SEC Division of Investment Management staff letter: Investment Company Institute

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

,'SION OF

~.. ,iT MANAGEMENT
October 3, 1997

AC ~vN0o-:Co~A-cl
Craig S. Ty Ie, Esquire SECON I--) - General Counsel RUL l7t-'f Investment Company Institute 1401 H Street, N.W. pULl l tr J- 17 Washington, D. C. 20005-2148 AVAJ.A fl Dear Mr. Tyle:
In your letter dated July 9, 1997 on behalf of the Investment Company Institute, you requested that the Commission make a "techncal modification" to rule 17f-4(b)(2) (17 CFR 17f-4(b)(2)) under the Investment Company Act. The modification you proposed would update the rule to reflect regulations the U.S. Department of the Treasury recently 270. promulgated concernng the book-entry system for U.S. Governent securities. As we

discussed on October 2, 1997, you have asked that we treat your letter as a request for no￾action assurance until the Commission next amends rule 17f-4. Rule 17f-4(b )(2) provides that, subject to certain conditions, a registered management investment company ("fund") and its qualified custodian may deposit the fund's portfolio securities in the federal book-entry system. The rule, adopted in 1978, identifies that system as:
the book-entry system as provided in Subpart 0 of Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entry regulations of federal agencies substantially in the form of Subpart 0 . . . .

On August 16, 1996, the U.S. Departent of the Treasury adopted new regulations concerng the Treasury/Reserve Automated Debt Entry System ("TRAES").l The TRADES regulations replaced the regulations referred to in rule 17f-4(b)(2), effective

See Regulations Governing Book-Entry Treasury Bonds, Notes and Bils, Department of the

Treasury Circular, Public Debt Series, No. 2-86, 61 FR 43626 (Aug. 23, 1996). The adopting release states that the new regulations "incorporateD recent and significant changes in commercial law addressing the holdings of securities in book-entry form through financial intermediaries. . . (and) replaceD existing Treasury regulations that contain outdated legal concepts." ¡d.

Craig S. Tyle, Esq.

October 3, 1997

January 1, 1997.2 The TRADES regulations are codified at 31 CFR Part 357, Subpart B. You state that other federal agencies and governent-sponsored enterprises that issue book￾entry securities and use the Federal Reserve Banks' book-entr facilties also have adopted new regulations substantially in the form of the TRADES regulations rather than former Subpart O. As you point out, the identification of the federal book-entry system in rule 17f-4(b)(2) has become outdated as a result of these regulatory developments. The Division believes that the Commission generally intended, when it adopted rule 17f-4 in 1978, to incorporate by reference future revisions of regulations governng the federal book-entry system, provided that these revisions would not materially increase risks to fund assets maintained in the system. The Division is considering recommending to the Commission that it propose amendments to rule 17f-4 that would address this issue, as well as other more significant developments that affect the rule. Pending possible future amendments to rule 17f-4, the Division would not recommend enforcement action to the Commission against any fund or custodian that maintains fund assets in accordance with the requirements of rule 17f-4 in the federal book-entry system described in the TRADES regulations, or described in other federal agency or governent sponsored enterprise regulations that are substantially in the form of the TRADES regulations. Sincerely, ¡J 2 ;J~ Robert E. Plaze

Associate Director
2 The TRADES regulations rescinded former Part 350 and replaced the pertinent portion of Subpart 0 of Part 306 with new Subpart B of Part 357.

INVESTMENT COMPANY INSTITUTE I!
\¡,~AIG S. TYLE
!ICE PRESIDENT & SENIOR COUNSEL SECURITIES AND FINANCIAL REGULATION July 9, 1997 Barry P. Barbash, Esq.

Director

Division of Investment Management

Securities and Exchange Commssion .
Room 10065 Stop 10-6

450 Fifth Street, N.W.

Washington, DC 20549

Re: Proposed Revision to Rule 17f-4(b )(2), Defing the Federal Book-Entr System

Dear Mr. Barbash:

The Investment Company Institute! is writig to request that a techncal modification be made to Rule 17f-4(b)(2) under the Investment Company Act of 1940 in order to update the citation therein to the Treasur Department's book-entr securties regulations. Rule 17f-4(b )(2) provides that, subject to certai conditions, registered investment companies and their qualfied custodian may deposit an investment company's securities in the federal book-entr system. In light of the fact that most U.S. Treasury securities and the securities of many U.S. governent agencies are issued exclusively in book-entr form, the authority to utilize the federal book-entr system pursuant to Rule 17f-4(b )(2) is essential to the investment or cash management operations of nearly al investment companes. The current language of Rule 17f-4(b )(2), however, refers to the federal book-entry system as being:
lithe book-entr system as provided in Subpar 0 of Treasur Circular No. 300, 31 CFR 306, Subpart B of 31 CFR Part 350, and the book-entr regulations of

federal agencies substantially in the form of Subpart 0.. ." On January 1,1997, the Treasur Deparent's revised reguations for.the Treasury /Reserve Automated Debt Entr System ("TRADES") became effective.2 The TRADES 1 The Investment Company Institute is the national association of the Amencan investment company industr. Its membership includes 6/543 open-end investment companies ("mutual fuds"), 445 closed-end investment companes and 11 sponsors of unit investment trsts. Its mutual fud members have assets of about $3.849 mIlon, accounting for approximately 95% of total industr assets, and have over 59 milion individual shareholders.

1401 H STREET. NW . WASHINGTON. DC 20005-2148 . 202/326-5815 . FAX 202/326-5827

Barr P. Barbash, Esq.

July 9, 1997

regulations deleted former Part 350 and replaced the pertent portion of Subpart 0 of Part 306

with new Part 357, Subpart B. Similarly, all of the governent sponsored enterprises that issue book-entr securities and utilize the Federal Reserve Banks' book-entr facilities also have adopted new reguations that are "substantially in the form of" TRADES, rather than the old Subpart 0.3 Thus, the language in curent Rule 17f-4(b)(2) has become obsolete.

We believe that it is clear that Rule 17f4(b)(2) is intended to authorize registered investment companies and their custodians to utilize the federal book-entr system. Nevertheless, to elimiate the possibilty of confsion or uncertainty, we request that a

techncal correction to the Rule be made at the Commssion's earliest opportuty. To effect such a correcton, we suggest that Rule 17f-4(b)(2) be amended to read as follows:
"(2) the Treasur/Reserve Automated Debt Entr System (TRADES), as provided for in 31 CFR Part 357, Subpart B, or any successor provision thereto, or another automated book-entr system operated by the Federal Reserve Ban pursuant to the reguations of federal agencies or instrmentalities that are substantially simiar to such Subpart B or successor provision thereto." We would be pleased to discuss ths proposed change with you at any time. If you have any questions, please call Amy Lancellotta at 202/326-5824 or the undersigned at 202/326-5815. Sincerely yours, /" ~ 7 .~i; Craig S. Tyle Vice President & Senior Counel cc: Robert E. Plaze t 2 A copy of the Treasur Departent's adoptig release, as publihed in 61 FR 43626 (Augut 23,1996), is attached for your convenience. . 3 These government sponsored enterpnses and the related reguations are as follows: (1) the Federal National Mortgage Assocation and the Federal Home Loan Mortgage Corporation (Reguations of the Departent of

Housing and Urban Development, 61 Fed. Reg. 63944); (2) the Federal Home Loan Bank (Reguations of the Federal Housing Finance Board, 61 Fed. Reg. 64021); (3) the Farm Credit Ban, the Federal Agncultual Mortgage Corporation and the Farm Credit System Financial Assistance COloration (Reguations of the Farm Credit Admistration 61 Fed. Reg. 67188); (4) the Resolution Funding Corporation (Regulations of the Thft Depositor Protecon Control Board 61 Fed. Reg. 66874); (5) the Student Loan Mortgage Assocation (Regulations of the Departent of Treasur's Bureau of Public Debt, Fiscal Service, 62 Fed. Reg. 621); and (6) the Tennessee Valley Authonty (62 Fed. Reg. 920). :) ,

43626 Federal Register / Vol. 61, No. 165 / Friday. August 23. 1996 / Rules and Regulations DEPARTMENT OF THE TREASURY Fiscal Service 31 CFR Part 357 (Department of the Treasury Circular. Public Debt Series, No. 2-861

Regulations Governing Book-Entry Treasury Bonds, Notes and Bils.

AGENCY: Bureau of the Public Debt,

Fiscal Service, Treasur.
ACTION: Final rule.

SUMMARY: The Deparent of the

Treasur is publishing a final rule that. on and after the effective date. wil govern Treasury bonds, notes, and bils

(Treasury securities) in book-entr form held in the commercial book-entry system. The rule incorporates recent and significant changes in commercial law addressing the holdings of secunties in book-entr form through financial intermediaries. The rule replaces existing Treasur regulations that contain outdated legal concepts. EFFECTIVE DATE: January 1. 1997. The

incorporation by reference of certain

publications listed in the regulations is

approved by the Director of the Federal

Register as ofJanuary 1. 1997.

FOR FURTHER INFORMATION CONTACT:
Walter T. Eccard. Chief Cowisel (202)

219-3320, or Cynthia E. Reese, Deputy

Chief Cowisel, (202) 219-3320. Copies

of the final rule are being made

available for downloading from the

Bureau of the Public Debt home page at

the following address:

http:\www.ustreas.gov/treasury/ bureaus/ pubdebtlpubdebt.html. SUPPLEMENTARY INFORMATION:
I. Background
On March 4, 1996. the Deparent published a proposed rule that would govern secuntíes held in the commercial book-entr system. now referred to as the Treasur/Reserve Automated Debt Entr System

("TRAES"). 61 FR 8420. Eleven written comment letters were received in response to that proposed rule. All but one of the comment letters were very supportive of the proposed rule. Most commenters recommended adoption ~f the proposed rule with various suggested clarifications. The Departent fowid the comments

extmely useful in makg the revisions described herein. Although some minor comments are not addressed, all comments have been considered in the formulation of this final rule.

