or discount margin would be awarded $80,150,000 in this
example. * * *
(b) Awards to customers. * * * For example, if 80.15% is the
announced percentage at the highest yield, discount rate, or discount
margin, then each customer bid at that yield, discount rate, or
discount margin must be awarded 80.15%.
0
10. In Sec. 356.23, revise paragraph (b)(2) to read as follows:
Sec. 356.23 How are the auction results announced?
* * * * *
(b) * * *
(2) The range of accepted yields, discount rates, or discount
margins.
* * * * *
Subpart D--Miscellaneous Provisions.
0
11. In Sec. 356.30, revise the fourth sentence of paragraph (a) to
read as follows:
Sec. 356.30 When does the Treasury pay principal and interest on
securities?
(a) * * * Interest is payable on a semiannual or quarterly basis on
the interest payment dates specified in the auction announcement
through the maturity date. * * *
* * * * *
0
12. In Sec. 356.31, revise the first sentence of paragraph (a) and the
paragraph (b) heading to read as follows:
Sec. 356.31 How does the STRIPS program work?
(a) General. Notes or bonds (other than Treasury floating rate
notes) may be ``stripped''--divided into separate principal and
interest components. * * *
(b) Treasury non-indexed securities (notes and bonds other than
Treasury inflation-protected securities or Treasury floating rate
notes) * * *
0
13. In Sec. 356.32, add paragraph (c) to read as follows:
Sec. 356.32 What tax rules apply?
* * * * *
(c) Treasury floating rate notes. Special federal income tax rules
for floating rate notes are set forth in Internal Revenue Service
regulations.
0
14. In Appendix A to Part 356, Section II, revise paragraph (d)(1) to
read as follows:
Appendix A to Part 356--Bidder Categories
* * * * *
II. How to Obtain Separate Bidder Recognition
* * * * *
(d) * * *
(1) Exchanging any of the following information with any other
part of the corporate [partnership] structure: (a) Yields, discount
rates, or discount margins at which it plans to bid; (b) amounts of
securities for which it plans to bid; (c) positions that it holds or
plans to acquire in a security being auctioned; and (d) investment
strategies that it plans to follow regarding the security being
auctioned, or
* * * * *
0
15. In Appendix B to Part 356:
0
a. Amend the introductory listing of sections by redesignating sections
IV and V as sections V and VI, and adding new section IV;
0
b. In section I., redesignate subsection C as subsection D and add new
subsection C;
0
c. In newly redesignated subsection D, add paragraph 6;
0
d. Redesignate sections IV and V as sections V and VI; and
0
e. Add new section IV.
The additions read as follows:
Appendix B to Part 356--Formulas and Tables
* * * * *
IV. Formulas for Conversion of Floating Rate Note Discount Margins to
Equivalent Prices
* * * * *
I. Computation of Interest on Treasury Bonds and Notes
* * * * *
C. Treasury Floating Rate Notes
1. Indexing and Interest Payment Process. We issue floating rate
notes with a daily interest accrual feature. This means that the
interest rate ``floats'' based on changes in the representative
index rate. We pay interest on
[[Page 46431]]
a quarterly basis. The index rate is the High Rate of the 13-week
Treasury bill auction announced on the auction results press release
that has been converted into a simple-interest money market yield
computed on an actual/360 basis and rounded to nine decimal places.
Interest payments are based on the floating rate note's variable
interest rate from, and including, the dated date or last interest
payment date to, but excluding, the next interest payment or
maturity date. We make quarterly interest payments by accruing the
daily interest amounts and adding those amounts together for the
interest payment period.
2. Interest Rate. The interest rate on floating rate notes will
be the spread plus the index rate (as it may be adjusted on the
calendar day following each auction of 13-week bills).
3. Interest Accrual. In general, accrued interest for a
particular calendar day in an accrual period is calculated by using
the index rate from the most recent auction of 13-week bills that
took place before the accrual day, plus the spread determined at the
time of a new floating rate note auction, divided by 360, subject to
a zero-percent minimum daily interest accrual rate. However, a 13-
week bill auction that takes place in the two-business-day period
prior to a settlement date or interest payment date will be excluded
from the calculation of accrued interest for purposes of the
settlement amount or interest payment. Any changes in the index rate
that would otherwise have occurred during this two-business-day
period will occur on the first calendar day following the end of the
period.
4. Index Contingencies.
(i) If Treasury were to discontinue auctions of 13-week bills,
the Secretary has authority to determine and announce a new index
for outstanding floating rate notes.
(ii) If Treasury were to not conduct a 13-week bill auction in a
particular week, then the interest rate in effect for the notes at
the time of the last 13-week bill auction results announcement will
remain in effect until such time, if any, as the results of a 13-
week Treasury auction are again announced by Treasury. Treasury
reserves the right to change the index rate for any newly issued
floating rate note.
* * * * *
D. Accrued Interest
* * * * *
6. For a floating rate note, if accrued interest covers a
portion of a full quarterly interest payment period, we calculate
accrued interest as shown in section IV, paragraphs C and D of this
appendix.
* * * * *
IV. Formulas for Conversion of Floating Rate Note Discount Margins to
Equivalent Prices
Definitions for Newly Issued Floating Rate Notes
P = the price per $100 par value.
T0 = the issue date.
N = the total number of quarterly interest payments.
i and k = indexes that identify the sequence of interest payment
dates.
