[Code of Federal Regulations]
[Title 31, Volume 2]
[Revised as of July 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 31CFR344.2]

[Page 258-260]
 
                  TITLE 31--MONEY AND FINANCE: TREASURY
 
         CHAPTER II--FISCAL SERVICE, DEPARTMENT OF THE TREASURY
 
PART 344--U.S. TREASURY SECURITIES--STATE AND LOCAL GOVERNMENT SERIES--Table of Contents
 
                     Subpart A--General Information
 
Sec. 344.2  What general provisions apply to SLGS securities?

    (a) What other regulations apply to SLGS securities? SLGS securities 
are subject to:
    (1) The electronic transactions and funds transfers provisions for 
United States securities, part 370 of this subchapter, ``Electronic 
Transactions and Funds Transfers Related to U.S. Securities'', and
    (2) The Appendix to subpart E to part 306 of this subchapter, for 
rules regarding computation of interest.
    (b) Where are SLGS securities held? SLGS securities are issued in 
book-entry form on the books of the Department of the Treasury, Bureau 
of the Public Debt, Division of Special Investments, Parkersburg, WV.
    (c) Besides DSI, do any other entities administer SLGS securities? 
The Secretary may designate selected Federal Reserve Banks and Branches, 
as fiscal agents of the United States, to perform services relating to 
SLGS securities.
    (d) Can SLGS securities be transferred? No. SLGS securities held in 
an account of any one type, i.e., time deposit, demand deposit, or 
special zero interest, cannot be transferred within that account, or to 
an account of any other type. Transfer of securities by sale, exchange, 
assignment, pledge, or otherwise is not permitted.
    (e) How does a bank or other agent certify its authority? When a 
commercial bank or other agent submits an initial or final subscription 
on behalf of the issuer, it certifies that it is acting under the 
issuer's specific authorization. Ordinarily, evidence of such authority 
is not required.
    (f) What transactions are not permitted? The following is a 
nonexclusive list of impermissible transactions:
    (1) It is impermissible to subscribe for SLGS securities for deposit 
in a defeasance escrow of fund if at any time between the close of 
business on the date of subscription and the close of business on the 
date of issue, the amount of SLGS securities subscribed for, plus the 
amount of any other securities already in such escrow or fund, plus the 
amount of other securities the issuer has acquired, or has the right to 
acquire for deposit in an escrow or fund, exceeds the total amount of 
securities needed to fund such escrow or fund.
    (2) For paragraph (f)(1) of this section, do not include in the 
computation any securities held in the escrow or fund that are not 
subject to an agreement conditioned on changes in the interest rate on 
open market Treasury securities on or before the issue date of the SLGS 
securities. An adjustment in the subscription amount under 
Sec. 344.5(b)(4)(ii) will not in and of itself make the transaction 
impermissible.
    (3) The following examples illustrate certain permissible and 
impermissible practices:
    (i) In order to fund an escrow for an advance refunding, the issuer 
simultaneously enters into a purchase contract for open market 
securities and subscribes for SLGS securities, such that either purchase 
is sufficient to pay the cash flows on the outstanding bonds to be 
refunded but together, the purchases are greatly in excess of the amount 
necessary to pay the cash flows. The issuer plans that, if interest 
rates decline during the period between the date of subscribing for SLGS 
securities and the requested date of issuance of SLGS securities, the 
issuer will enter into an offsetting agreement to sell the open market 
securities and use the bond proceeds to purchase SLGS securities to fund 
the escrow. If, however, interest rates do not decline in that period, 
the issuer plans to use the bond proceeds to purchase the open market 
securities to fund the escrow and cancel the SLGS securities 
subscription. This arrangement in effect allows the SLGS program to 
provide a

[[Page 259]]