As indicated in the March 4 release. Treasury wil include commentar on TRES in the Code of Federal Regulations. This commentar can be fowid in Appendix B. Comments from several persons

overlapped and those comments

addrssed thee general areas:
(1) The scope of federal preemption and related issues involving state varations on Revised Aricle 8 of the UCC as well as Treasur procedures and notice rearding acceptance of state enactments of Revised Aricle 8; (2) Coordination as to timeframes and notices to faciltate revision and issuance of parallel rules for book-entr secunties of Governent Sponsored Enterpnses (GSEs) to conform to the final TRAES rule; and (3) The need for fuer explanation and clanfication. especially the inclusion of hypotheticals. to ilustrate

how TRADES wil apply to a varety of transaction scenarios of varing complexity, including the application of the féderallaw to transactions involving clearng bans.
II. General Comment Discussion
In the March 4 proposal. Treasury set fort its conclusion that. because of the

size and importance of the Treasury market. unformity of treatment of holders of interests in Treasury securities was essential. In addition, Treasury set fort in some detail the

reasons it had concluded that Revised

Article 8 was an appropriate vehicle to

use to obtain that wiiformity. As of

March 4. 13 states had adopted Revised

Article 8. As of the date of
this release
28 states i have adopted Revised Aricle 8 and it has been introduced in 4 additional states and the Distrct of Columbia.2 This remarkable progress

reflects strong support for the legal concepts set fort in Revised Arcle 8 and supports Treasur's decision to base TRAES on Revised Article 8, which is incorporated by reference in this final rule. In the March 4 release. Treasur proposed achieving uniformity for Treasury secunties in two ways. First.
Section 357.10(a) established a rule of
Federal preemption in descnbing the nghts and obligations of Treasury and the Federal Reserve Bans. Second, TRDES established a choice of law rule that mandated use of Revised
Article 8 in the event the state
determined by the application of the i Alabama. Alaska. Arizona. Arkansas. Colorado. Idaho. Iowa. lI/inois. Indiana. Kansas, Kentucky. Louisiana. Maryland. Massachusetts. Minnesota. Mississippi. Nebraska. New Mexico. Oklahoma. Oregon. Pennsylvania. Texas. Utah. Vermont. Virginia. Washington. West Virginia. Wyoming. 'California. District ofColumbia. Hawaii. New York. Ohio. choice of law rule had not adopted Revised Artcle 8.

Commenters generally supported

Treasury's conclusion that unfOrmty

was important for the market and

investors in Treasur secunties. In addition commenters were supportve of the use of Revised Artcle 8 to achieve this uniformitv. Thr different questions, ho\vever, were raised about the maner in which Treasur achieved unformity and used Revised Article 8. A. Federa Preemption First. 5 commenters questioned whether §§ 357.10(c) and 357.11(d) were intended to be a complete or limited preemption of a state's law if the state had not adopted Revised Aricle 8. As set fort in the Marh 4 release. the preemption in TRES is limited. See the commentary in Appendix B. In order to clarfy this issue, Treasury has adopted language in both §§ 357.10(c) and 357.1l(d) suggested by a cotnmenter to make the limited nature of the .

preemption clearer. This language provides that. if a state has not adopted Revised Article 8. that state's laws shall be viewed as though that state had adopted Revi'ed Article 8.

Second, 4 commenters noted that

while in the discussion section of the

March 4 release Treasur stated that

minor variations made by a state in adopting Revised Article 8 would not affect Treasury's conclusion that a state had adopted Revised Aricle 8, the language of the proposed rule had no similar qualification. Furter. commenters noted that while the standard in the commentarv seemed appropriate. determination"of what constituted minor varations could be diffcult. In response to these comments, and in an attempt to provide certainty; Treasur is taking the following actions. Treasury' has reviewed the form of Revised Article 8 adopted by the 28 statesJ that have adopted Revised
Article 8 as of the date of this release
and has concluded that the changes made by these states indeed ar minor. Therefore. Treasury has concluded that they all are substantially similar to Revised Article 8. Accordingly, if either § 357.10(b) or 357.1l(a) directs a person to one of these 28 states. the pro'isions of §§ 357.10(c) and 357.11(d) are not applicable. In addition, as additional states adopt Revised Aricle 8, Treasury wil. after review of the statute, publish in the Federal Register a notice setting fort its conclusion as to whether §§357.10(c) and 357.11(d) remain applicable to those states. 'See NOle ! supro.

43627 Federal Register I Vol. 61, No. 165 I Friday, August 23, 1996 I Rules and Regulations

Third, a commenter raised a question of what Treasur would do in the event a state adopted Revised Arcle 8 and then subsequently amended Revise.d Artcle 8 in a fashion that resulted in an unsatisfactory lack of uniformity:
Treasur believes such an event is unlikely. In addition, ?nc~ Treasury has anounced its determination tht a state has adopted Revised Article 8, the market is entitled to rely on-that decision.4 Nonetheless, if such an unlikely event were to occur, Treasury has the authority to take the action that would result in §§ 357.10(c) and 357.11(d) (or their equivalent) being reapplied. Any such action w.ould be

published in the Federal Register.
B. Action With Respect to GSEs Several commenters noted that market paricipants and practitioners were

concerned about coordination among Treasur and other GSEs that issue. .

book-entr securities. The assumption is that the substance of any such regulations will be substantially identical to the Treasury proposed rule. Treasury is working with the GSEs and their regulators toward the goal of havina the effective dates of all fial

book-~ntr regulations timed t~ coincide. One commenter specifically suggested delaying the effective date of the final TRAES rule to provide suffcient lead time to GSE issuers.

Treasur understands the market's desire for simultaneous adoption of book-entr rules substantially similar to TRADES for GSEs. While adoption of rules for GSEs is subject to the control of the vmous GSEs and the entities that promulgate their rules, Treasur has taken several steps to facilitate the simultaneous adoption of parallel GSE rules. These steps have included

meetigs with representatives of the

GSEs and their regulators to inform

them 'of the actions Treasur was takig with respect to TRDES and the . timetable for adoption of TRES. Consistent with ths supportve approach, Treasury has determined that it wil, at the request of the Federal

Far Credit Ban Funding .
Corporation, delay the effecveness of TRES until Januar 1. That should permit suffcient tie fòr rules similar to TRADES to be in place for GSEs by the effective ?ate of TRADES. . One commenter noted ihat Micle 9 is current! y being revised. which could lead .10 the res~lt.lhat a stale could adopt differenl Article 9 provisions :ban are included in the Anicle 8 conforming amendments. Tresury does not anticipale that such an event would result in the need t.o reapply §§ 357.10(c) and 357.1I(dJ.lf that were necessary.

Treasury would talce the same action. after notice. as described herein.
C. Request for Hypotheticals
Several commenters suggested that Treasur include in the Commentary to the final regulations vmous . hypotheticals to ilustrte the maner in which selected transactions would be treated under the TRDES regulations. Initially, Treasur notes that Revised
Article 8 provides nume;ous .
hypotheticals that explan the operation of Revised Aricle 8. Treasur has studied those hypothçticals carefully.

and believes that they are very useful in understanding Revised Aricle 8. In light of those hypotheticals. and since TRAES is based. in lare measure, on Revised Article 8. Treasur has

concluded that developing

hypotheticals explaing the operation of Revised Artcle 8 is unecessary. On the other had. TRES does provide for an interaction of federal and state law. Since the results in a paricular factual situation could depend on which law is applicable, Treasur has concluded that hypotheticals that ilustrate what law would apply in different situations would be usefuL. Accordingly. the Comi;entar conta~ns hypotheticals to explain the interaction of federal and state law.
III. Other Comments
In addition to the general comments described above, Treasur received a . number of other comments. Many of these included technical drafting suggestions. . One commenter noted concerns with the tiered nature of the commercial book-entr system and indicated that

investors may not be aware of how the

commercial book-entry system works.

Treasur agrees that it is important that investors understand the operation of

both the book-entr system and

TRES. The discussion in the March

4 Proposed Rule was designed to

promote that understanding. In

addition. the inclusion of a commentary on "IES in the Code of Federal Regulations is another effort to promote an understading of both TRDES and the book-entr system. Furermore. Treasur plans to contiue its investor

education efforts in the coming months.

One commenter questioned the use of

the term "Security Entitlement" to

descnbe the interest of a Parcipant in

a Treasur book-entr security. The commenter noted that the term "Security Entitlement" is úsed in Revised Arcle 8 and its use in TRADES to descrbe the interest of a Parcipant could be confusing. Treasury considered using different terms to describe ~is interest but-concluded that Security Entitlement was the most usefuL. In order to avoid confusion. there was languageïn the commentar in the Marh 4 release that attempted to make it clear that the term "Security Entitlement" has a special meang in TRES. Additional language has been added to the commentar to clarfy ths fuer. Due to Treasur's obligation to

pay a Paricipant (see § 357.13(b)). the interest of a Parcipant and a person holding in TRSURY DIRCl ar, in practcal terms. the same since both the

Parcipant and the person holdig in

TREASURY DlRECl have a direct clai against the United States. One commenter proposed addig a

new defined term, "State." ~d m~de certain'other draftng changes to the

definitions. Those suggestions mainly

clarfy the meanng intended by

Treasur in the Marh release and were

adopted. In adopting these draftg

suggestions. Treasur concluded that a new defined term, "Adverse Claim" was needed. This definition is based on the definition of that term in Revised
Article 8. By adding this term, Treasur
is able to adopt the suggestions that it

delete the general incorporation

reference in the defiiution section that

appeared in the March release. Secton
357.2 is complete and reference to other
definitions is unnecessar.
One commenter found the language of § 357.10(b) unclear and proposed drafting suggestions to clarify its. meaning. Section 357.10(b) decribes the law that governs secunty interests granted to Federal Reserve Banks. The Commentary, anct hypotheticals .

included in the commentar. explain how § 357.10(b) works. In addition Treasury has redrafted § 357.10(b) in order to make its meaning clearer. Several comments stated that §357.11(c) should be modified to conform to the choice of law rule in
Section 9-103(6)(0 of Revised Arcle 8.

Treasur agres with this comment and has made changes to § 357.11(c). In paricular. Treasury agres that it is appropriate to delete rereren~e to prionty so that, as provided in § 357.11(a)(5), the law of the Secunties Intermediary's jurisdiction governs on this issue. Procedural Requirements This final rule does not meet the criteria for a "significant regulatory action" pursuant to Executive Order 12866. The notice and public comment procedures requirements of the Administrtive Procedure Act are

inapplicable, pursuant to 5 U.S.c. 553(a)(2). . . As no notice of proposed rulemakng was required. the provisions of the

43628 Federal Register I Vol. 61. No. 165 I Friday, August 23, 1996 I Rules and Regulations Regulatory Flexibilty Act (5 U.S.C. 601.

et sea.) do not apply.

There ar no collections of

information contaied in this fial rule. Therefore, the Paperwork Reduction Act does not apply. .

List of
Subjects in 31 CFR Part 357 Bonds. Electronic funds trsfer,

Federal Reserve System. Governent securties, Incorporation by reference.

Securties.
For the reasons set fort in the

preamble. title 31. chapter II, subchapter B, part 357 is amended as follaws:
PART 357-(AMENOED)

1. The authonty citation for par 357
   continues to read as follows: .
   Authority: 31 U.S.C. chapter 31; 5 U.S.C.

301; 12 U.S.c. 391.
2. Sections 357.0 and 357.1 are added
to read as follows:
§ 357.0 Dual book-entry systems.