Ti = the ith quarterly interest payment date.
Ti - Ti-1 = the number of days between the
interest payment date Ti and the preceding interest
payment date.
TN = the maturity date.
r = the index rate applicable to the issue date.
s = the spread.
m = the discount margin.
A. For newly issued floating rate notes issued at par:
Formula:
[GRAPHIC] [TIFF OMITTED] TR31JY13.000
Example:
The purpose of this example is to demonstrate how a floating
rate note price is derived at the time of original issuance.
Additionally, this example depicts the association of the July 31,
2012 issue date and the two-business-day lockout period. For a new
two-year floating rate note auctioned on July 25, 2012, and issued
on July 31, 2012, with a maturity date of July 31, 2014, and an
interest accrual rate on the issue date of 0.215022819% (index rate
of 0.095022819% plus a spread of 0.120%), solve for the price per
100 (P). This interest accrual rate is used for each daily interest
accrual over the life of the security for the purposes of this
example. In a new issuance (not a reopening) of a floating rate
note, the discount margin determined at auction will be equal to the
spread.
Definitions:
T0 = July 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.095022819%.
s = 0.120%.
m = 0.120%.
As of the issue date the latest 13-week bill, auctioned at least
two days prior, has the following information:
Table 1--13-Week Bill Auction Data
----------------------------------------------------------------------------------------------------------------
Auction clearing
Auction date Issue date Maturity date price Auction high rate Index rate
----------------------------------------------------------------------------------------------------------------
7/23/2012 7/26/2012 10/25/2012 99.975986 0.095% 0.095022819%
----------------------------------------------------------------------------------------------------------------
The rationale for using a 13-week bill auction that has occurred
at least two days prior to the issue date is due to the two-
business-day lockout period. This lockout period applies only to the
issue date and interest payment dates, thus any 13-week bill auction
that occurs during the two-day lockout period is not used for
calculations related to the issue date and interest payment dates.
The following sample calendar depicts this relationship for the
floating rate note issue date.
[[Page 46432]]
[GRAPHIC] [TIFF OMITTED] TR31JY13.001
Computing the Projected Cash Flows
The following table presents the future interest payment dates
and the number of days between them.
Table 2--Payment Dates
------------------------------------------------------------------------
Dates Days between dates
------------------------------------------------------------------------
Issue Date: T0 = 7/31/2012........................ ....................
1st Interest Date: T1 = 10/31/2012................ T1 - T0 = 92
2nd Interest Date: T2 = 1/31/2013................. T2 - T1 = 92
3rd Interest Date: T3 = 4/30/2013................. T3 - T2 = 89
4th Interest Date: T4 = 7/31/2013................. T4 - T3 = 92
5th Interest Date: T5 = 10/31/2013................ T5 - T4 = 92
6th Interest Date: T6 = 1/31/2014................. T6 - T5 = 92
7th Interest Date: T7 = 4/30/2014................. T7 - T6 = 89
8th Interest & Maturity Dates: T8 = 7/31/2014..... T8 - T7 = 92
------------------------------------------------------------------------
Let
ai = 100 x max(r + s,0)/360
and
Ai = ai x (Ti - Ti-1) + 100 x 1{i=8{time}
ai represents the daily projected interest, for a $100 par value,
that will accrue between the future interest payment dates
Ti-1 and Ti, where i = 1,2, . . . ,8. ai's are
computed using the spread s = 0.120% obtained at the auction, and
the fixed index rate of r = 0.095022819% applicable to the issue
date (7/31/2012). For example:
a1 = 100 x max(0.00095022819 + 0.00120,0)/360 =
0.000597286
Ai represents the projected cash flow the floating rate note holder
will receive, for a $100 par value, at the future interest payment
date Ti, where i = 1,2, . . . ,8. Ti - Ti-1 is the number
of days between the future interest payment dates Ti-1
and Ti. To account for the payback of the par value, the variable
1{i=8{time} takes the value 1 if the payment date is the
maturity date, or 0 otherwise. For example:
Ai = 92 x 0.000597286 = 0.054950312
and
A8 = 92 x 0.000597286 + 100 = 100.054950312
[[Page 46433]]
Let
Bi = 1 + (r + m) x (Ti - Ti - 1)/360
Bi represents the projected compound factor between the future dates
Ti-1 and Ti, where i = 1,2, . . . ,8. All Bi's
are computed using the discount margin m = 0.120% (equals the spread
determined at the auction), and the fixed index rate of r =
0.095022819% applicable to the issue date (7/31/2012). For example:
B3 = 1 + (0.00095022819 + 0.00120) x 89/360 =
1.000531584.
The following table shows the projected daily accrued interest
values for $100 par value (ai's), cash flows at interest payment
dates (Ai's), and the compound factors between payment dates (Bi's).
