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Federal R eserve Bank
OF DALLAS
WILLIAM H. WALLACE
F IR S T VICE P R E S ID E N T
April
2 , 1986
d a lla s ,te x a s
75222
Circular 86-30
TO: The Chief Executive Officer of all
depository institutions in the
Eleventh Federal Reserve District
SUBJECT
Proposed regulations for Treasury securities held in the commercial
book-entry system, which is now designated as the Treasury/Reserve Automated
Debt Entry System (TRADES)
DETAILS
The Department of the Treasury is requesting comment on the proposed
regulations for Treasury securities held in the commercial book-entry system
TRADES. The proposed regulations are intended to provide investors in bookentry Treasury securities with precise procedures by which their interests in
those securities can be established and maintained.
ATTACHMENTS
Attached is a copy of the Department of the Treasury's request for
comment on the proposed regulations governing TRADES. Comments must be
received at the office of the Chief Counsel, Bureau of the Public Debt, E
Street Building, Washington, D.C. 20239-0001, on or before May 13, 1986.
MORE INFORMATION
For further information, please contact Tyrone Gholson (214) 651-6263
at the Head Office; Robert W. Schultz (915) 544-4730 at the El Paso Branch;
Luke Richards (713) 659-4433 at the Houston Branch; or Tony Valencia (512)
224-2141 at the San Antonio Branch.
Sincerely yours,
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
8846
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
maintenance of the securities at the
aggregate level still was handled
through the Federal Reserve Banks in
their capacity as fiscal agents of the
United States.
As a result of the expansion of the
book-entry system, Treasury book-entry
securities now are held by investors of
all types through a vast network of
entities that maintain book-entry
records of such securities (hereinafter
referred to as "book-entry custodians”).
Between each ultimate owner of a bookentry security and the Federal Reserve
Bank that initially issued such security
FOR FURTHER INFORMATION CONTACT:
or currently maintains a record of such
Virginia Rutledge, Attomey-Advisor,
security, there may be several
(202-535-4890) or Cynthia Reese,
intervening book-entry custodians,
Attomey-Advisor, (202-376-4320).
beginning with a depository institution
SUPPLEMENTARY INFORMATION:
for whose account die securities are
Interested persons are invited to
recorded on the books of the Federal
participate in this rulemaking by
Reserve Bank and ending with the booksubmitting written comments and
entry custodian on whose books the
suggestions. Those received before the
expiration of the comment period will be interest of the beneficial owner is
recorded.
considered in the preparation of the
final rule. No pubic hearing is
An example will illustrate the tiered
contemplated, but if written requests for nature of the Treasury book-entry
a hearing are received, and if it is
system. Assume that an individual
determined that the rulemaking process
(“Individual Investor”) has invested in a
will be clearly enhanced by oral
Treasury 5-year note through a local
presentation, a hearing will be
government securities dealer ("Local
scheduled.
Dealer"). Local Dealer will be
maintaining one or more Treasury 5Discussion of Proposed Rules
year notes of the same issue through
Background
another book-entry custodian such as a
larger government securities dealer
Under the authority of Chapter 31 of
(“National Dealer”). National Dealer
Title 31 of the United States Code, the
would, most likely, be maintaining the 5Department of the Treasury (the
year notes through a bank (“Clearing
“Department”) issues marketable debt
Bank”). Clearing Bank would be
obligations of the United States in the
maintaining the 5-year notes directly in
form of bills, notes, and bonds
(“Treasury securities” or "securities”).
an account at a Federal Reserve Bank,
In 1967, the Department initiated a
assuming that Clearing Bank is an entity
system for issuing and maintaining
that is otherwise authorized to maintain
Treasury securities solely by means of
a securities account on the books of the
entries on the records of a Federal
Federal Reserve Bank. Each of the bookReserve Bank. The Department also
entry custodians will record on its books
provided that such book-entry securities
securities maintained for the account of
could be converted into definitive form.1 the book-entry custodian below it in the
Initially, the book-entry system was
chain, and local dealer will record on its
limited to securities owned by
books the interest of Individual Investor.
institutions that maintained securities
Because of the speed and efficiency
accounts directly on the books of a
with which transaction involving
Federal Reserve Bank. In the early
Treasury book-entry securities can be
1970s, the book-entry system was
accomplished, the book-entry system
expanded to permit institutions dealing
has proven immensely successful. As of
directly with the Federal Reserve to
December 31,1985, 97% of all
establish aggregate accounts for their
outstanding marketable Treasury
customers’ securities as well. In this
securities were held in book-entry form.
expanded system, ownership of, or
Since 1978 Treasury bills have been
security interests in, Treasury bookentry securities could be reflected on the issued in book-entry form only.