(a) Treasury secunties shall be maintaied in either of the following

two book-entr systems:
(1) Treasury/Reserve Automated Debt Entry System (TRADES). A Treasur security is maintained in TRAES if it

is credited by a Federal Reserve Bank to

a Parcipant's Securities Account. See

subpar B of this part for rules pertaining to TRADES. (2) TREASURY DIRECT Book-entry Securities System (TREASURY

DIRECT). A Treasury secunty is

maintained in TREASURY DIRECl if it is credited to a TREASURY DIRECl account as described in § 357.20. Such accounts may be accessed by investors in accordance with subpar C of ths

par through any Federal Reserve Bank . or the Bureau of the Public Debt. See subpar C of ths par for rules pertaining to TREASURY DlRECl. (b) A Treasur security eligible to be maintained in TRASURY DIRECl under the terms of its offering circular or pursuant to notice published by the

Secretar may be transferred to or from

an account in TRAES frm or to an account in TREASURY DIRCT in accordance with § 357.22(a). § 357.1 Effective date. Subpar B of this Part, the definitions of "Adverse Claim," "Book-entr Security," "Entitlement Holder," "Federal Reserve Bank Operating Circular:: "Funds Account," "Issue," "Paricipant," "Paricipant's Securties Account," "Person," "Revised Aricle

8," "Securties Intermediary," "Security Entitlement," "State," and "Transfer Message" and revisions to the definitions of "Security" and "TRES:' and §§ 357.42 and 357.44 and the revisions to § 357Ai ar effective Januar 1. 1997. All other provisions in effect prior to Januar 1. 1997, remain in effect.
3. Section 357.3 is redesignated
§ 357.2, in the defiJtion of "depository institution" pargrphs (a) though (0 are redesignated as pargraphs (1) thugh (6). the definition of "securty interest and pledge" is removed, the definitions of "Secuty" and "TRES" are revised, and the remaining defitions arc added in

alphabetical order as follows:

§ 357.2 Definitions.

---

Adverse Claim means a claim that a claimant has a property interest in a Security and that it is a violation of the nghts of the claimant for another Person to hold. trsfer. or deal \vith the

Securty. * *

Book-entry Security means. in subpar B of this part, a Treasury Security maintained in TRDES and, in subpar C of this part, a Treasurf Securty maintained in TRSURY DIRECl. * * * Entitement Holder means a Person to whose account m interest in a Book￾entry Security is credited on the records of a Securities Intermediar. " Federal Reserve Bank Operating Circular means the publication issued by each Federal Reserve Bank that sets fort the terms and conditions under

which the Reserve Ban maintains Book-entr Securities accounts and tranfers Book-entry Securties.

*
Funds Account means a reserve and! or clearng account at a Federal Reserve Ban to which debits or crdits are posted for tranfer agaist payment. book-entr securties transaction fees, or pricipal and interest payments.

• " *
  Issue means a group of securties. as defined in ths section. that is identified by the same CUSLP (Committee on Uniform Secuties Identification Practices) nwnber. Participant means a Person that maintains a Paricipant's Securities Account with a Federal Reserve Ban. Participant's Securities Account means an account in the náme of a Parcipant at a Federal Reserve Bank'to

which Book-entry Secunties held for a Parcipant are or may be credited. Person means and includes an individuaL. corporation. company. governmental entity. association. firm, parership, trt,.estate. representative

and any other similar organzation but does not mea or include the .Unit~d States or a Federa Reserve Ban * *

Revised Arcle 8 means Uniform Commercial Code. Revised Arcle 8. \ .Investment Securties (with ConfOrmng and lvfisællaneous Amendments to Arcles 1,3.4.5.9. and 10) 19901

Offcial Text Revise Artcle 8 of the Uniform Commercial Code is incorporated by reference in this Part puruant to 5 U.S.C. 552(a) and 1 CFR

par 51. Arcle 8 was adopted by the

America Law Insttute and the National Conferenæ of Commissioners On Uniform State Laws and approved by the American Bar Association on Februar 14. 1995. Copies of this publication ar available frm the Executive Offce of the American Law Institute, 4025 Chestnut Street. Philadelphia. PA 19104, and the National Conference of Commissioners on Uniform State Laws. 676 North St. Clair Stret. Suite 1700. Chcago, IL
60611. Copies are also available for
public inspection at the Deparent of the Treasur Libra, Room 5030, Main

Treasury Building, 1500 Pennsylvania Avenue. NW.. Washington DC 20220.

and at the Offce of the Federal Register, 800 Nort Capitol Strt. NW., Suite

iOO. Washington DC.
Securites Intermediary means:
(1) A Person that is registered as a "cleanng agency" under the federal securities laws; a Federal Reserve Bank; any other. person that provides clearance or settlement services with respect to a Book-entry Securty that would require

it to register as a cleanng agency under the federal securities laws but for an exclusion or exemption from the 'registration requirement. if its actÍ'Íties as a cleanng corporation, including promulgation of rules, ar subject to regulation by a federal or state governental authonty; o.r (2) A Person (other than an individuaL. unless such individual is

registered as a broker or dealer under the federal securities laws) including a ban or broker. that in the ordinary course of its business maintains secunties accounts for others and is acting in that capacity. Secutitymeans a bil, note. or bond, each as defined in this section. It also means any other obligation issued by the Departent that, by the terms of the applicable offering circular or anouncement, is made subject to this par. Solely for puroses of ths part. it also means:
(1) The interest and principal components of a security eligible for

43629 Federal Register I Vol. 61, No. 165 I Friday, August 23, 1996 I Rules and Regulations

Separate Trading of Registered Interest obligations of the United States and the interest therein from an Entitlement \ and Princi pal of Securties ("STRS"). I if such secunty has been divided into such components as authoried by the

express terms of the offenng circular under which the securty was issued and the components are maitained separtely on the books of one or more Federal Reserve Bans; and (2) The interest coupons that have ben converted to book-entr form under the Treasur's Coupons Under Book-Entr Safekeeping Program

("CUBES"), pursuant to agreement and the regulations in 31 CFR par 358. Security Entitlement means the nghts and property interest of an Entilement Holder with respect to a Book-entr Security. .

---

State means any State of the United

States, the Distrct of Columbia, Puerto

Rico, the Virgin Islands, or any other territory or possession of the United States. * TRADES is the Treasury/Reserve Automated Debt Entr System, also referred to as the commercial book-entry system.

---

, Transfer Message means an

) instrction of a Paricipant to a Federal . Reserve Bank to effect a trnsfer of a Book-entry Security maintained in TRADES, as set fort in Federal Reserve Bank Operating Circulars.
4. Subpart B, consisting of §§ 357.10
though 357.14. is added to read as follows:
Subpart B- Treasury/Reserve

Automated Debt Entr System

(TRADES)
§ 357.10 Law governi'ng rights and obligations or United States and Federal Reserve Bank: rights or any Person against United States and Federal Reserve Banks.

§ 357.11 Law governing other interests.

§ 357.12 Creation or "Paricipant's Secuity Entitlement: ,security interests. § 357.13 Obligations or United States; no Adverse Claims. § 357.14 Authority or Federal Reserve

Banks.

Subpart B- Treasury/Reserve

Automated Debt Entr System

(TRADES)
§357.10 Lawgovemingrightsand

obligations of United States and Federal

Reserve Banks; rights of any Person ,i .against United States ai:d Federal Reserve i Banks.

(a) Except as provided in paragraph (b) of this section. the rights and Federal Reserve Bans with respetto:

A Book-entr Security or Securty Entitlement and the operation of the Treasur book-entr system: and the

ñghts of any Person, including a Parcipant, against the United States

and the Federal Reserve Bans with respect to: A Book-entr Securty or Securty Entitlement and the operation of the Treasur book-entr system; ar governed solely by Treasur regulations, including the reulations of ths Part, the applicable offenng circular (which is 31 CFR par 356, in the case of secuties issued on and after Marh 1, 1993), the anouncement of the offenng, and Federal Reserve Ban Operating Circulars. . (b) A securty interest in a Security . Entitlement that is in favor of Federal Reserve Ban from a Parcipant and that is not recorded on the books of a Federal Reserve San pursuant to

§ 357.12(c)(1), is governed by the law (not including the conflict-of-Iaw rules) of the jursdiction where the head offce of the Federal Reserve Bankmaintaining the Paricipant's Securties Account is located. A security interest in a Security Entitlement that is in favor of a Federal Reserve Ban from a Person that is not a Parcipant, and that is not recorded on the books of a Federal Reserve Bank puruant to § 357.12(c)(1), is governed by the law determined in the manner specified in § 357.11.

(c) If the jursdiction specified in the first sentence of paragraph (b) of this
section is a State that has not
adopted Revised Article 8 (incorporated by reference, see§ 357.2) then the law specified in pargrph (b) of this section shall be the law of that State as though Revised Arcle 8 had been adopted by

that State.

§ 357.11 Law governing other Interests. (a) To the extent not inconsistent with these regulations, the law (not including the conflct-of-Iaw rules) of a Securties Intermediar's jursdiction governs:
(1) The acquisition of a Secunty Entitlement from the Secunties Intermediar; (2) The nghts and duties of the Securties Intermediar and Entitlement

Holder ansing out of a Secunty Entitlement; (3) Whether the Securties Intermediary owes any duties to an adverse cl;iimant to a Security Entilement; (4) Whether an Adverse Claim ca be asserted against a Perso.n who acquires a Security Entitlement from the

Securities Intermediar or a Person who purchases a Security Entitlement or Holder; and (5) Except as otherwse provided in pargraph (c) of this secton, the perfection, effect of perfection or non￾perfecton and pnonty of a security interest in a Secwjty Entitlement. (b) The following rules determine a "Secunties Intermediar's junsdiction"

for puioses of ths section:
(1) If an agreement between the Secuties Intermediar and its

Entitlement Holder specifies that it is governed by the law of a parcular junsdiction. that jursdiction is the

Secunties Intermediary's jursdiction.

(2) If an agreement between the Secunties Intermediar and its Entitlement Holder does not specify the governng law as provided in paragraph (b)(1) of this section. but expressly specifies that the secuties account is maintained at an offce in a paricular junsdiction, that jursdiction is the

Securties Intermediary's jurisdiction. (3) If an agreement between the Securities Intermediary and its Entitlement Holder dcies not specify a jurisdiction as provided in paragraph (b)(1) or (b)(2) of this section, the Secunties Intermediary's junsdiction is

the jurisdiction in which is located the ' offce identified in an account statement as the offce serving the Entitlement Holder's account. (4) If an agreement between the Securities Intermedíary and its Entitlement Holder does not specify a jurisdiction as provided in paragraph (b)(l) or (b)(2) of this section and .an account statement does not identify an offce serving the Entitlement Holder's account as provided in paragraph (b)(3) of this section, the Securties Intermediar's junsdiction is the junsdiction in which is located the chief executive offce of the Securities Intermediary . (c) Notwithstanding the general rule in paragraph (a)(5) of this section, the law (but not the conflct-of-Iaw rules) of the jurisdiction in which the Person creating a security interest is located governs whether and how the secuty interest may be perfected automatically or by fiing a financing statement. (d) If the junsdiction specified in paragraph (b) of this section is a State that has not adopted Revised Artcle 8 (incorporated by reference, see § 357.2), then the law for the matters specified in paragraph (a) of this section shall be the law of that State as. though Revised
Article 8 had been adopted by that
State. For puroses of the application of the matters specified in paragraph (a) of this section, the Federal Reserve Bank maintaining the Secunties Account is a clearing corporation, and the

43630 Federal Register I Vol. 61, No. 165 I Friday, August 23, 1996 I Rules and Regulations Parcipant's interest in a Book-entr Secunty is a Securty Entitlement. §357.12 Creation of Participant's Security Entitlement; seurity Interets.