Table 3--Projected Cash Flows and Compound Factors
----------------------------------------------------------------------------------------------------------------
i ai Ai Bi
----------------------------------------------------------------------------------------------------------------
1.................................... 0.000597286 0.054950312 1.000549503
2.................................... 0.000597286 0.054950312 1.000549503
3.................................... 0.000597286 0.053158454 1.000531584
4.................................... 0.000597286 0.054950312 1.000549503
5.................................... 0.000597286 0.054950312 1.000549503
6.................................... 0.000597286 0.054950312 1.000549503
7.................................... 0.000597286 0.053158454 1.000531584
8.................................... 0.000597286 100.054950312 1.000549503
----------------------------------------------------------------------------------------------------------------
Computing the Price
The price is computed as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY13.002
B. For newly issued floating rate notes issued at a premium:
Formula:
[[Page 46434]]
[GRAPHIC] [TIFF OMITTED] TR31JY13.003
Example:
The purpose of this example is to demonstrate how a floating
rate note auction can result in a price at a premium given a
negative discount margin and spread at auction. For a new two-year
floating rate note auctioned on July 25, 2012, and issued on July
31, 2012, with a maturity date of July 31, 2014, solve for the price
per 100 (P). In a new issue (not a reopening) of a floating rate
note, the discount margin established at auction will be equal to
the spread. In this example, the discount margin determined at
auction is -0.150%, but the floating rate note is subject to a daily
interest rate accrual minimum of 0.000%.
Definitions:
T0 = July 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.095022819%.
s = -0.150%.
m = -0.150%.
As of the issue date the latest 13-week bill, auctioned at least
two days prior, has the following information:
Table 1--13-Week Bill Auction Data
----------------------------------------------------------------------------------------------------------------
Auction clearing
Auction date Issue date Maturity date price Auction high rate Index rate
----------------------------------------------------------------------------------------------------------------
7/23/2012 7/26/2012 10/25/2012 99.975986 0.095% 0.095022819%
----------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TR31JY13.004
Computing the Projected Cash Flows
The following table presents the future interest payment dates
and the number of days between them.
Table 2--Payment Dates
------------------------------------------------------------------------
Dates Days between dates
------------------------------------------------------------------------
Issue Date: T0 = 7/31/2012........................ ....................
1st Interest Date: T1 = 10/31/2012................ T1 - T0 = 92
2nd Interest Date: T2 = 1/31/2013................. T2 - T1 = 92
3rd Interest Date: T3 = 4/30/2013................. T3 - T2 = 89
4th Interest Date: T4 = 7/31/2013................. T4 - T3 = 92
5th Interest Date: T5 = 10/31/2013................ T5 - T4 = 92
6th Interest Date: T6 = 1/31/2014................. T6 - T5 = 92
7th Interest Date: T7 = 4/30/2014................. T7 - T6 = 89
8th Interest & Maturity Dates: T8 = 7/31/2014..... T8 - T7 = 92
------------------------------------------------------------------------
[[Page 46435]]
Let
ai = 100 x max(r + s,0)/360
and
Ai = ai x (Ti - Ti - 1) +
100x1{i=8{time}
ai Represents the daily projected interest, for a $100 par value,
that will accrue between the future interest payment dates Ti
- 1 and Ti where i = 1,2, . . . ,8. ai's are
computed using the spread s = - 0.150%, and the fixed index rate of
r = 0.095022819% applicable to the issue date (7/31/2012). For
example:
ai = 100 x max(0.00095022819-0.00150,0)/360 = 100 x 0/360
= 0.000000000
Ai represents the projected cash flow the floating rate note
holder will receive, for a $100 par value, at the future interest
payment date Ti, where i = 1,2, . . ., 8. Ti - Ti-1 is
the number of days between the future interest payment dates
Ti-1 and Ti. To account for the payback of the par value,
the variable 1{i=8{time} takes the value 1 if
the payment date is the maturity date, or 0 otherwise. For example:
A1 = 92 x 0.000000000 = 0.000000000
and
A8 = 92 x 0.000000000 + 100 = 100.000000000
Let
Bi = 1 + (r + m) x (Ti-Ti-1)/360
Bi represents the projected compound factor between the future
dates Ti-1 and Ti, where i = 1,2, . . ., 8. All Bi's are
computed using the discount margin m = -0.150% (equals the spread
obtained at the auction), and the fixed index rate of r =
0.095022819% applicable to the issue date (7/31/2012). For example:
B3 = 1 + (0.00095022819-0.00150) x 89/360 = 0.999864084.
The following table shows the projected daily accrued interests
for $100 par value (ai's), cash flows at interest payment dates
(Ai's), and the compound factors between payment dates (Bi's).
Table 3--Projected Cash Flows and Compound Factors
----------------------------------------------------------------------------------------------------------------
i ai Ai Bi
----------------------------------------------------------------------------------------------------------------
1.................................... 0.000000000 0.000000000 0.999859503
2.................................... 0.000000000 0.000000000 0.999859503
3.................................... 0.000000000 0.000000000 0.999864084
4.................................... 0.000000000 0.000000000 0.999859503
5.................................... 0.000000000 0.000000000 0.999859503
6.................................... 0.000000000 0.000000000 0.999859503
7.................................... 0.000000000 0.000000000 0.999864084
8.................................... 0.000000000 100.000000000 0.999859503
----------------------------------------------------------------------------------------------------------------
Computing the Price
The price is computed as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY13.005
Definitions for Reopenings of Floating Rate Notes and Calculation
of Interest Payments
IPi = the quarterly interest payment at date
Ti.
PD = the price that includes the accrued interest per $100 par value
as of the reopening issue date.
AI = accrued interest per $100 par value as of the reopening issue
date.
PC = the price without accrued interest per $100 par value as of the
reopening issue date.
