[Code of Federal Regulations]
[Title 31, Volume 2]
[Revised as of July 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 31CFR344.2]

[Page 274-278]
 
                  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 BPD.
    (c) Besides BPD, 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 issued 
as any one type, i.e., Time Deposit, Demand Deposit, or Special Zero 
Interest, cannot be transferred for other securities of that type or any 
other type. Transfer of securities by sale, exchange, assignment, 
pledge, or otherwise is not permitted.
    (e) What certifications must the issuer or its agent provide?--(1) 
Agent Certification. When a commercial bank or other agent submits a 
subscription, or performs any other transaction, on behalf of the 
issuer, it must certify that it is acting under the issuer's specific 
authorization. Ordinarily, evidence of such authority is not required.
    (2) Yield Certifications.--(i) Purchase of SLGS Securities. Upon 
submitting a subscription for a SLGS security, a subscriber must certify 
that:
    (A) Marketable Securities to SLGS Securities. If the issuer is 
purchasing a SLGS security with any amount received from the sale or 
redemption (at the option of the holder) before maturity of any 
marketable security, the yield on such SLGS security does not exceed the 
yield at which such marketable security was sold or redeemed; and
    (B) Time Deposit Securities to SLGS Securities. If the issuer is 
purchasing a SLGS security with any amount received from the redemption 
before maturity of a Time Deposit security (other than a zero interest 
Time Deposit security), the yield on the SLGS

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security being purchased does not exceed the yield that was used to 
determine the amount of redemption proceeds for such redeemed Time 
Deposit security.
    (ii) Early Redemption of SLGS Securities. Upon submission of a 
request for redemption before maturity of a Time Deposit security (other 
than a zero interest Time Deposit security) subscribed for on or after 
August 15, 2005, the subscriber must certify that no amount received 
from the redemption will be invested at a yield that exceeds the yield 
that is used to determine the amount of redemption proceeds for such 
redeemed Time Deposit security.
    (f) What are some practices involving SLGS securities that are not 
permitted?--(1) In General. For SLGS securities subscribed for on or 
after August 15, 2005, it is impermissible:
    (i) To use the SLGS program to create a cost-free option;
    (ii) To purchase a SLGS security with any amount received from the 
sale or redemption (at the option of the holder) before maturity of any 
marketable security, if the yield on such SLGS security exceeds the 
yield at which such marketable security is sold or redeemed; or
    (iii) To invest any amount received from the redemption before 
maturity of a Time Deposit security (other than a Zero Percent Time 
Deposit security) at a yield that exceeds the yield that is used to 
determine the amount of redemption proceeds for such Time Deposit 
security.
    (2) Examples. (i) Simultaneous Purchase of Marketable and SLGS 
Securities. In order to fund an escrow for an advance refunding, the 
issuer simultaneously enters into a purchase contract for marketable 
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 starting a 
SLGS subscription and the requested date of issuance of SLGS securities, 
the issuer will enter into an offsetting agreement to sell the 
marketable 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 marketable securities to fund the escrow and cancel the 
SLGS securities subscription. This practice violates the prohibition on 
cancellation under Sec.  344.5(c) or Sec.  344.8(c), and no exception or 
waiver would be granted under this part because the ability to cancel in 
these circumstances would result in the SLGS program being used to 
create a cost-free option. In addition, this practice is prohibited 
under paragraph (f)(1)(i) of this section.
    (ii) Sale of Marketable Securities Conditioned on Interest Rates. 
The existing escrow for an advance refunding contains marketable 
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 marketable 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 marketable securities 
would be sold at a yield which is less than the yield on the SLGS 
securities purchased. 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 practice violates the prohibition 
on cancellation under Sec.  344.5(c) or Sec.  344.8(c), and no exception 
or waiver would be granted under this part because the ability to cancel 
in these circumstances would result in the SLGS program being used to 
create a cost-free option. In addition, this practice is prohibited 
under paragraphs (f)(1)(i) and (ii) of this section.
    (iii) Sale of Marketable Securities Not Conditioned on Interest 
Rates. The facts are the same as in paragraph (f)(2)(ii) of this 
section, except that in this case, the agreement entered into by the 
issuer with a third party to sell the marketable securities in order to 
obtain funds to purchase SLGS securities