Beginning in mid-1986, the Department
books of entities other than the Federal
will issue all marketable Treasury
Reserve Banks; however, issuance and
securities in book-entry form only.
However, bonds and notes issued prior
1 If a security is converted to definitive form, the
to that date will continue to be
holder receives an engraved or printed certificate
convertible to definitive form.
evidencing the debt obligation of the United States.
TREASURY DIRECT Book-Entry
Securities System ("TREASURY
DIRECT’), will be implemented in mid1986. The proposed rulemaking for
TREASURY DIRECT (formerly referred
to as T-DAB) was published separately
for public comment on December 2,
1985, at 50 FR 49412.
d a t e : Comments must be received on or
before May 13,1986.
a d d r e s s : Send comments to the Office
of the Chief Counsel, Bureau of the
Public Debt, E Street Building,
Washington, DC 20239-0001.
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 357
[Department of the Treasury Circular,
Public Debt Series, No. 2-86]
Regulations Governing Book-Entry
Treasury Bonds, Notes, and Bills
Bureau of the Public Debt,
Fiscal Service, Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Bureau of the Public Debt
plans to issue Treasury bonds and
Treasury notes only in book-entry form,
beginning on or after July 1 ,1986. This
action will complete the Department's
plan, initiated in 1976 with Treasury
bills, to offer marketable Treasury
securities only in the form of book
entries.
The proposed rule, a portion of which
is being published below, will, upon
final adoption, govern dual book-entry
systems covering generally all
marketable Treasury securities.
Nonmarketable Treasury securities,
such as savings bonds, are governed by
other regulations found in Subtitle B.
Chapter II, Subchapter B of Title 31 of
the Code of Federal Regulations.
The part of the rule set out here for
comment applies only to securities to be
held in the commercial book-entry
system, referred to herein as the
Treasury/Reserve Automated Debt
Entry System (“TRADES”). A separate
book-entry system, to be luiown as the
SUMMARY:
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
The book-entry system currently is
used for a wide variety of transactions
in book-entry securities, from holding
Treasury securities solely as a fixedincome investment to the intensive daily
trading of Treasury securities in the
interdealer market. The Department
recognizes that some investors, such as
those who purchase Treasury securities
for the income stream and who do not
intend to trade in the interdealer market,
may desire to have a direct relationship
with the Department as issuer of the
security. As a result, in conjunction with
the planned shift to a pure book-entry
system, the Department has designed
the new book-entry system known as
TREASURY DIRECT that will permit
investors to hold their securities directly
on records of the Bureau of the Public
Debt. The existing commercial bookentry system, which can accommodate
the intensive daily trading in Treasury
book-entry securites of the secondary
market, will be retained essentially in its
present form.
In anticipation of the change to a pure
book-entry system, Treasury has
reviewed its existing regulations for
book-entry securities (Subpart O of 31
CFR Part 306), which were initially
adopted in 1967, and were last amended
on June 17,1974. See 32 FR15672 (1967);
39 FR 20965 (1974). Particular attention
has been given to the rules describing
the methods for effectively transferring,
and perfecting security interests in.
Treasury book-entry securities. Over the
past several years, a number of
interpretative questions concerning the
existing rules have been identified.
Treasury believes that it is important
that these questions be resolved to help
ensure the continued efficiency of the
market for government securities and to
provide the commercial certainty
required by market participants.
Although the current regulations
provide a legally sufficient mechanism
for transferring and pledging Treasury
securities, they are based on a concept,
as explanied below, that does not
conform to the fact that most
transactions involving Treasury
securities take place solely by means of
computerized book entries. The
Department believes that revising its
rule to reflect more nearly how
transactions take place in the market
will simplify transactions in Treasury
securities. In addition, these proposed
rules should give investors clearer
guidelines on how to structure their
transactions for maximum safety.
At the time of the adoption of the
initial book-entry regulations, virtually
every state’s commercial law dealing
with investment securities anticipated
that securities would exist only in
definitive form. That law was based
upon Articles 8 and 9 of the Uniform
Commercial Code. When the
Department expanded the book-entry
system to permit maintaining book-entry
securities on the books of entities other
than the Federal Reserve Banks, it
concluded that state law should
continue to govern, with only slight
variations, transactions recorded at
levels below the books of the Federal
Reserve Banks. As a means of applying
those rules, the book-entry regulations
currently provide that Treasury bookentry securities be deemed to be
maintained in bearer definitive form.
After careful consideration, the
Department has concluded that
continued use of the bearer definitive
fiction in the book-entry regulations is
not advisable. The methods of
accomplishing transactions involving
book-entry and definitive securities are
operationally different. Rules for
transferring ownership of definitive
securities or for perfecting security
interests therein are built around the
concepts of possession and delivery.