T-1 = the dated date if the reopening occurs before the
first interest payment date, or, otherwise, the latest interest
payment date prior to the reopening issue date.
T0 = the reopening issue date.
N = the total number of remaining quarterly interest payments as of
the reopening issue date.
i and k = indexes that identify the sequence of interest payment
dates relative to the issue date. For example T1,
T2, and T3 represent the first, second, and
the third interest payment dates after the issue date respectively,
while T-1 represents the preceding interest payment date
before the issue date.
j = an index that identifies days between consecutive interest
payment dates.
Ti = the ith remaining quarterly interest
payment date.
Ti - Ti-1 = the number of days between the
interest payment date Ti and the preceding interest
payment date.
TN = the maturity date.
[[Page 46436]]
rj's = the effective index rates for days between the
last interest payment date and the reopening issue date.
r = the index rate applicable to the reopening issue date.
s = the spread.
m = the discount margin.
C. Pricing and accrued interest for reopened floating rate notes
Formula:
[GRAPHIC] [TIFF OMITTED] TR31JY13.006
Example:
The purpose of this example is to determine the floating rate
note prices with and without accrued interest at the time of the
reopening auction. For a two-year floating rate note that was
originally auctioned on July 25, 2012, with an issue date of July
31, 2012, reopened in an auction on August 30, 2012 and issued on
August 31, 2012, with a maturity date of July 31, 2014, solve for
accrued interest per 100 (AI), the price with accrued interest per
100 (PD) and the price without accrued interest per 100
(PC). Since this is a reopening of an original issue from
the prior month, Table 2 as shown in the example is used for accrued
interest calculations. In the case of floating rate note reopenings,
the spread on the security remains equal to the spread that was
established at the original auction of the floating rate notes.
Definitions:
T-1 = July 31, 2012.
T0 = August 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.105027876%.
s = 0.120%.
m = 0.100%.
The following table shows the past results for the 13-week bill
auction.
Table 1--13-Week Bill Auction Data
----------------------------------------------------------------------------------------------------------------
Auction
Auction date Issue date Maturity date clearing Auction high Index rate
price rate (percent) (percent)
----------------------------------------------------------------------------------------------------------------
7/23/2012....................... 7/26/2012 10/25/2012 99.975986 0.095 0.095022819
7/30/2012....................... 8/2/2012 11/1/2012 99.972194 0.110 0.110030595
8/6/2012........................ 8/9/2012 11/8/2012 99.974722 0.100 0.100025284
8/13/2012....................... 8/16/2012 11/15/2012 99.972194 0.110 0.110030595
8/20/2012....................... 8/23/2012 11/23/2012 99.973167 0.105 0.105028183
8/27/2012....................... 8/30/2012 11/29/2012 99.973458 0.105 0.105027876
----------------------------------------------------------------------------------------------------------------
[[Page 46437]]
[GRAPHIC] [TIFF OMITTED] TR31JY13.007
The following table shows the index rates applicable for the
accrued interest.
Table 2--Applicable Index Rate
----------------------------------------------------------------------------------------------------------------
Applicable floating rate
Number of days -------------------------------
Accrual starts Accrual ends in accrual Index rate
period Auction date (percent)
----------------------------------------------------------------------------------------------------------------
7/31/2012....................................... 7/31/2012 1 7/23/2012 0.095022819
8/1/2012........................................ 8/6/2012 6 7/30/2012 0.110030595
8/7/2012........................................ 8/13/2012 7 8/6/2012 0.100025284
8/14/2012....................................... 8/20/2012 7 8/13/2012 0.110030595
8/21/2012....................................... 8/27/2012 7 8/20/2012 0.105028183
8/28/2012....................................... 8/30/2012 3 8/27/2012 0.105027876
----------------------------------------------------------------------------------------------------------------
Computing the Accrued Interest
The accrued interest as of the new issue date (8/31/2012) for a
$100 par value is:
AI = 1 x 100 x max (0.00095022819 + 0.00120,0)/360
+ 6 x 100 x max (0.00110030595 + 0.00120,0)/360
+ 7 x 100 x max (0.00100025284 + 0.00120,0)/360
+ 7 x 100 x max (0.00110030595 + 0.00120,0)/360
+ 7 x 100 x max (0.00105028183 + 0.00120,0)/360
+ 3 x 100 x max (0.00105027876 + 0.00120,0)/360
AI = 1x0.000597286
+ 6x0.000638974
+ 7x0.000611181
+ 7x0.000638974
+ 7x0.000625078
+ 3x0.000625077
AI = 0.000597286 + 0.003833844 + 0.004278267 + 0.00472818 +
0.004375546 + 0.001875231
AI = 0.019432992 = $0.019433
Computing the Projected Cash Flows
The following table presents the future interest payment dates
and the number of days between them.
Table 3--Payment Dates
------------------------------------------------------------------------
Dates Days between dates
------------------------------------------------------------------------
Original Issue Date: T-1 = 7/31/2012.............. ....................