[[Page 276]]

is not conditioned upon changes in interest rates on Treasury 
securities. This practice violates the yield gain prohibition in 
paragraph (f)(1)(ii) of this section and is prohibited.
    (iv) Simultaneous Subscription for SLGS Securities and Sale of 
Option to Purchase Marketable Securities. The issuer holds a portfolio 
of marketable 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 marketable 
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 practice violates the prohibition on 
cancellation under Sec.  344.5(c) or Sec.  344.8(c), and no exception or 
waiver would be granted under this part because the ability to cancel in 
these circumstances would result in the SLGS program being used to 
create a cost-free option. In addition, this practice is prohibited 
under paragraph (f)(1)(i) of this section.
    (v) Early Redemption of Time Deposit Security and Subsequent 
Purchase of Marketable Security. On February 6, 2006, an issuer 
purchases a Time Deposit security using tax-exempt bond proceeds in a 
debt service reserve fund. The Time Deposit security has a principal 
amount of $7 million, an interest rate of 3.63 percent, and a maturity 
date of February 6, 2009. On March 1, 2007, the issuer submits a request 
to redeem the Time Deposit security on March 15, 2007. The yield used to 
determine the amount of redemption proceeds is 3.21 percent. On March 5, 
2007, the issuer subscribes for the purchase, on March 15, 2007, of a 
second Time Deposit security. The issuer pays for the second Time 
Deposit security on March 15, 2007, with the redemption proceeds of the 
first Time Deposit security. The second Time Deposit security has an 
interest rate of 2.77 percent and a maturity date of April 16, 2007. On 
April 9, 2007, the issuer enters into a contract to purchase, on April 
16, 2007, a ten-year, marketable Treasury security using the principal 
and interest to be received at the maturity of the second Time Deposit 
security. The marketable Treasury security has a yield of 4.02 percent. 
This transaction satisfies the yield limitation in paragraph (f)(1)(iii) 
of this section because:
    (A) The yield on the second Time Deposit security does not exceed 
the yield that is used to determine the amount of redemption proceeds 
for the first Time Deposit security; and
    (B) The second Time Deposit security is not redeemed before maturity 
and therefore the re-investment of the principal and interest received 
on the second Time Deposit security is not subject to the yield 
limitation in paragraph (f)(1)(iii) of this section. This transaction 
constitutes a permissible use of the SLGS program.
    (vi) Early Redemption of Time Deposit Security and Simultaneous 
Purchase of Marketable Security. The facts are the same as in paragraph 
(f)(2)(v) of this section, except that the issuer subscribes for the 
second Time Deposit security on March 1, 2007, and enters into the 
contract to purchase the marketable Treasury security on March 1, 2007. 
This transaction, if permitted, would enable the issuer to redeem the 
first Time Deposit security at a yield that is held constant for 12 
hours based on the ``current Treasury borrowing rate'' for March 1, 
2007, and to re-invest the redemption proceeds based on a market yield 
that may fluctuate during that 12-hour period. The use of the SLGS 
program in this manner would create a cost-free option. Accordingly, 
this transaction is impermissible under paragraph (f)(1)(i) of this 
section.
    (g) When and how do I pay for SLGS securities? You must submit full 
payment for each subscription to BPD no later than 4 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, BPD's ABA Routing Number is 051036476.

[[Page 277]]

    (h) What happens if I need to make an untimely change or do not 
settle on a subscription? An untimely change to a subscription can only 
be made in accordance with Sec.  344.2(n) of this part. The penalty 
imposed for failure to make settlement on a subscription that you submit 
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, or such 
other amount as we may publish in the Federal Register. We will not 
issue SLGS securities until we receive the late payment assessment, 
which is due on demand.
    (i) What happens at 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) How do I contact BPD? BPD's contact information is posted on 
BPD's Web site. (1) Will the offering be changed during a debt limit or 
disaster 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; and rollovers) 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, or that a disaster situation exists. 
We will announce such changes by any means that the Secretary deems 
appropriate.
    (m) What are some of the rights that Treasury reserves in 
administering the SLGS program? We may decide, in our sole discretion, 
to take any of the following actions. Such actions are final. 
Specifically, Treasury reserves the right:
    (1) To reject any SLGSafe Application for Internet Access;
    (2) To reject any electronic message or other message or request, 
including requests for subscription and redemption, that is 
inappropriately completed or untimely submitted;
    (3) To refuse to issue any SLGS securities in any case or class of 
cases;
    (4) To revoke the issuance of any SLGS securities and to declare the 
subscriber or the issuer 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); or
    (5) To review any transaction for compliance with this part, 
including requiring a subscriber or the issuer to provide additional 
information, and to determine an appropriate remedy under the 
circumstances.
    (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

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subject the United States to substantial expense or liability.
    (o) Are SLGS securities callable by Treasury? No. Treasury cannot 
call a SLGS security for redemption before maturity.

                     SLGSafe[reg] Service