Possession is significant in that it is
exclusive: only one entity or individual
may be in actual possession of a
definitive security at any given moment.
As a general matter, delivery constitutes
the transfer of possession. In contrast,
ownership of a book-entry security, or a
security interest in such a security,
generally depends upon the records of at
least one entity other than the beneficial
owner. In the example described above,
the Individual Investor’s record of
ownership depends upon entries on the
books of the Federal Reserve Bank, the
Clearing Bank, the National Dealer, and
the Local Dealer.
Given all of the foregoing, the
Department believes that the bearer
definitive fiction may in some cases
cloud the intended relationships
between parties to a transaction
involving book-entry securities,
especially in a secured transaction
where book-entry securities are the
collateral. Under general legal
principles, rights and duties of the
secured party and the grantor of the
security interest may depend to some
extent on who is in possessionof the
collateral. Because the concept of
possession is not applicable to bookentry securities in quite the same sense
as it is with definitive securities, what
rights and duties are relevant may be
unclear. In part because of these
ambiguities, the Department proposes to
eliminate use of the bearer definitive
fiction. However, to do away with the
fiction and leave book-entry securities
8847
subject to state law would result in a
lack of uniformity in the rules that
would govern transactions is such
securities.
Since the initial adoption of the
Treasury book-entry regulations, Article
8 of the Uniform Commercial Code has
been amended to include rules for both
certificated and uncertificated, i.e.,
book-entry, securities. As of January 21,
1986, nineteen states had adopted some
variation of the revised Article 8. Given
this current state of flux in state
commercial law governing uncertificated
investment securities, reliance on state
law would create a lack of uniformity
that would be undesirable'given the
national scope of the government
securities market. Recognizing the need
for uniform rules at all levels of the
book-entry system, the Department
concluded that its own regultions should
include all of the basic mechanical rules
needed for effectively transferring
Treasury book-entry securities and for
perfecting security interests therein. In
drafting the proposed rule set forth
below, a major goal was to generate
rules that provide needed clarity and
uniformity, but that, to the extent
possible, conform to current practice in
recording transactions involving bookentry securities, so that the rules would
not unnecessarily require operational
changes for participants in the
government securities market.
Section-by-Section Analysis
Section 357.0. This section establishes
that, beginning with the earliest
effective date to be specified in
§ 357.1(b), the Department will maintain
two separate book-entry systems for
holding securities. TRADES is in
essence the same system that exists
today (also referred to as the
commercial book-entry system). That
system is made up of a network of
entities, including the Federal Reserve
Banks, a variety of financial institutions,
and dealers and brokers in government
securities, through which investors may
maintain or carry out transactions in
securities. If a security is maintained in
TRADES, as described in § 357.0(a),
then there may be one or more tiers of
book-entry custodians between a given
Federal Reserve Bank and the ultimate
owner, in addition to the depository
institution in whose account the security
is reflected on that Federal Reserve
Bank's records. TREASURY DIRECT is
a new system that will permit investors
to hold securities directly on records of
the Bureau of the Public Debt. Proposed
rules governing TREASURY DIRECT
(formerly referred to as T-DAB) were
O O iiQ
0040
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
published for public comment on
December 2,1985, at 50 FR 49412.
Section 357.1. Section 357.1(a)
describes the applicability of the
proposed rule both to new issues of
securities and to securities already
issued and outstanding. With two
qualifications, the proposed rules will
apply to all transactions in bonds, notes,
and bills occurring on or after a
specified date. Transactions occurring
prior to the specified date will be
governed by the existing regulations.
The first qualification to the general rule
of applicability is that securities will not
be eligible to be transferred to or
maintained in the new TREASURY
DIRECT system unless the offering
circular for such security specifies that it
is eligible for TREASURY DIRECT or
until such time as the Department
subsequently may announce its
eligibility. The Department plans to
phase in applicability of the TREASURY
DIRECT system to outstanding issues of
bonds and notes at some time after the
system has been implemented. Bills
issued prior to the specified date for
bills will not become eligible for
TREASURY DIRECT, but may continue
to be maintained either through
TRADES or through the existing bookentry system maintained by the
Department exclusively for bills. The
Department intends to phase out the
latter system as bills mature and the
new bills that are offered are made
eligible for TREASURY DIRECT.
The second qualification to the
general applicability rule is that the new
rules of Part 357 may not limit or restrict
obligations of the United States with
respect to any security issued and
outstanding prior to the date such
security becomes eligible for
TREASURY DIRECT. In addition, rights
in securities that were acquired under
applicable law as in effect before the
date specified herein [which is 60 days
after the date of publication of this Part
in final form] shall not be affected.