New Issue Date: T0 = 8/31/2012.................... T0 - T-1 = 31
1st Interest Date: T1 = 10/31/2012................ T1 - T0 = 61
2nd Interest Date: T2 = 1/31/2013................. T2 - T1 = 92
3rd Interest Date: T3 = 4/30/2013................. T3 - T2 = 89
4th Interest Date: T4 = 7/31/2013................. T4 - T3 = 92
5th Interest Date: T5 = 10/31/2013................ T5 - T4 = 92
6th Interest Date: T6 = 1/31/2014................. T6 - T5 = 92
7th Interest Date: T7 = 4/30/2014................. T7 - T6 = 89
8th Interest & Maturity Dates: T8 = 7/31/2014..... T8 - T7 = 92
------------------------------------------------------------------------
Let
a1 = 100 x max(r + s, 0)/360
and
Ai = ai x (Ti - Ti-1) +
100x1{i=8{time}
a1 represents the daily projected interest, for a $100 par
value, that will accrue between the future interest payment dates
Ti-1 and T1, where i=1,2,...,8. ai's are
computed using the spread s = 0.120% obtained at the original
auction, and the fixed index rate of r = 0.105027876% applicable to
the new issue date (8/31/2012). For example:
ai = 100 x max(0.00105027876 + 0.00120,0)/360 = 0.000625077
Ai represents the projected cash flow the floating rate note
holder will receive, less
[[Page 46438]]
accrued interest, for a $100 par value, at the future interest
payment date Ti, where i=1,2,...,8. Ti-1 is the number of
days between the future interest payment dates Ti-1 and
Ti. To account for the payback of the par value, the variable
1{i=8{time} takes the value 1 if the payment
date is the maturity date, or 0 otherwise. For example:
Ai = 61x0.000625077 = 0.038129697
and
A8 = 92x0.000625077 + 100 = 100.057507084
Let
Bi = 1 + (r + m)x(Ti-1)/360
Bi represents the projected compound factor between the future
dates Ti-1 and Ti, where i=1,2,...,8. All Bi's are
computed using the discount margin m = 0.100% obtained at the
reopening auction, and the fixed index rate of r = 0.105027876%
applicable to the new issue date (8/31/2012). For example:
B3 = 1 + (0.00105027876 + 0.00100)x89/360 = 1.000506874
The following table shows the projected daily accrued interests
for $100 par value (ai's), cash flows at interest payment dates
(Ai's), and the compound factors between payment dates (Bi's).
Table 4--Projected Cash Flows and Compound Factors
----------------------------------------------------------------------------------------------------------------
i ai Ai Bi
----------------------------------------------------------------------------------------------------------------
1.................................... 0.000625077 0.038129697 1.000347408
2.................................... 0.000625077 0.057507084 1.000523960
3.................................... 0.000625077 0.055631853 1.000506874
4.................................... 0.000625077 0.057507084 1.000523960
5.................................... 0.000625077 0.057507084 1.000523960
6.................................... 0.000625077 0.057507084 1.000523960
7.................................... 0.000625077 0.055631853 1.000506874
8.................................... 0.000625077 100.057507084 1.000523960
----------------------------------------------------------------------------------------------------------------
Computing the Price
The price with accrued interest is computed as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY13.008
[[Page 46439]]
D. For calculating interest payments:
Example:
For a new issue of a two-year floating rate note auctioned on
July 25, 2012, and issued on July 31, 2012, with a maturity date of
July 31, 2014, and a first interest payment date of October 31,
2012, calculate the quarterly interest payments (IPI) per
100. In a new issuance (not a reopening) of a new floating rate
note, the discount margin determined at auction will be equal to the
spread. The interest accrual rate used for this floating rate note
on the issue date is 0.215022819% (index rate of 0.095022819% plus a
spread of 0.120%) and this rate is used for each daily interest
accrual over the life of the security for the purposes of this
example.
[GRAPHIC] [TIFF OMITTED] TR31JY13.010
Example 1: Projected interest payment as of the original issue
date.
T0 = July 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.095022819%.
s = 0.120%.
m = 0.120%.
As of the issue date the latest 13-week bill, auctioned at least
two days prior, has the following information:
Table 1--13-Week Bill Auction Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
Auction Auction high
Auction date Issue date Maturity date clearing price rate Index rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
7/23/2012.......................................................... 7/26/2012 10/25/2012 99.975986 0.095% 0.095022819%
--------------------------------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TR31JY13.011
Computing the Projected Cash Flows
The following table presents the future interest payment dates
and the number of days between them.
Table 2--Payment Dates
------------------------------------------------------------------------
Dates Days between dates
------------------------------------------------------------------------
Issue Date: T0 = 7/31/2012........................ ....................
1st Interest Date: T1 = 10/31/2012................ T1 - T0 = 92
2nd Interest Date: T2 = 1/31/2013................. T2 - T1 = 92
3rd Interest Date: T3 = 4/30/2013................. T3 - T2 = 89
4th Interest Date: T4 = 7/31/2013................. T4 - T3 = 92
5th Interest Date: T5 = 10/31/2013................ T5 - T4 = 92
6th Interest Date: T6 = 1/31/2014................. T6 - T5 = 92
7th Interest Date: T7 = 4/30/2014................. T7 - T6 = 89
8th Interest & Maturity Dates: T8 = 7/31/2014..... T8 - T7 = 92
------------------------------------------------------------------------
[[Page 46440]]
Using the spread s = 0.120%, and the fixed index rate of r =
0.095022819% applicable to the issue date (7/31/2012), the first and
seventh projected interest payments are computed as follows:
IP1 = 92x[100xmax(0.00095022819 + 0.00120,0)/360]
IP1 = 92x0.000597286 = 0.054950312
IP7 = 89x[100xmax(0.00095022819 + 0.00120,0)/360]
IP7 = 89x0.000597286 = 0.053158454
The following table shows all projected interest payments as of
the issue date.