(a) A Parcipant's Secty Entitlement is created when a Federal Reserve Ban indicates by book entr

that a Book-entr Secity has been credited to a Parcipant's Secunties Account. (b) A secunty interest in a Securty Entitlement of a Parcipant in favor of

the United States to secur deposits of public mpney; includig without limitation deposits to the Treasur tax and loan accounts, or other securty interest in favor of the United States that is required by Federal statute, regulation. or agreement, and that is

marked on the books of a Federal

Reserve Bank is thereby effected and perfècted, and has priority over any other interest in the securities. Where a security interest in favor of the United States in a Secunty Entitlement of a Paricipant is marked on the books of a

Federal" Reserve Bank. such Reserve

Ban may rely, and is protected in

relying, exclusively on the order of an authorized representative of the United States directing the transfer of the secunty. For puroses of ths paragraph, , an "authorized representative of the ) United States" is the official designated . in the applicable regulations or agreement to which a Federal Reserve Ban is a party. governing the security interest.

(cl (1) The United States and the Federal Reserve Banks have no obligation to agree to act on behalf of any Person or to recognize the interest of any transferee of a security interest or other limited interest in-favor òf any Person except to the extent of any specific requirement of Federal law or

regulation or to the extent set fort in

any specific agreement with the Federal Reserve Ban on whose books the interest of the Parcipant is recorded. To the extent required by such law or regulation or set fort in an agreement with a Federal Reserve Bank, or the

Federal Reserve Ban Operatig Circular, a securty interest in a Secunty Entitlement that is in favor of a Federal

Reserve Bank or a Person may be

. created and perfected by a Federal ReserVe Bank markig its books to record the secmity interest. Except as provided in paragraph (b) of this
section. a security interest in a Security
Entitlement marked on the 'books of a \ Federal Reserve Ban shall have priority lover any other interest in the secu.-ities. . (2) In addition to the method

provided in paragraph (c)(i) of this

section, a security interest. including a

securty interest in favor of a Federal Reserve Ban. may be perfected by any method by which a secty interest may be perfected u~der applicable law as descrbed in § 357.10(b) or § 357.11. The perfecton. effect of perfection or non-perfection and prionty of a secunty interest ar governed by that applicable

law. A securty interest in favor of a Federal Reserve Ban shal be trated as

a secuty interest in favor of a cleag corporation in all respec under that law, including with respect to the effect of perfection and prionty of the security interest. A Federal Reserve Ban Operating Cirular shall be trated as a rule adopted by a clearg corporation for such puroses. § 357.13 Obligations of the United States; no Advers Claims. (a) Except in the case of a secunty interest in favor of the United States or a Federal Reserve Ban or otherwise as provided in § 357.12(c)(i). for the

purposes of this subpar B. the United

States and the Federal Reserve Bans

shall treat the Parcipant to whose

Securties Account an interest in a Book-entr Security has been credited as the person exclusively entiled to

issue a Transfer Message, to receive interest and other payments with respect thereof and othenvise to exercise all the rights and powers with respect to the Secunty, notwithstanding any information or notice to the contrary. Neither the Federal Reserve Ban nor Treasury is liable to a Person assertng or having an Adverse Claim to

a Securty Entitlement or to a Book￾entr Security in a Parcipant's

Secunties Account, including any such

claim arising as a result of the transfer or disposition of a Book-entr Secuty by a Federal Reserve Ban pursuant to a Transfer Message that the Federal Reserve Ban reasonåbly believes to be genuine. . (b) The obligation of the United States to make payments of interest and pricipal with respect to Book-entry

Secrities is dischared at the time

payment in the appropriate amount is made as follows: .

(1) Interest on Book-entr Securties is either credited by a Federal Reserve Ban to a Funds Account maintained at the Ban or otherwse paid as directed by the Paricipant. (2) Book-entr Securities are redeemed in "accordance witl their

terms by a Federal Reserve Bank withdra\ving the securities from the Paricipant's Securities Account in which they are maintained and by either crediting the amount of the redemption proceeds. including both principal and interest, where applicable. to a Funds Account at the Ban or othen..ise paying such principal and interest as directed by the Parcipant. No action bv the Paricipant i!l required in COlUectio￾with the redemption of a Book-entr n Secunty. §357.14 Authority of Federal Resrve Banks. (a) Each Federal Reserve Ban is hereby authorized as fiscl agent of the United States to perform fuctions With respect to the issuance of Book-entr Secunties offered and sold by the Deparent to which ths Subpar applies, in accordance with the terms. of the applicable offerig circular and with procedures established by the Deparent; to service and maintain Book-entr Securities in accounts established for such puroses; to make payments of pnncipal and interest. as directed by the Deparent; to effect transfer of Book-entr Securities between ParcipantS' Securities

Accounts as directed by the

Paricipants; and to perform such other

duties as fiscal agent as may be

requested by the Deparent.

(b) Each Federal Reserve Bank may issue Operating Circulars not inconsistent with this Part, governing the details of its handling of Book-entr Securities; Secunty Entitlements. and the operation of the book-entr system under this Part.
5. In subpart D. § 357.41 is revised
and the text of §§ 357.42 and 357.-4 are added. to read as follows:
Subpart D-Additlonal Provisions § 357.41 Waiver of regulations. . The Secretary reserves the nght. in the Secretary's discretion. to waive any provision(s) of these reulations in any case or class of cases for the convenience of the United States or in order to relieve any person(s) of unnecessar hardship. if such action is not inconsistent with law. does not adversely affect any substantial existig

rights. and the Secretary is satisfied that such action wil not subject the United

States to any substantial expense or liability. § 357.42 Liabilty of Department and Federal Reserve Banks. The Deparent and the Federal Reserve Banks may rely on the information provided in a tender. transaction request form. or Trasfer Message, and are not required to verify the information. The Deparent and the Federal Reserve Banks shall not be liable for any action taken in accordance with the information set out in a tender. transaction request form, or Transfer

43631 Federal Register I Vol. 61. No. 165 I Friday. August 23. 1996 I Rules and Regulations

Message. or evidence submitted in

support thereof.
§ 357.44 Notice of atchment for seurities In TRADES. The interest of a debtor in a Secuity Entitlement may be reached by a creditor only by legal process upon the Securties Intermediar with whom the debtor's securties account is maitaied. except where a Securty .

Entitlement is maitained in the name of a secured pary. in which cae the debtor's interest may be reached by legal process upon the secured pary. These regulations do not purport to establish whether a Federal Reserve Ban is required to honor an order or other notice of attaclient in any parcular case or class of cases.
6. Appendix B to part 357 is added to
read as follows:

Appendix B to Part 357-TRAES
Commentary
Introduction
The adoption of regulations for the Treasury/Reserve Automated Debt Entry System ("TRDES") is the culmination of a multi-yea: Treasury process of moving from issuing securities only in definitive (physical/certifcated/paper) form to issuing securities exclusively in bok-entr form. The TRADES regulations provide the legal !'ework for all commercially-maintained Treasury bok-entr secuties. For a more

detailed explaation of the proetural and legal development of book-entr and the TRDES reglations, see the preamble to the rule proposed Marh 4. 1996 (61 FR 8420). as well as the earlier proposals cited therein 51 FR 8846 (March 14, 1986); 51 FR 43027 (November 28. 1986); 57 FR 12244 (April 9. 1992). Comparison of TRAES, and Treasury Direct A person may hold interests in Treasury. book-entr securities either in TRADES i or TREASURY DlRECl. The following summarizes the major differences between the two systems.

Persons holding Treasury bok-entr secirities in TRDES hold their interets in such securities in a tiered sytem of ownership accounts. In TRDES, Treasur. through its fiscal agents, the Federal Reserve Banks. recogizes tho! identity only of Paricipants (persons with a diret account relationship with a Federal Reserve Bank).

While Participants may be beneficial owners of interests in Treasury book-entrsecuities. there are many beneficial owners of such interests that are not Participants. Such i In TRDES a Persn's interest in a Treasury book-entr security is a Security Entitlement. as described in TRDES. A Participat's interet in a marketable Treasury book-entr seurity also is a Security Entitlement. A Paricipæit's Security Entitlement is different than a Seity Entitlement ) as described in Revised Aricle 8. with respect to

/ the Pa.-iicipant's rights against the isuer. A non. Participant's Security Entitlement is described in Revised Aricle 8. beneficial owners hold their interests thugh one or more Secties Intermediares such as

banks. brokerage firs or secuties clearng

organizations.
In TRES, the rights of non-Paricipant beneficial owners may be exercised only through their Secities Intermediares. Neither Treasur nor the Federal Reserve

Banks have any obligation to a non￾Participant beneficial owner of an interest in a Treasur book-entr securty. Two exaples ilustrte this principle. First, except where a pledge has ben reorded diretly on the boks of a Federal Reserve

Bank puruant"o § 357.12(c)(1), Federal

Reserve Banks. as Treasur's fiscal agents,

wil act only on instrctions of the

Paricipant in whose Secties Account the Treasur bok-enir security is maintained in recording trfers or an interet in a Treasur book-entr secuity. A beneficial owner of the interest that is a non-Paricipant has no abilty to direct a trfer on the books of a Federal Reserve Bank Second. Treasury . dischares its payment obligation with respect to a Treasur book-entry security

when payment is crdited to a Paricipant's

account or paid in accordance with the

Participant's instrctions. Naither Treasur nor a Federal Reserve Bank has any payment obligation to a non-Participant beneficial owner of an interest in a Treasury book-entr security. A non-Parcipant beneficial owner receives its payment when its Securities Intennediary crdits the owner's account.

