October 12, 1995 Mr. Walter J. Robertson Director of Compliance National Association of Securities Dealers 1735 K Street, N.W. Washington, D.C.

20006 Dear Mr. Robertson: The Uniform Offering Circular (31 CFR Part 356), setting out the terms and conditions under which the Department of the Treasury sells and issues marketable book-entry Treasury bills, notes, and bonds to the public, has been in effect since March, 1993. Since that time, the Bureau of the Public Debt has received inquiries from auction participants indicating a need to review the net long position reporting requirement, which is set out at section 356.13 of the Uniform Offering Circular (Circular). Therefore, we are providing additional guidance and clarification on the major provisions of the net long position rule, since inaccurate, incomplete or delayed reporting of this information could have serious consequences for the integrity of Treasury securities auctions. The net long position reporting requirement is used to enforce Treasury's policy that, upon completion of an auction of a particular Treasury security, no bidder will have acquired more than 35 percent of the amount awarded to the public. This policy helps to ensure broad distribution of Treasury securities and makes it less likely that ownership of Treasury securities will become concentrated in a few hands as a result of the auction. The rule primarily affects competitive bidders that reach the $2 billion net long position reporting threshold, discussed below. The rule also affects investment advisers and others that bid competitively on behalf of their managed investment accounts, regardless of whether the bid is in the name of the investment adviser or in the name of the account. The Net Long Position Reporting Requirement Paragraph 356.13(a) of the Circular establishes a $2 billion net long position reporting threshold in all auctions./1/ To determine whether the reporting threshold has been met, a bidder must combine both: 1. 2. its net long position, if any, in the security being auctioned (as defined in 356.13(b)); and the total dollar amount of its competitive bids in that auction.

/1/Under the Circular, Treasury reserves the right to modify the terms of any new securities offerings, e.g., the net long position reporting threshold for any auction. If it does so, the change will be stated in the offering announcement. As of What Time the Net Long Position Must be Determined Under paragraph 356.13(b), the net long position must be determined as of one-half hour prior to the closing time for competitive bidding

(for most auctions, this is 12:30 p.m. Eastern time). This is a "snapshot" or point-in-time measurement. If the bidder's position changes during the final half-hour period, this does not affect the amount to be reported. How to Calculate the Net Long Position Paragraph 356.13(b) defines net long position as the par amount of the following components: 1. 2. holdings of outstanding securities with the same CUSIP number as the security being auctioned; any positions in the security being auctioned obtained from the following sources: --when-issued trading, futures contracts that require delivery of the specific security being auctioned (neither futures contracts for which the security being auctioned is one of several securities that may be delivered nor cash-settled futures contracts need be included), and -forward contracts (including next-day settling); and 3. holdings of STRIPS principal components of the security being auctioned, including when-issued trading positions of such principal components.

In calculating a bidder's overall position for auction purposes, the actual amount of each of these components of a position should be included as a positive number (long), a negative number (short), or zero. None of these components should be adjusted, such as by changing a short amount to zero. These unadjusted numbers should be added together to derive a bidder's position, which is one aggregate number that also may be positive (long), negative (short), or zero. How to Determine When a Position is to be Reported Whether the net long position must be reported is determined by a summation of (1) a bidder's net long position in the security being auctioned, and (2) its competitive bids in that auction. If the total of these two components equals or exceeds $2 billion, the bidder must report the full amount of its net long position. For example, if the total amount of a bidder's competitive bids in an auction is $1,900,000,000, and the amount of the bidder's net long position in the security being offered is $200 million, the bidder must report a net long position of $200 million, since the combined total is $2.1 billion. Note that the amount to be reported is the full amount of the net long position, not the excess of competitive bids plus net long position above the $2 billion threshold. If the total of the bidder's competitive bids itself equals or exceeds $2 billion and the bidder has a net short position or no position, it must then report a net long position of zero. For example, if the total of the bidder's competitive bids equals $3 billion and the bidder's position is net short $350 million, the bidder must report $0 as its net long position.