Table 3--Projected Interest Payments
------------------------------------------------------------------------
i Dates IPi
------------------------------------------------------------------------
1....................................... 10/31/2012 0.054950312
2....................................... 1/31/2013 0.054950312
3....................................... 4/30/2013 0.053158454
4....................................... 7/31/2013 0.054950312
5....................................... 10/31/2013 0.054950312
6....................................... 1/31/2014 0.054950312
7....................................... 4/30/2014 0.053158454
8....................................... 7/31/2014 0.054950312
------------------------------------------------------------------------
Example 2: Projected interest payment as of the reopening issue
date (intermediate values, including rates in percentage terms, are
rounded to nine decimal places).
This example demonstrates the calculations required to determine
the interest payment due when the reopened floating rate note is
issued. This example also demonstrates the need to calculate accrued
interest at the time of a floating rate reopening auction. Since
this is a reopening of an original issue from 31 days prior, Table 5
as shown in the example is used for accrued interest calculations.
For a two-year floating rate note originally auctioned on July 25,
2012 with an original issue date of July 31, 2012, reopened by an
auction on August 30, 2012 and issued on August 31, 2012, with a
maturity date of July 31, 2014, calculate the quarterly interest
payments (IPI) per 100. T-1 is the dated date
if the reopening occurs before the first interest payment date, or
otherwise the latest interest payment date prior to the new issue
date.
T-1 = July 31, 2012.
T0 = August 31, 2012.
N = 8.
TN = July 31, 2014.
r = 0.105027876%.
s = 0.120%.
m = 0.100%.
The following table shows the past results for the 13-week bill
auction.
Table 4--13-Week Bill Auction Data
----------------------------------------------------------------------------------------------------------------
Auction high
Auction date Issue date Maturity date Auction rate Index rate
clearing price (percent) (percent)
----------------------------------------------------------------------------------------------------------------
7/23/2012....................... 7/26/2012 10/25/2012 99.975986 0.095 0.095022819
7/30/2012....................... 8/2/2012 11/1/2012 99.972194 0.110 0.110030595
8/6/2012........................ 8/9/2012 11/8/2012 99.974722 0.100 0.100025284
8/13/2012....................... 8/16/2012 11/15/2012 99.972194 0.110 0.110030595
8/20/2012....................... 8/23/2012 11/23/2012 99.973167 0.105 0.105028183
8/27/2012....................... 8/30/2012 11/29/2012 99.973458 0.105 0.105027876
----------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TR31JY13.012
The following table shows the index rates applicable for the
accrued interest.
Table 5--Applicable Index Rate
----------------------------------------------------------------------------------------------------------------
Applicable floating rate
Number of days -------------------------------
Accrual starts Accrual ends in accrual Index rate
period Auction date (percent)
----------------------------------------------------------------------------------------------------------------
7/31/2012....................................... 7/31/2012 1 7/23/2012 0.095022819
8/1/2012........................................ 8/6/2012 6 7/30/2012 0.110030595
8/7/2012........................................ 8/13/2012 7 8/6/2012 0.100025284
8/14/2012....................................... 8/20/2012 7 8/13/2012 0.110030595
8/21/2012....................................... 8/27/2012 7 8/20/2012 0.105028183
[[Page 46441]]
8/28/2012....................................... 8/30/2012 3 8/27/2012 0.105027876
----------------------------------------------------------------------------------------------------------------
Computing the accrued interest
The accrued interest as of 8/31/2012 for a $100 par value is:
AI = 1 x 100 x max (0.00095022819 + 0.00120,0)/360
+ 6 x 100 x max (0.00110030595 + 0.00120,0)/360
+ 7 x 100 x max (0.00100025284 + 0.00120,0)/360
+ 7 x 100 x max (0.00110030595 + 0.00120,0)/360
+ 7 x 100 x max (0.00105028183 + 0.00120,0)/360
+ 3 x 100 x max (0.00105027876 + 0.00120,0)/360
AI = 1 x 0.000597286
+ 6 x 0.000638974
+ 7 x 0.000611181
+ 7 x 0.000638974
+ 7 x 0.000625078
+ 3 x 0.000625077
AI = 0.000597286 + 0.003833844 + 0.004278267 + 0.004472818 +
0.004375546 + 0.001875231
AI = 0.019432992 = $0.019433
The following table presents the future interest payment dates
and the number of days between them.
Table 6--Payment Dates
------------------------------------------------------------------------
Dates Days between dates
------------------------------------------------------------------------
Original Issue Date: T-1 = 7/31/2012..............