Persons holding Treasury book-entr securites in TRESURY DlRECl, on the other hand, hold their secities accounts on records maintained by Treasury thugh its

fiscal agents, the Federal Reserve Banks. The primar charcteristic of TRSURY D1RECl is a dirt account relationship between the beneficial owner of a Treasury book-entry security and Treasur. In TREASURY

D1RECl, Treasury dischares its payment

obligation when payment is crdited to the

depository institution specified by the

beneficial owner of the Treasury book-entr

security. paid dirctly to the beneficial owner

by check, or paid in accordance with the

beneficial owner's instrctions. Unlike

TRDES. TRESURY DIRECl does not provide a mechanis for the exchange of cash to settle a secondaf' market trnsaction, nor ar pledges of Treasury bok-entr securities held in TRASURY DIRCl generally recognized. Accordingly. TRASURY DIRCl is suited for persons ,who plan to hold their Treasury securities until maturity. and provides an alternative for investors who ar concerned about holding securities though intennediaries and who do not wish to hold their interests in Treasury securities indirectly in TRADES. Scope of Regulation Just as the scope of Revised Aricle 8 is limited.2 the scope of this regulation is limited. It is not a comprehen~ive codification of the law governing securities. trnsactions in securities or the law of contrcts for the purchase or sale of

sp.curities. Similarly. it is not a codification of all laws that could affect a person's 2 U.C.C. Revised Aricle 8. Prefatory Note at 12.

interest in a TreasUr bok-entr security. For example, state laws regarding divorce or intestate Succession could well affect which persons have eights in the interest in a Treasur bok-entr secuity. Moreover, the

reulations deal with certin aspets of trsactions in Treasur securties. such as

perfection of a sety interest and its effects and not other aspects. such as the contractual relationship between a debtor and its securd pary. which ar left to applicable law 3 See the discussion under § 357.10 of the Section￾by-Section Analysis.

Section-by. Section Analysis
Section 357.0 Dual Book-entry Systems

Section 357.0 sets fort that Treasur
provides two systems for matntaining Treasur book-entr securities-

TRES and TRASURY DIRECl.

Subpart A of par 357 of 31 CFR

contains general information about TRES and TRSURY DIRCl. Subpar 8 contains the TRES

regulations. Subpar C contains the

TRSURY DIRCl regulations.

Subpar D contains miscellaneous provisions. Thus. in its totality. Part 357 sets fort in ane place the complete set

of governing rules for Treasur

securties issued in book-entry form.

Secion 357.1 Effecive Date
Section 357.1 establishes the effective date
for TRDES. TRDES applies to outstanding securities fonnerly governed by 31 CFR par 306, subpart O. Conforming changes to paIs
306. 356, and 358 are being made to coincide
with the publication of
TRADES in final fonn. Consistent with the approach set forth in Revised Aricle 8 (see § 8-03 and the offcial comment thereto). on and after the

effective date these regulations wil apply to

all trnsactions, including trnsactions commenced prior to the effective date.

Revised AricleS, in Section 8-03. gave

secured paries four months after the effective date to take action to continue the

perfection of their security interests.

TRADES. through its delayed effectiveness.

provides a similar period. In TRADES.

January 1, 1997, becomes the Qate by which such actions must be completed.

The effective date for TRDES is January

1.1997. While TRAES is based in lare part

on Revised Aricle 8 that has receh'ed widespread attention in the financial community and already has been adopted in 'T.he regulations in 31 CF 306.118(b1. which are being supplanted by TRES. state that "applicable la w" cm.ers how a transfer or pledge is "effected" as well as perfected. Except with respec to security interests marked on the books of a Federal Reserve Bank. TRDES does not address how a security interest in a Treasury book-.ntr security is creted or what law governs the creation of a security interest. Section 357.11(a) ofTRDES. which establishes the choice of law for interets other than those covered by § 357.10. addrsses the choice or

law with respect to the perfection. effect of perfection or non-perfection. and priority of security interests. but does not address the law governing creation or aiiachment of a security interest. This is consistent with iJe scope and choice of law provisions of Revised Aricle 8.

43632 Federal Reger I Vol. 61, No. 165 I Friday. August 23, 1996 I Rules and Regulations 28 states,4 Treasur has determned that . TRDES wil be effective on Januar 1. 1997. to ensure a smooth transition to TRDES. In )nakng that determination, Treasur has taken into account the time reuird by other Government-Sponsored Enterprises (GSEs) to promulgate similar reglations for their securities. Such an effective date. when combined with TRAES having ben published in proposed form with a 50-day

comment period, should provide suffcient time ror an orderly trsition to the new

TRDES rules. .

Section 357.2 DefiniUons
Section 357.2 contains definitions for use
in subpars Band C. While most or the . definitions ar slraightforward. four terms￾Paricipant, Entitlement Holder. Securty Entitlement and Securities Intermediar-a critical to an unde:-tanding of the proposed TRADES regulations. (a) Participant A Paricipant is a person that has a seciritie~ account rclationshio in its name with a Feder.l Reserve Bank. Accordingly.

the :ederal Reserve Bank and Treasury know both the identity of the persons maintaining these accounts and the. Treasury book-entry

securities held in these accounts.
(h) Securities Intermediary Securities Intermediaries are persons (other than individuals, except as described below) th:it are in the business of holding interests in Treasury book-entt securiti.es for others. Paricipants can be. and usually are, S.iurities Intermediaries.

.. In addition, entities such as dearing \orpo:ations, banks. brokers and dealers can be Securities Intermediaries in a single chain of ownership of a Treasury security. An individual, unless registered as .! broker or dealer under thp. federal securities laws.

cannot be a Securitie~ Intermedia.ry. As an

ilustrtion of a possible chain of ownership,

in the following chart. U¡e Federai Reserve

Bank, Participant and Broker-Dealer are all Securities intermediaries.

Treasury

Federnl Reservp. Bank
I
Participant
I
Broker-Dealer
I
Individual Holder
. (c) E:itit/ement Holder _ An Entitlemtlnt Holder is an)' person for

whom a SecuCitics .Iniermediar holds a:\

interest in a Treasur book-entry security. in the above exampla Individuai Holder. Broker-Dealer and Paricipant are all .

Entitlement Holders. ïhu:i, a person can be both a Securities !ntermediarv and an . Entitlement Hòlder. See also the commentary on "Sc:curity Entitlement." . .... of ..ugust1. 19!16. ihasa stat~.; ar", ..Iabama. Alaska. Arizona. Arkansas. Colorado. Idaho. ll1inois. !:diana. !owa. Kansas. Ke::ti:ckv. )o.ui~ia~a. .Ma,ryland. ~fassachus~::s. /o!in:,,,se:a. ,1'SSISS:Ppl. :-ebrasb. New Mexico. O.:!anoma. Òregon. P~nnsylvania. Texas. Utah. Vermont.

Virginia. Washington. West Virgin;a and Wyoming.

S~e disc:.ssion accompanying rlJot~ote 11.

(d) Security Entitlement A Secty E.titlement is the interest that an Entitlement Holder has in a Treasurv bok-entr security. In U!e example. - Paricipant. Broker-Dealer and individual

Holder all hold Security Entitlemenis. The rights and property interests associated with a Security Entitlement of a Paricipant held on the boks of a Federal Reserve Bank

(~'Paricipant's Security Entitlement") are, howe'er. different from the rights and propert interests assoiated with other Secrity Entitlements. As provided in .

§ 357.10(a). Federal law defines the scope and nature of a Participant's Security Entitlement. While TRADES is basd in large
part on Revised Aricle e, the meaning or
Security Entitlement under federal law is differe~t than under Revised Aricle 8. For example. Paric:pants have a direct claim against the United States ror interet and principal even though, under state iaw. an Entitlement Holder would only have a claim against its Securities In!.errediaiy for such payment. To the extent not inconsistent with this reulation. the scope and natur of a Security Eniitlement of an Entitlement Holder below the level of a Particiodnt. (Broker-dea!er and Individual Holder in the

exaple abo'e), is defined by applicable state law. as deterrined pursuant to § 357.11. It should also be noted that ....hile a Parcipant's :ights have Federal law components under § 357.10(a), the nature of a Security Entitl::ment held by a lowo;r tie:' intermediary 0:\ tl:e books of a Paricipant is determined pursuant to a;iplicable law as provided iii § 357.11.
Section 35ì.10 LaI'Co~'erning the United
Slates and Resen¡e Ba:iks
Section 357.10(a) provides that :he rights
and obligations of the United States and tle

F'edernl Reserve Banks (wirh one exception detailed below). with respect to both the TRADES system and Treasury book-entr securities maintained in TRADES are governed solely and exclusively by Federal law. Thus. daims against the ü¡¡ited States and Fede!'.!1 Reserve Banks of both Paricipants and all oiler per30ns with an interest (or claiming an interest! in a Treasury book-entry security maintained in TRDES l're govenied by Federal law. Federal law is defir,ed to include TRADES. the.ofti!ring circulars pursuant to which the Treasur securities arc sold. thp. offering announcements and Federal Reserve Bank Operating Circulars.s Prior to March I, 1993. the terms of each offering d Treasur securities, except for Treasur bils were set forth in an offering circular published in the Federal Regster.6 Since March 1. 1993. all Treasu.ry book-entry securities have been , A "Feceral Reserve Bank Ope:~tin6 Circular" ;5 ddi:ied in § 357.2 as the Dubli12tien lssued by each

Federal Re,,,rve Bank thåt sers forth the terms and conditions under which the Reserve Bank

maintains ilook-intry S"curiti~s ..\ccot;nts aiid t.ansfers Bouk-eni:y Securities. 6ireasu.y bilis were issued pursuant to one

master offering drcular (31 CFX part 349. rerrw"ecf. and ..placed by 31 CFR par 356) effective March
1.1993. (58 FR 412)

offered pursuant to a unifomi orfering circular set fort at 31 CF pan 356. While TRADES is based in lare mo;asure on Revised Aricle 8. a fudamental prinCiple of these reulations (and a divergence frm Revised Aricle 8) is that the obligations of the issuer (the United States) and the Federal Reserve Banks, as well as all claims with respilct to TRADES or a Treasury bok-en!r . security against Trtlasur or a Federal Reserve Bank. are governe.d solely by Federal law. Thus. for exaple. those pars of Revised Arcle 8 that detail obligations of issuers (or their agents) of secties ar not applicable to either the United States or Federal Reserve Banks.7 In addition. neither

the United States nor Federal Reserve Banks have any obligations to persons holding their interests in a Treasury bok-entr secity at levels below tle level or a Paricipant or tò any other person claiming an interest in a Treasur book-entr security (with the

limited exception set out in § 357.12(c)(i)).

Thus. there are no derivative rights agai!!st

either the United States or the Federal Reserve Banks. (n interpreting this section. it is important to note that the scope of TRADES. like that of Re'i:;ed Article 8. is limited. Accordingly. the goveruii:g law set forth in § 357.10(:1) is

applicable only to the maU,,!' set forth in

§ 357.10(a). Gther laws remain applicaiile

and could affect the holders of beak-entry

securities.

For example, the tax treatment of So;curities Entitlements is outside the scope

of TRADES and other law (the Fedtlra!

income tax code) is appliCable in

determining such tax treatment. Similariy. nothing in § 357.10(a) limits the applicability of orher iaw~ to matt.~rs such as whether ~hi! activities of Participants or Securities

Intermediaries with respect to interests in

Treasury book-entry securities are subject to

banking or s.,curities laws.