Aggregation of Net Long Position Amounts by Affiliates The bidder definitions in Appendix A to Part 356 define various categories of bidders. The definitions are used to determine what constitutes a bidder. For example, the definitions state that, for purposes of bidding in Treasury auctions, a corporation or partnership and its affiliates are considered to be one bidder. Accordingly, the $2 billion reporting threshold applies to the total of all competitive bids and positions within a corporate or partnership structure (e.g., the parent and its subsidiaries). This means that an entity made up of several affiliates must take into consideration the bids and positions of all of its affiliates. Appendix A to Part 356 provides a process by which one or more major organizational components (e.g., the parent or a subsidiary) in a corporate or partnership structure may be recognized as a bidder separate from the larger corporate or partnership structure. To obtain such recognition, however, each component or group of components must request and officially receive such recognition from the Treasury. The rule details specific criteria that must be met to be so recognized. Merely having established internal procedures, such as "Chinese walls," to prevent the exchange of information related to bidding in Treasury auctions does not allow parts of a corporate or partnership structure to be treated as a separate bidder. Separate bidder status can only be accomplished through formal written recognition by the Treasury, and is not effective until the entity has been granted such recognition. To Whom Net Long Positions Must be Reported Under paragraph 356.13(a), a bidder's reportable net long position must be reported in connection with only one of its bids. If a bidder with a reportable net long position bids through more than one submitter or intermediary, the bidder must provide its net long position to only one such submitter or intermediary. If a bidder bids directly in an auction through more than one Federal Reserve Bank (FRB), the bidder must report its net long position to only one such FRB. The requirement to report a position to only one FRB, submitter or intermediary also applies to a corporate or partnership structure (see Appendix A to Part 356 for detailed discussions of a "corporation" and a "partnership"), even though different affiliates may bid separately and incur separate positions. Corporations and partnerships that may meet the threshold for reporting need to devise a method to aggregate their affiliates' positions and report the aggregate to one location -- either one FRB or one submitter or intermediary -- even if these affiliates otherwise do not generally communicate with one another (unless otherwise recognized as a separate bidder). Correcting a Net Long Postion Report If a bidder determines that the reported net long position is incorrect, the bidder should immediately attempt to make a

correction. For electronic tenders, this may be accomplished by replacing the previously transmitted tender with a revised tender prior to the closing time for competitive bids. If there is not enough time to do this, or if the submitted tender was a paper tender, the bidder should immediately contact the FRB to which the tender was submitted to report the error. If the bidder did not submit a tender directly to an FRB, the bidder should immediately contact the depository institution or dealer through which it placed its bid and report the error. That depository institution or dealer should then immediately contact the appropriate FRB. Informing Customers of the Net Long Position Reporting Requirement The Uniform Offering Circular requires submitters and intermediaries to help ensure that customers are aware of the net long position reporting requirement. Under paragraph 356.14(c), whenever a customer places a competitive bid of $100 million or more, the submitter or intermediary receiving the bid must inform the customer of its net long position reporting obligation. In many cases, the submitter or intermediary would meet this requirement by informing the customer of the reporting threshold, and that the threshold applies to the sum of all of the customer's competitive bids in the auction and its net long position. If there are any questions (e.g., the customer requests guidance on how to calculate the net long position), the submitter or intermediary may refer the customer to the Uniform Offering Circular, Section 356.13, and this interpretation of the net long reporting obligation. Verifying the Accuracy of Net Long Position Calculations Accurate reporting of net long positions is essential to maintain the integrity of the auction process and helps to ensure that bidders receive no more securities than the rules permit. All auction participants that may have a reportable net long position should have procedures in place to accurately calculate, verify, and report net long positions. Accordingly, it is suggested that bidders: 1) 2) verify the net long position calculation prior to submissions of bids; and after submission, verify/reconcile the net long position reported to the FRB (for most competitive bidders, this is the amount indicated on the submitter's copy of the tender) with internal worksheets used to calculate the position.

These procedures should occur in a timely manner so that any errors found after submission of tenders may be corrected prior to the close of the auction or the release of the results. Should the of the net long the extent of a procedures will Treasury position bidder's be given determine that a penalty for a violation reporting requirement is appropriate, existing compliance policies and considerable weight. Therefore,

such procedures should be reviewed periodically by appropriate internal audit and compliance staffs. In addition, a review of the bidder's auction procedures and processes for compliance with the auction rules should be included as part of the bidder's annual audit program. Please distribute this letter to auction participants that, to your knowledge, may be affected by the net long position reporting rules. Any questions regarding this letter, or any other questions pertaining to interpretation of the provisions of the Uniform Offering Circular, should be directed to the Government Securities Regulations Staff at (202) 219-3632. This letter is being sent to the Federal Reserve Banks of New York, Chicago and San Francisco; to the National Association of Securities Dealers; and to the various federal bank regulatory agencies. Sincerely, Kenneth R. Papaj Director, Government Securities Regulations Staff cc: Stephanie S. Wolf Vice President and Assistant General Counsel Public Securities Association

Identical Letters addressed to: Mr. Hugh Conway Review Examiner, Compliance Federal Deposit Insurance Corporation 550 17th Street, N.W. Washington, D.C. 20429 Ms. R. Julie Olson Assistant Chief National Bank Examiner Office of the Comptroller of the Currency 250 E Street, S.W. Washington, D.C. 20219 Ms. Laura M. Homer Assistant Director, Division of Banking, Supervision and Regulation Board of Governors of the Federal Reserve System Washington, D.C. 20551 Mr. Larry Powaga Assistant Vice President Federal Reserve Bank of Chicago P.O. Box 834 Chicago, Illinois 60690 Ms. Paige Birdsall Assistant Vice President Federal Reserve Bank of San Francisco P.O. Box 7702 San Francisco, California 94120 Ms. Pauline Chen

Vice President Federal Reserve Bank of New York Federal Reserve P.O. Station New York, New York 10045