New Issue Date: T0 = 8/31/2012.................... T0 - T-1 = 31
1st Interest Date: T1 = 10/31/2012................ T1 - T0 = 61
2nd Interest Date: T2 = 1/31/2013................. T2 - T1 = 92
3rd Interest Date: T3 = 4/30/2013................. T3 - T2 = 89
4th Interest Date: T4 = 7/31/2013................. T4 - T3 = 92
5th Interest Date: T5 = 10/31/2013................ T5 - T4 = 92
6th Interest Date: T6 = 1/31/2014................. T6 - T5 = 92
7th Interest Date: T7 = 4/30/2014................. T7 - T6 = 89
8th Interest & Maturity Dates: T8 = 7/31/2014..... T8 - T7 = 92
------------------------------------------------------------------------
Using the original spread s = 0.120% (obtained on 7/25/2012),
and the fixed index rate of r = 0.105027876% applicable to the new
issue date (8/31/2012), the first and eighth projected interest
payments are computed as follows:
IP1 = 0.019432992 + 61 x [100 x max (0.00105027876 +
0.00120,0)/360]
IP1 = 0.019432992 + 61 x 0.000625077
IP1 = 0.019432992 + 0.038129697 = 0.057562689
and
IP8 = 92 x [100 x max (0.00105027876 + 0.00120,0)/360]
IP8 = 92 x 0.000625077 = 0.057507084
The following table shows all projected interest payments as of
the new issue date.
Table 7--Projected Interest Payments
------------------------------------------------------------------------
i Dates IPi
------------------------------------------------------------------------
1....................................... 10/31/2012 0.057562689
2....................................... 1/31/2013 0.057507084
3....................................... 4/30/2013 0.055631853
4....................................... 7/31/2013 0.057507084
5....................................... 10/31/2013 0.057507084
6....................................... 1/31/2014 0.057507084
7....................................... 4/30/2014 0.055631853
8....................................... 7/31/2014 0.057507084
------------------------------------------------------------------------
Definitions for Newly Issued Floating Rate Notes with an Issue Date
that Occurs after the Dated Date
PD = the price that includes accrued interest from the dated date to
the issue date per $100 par value as of the issue date.
AI = the accrued interest per $100 par value as of the issue date.
PC = the price without accrued interest per $100 par value as of the
issue date.
T-1 = the dated date.
T0 = the issue date.
N = the total number of remaining quarterly interest payments as of
the new issue date.
i and k = indexes that identify the sequence of interest payment
dates.
j = an index that identifies days between the dated date and the
issue date.
Ti = the ith quarterly future interest payment date.
Ti - Ti-1 = the number of days between the
interest payment date Ti and the preceding interest
payment date.
TN = the maturity date.
rj's = the effective index rates for days between the dated date and
the issue date.
r = the index rate applicable to the issue date.
s = the spread.
m = the discount margin.
E. Pricing and accrued interest for new issue floating rate
notes with an issue date that occurs after the dated date
Formula:
[[Page 46442]]
[GRAPHIC] [TIFF OMITTED] TR31JY13.013
Example:
The purpose of this example is to demonstrate how a floating
rate note can have a price without accrued interest of less than
$100 par value when the issue date occurs after the dated date. An
original issue two-year floating rate note is auctioned on December
29, 2011, with a dated date of December 31, 2011, an issue date of
January 3, 2012, and a maturity date of December 31, 2013.
Definitions:
Dated date = 12/31/2011.
Issue date = 1/3/2012.
Maturity date = 12/31/2013.
Spread = 1.000% at auction.
Discount margin = 1.000%.
As of the issue date the latest 13-week bill, auctioned at least
two days prior, has the following information:
Table 1--13-WEEK BILL AUCTION DATA
--------------------------------------------------------------------------------------------------------------------------------------------------------
Auction Auction high
Auction date Issue date Maturity date clearing price rate Index rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
12/27/2011......................................................... 12/29/2011 3/29/2012 99.993681 0.025% 0.025001580%
--------------------------------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] TR31JY13.014
The following table shows the index rates applicable for the
accrued interest.
Table 2--Applicable Index Rate
----------------------------------------------------------------------------------------------------------------
Number of days Applicable floating rate
Accrual starts Accrual ends in accrual ---------------------------------
period Auction date Index rate
----------------------------------------------------------------------------------------------------------------
12/31/2011.................................. 1/2/2012 3 12/27/2011 0.025001580%
----------------------------------------------------------------------------------------------------------------
[[Page 46443]]
Computing the accrued interest
The accrued interest as of the new issue date (1/3/2012) for a
$100 par value is:
AI = 3 x 100 x max (0.00025001580 + 0.01000,0)/360
AI = 3 x 0.002847227
AI = 0.008541681 = $0.008542
Computing the Projected Cash Flows
The following table presents the future interest payment dates
and the number of days between them.
Table 3--Payment Dates
------------------------------------------------------------------------
Dates Days between dates
------------------------------------------------------------------------
Dated Date: = T-1 = 12/31/2011....................
Issue Date: T0 = 1/3/2012......................... T0 - T-1 = 3
1st Interest Date: T1 = 3/31/2012................. T1 - T0 = 88
2nd Interest Date: T2 = 6/30/2012................. T2 - T1 = 91
3rd Interest Date: T3 = 9/30/2012................. T3 - T2 = 92
4th Interest Date: T4 = 12/31/2012................ T4 - T3 = 92
5th Interest Date: T5 = 3/31/2013................. T5 - T4 = 90
6th Interest Date: T6 = 6/30/2013................. T6 - T5 = 91
7th Interest Date: T7 = 9/30/2013................. T7 - T6 = 92
8th Interest & Maturity Dates: T8 = 12/31/2013.... T8 - T7 = 92
------------------------------------------------------------------------
Let
ai = 100 x max(r + s, 0)/360
and
Ai = ai x (Ti - Ti-1) + 100 x
1{i=8{time}
ai represents the daily projected interest, for a $100 par
value, that will accrue between the future interest payment dates
Ti-1 and Ti, where i = 1,2,...,8. ai's are computed using
the spread s = 1.000% obtained at the auction, and the fixed index
rate of r = 0.025001580% applicable to the issue date (1/3/2012).