While TRADES in § 357.10(a) define. what

iaw gov'irns the contract between the Lniteò

States, as issuer. and the holder of a Seccrity

Entitlement. it is not a complete statement of

the contract law applicable to the United

States or Federal Reservo; Banks. For example. if a Participant obt.ains a discount window loan from a Federal Reserve Bank and agrees to pledge collateral. including íreasuiy book-entr securities. to thtl Federal Reserve Bank as security for the loan. § 357.10(a) does not establish thtl law :o~

determining the valiåity or e:iforceabHi:y of the contract or the iaw applicable to the creation and perfection of security inte:ests in property that is nota Treasuiy book-e::ir sec:rity. Section 357.10(a) docs pro,'ide the law applicable for how a security interest in Trtlasury book-entr secur:ties is perfe:::.,d. rhe priority of such interest and, if § 35ï.1:!(c)(1) is applicable. bow such security interest is created. Similarly. noÜiing in § 357.10(a) affects the continuing applicability or enforceability of Federal Reserve BanI: operating circulars sucI as the

circular :;etting forth provisions regar¿ing 'The regulations in tubpart C of this p.n se~ out

other obligat:ons of the United States and t::~ Feeleral Reserve Banks for secur::i~s held i" TREASURY DIRECT. The,e regulitions pr~e::?t ~!,pl;G1ble ,rat_: I.w.

43633
Federal Register I Vol. 61. No. 165 I Frida)'. August 23. 199(ì i Ruies and Regulations

electronlc access to service~ provided by F.ederal R?serve Banks and agreements executed in connection with 'Such circulars. The law applicable with re~O¡;.:i tv interests granted to a Federal Reserve Bank depends on the mai:er in which the sec-irity interest is grn~ed. Where a security interest in favor of a federal Reserve Bank is marked on the boks of the Federal Reserve Bank under Section 357.12(c)(1). § 357.10(a) establishes the applicable law. A security interest in favor of a Federal Reserve Bank would be rerded on

the Federal Reserve Bank's books where. for example. the Federal Reserve Bank made a discount window loan to a depository institution and any Treasur bok-entr . securities provided by the depository institution as collateral have been deposited to a pledge account on the books of the Federal Reserve Bank; For a borrowing depository institution that is not a Paricipant. the book-entr securities used as collateral generally would be deposited to the Federal Reserve Bank pledge account by the borrowing institution's Securities Intermediar. See Hypothetical 5.

Section 357.10(b) sets forth law applicable
..ith respect to security interests in favor of a Federal Reserve Bank that have not been marked on the books of a Federal Reserve Bank. A security interest in the Securties Entitlement of a Participant in favor of a Federal Reserve Bank that is not marked on tne books of the Federal Reserve Bank is governed by the law of the state in which the head offce of the Federal Reserve Bank is

located. Such a security interest"could arise. for example. where the delivery oibok-entr securities to the securities account of the Paricipant r'!sults in an o.erdraft in the Paricipant's Funds Account. The extent to which the Federal Reserve B;ink has an intp.rest in the Participant's book-entry securities to secure the overdraft therefore would be determined under the law of the state in which the Reserve Bank's head offce is located. If the State in ".:hich the head offce of the Federal Reserve Bank is located has not adopted Revised .\rticle 8. under § 357.10(c) that Státe is deemed to have adopted Revised Aricle 8. In certain very limited cirstances. a Federal Reserve Bank also may have a security interest in the book-entr secuties of a non.Paricipant that is not marked on the books of the Federal Reserve Bank.. Section 357.10(b) provides a separte rule for such a

security interest.. which would be go'crned bi" the law of the non-Participant's Securities Interrediar. as determined under § 357.11.

Under § 357.11, the perfection. effect of perfection. and priority of a security interest created under su::h an agreement would be l!oVtrned bv the law of the Securities rntemiediary's jurisdiction, as dctl!rmined under§357.11(b). Under§357.11(dl, if the jurisdiction specified in § 35i.11(b) has not adopted Re'ised Article 8. juri~diction would be deemed to h;ive adopted Revised Aricle e.~ IS.-\ in!e::~st in book-en:r;o secur;:i~s oI a non4 Pa,,¡cipan: that is nut maÙed on the boo; of thl! federal Reserve Bank. while u:icommon. could arise where th" federal Reser,.e Bank lends to a For purpose3 oi applying the state law chosen under the rules of § 357.10(b). FedE:ral Reserve Banks ar trated as clew inti r:rporations. As a reult. a security int..rnst in a Se-..;i:ies Entitlement of a P".iiC:l'anl in favor oi a Fiideral Reserve Bank under § 357.12(c)(2) has the sanie priority as security interests gran:ed to other clearing

corporations under state law. This is. consistent with the tr;itment ãccorded to

Federal Reserve Banks generally under Revised Aricle 8. Secion 357.11 Law Governing Other

Interests
(a) La;v Governing the Rights and Ohligation of Participants and Third Parties
Section 357.11 is a choice oflaw rule. The
substantive matters subject to this choice or law rule are set forth in § 357.11(a). The matters set fort in § 357.11(a) are meant to

be coextensive with those matters covered by Revised Aricle 8 with respect to a person's interest in a Treasur bok-entr security (other than those related to a person's

relationship to Treasur or a Federal Reserve

Bank which are governed solely by federal law). For purposes of these choice of law rules Participants are Secuities In termediares.
Section 357.11(b) adopts Revised Aricle

8's general choice of law rule. Section 357.1l(c) sets fort a special choice of law

rule with respect to security interests perfected automatically or by filing. which also is included in Revised .-\¡cle 8. Generally. the law applicable to the Securities Intermediar wiI govern matters

involving an interest in a book-entr security held through that intermediary. This approach is not followed with respect to perfection of security interests automatically or by filing. (n those cases, the law 0; the jurisdiction in which the debtor is located is the governing law. Since fiing systems are based on the location of the debtor. this approach should reduce uncertainty and preserve the normal practice of searching records based on the debtor's location.9 The language "person crating a security interest" is used in lieu of the term "debtor" in this pro"'ision to avoid any confusion. The word "debtor" has two meanings in the Uniform Commercial Code and the expression "person crating a security interest" provides clarty with i"spect to who is covered by this

section. The term does not refer to a creditor.
The language "is located" is intended to conform to its meaning under applicable law. as it may be amended from time to time. See e.g., U.C.C. section 9-103(3)(d). Section . 357.11(d) provides for the application oi :ien.Paricipant deposito:ry ir.stitution and enters into a triparty agreement witl the depository ir.stitution and :ts Secu:i~ics !ïitcnnediarv r.:tlier than requiring the deposit of the book-eniry . s"curiti~. in a pledge account o:i the bo"k, of the Federal Reserve Bank through an Í¡struc:ion give" oy the non-Participant depository in.titution to its S~curities Intermediary. "The substantive efiect of fiing is !iinit.,d a:id applies only in slates which have adopt~d Revised ..iticla 6. Since tho eirect of Iii in;; is a ;.nique state law matter. in this one area. Treasury has determined that possible lack or uniiormi:y does not justify altering .tate law. Revised Aricl.. 6 if the choice of law ;mal vsis required by § :i57.11(bI1"suli~ in the chviee o~ ihe w cf a Slat'3 that has not yet adop:eè R~vised ¡\rticle s. .~..s r~:~f' C'l:~.:¡:.... ~~ such a situation. the Stale's law is v;"wed as if it had adopted Revised .-\icle 8. This
section also provides that. ior purp~es of
applying state law, the Federal Reserve Banks are dearing corporations and Participants' interests in bok-entr securities 3!ii Security Entitlements. (b) Limited SCOM of Federal Prmption

In an earlier TRDES proposal Treasur

contemplated adopting a comprehensÌ'e

regulation go'erning the rights of all persons in Treasury bok-entr secuties held in

TRDES. Such an approch was proposed because Treasur belie'ed that a uniíorm rule was necessary to preserve the effciency and liquidity of the market for Treasury securities-the most liquid and effcient

market in the world. Treasur believed then. and believes now, that the måterial rights of a holder in the United States of an interest in a Treasur security should not 'ary soleiy by virtue of such holder's geogphic location or the location of the financial institution

through which it holds its interest ic Treasury securities. In light of Revised
Article 8. Treasury has determined that it is
possible to achieve this uniformity ..ithout

developing an independent system of Federal commercial law.' The questions inherent in a tiered system of ownership have been analyzed. and. in Treasur's view. satisfactorily addressed by Revised A."ticle 8. As of August 1. 199G. 28 states have adopted Revised Aricle 8 and Treasurv

understands that it wil soon be adopted in additional states. As with all uniform laws, the adoption proess takes se'eral years. In order to assure uniformity. in light of the unavoidable delays in the s~ate-by-state adoption proc~ss of Revised Article 8. Treasur is promulgating regulations with a limited form of preemption. As pro'ided in both §§ 357.10(c) and 357.11(d), if the choice of law rules set forth in TRDES would lead to the applkation of the law of a State that has not yet adopted Revised Article 8. TRADES wil apply Revised Aricle 8 (with conforming and miscellaneous amendments to other Articles) in the form approved bv the ALl and NCCUSL. Treasury expects that' these provisions wil be operative on i)' during the state-by-state adoption process and would plan to amend TRADES to delete refe;ence to these provisions once the adoption process has been completed. While Revised Article 8 is defined to mean the offcial text of Article 8 as appro'e¿ by the All and NCCUSL. Treasury recošnizes

that states may make minor changes i:i that ¡p.xt when ado;iting Article 8_ Treasury has concluded that minor changes should not prevent Revised Article 8, .as adopteè bi" a state. from being the appropriate law. In other words, if a state passes a version or
Article 8 that is substantially identical to
Re'/isi.d Article 8. refe:-nce to Revised
Article 8 (as defined) would no longer be
:cquired. Treasury has determined that the . Ai noted pre,.busly. the substantive SCO¡;~ or

this regulation is limited.

43634 Federal Regier I Vol. 61. No. 165 I Friday. August 23, 1996 I Ruies and Regulations 'ersions of Article 8 passed by 28 states to :liat ha'e enacted Aricle 8 as of the date this rule is published in the Feder"l R~ist'!r meet this stind3Id, According!y, §§ 35/, lO(c; ..nd 35 i .11(d) would not n. applicab!tl if the choice of law provisio:is of TRAES dirted a per~on to one of those states. As additional states adopt Revised Article 8. Treasury wil provide notice in the Federal Register as to whether :he enactments are "substantially identical"' to thp. uniform version for puroses of these regulations and on an annual basis, the Commentar wil be amended to reflect subsequent enactments. This approach represents a significantly reduced form of premption of state law from former versions of TRADES and preserves Treasur's preeminent interest in a uniforI system of rules applicable to all holders of interests in Treasur bok-entr secuties. Seion 357.12 Obtaining an Interest in a Book-entry Security

(a) Creation of a Participant's Security Entitlement A Participant's interest in a Treasur book. entr secuity is a Securities Entitlement.