cost-free option to the issuer. This transaction is prohibited.
    (ii) The existing escrow for an advance refunding contains open 
market securities which produce a negative arbitrage. In order to reduce 
or eliminate this negative arbitrage, the issuer subscribes for SLGS 
securities at a yield higher than the yield on the existing escrow, but 
less than the permitted yield. At the same time, the issuer agrees to 
sell the open market securities in the existing escrow to a third party 
and use the proceeds to purchase SLGS securities if interest rates 
decline between the date of subscribing for SLGS securities and the 
requested date of issuance of SLGS securities. The issuer and the third 
party further agree that if interest rates increase during this period, 
the issuer will cancel the SLGS securities subscription. This 
arrangement in effect allows the SLGS program to provide a cost-free 
option to the issuer. This transaction is prohibited.
    (iii) Under the same facts as in paragraph (f)(3)(ii) of this 
section, except that in this case, the agreement entered into by the 
issuer with a third party to sell the open market securities in order to 
obtain funds to purchase SLGS securities is not conditioned upon changes 
in interest rates on Treasury securities. No option is created. This 
transaction is permissible.
    (iv) The issuer subscribes for SLGS securities fifteen days before 
the settlement date of its bonds at the maximum rates on such day, but 
the resulting yield in the escrow is less than the permitted yield. The 
rates on the SLGS securities rise over the next few days, and, within 
the time periods permitted for cancellation of a subscription under 
Sec. 344.5(b)(1) and Sec. 344.8(b)(2), the issuer cancels the earlier 
subscription and resubscribes at the higher rates. This transaction is 
permissible.
    (v) The issuer holds a portfolio of open market securities in an 
account that produces negative arbitrage. In order to reduce or 
eliminate this negative arbitrage, the issuer subscribes for SLGS 
securities for purchase in sixty days. At the same time, the issuer 
sells an option to purchase the portfolio of open market securities. If 
interest rates increase, the holder of the option will not exercise its 
option and the issuer will cancel the SLGS securities subscription. On 
the other hand, if interest rates decline, the option holder will 
exercise the option and the issuer will use the proceeds to purchase 
SLGS securities. This arrangement uses the SLGS program to provide the 
issuer with a cost-free option. This transaction is prohibited.
    (g) When and how do I pay for SLGS securities? You must submit full 
payment for each subscription to DSI by 4:00 p.m., Eastern time, on the 
issue date. Submit payments by the Fedwire funds transfer system with 
credit directed to the Treasury's General Account. For these 
transactions, Public Debt's ABA Routing Number is 051036476.
    (h) What happens if I do not settle on a subscription? The penalty 
imposed for failure to make settlement on a subscription that you submit 
but do not timely cancel will be to render you ineligible to subscribe 
for SLGS securities for six months, beginning on the date the 
subscription is withdrawn or the proposed issue date, whichever occurs 
first.
    (1) Upon whom is the penalty imposed? If you are the issuer, the 
penalty is imposed on you unless you provide the Taxpayer Identification 
Number of the conduit borrower that is the actual party failing to make 
settlement of a subscription. If you provide the Taxpayer Identification 
Number for the conduit borrower, the six-month penalty will be imposed 
on the conduit borrower.
    (2) What occurs if Treasury exercises the option to waive the 
penalty? If you settle after the proposed issue date and we determine 
that settlement is acceptable on an exception basis, we will waive under 
Sec. 344.2(n) the six-month penalty under paragraph (h) of this section. 
You shall be charged a late payment assessment. The late payment 
assessment equals the amount of interest that would have accrued on the 
SLGS securities from the proposed issue date to the date of settlement 
plus an administrative fee of $100 per subscription. Late payment 
assessments are due on demand.

[[Page 260]]

    (i) What happens at redemption? Treasury cannot call a security for 
redemption before maturity. Upon the maturity of a security, we will pay 
the owner the principal amount and interest due. A security scheduled 
for maturity on a non-business day will be redeemed on the next business 
day.
    (j) How will I receive payment? We will make payment by the 
Automated Clearing House (ACH) method for the owner's account at a 
financial institution as designated by the owner. We may use substitute 
payment procedures, instead of ACH, if we consider it to be necessary. 
Any such action is final.
    (k) If I am not an Internet customer, how do I submit transactions 
to DSI? Non-Internet customers may submit transactions by fax at (304) 
480-6818, or by carrier service, U.S. Postal Service (certified or 
registered mail), or other means, to the Bureau of the Public Debt, 
Division of Special Investments, 200 3rd St., P.O. Box 396, Parkersburg, 
WV 26106-0396. Unless requested, DSI will not send a confirmation of 
receipt to non-Internet customers.
    (l) Will the offering be changed during a debt limit contingency? We 
reserve the right to change or suspend the terms and conditions of the 
offering, including provisions relating to subscriptions for, and 
issuance of, SLGS securities, interest payments, early redemptions, 
rollovers, and notices, at any time the Secretary determines that the 
issuance of obligations sufficient to conduct the orderly financing 
operations of the United States cannot be made without exceeding the 
statutory debt limit. We will announce such changes by any means the 
Secretary deems appropriate.
    (m) What transaction requests are unacceptable? A decision to reject 
an unacceptable transaction request is in our sole discretion and is 
final. Although we may waive the right to reject transactions under 
Sec. 344.2(n), Treasury reserves the right:
    (1) To reject any SLGSafe\SM\ Application for Internet Access;
    (2) To reject any electronic or paper transaction request (including 
requests for subscription and redemption, and changes to subscriptions) 
that is unsigned, inappropriately completed, or untimely submitted;
    (3) To refuse to issue any SLGS securities in any case or class of 
cases; and
    (4) To revoke the issuance of any SLGS securities and to declare the 
subscriber ineligible thereafter to subscribe for securities under the 
offering if the Secretary deems that such action is in the public 
interest and any security is issued on the basis of an improper 
certification or other misrepresentation (other than as the result of an 
inadvertent error) or there is an impermissible transaction under 
Sec. 344.2(f).
    (n) Are there any situations in which Treasury may waive these 
regulations? We reserve the right, at our discretion, to waive or modify 
any provision of these regulations in any case or class of cases. We may 
do so if such action is not inconsistent with law and will not subject 
the United States to substantial expense or liability.

                             SLGSafeSM