For example:
a1 = 100 x max(0.00025001580 + 0.01000,0)/360 =
0.002847227
Ai represents the projected cash flow the floating rate note
holder will receive, less accrued interest, for a $100 par value, at
the future interest payment date Ti, where i = 1,2,...,8. Ti -
Ti-1 is the number of days between the future interest
payment dates Ti-1 and T1. To account for the payback of
the par value, the variable 1{i=8{time} takes
the value 1 if the payment date is the maturity date, or 0
otherwise. For example:
A1 = 88 x 0.002847227 = 0.250555976
and
A8 = 92 x 0.002847227 + 100 = 100.261944884
Let
Bi = 1 + (r + m) x (Ti - Ti-1)/360
Bi represents the projected compound factor between the future
dates Ti-1 and Ti, where i = 1,2,...,8. All Bi's are
computed using the discount margin m = 1.000% (equals the spread
obtained at the auction), and the fixed index rate of r =
0.025001580% applicable to the issue date (1/3/2012). For example:
B3 = 1 + (0.00025001580 + 0.01000) x 92/360 = 1.002619448
The following table shows the projected daily accrued interests
for $100 par value (ai 's), cash flows at interest payment dates (Ai
's), and the compound factors between payment dates (Bi's).
Table 4--Projected Cash Flows and Compound Factors
----------------------------------------------------------------------------------------------------------------
i ai Ai Bi
----------------------------------------------------------------------------------------------------------------
1.................................... 0.002847227 0.250555976 1.002505559
2.................................... 0.002847227 0.259097657 1.002590976
3.................................... 0.002847227 0.261944884 1.002619448
4.................................... 0.002847227 0.261944884 1.002619448
5.................................... 0.002847227 0.256250430 1.002562504
6.................................... 0.002847227 0.259097657 1.002590976
7.................................... 0.002847227 0.261944884 1.002619448
8.................................... 0.002847227 100.261944884 1.002619448
----------------------------------------------------------------------------------------------------------------
Computing the price
The price with accrued interest is computed as follows:
[[Page 46444]]
[GRAPHIC] [TIFF OMITTED] TR31JY13.015
* * * * *
0
16. In Appendix C, add Section II to read as follows:
Appendix C to Part 356--Investment Considerations
* * * * *
II. Floating Rate Notes
A. Interest Variability
An investment in securities with interest determined by
reference to a 13-week Treasury bill index involves risks not
associated with an investment in a fixed interest rate security.
Such risks include the possibility that:
Changes in the index may or may not correlate to
changes in interest rates generally or with changes in other
indexes;
any given interest payment may be more or less than the
amount paid on prior interest payment dates;
the resulting interest payments may be greater or less
than those payable on other securities of similar maturities, and
in the event of sustained falling interest rates, the
amount of the quarterly interest payments will decrease.
B. Trading in the Secondary Market
The Treasury securities market is the largest and most liquid
securities market in the world. The market for Treasury floating
rate notes, however, may not be as active or liquid as the market
for Treasury non-indexed securities or Treasury inflation-protected
securities. In addition, Treasury floating rate notes may not be as
widely traded or as well understood as these other types of Treasury
marketable securities. Prices for floating rate notes may not
fluctuate in reaction to interest rate movements in the same manner
as other Treasury securities. Lesser liquidity and fewer market
participants may result in larger spreads between bid and asked
prices for Treasury floating rate notes than the bid-asked spreads
for other Treasury marketable securities with the same time to
maturity. Larger bid-asked spreads normally result in higher
transaction costs and/or lower overall returns. The liquidity of a
Treasury floating rate note may be enhanced over time as we issue
additional amounts or more entities participate in the market.
C. Tax Considerations
Treasury floating rate notes are subject to specific tax rules
provided by Treasury regulations issued under section 1275(d) of the
Internal Revenue Code of 1986, as amended.
D. Indexing Issues
The Bureau of the Fiscal Service publishes the High Rate
immediately following a 13-week bill auction as part of the auction
results. The 13-week bill is generally auctioned once per week.
Treasury retains the flexibility to increase or decrease the
frequency of 13-week bill auctions, which would affect the frequency
of index rate resets. The High Rate is subject to various interest
rate and market environments over which Treasury has no control. For
a discussion of actions that Treasury would take in the event
auctions of 13-week bills are discontinued or delayed, see appendix
B, section I, paragraph C.4 of this part.
0
17. In Appendix D, revise the heading, designate the current text as
section I. Consumer Price Index, and add section II to read as follows:
[[Page 46445]]
Appendix D to Part 356--Description of the Indexes
I. Consumer Price Index
* * * * *
II. Floating Rate Note Index
The floating rate note index is the 13-week Treasury bill
auction High Rate (stop out rate), and converted to the simple-
interest money market yield computed on an actual/360 basis.
Richard L. Gregg,
Fiscal Assistant Secretary.
[FR Doc. 2013-18178 Filed 7-30-13; 8:45 am]
BILLING CODE 4810-39-P