Setion 357.12(a) provides that a Paricipant's Secunties Entitlement is crated when a Federal Reserve Bank indicates by bok entr that a Book-entr Security has

been crdited to a Paricipant's Securitiès Account. Instead of the concept of initial crdit and transfer of a Treasury hook.entr secrity. as set forth in the existing

regulations. this proposal focuses on the creation of a Paricipant's Securities Entitlement and. in this way. is similar to
Section 8-501 of Revised Aricle 8.
The regulation focuses on the creation of a Participant's Security Entitlement because Security Entitlement is the term used to describe the Participant's interest in a Treasur book-entr secunty. Once a

Paricipant obtains that interest. the regulation sets fort what that interest is. Thus. as provided in § 357.10. federal law describes a Paricipant's rights against the United States and the Federal Reserve Bank where it maintains its Securties Account. To the extent not inconsistent with § 357.10,

§ 357.11 describes the applicable law to

determine Paricipants' rights and obligations with respect to all other persons. Under these regulations. Participants can still trnsfer their interests in a Treasur book-entr secrity as they did beforey issuing a Transfer Message to the Federal Reserve Bank where they hold such interest. Transfer of interests between Paricipants can occu by a Paricipant holding such interest issuing a Transfer Message. As a result of such message. the Federal Reserve Bank \vill make a book entry in favor of the receiving Participant (thereby creating a Security Entitlement in favor of such Paricipant) and also wil make a book entr deleting the initiator Paricipant's interest in such Treasur book-entr security (thereby 10 Alabama. Alaska. Arizona. Arkansas. Colorado. Idaho. Iowa. llinois. Indiana. Kansas. Kentucky.

Louisiana. Marvland. Massachusetts. ~innesota.

:-lississippi. N';hraska. New Mexico. Oklahoma. Oregon. Pennsylvania. Texas. Utah. Vermont. Virginia. Washington. West Virginia. Wyoming. eliminating that Parcipant's Security Entitlement). In addition. if authorized under applicable state law. Participants may enter into ¡;g~mants with other Paricipants that. as to the ?articipants, constiaite a tr,sfer.

Such action is without effect to either the United States or a Federal Reserve Bank. (b) Creation and Priority of a Security Interest (i. Securit~'.nterests of the United States.
Section 357.i2(b) providés that a security
interest in favor of the United States has priority over the interests of any other person in a Treasur bok-entr secnty. The United States obtains security interests in Treasur secuities as collateral to secu funds in a variety of situations such as Treasury Ta;c and Loan accounts; governent agency funds or funds under the contrl of the Federal

Cour held at financial institutions; and securities pledged in lieu of surety by contrctors and others. The pnonty provided the United States in these situations is consistent with existing law. In addition, Federal Reserve Banks do recognize on their boks and records secunty interests in favor of the United States. In that situation. the Federal Reserve Bank wil not trnsfer the secuity without the permission

of the United States. This section provides that a Federal Reserve Bank may rely exclusively on the dirctions of an

authorized representative of the United States to trnsfer a secuity and is protected in so relying. Ordinarily. an authorized representative of the United States would take such action under circmstances such as the default or insolvency of the pledgor. (i) Security Interests on the Books of a

Reserve Bank. Where required by Federal law or regulation or pursant to a specific agreement with a Federal Reserve Bank. a security interest in favor of a Federal Reserve Bank or other person may be created or perfected by a Federal Reserve Bank marking its books to record the secunty interest under § 357.12(c)(1). An example of a security interest that is marked on the books of a Federal Reserve Bank would be the pledge in favor of a FedGral Reserve Bank of a Participant's book-entr sécunties as collateral for a discount window loan. tt For limited categories of pledges. Federal Reserve Banks may agree to record a security interest in favor of a third par on their books. 'For

example. in some circmstances a Federal Reserve Bank may permit the establishment of a pledge account to hold bok-entr securities pledged to governmental entities other than the United States governent. It is important to note that there is no obligation for either Treasury or a Federal Reserve Bank to agree to record a security interest on the books of a Federal Reserve Bank. except as required by Federal law or regulation. 1£ they do so. the security interest

is perfected when the Federal Reserve Bank records a security interest on its books, In addition. the security interest has priority II Book-entry securities pledged by a non. Participant to a Federal Reserve Bank generallj' would be deposit.d by the non.Participant's Securities Intermediary to a pledge account at the Federal Reserve Bank. and therefore also would be marked on the books olthe Federal Reserve Bank. See the discussion under O. (§ 357.10). over all oth~r interests i~ the Treasury bok￾entr security except an interest of the

United States. aii Oter Security Intt'rests. As provided

in § 35ï.12(t:)(2), a secrity interest in a hook￾entr security may be perfected by any method a'ailable under applicable state law as determined under § 357.10(b) or '

§ 357.11.ti The perfection and priority of such interests shall be gO'erned by applicable law. Secnty inte~sts under this
section may include secty interests in

favor of a Federal Reserve Bank. such as a clearng lien or pledge by a non-participant of bok. entr secunties held through a Securities Intermediar where the securities have not been deposited to a Federal Reserve Bank pledge account. Consistent with Revised Article 8. a Federal Reserve Bank would be trated as a clearng corporation

under the applicable state law.
If a Person perfects a secrity interest

puruant to § 357.12(c)(2), obligations of the Treasur and the Federal Reserve Banks with

respet to that security interest are limited. Specifically, unless special amgements are agreed to by the United Stattls or a Federal Reserve Bank puruant to § 357.12(c)(1). neither the Federal Reserve Bank nor the United States wil recognize the interests of any person other than the person in whose secrities account the interest in a Treasury hook-entr security is maintained. This does not mean that such a security interest is invalid. Rather. it means that the crditor's recoure wil be solely against the debtor Participant or other third party.

Section 357.13 Rights and Obligations of
Treasury and the Reserve Banks (a) Adverse Claims

Section 357.13(a) sets fort the general rule

that. with limited exceptions. Treasury and the federal Reserve Banks wil recognize only the interest of a Paricipant in a Treasur book-entr secuity in whose Securities Account such interest is maintained. As noted previously. Treasur book-entry secrities màintained in TRDES are held in a tiered system of ownership. The records of a Federal Reserve Bank reflect only the ownership at the top tier. Institutions maintaining a Securities Account with a Federal Reserve Bank frquently wil hold

interests in Treasury bok-entr securities for their customers (which can include broker. dealers and other Securities Intermediaries) and in certain cases those customers will hold interests in securities for their customers. Accordingly. neither Treasury nor a federal Reserve Bank wil know the identity or recognize a claim of a Participant's customer if that customer were to present it to Treasury or a Federal Reserve Bank. In addition. except in the limited case where a security interest is marked on the books of a federal Reserve Bank pursuant to § 357.i2(c)(i), neither the Treasury nor a federal Reserve Bank wil recognize the

claims of any other person asserting a claim i: Under both of these sections. if the state has not yet adopted Revised Article 8. the applicable law would be that slate's law as it would be amended by Revised Aricle 8.

43635 Federal Register I Vol. 61. No. 165 / Friday, August. 23, 1996 / Rules and Regulations

in a Treasur book-entr security. Persons at levels below the Participant level must present their claims to their Securities Intermediar. (b) Payment obligations
Section 357.13(b) contains a cor~llal) ~o

the rule set forth in § 357.13(a). This section provides that Treasury dischares its payment responsibilty with respect to a security that it has issued when a Federal Reserve Bank credits the funds account of a Paricipant with amounts d~e on that

security or makes payment i~ ~ome oth~r . manner specified by the Paricipant. This is consistent with existing law and the first TRADES proposal.ii In Revised Aricle 8, the issuer discharges its obligations when it makes payment to an owner registered on its books. Under common commercial practice, the registered owner in the indirect system , may be a clearing corporation or the clearing corporation's nominee. Although the Federal Reserve Banks are treated as clearing corporations under both Revised Article 8 and TRADES. Treasury remains liable until pa~'Tent is made to. or in accordance with the instrctions of. a Participant. Section

357.13(b)(2) establishes the mechanism of how Treasury book.entr securities are paid at maturity. It is intended to cover a variety of procedures, including where the proceeds of pledged securities are credited to a suspense account pending substitution or release. This paragraph makes clear that the payment takes place automatically and that, unlike with physical certificates. there is no act of presentment required by the Participant.
Section 357.1-l Authority of Reseii'e Banks

Section 357.14 provides that Federal
Reserve Banks are authorized. as fiscal agents of Treasury. to operate the commercial book. entr system for Treasury.

Section 357A4 Notices
Section 357.44 contains a revised version
of a provision that appeared in earlier .

TRADES proposals. Similar to the rule in Revised Article 8 (see section 8-112), it

provides where certain legal process should

be directed. While providing instrctions on where notice should be directed, it makes clear that the regulations do not establish whether a Federal Reserve Bank is required

to honor any such order or notice.

J. Hypotheticals

HYPOTHEICAL 1
TREASURY
FEDERAL RESERVE BANK
I
P ARTICIP A.'I

I
DEALER
I
INVESTOR

The first hypothetical is designed to show

what law applies at different levels of the tiered book-entry system. TRADES provides that federal law. and only federal law (defined in § 357.10(a)), governs the rights OJ 51 FR 88-16.88-18 (\Iarch 1-1. 1986). and obligations of the United States and the Federal Reserve Banks (except for those matters involving Federal Reserve Banks set forth in § 357.10(b)). Thus. for example. Treasury discharges its payment obligations with respect to a security it has issued in the manner described in § 357.13(b). Federal la\v both defines the payment obligation and describes how Treasury fulfills that obligation. Those portions of Revised Article 8 dealing with issuer obligations are not applicable to Treasury or the Federal Reserve Banks.I" Similarly, with certin limited

exceptions as set fort in § 357.12(c)(1),

Treasur and the Federal Reserve Banks wil

recognize only the interest of a Participant in a Treasury book-entr security in whose Security Account the interest is maintained. Accordingly, as a matter of federal law, neither Treasury nor a Federal Reserve Bank wil recognize any claim by Dealer or

IS Investor.
In the hypothetical above. as between Participant and Dealer, Paricipant is the Securities Intermediary. With respect to the matters set forth in § 357.11(a), the law of the Securities Intermediary's jurisdiction governs. Thus, with respect to the matters in § 357.11(a), the law of Participant's

jurisdiction applies as between Participant and Dealer. '6 If Participant's jurisdiction, as determined under § 357.11(b), has not adopted Revised Aricle 8, the law of

Participant's jurisdiction, as it would be

amended by Revised Article 8, applies.

Similariv. as between Dealer and Investor.

Dealer is a Securities Iiitermediary. with

respect to the matters in § 357.11(a), the law of Dealer's jurisdiction applies as between Dealer and Investor. If Dealer's jurisdiction has not adopted Revised Article 8, the law of Dealer's jurisdiction, as it would be amended by Article 8. applies. HYPOTHETICAL 2 TREASURY FEDERAL RESERVE BANK I I PARTICIPANT A PARTICIPAi\lT B I I

DEALER A DEALER B

Assume that Dealer A sells its interest in 'a Treasury book-entry security to Dealer B. The trnsaction likely would take the

following form. Dealer A wil instruct

Participant.. to trnsfer its interest in a

Treasury security to Paricipant B against

'.As provided in § 357.14. Federal Reserve

Banks. among other things. effect transfers of book. entry securities between Participants' Security Accounts. "One co:nent questioned whether similar language in ihe March 4. 1996 release implied that. under Revised Article 8. in ihe above example Investor could have a claim against Participant. No such implication was intended. The only point of the language is to make it clear that Federal. not state. law go"erns the rights an4 obligations of Treasury and the Federal Reserve Banks.

.. As descrihed in the March 4 Release. the scope of TRADES is limited. As a general rule. if a matter is not covered in § 357.11(a). TR..\DES is not applicable. One comment questioned whether TRADES covered the creaiion and attachment of a security interest. The omission of creation and attachment in § 357.ll(a) is intentionaL. cash payment. Dealer B wil instnct

Paricipant B to trnsfer cash to Participant A against delivery of an interest iii the specified securities. Paricipant .\ wil instrct the Federal Reserve Bank to trnsfer

its interest in the Treasury security to Participant B against simultaneous credit of cash. The Federal Reserve Bank \'ii debit Paricipant A's security account and credit Paricipant B's security aCCOunt azid

simultaneously credit Participant A's cash account and debit Paricipant B's cash

account. Participant A wil mark its books to show that it has debited Dealer A'~ securities account and credited Dealer A's cash

account. Participant B wil mark its books to show the Security Entitlement in the Treasur security in favor of Dealer B and a debit against Dealer B's cash account. Federal law, set forth in § 357.12(a) provides that Participant B acquires its interest in the Triiólsur book-entr security when the Federal Reserve Bank indicates by book-entry that the interest in the security has been credited to Participant B's Securities

Account. Pursuant to § 357.11(a). but subject to § 357_11(d). Participant B's jurisdiction

governs Dealer a's acquisition of a Securities Entitlement from Participant B. HYPOTHETICAL 3 TREASURY FEDER.\L RESERVE BA:-K I . PARTICIPANT Assume Participant wishes to o:i:ain a loan from Federal Reserve Bank and. as :iart of the transaction. will grant Federal Re;e~'e Bank a security interest in its Securities Entitlement with respect to Treas14"Y book-

entry securities. The transaction can be accomplished in one of two ways. Pursuant to §357.12(cJ(1). the Federal Rese:o'e Bank

can mark its books to reflec the security

interest. ..s a matter of federal law. that action creates and perfects the Federal Reserve Bank's security interest and grants

the Federal Reserve Bank priority over all

other claimants (other than the United States

pursuant to § 357.12(b)),1 A second method

for completing the trnsaction, as set forth in

§ 357.12(c)(2). would be to take whatever

actions are authorized by applicable law. In

that case. applicable law is the law of the

jurisdiction of the head offce of the f'edernl

Reserve Bank. If that jurisdiction had

adopted Revised Article 8, it would be the

law or that jurisdiction. If that jurisdiction

had not adopted Revised Article 8, it would

I' In certain limited circumstances. a Federal Rl!SCfve Bank may enter into an agreer:e:it under

which it agrees to record on iis books an interest in Participants book.entry securities in favor of a non.Participant. such as a governmental entity. Under ihese circumstances. the non.Pe=iicipant would ha,'e a perfecied security interest with priority o"er other claimants (oiher than the United Slates under § 357. nIb)). It should be noted that. as set forth in § 357.12(c)(I). there is no :equiremçnt that either the United States or a Feder.l Resen'e Bank agree to creation and perfection 0: e security interest in this ...ay. except as provide¿ i:i § 357.1 Z(cl( t I.

43636 Federal Register I Vol. 61, No. 165 I Friday, August 23. 1996 i Rules and Regulations be the law of that jurisdiction as if the jurisdiction had adopted Revised Article 8. Under Revised Aricle 8. the Federal Reserva Bank's interest would be that of a clearing corporation. HYPOTHTICAL 4 TRASURY FEDERAL RESERVE BANK I f PARTICIPA!'ï A PARTICIPMï a Asswne that Paricipant A wishes to borrow from Paricipant B and grnt

Paricipant B a security interest in its Security Entitlement in Treasury book-entry securities. As provided in § 357.12(cl(2). the transaction would be completed pursuant to applicable law determined in accordance with 357.11. Although such an interest could be recorded on the books of a Federal Reserve Bank under § 357.12(c)(1). Federal Reserve Banks generally do not mark their books to record this type of security interest for Paricipants.

HYPOTHEiIC..iL 5

TREASURY
FEDERAL RESERVE BANK
I
PARTICIPAl''T A
I
DEALER A
I
BANK A

Assum~ that Bank A wishes to borrow from '¡ ~he Fed~ral Reserve Bank and will pledge its ! interest in Treasury book.entry securities held at Dealer A to collateralize that loan.

The transaction could be accomplished in

two ways. Pursuant to § 357.12(c)(1), the interest could :ie created and oerfected on the books of a Federal Reserve Bank. Such a transaction would take place in the following fashion. Bank A could ha'e Dealer A instruct Participa¡it A to deposit securities to a pledge account specified by the Federal Reserve Bank. The Federal Reserve Bank likely would create an account on its hooks and specify that account to Bank A as the account to receive Bank ..~:5 interest in Treasury book￾entr securiti.:s. Participant A. upon receiving Dealer "'''s instrctions. would then instrct the Federal Reserve Bank to debit its

account at the Federal Reserve Bank and

credit the account created by the Federal

Reserve Bank. The second wa" the

trnsaction could take place iš by any

method permitted by the law of Dealer A's

(Bank A's Securities Intermediary)

jurisdiction. This could im'olve a tri-party

agreement among the Federal Reserve Bank,

Dealer A. and Bank A. As set forth in .§ 35ï.ll(b)(i). .that agreement likely would specify which jurisdiction's lâw is to govern the transactio:! and could specify that such choice of law supersedes any other choice of law agreement previously entered into by Dealer A and Bank A. If Dealer .-'s jurisdiction has not adopted Re'ised Article
8. the applicable law would be the law of
pealer A's jurisdiction as it would be .¡mended hy Revised Article 8. Dated: "Aiig'.St 16, 1996. Gerald Murhy. Fiscal Assistant Secretary.

(FR Doc. 96-21469 Filed 8-20-96; 1:29 pml BllUNG COOE "'10-_

DEPARTMENT OF THE TREASURY . Fiscal Service 31 CFR Parts 306, 350, 356, and 358 Conforming Book-entr Changes AGENCY: Bureau of the Public Debt, Fiscal Service. Treasury. ACTION: Final rule.

.SUMMARY: The Deparment of the

Treasury is publishing final regulations to conform existing miscellaneous regulatory provisions to new regulations governing book-entr Treasury Bonds,

Notes andBils that are being pubiished as a separate rule making document on this date. The changes are technical and non-substantive. EFFECTIVE DATE: January I, 1997.

FOR FURTHER INFORMATION CONTACT:
Walter T. Eccard. Chief Counsel (202)

21~-3320, or Cynthia E. Reese, Deputy Chief Counsel. (202) 219-3320. Copies of the final regulations are being made available for downloading from the . Bureau of the Public Debt home page at the following address: http:// www.ustreas.gov!treasury/bureaus! pubdebt!pubdebt.html. SUPPLEMENTARY INFORMATION: fn a separate publication in this Federal Register. the Department of the Treasury is publishing a final rule that. on and

after the effective date. wil govern

Treasury bonds. notes. and bils

(Treasury secunties) in book-entrv form held in the commercial book-entr;" system (31 CFR Part 357). That ru"le incorporates by reference recent and signifcant changes in commercial law addressing the holding of securities in book-entry form through intermediaries. The rule replaces existing Treasury regulations that contain outdated legal concepts. In this rulemaking document. existing .Treasury regulations are being amei:ded to conform to the changes in Part. 357. No other changes of a substantive nature are being made. These 'arious technical changes are summarized below.
Part 306
Subpart 0 of Part 306 contains the provisions governing book-entry

Treasurv securities that have been in effect fo'r over twenty years. :\Imost all of these pro'isions. including those dealing with transfer and pledge. are being supplanted by the new regulatio in 31 CFR Par 357, Subpart B (the ns

"TRES" regulations). The only provisions that wil continue to have any force on and after the effective dat are those dealing with the procedures e for withdrawal of secuties from book￾entr. Those provisions only apply to

secunties issued before August 15, 1986, which were offered in definitive (certficated) form. In revised § 306.115. a new defiition of "Eligible book-entr Treasurv secunty" has been added and the

definition of "Definitive Treasury

secunty" is being retained, but

otherwise the definitions in 31 CFR

§ 357.3 wil apply. Revised § 306.117

contains the rules for withdrawal of Eligible book-entry Treasury securties for conversion to definitive form. It is based on provisions in former §§306.118(d) and (tand 306.119. All other provisions of current Subpart 0 are covered by TRAES or are obsolete.
Part 350
This Part contained the regulations

governing Treasury bils that wer~

offered exclusively in book-entry form. beginning in 1976.\ Subpart C of Part

350, which related to dirp.ct access

Treasury bil accounts: was supersed~d

hy the TREASURY OlRECl regulations in Part 357. Subpart C. Subpar B of Part
350. which related to Treasury bills held
in the comm~rcial book-entry system. was applicable until promulgation in 1993 of the uniform offering circular, 31 CFR Part 356 (Sale and Issue of Book￾Entr Treasur)' Bils, Notes. and Bonds.

Department of the Trp.asury Circular, Public Debt Series No. 1-93). Under

§§ 356.3 and 356.5, Tr~asurv bills were

made subject to 31 CFR par 306 and
357. Because Treasury bills have a

maturity of no longer than one year.

there are currently no unmatured

Treasury bils subject to Part 350.

Therefore. Par 350 is being removed.
Part 356
All of the changes in this Part either replace references to 31 CFR Part 306 with Part 35'7. or add references to TRADES.
Part 358
One change is being made to Section
358.3 to delete language that will no
longer apply as a result of the ptiblication ofTR.-\DES. Procedural Requirements This ruleníaking does not meet the

criteria for a "significant regulatory i (Subpar: 0 of Part 350 provided f.or iSSUAnce of

d~finiii1/t: bit!:; ll:l an exception bdSis for a li:nitcd period of time.)