Under this provision, for example,
holders of outstanding securities that
contained an option to convert to
definitive form will continue to have this
option. However, consistent with the
Department’s goal of shifting to a pure
book-entry system, securities offered
and issued after dates to be announced
by the Secretary will not include such
an option.
Section 357.2. This section describes
the law which governs the rights and
obligations arising out of interests in
securities. The rights and obligations of
the United States, the Department, and
the Federal Reserve Banks in their
capacity as fiscal agents of the United
States, are governed solely by Federal
law. Therefore, obligations of issuers of
securities under state law,' such as those
set forth in Article 8 of the Uniform
Commercial Code, will not apply.
The rights and obligations of others
with respect to interests in securities
shall also be governed by Federal law
and any state or local law not
inconsistent with such Federal law. For
example, state law, such as laws on
succession or inheritance, may still be
applied, where relevent, in determining
rights to specific securities so long as
such law is not inconsistent with these
regulations and other applicable Federal
law. The operation of state law in a case
of intestate succession would not be
inconsistent with these regulations so
long as the application of such law was
based initially upon a recognition of
ownership by the deceased as reflected
on TREASURY DIRECT. Other
examples of potentially applicable state
law are given in the text of § 357.2.
The section on governing law does not
explicity deal with the impact of the
rules contained in this Part on
transactions in book-entry securities
that occur outside the United States. The
Department intends these rules to be the
exclusive means for voluntary transfers
of interests in securities, but recognizes
that the rules governing conflicts or
choice of laws in other countries may
dictate that such other country’s own
commercial law govern such
transactions, especially if the parties to
the transaction do not contractually
select U.S. Federal law as the governing
law. The Department specifically invites
comments on the potential for conflict of
the proposed rules and foreign law. To
the extent that such comments
recommend dealing with the issue
explicity in § 357.2, the Department
invites suggestions as to how such a
provisions should be formulated.
Section 357.3. This section contains
certain defined terms that are relevant
to Subpart B. Additional defined terms
were published in § 357.4 in connection
with proposed rules relating to
TREASURY DIRECT. In the final rule,
§ 357.4 as originally proposed will be
renumbered as § 357.3 and will contain
all of the definitions relevant to both
Subpart B and Subpart C.
Note that the proposed definitions of
“security”, “security interest” and
“pledge” contained in this proposed
rulemaking supplement the proposed
definitions initially published in § 357.4
as described above. All other proposed
definitions are published for the first
time in this proposed rulemaking or
simply restate definitions previously
proposed.
The only definition that requires some
explanation is the definition of “bookentry custodian”. As defined, the term
includes ony persons that maintain
securities accounts for others as part of
their ordinary course of business. The
rational is to permit only persons with a
regularized system of records showing
interests of customers in securities to
act as book-entry custodians for
purposes of these rules. It should be
noted that a transaction involving
securities will not be effective unless the
transaction is reflected in accordance
with these rules on the books of a bookentry custodian, as defined in § 357.3, or
on the books of a Federal Reserve Bank,
whichever is appropriate.
Section 357.10. This section specifies
how payments of interest and principal
on securities in TRADES will be made.
The rule specifies that the payment
obligation of the United States is
discharged at the time a payment is
credited to an account at a Federal
Reserve Bank in accordance with the
instructions of the holder of the
securities. The rule further requires that
book-entry custodians make payments
received with respect to securities
available for use by their customers by
the close of business on the day on
which the book-entry custodian receives
such payment. Similar provisions exist
with respect to securities held in
TREASURY DIRECT. See 31 CFR 357.26.
Sections 357.11. The proposed rules on
rights acquired by a transferee follow
similar rules in Article 8 of the Uniform
Commercial Code. In connection with
this rule, the department has given
careful consideration to whether it is
feasible or appropriate to include a rule
for setting competing claims to the same
security where both claimants acquired
their interest in the security in good faith
and without knowledge of the
conflicting claim. As is described in
detail below, the inclusion of such a rule
raises a number of issues all of which
are significant and some of which are
particularly important to the continued
high level of efficiency of the
government securities market.
Because of the complexity created by
the various issues raised, the
Department has chosen not to include a
specific rule for competing claims this
time but to leave settlement of such
claims to state law. The Department
specifically invites comments as to all of
the issues raised and the various
alternative approaches to competing
claims that are discussed below.
Furthermore, the Department welcomes
suggestions of a specific rule for
settlement of competing claims that
might be adopted in these regulations in
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
place of applicable state law. Any such
suggestions should, if possible, include
both implementing language and
detailed consideration of die effect of
the suggested approach on all aspects of
the government securities market.
The Department has considered three
different approaches to the question of
competing claims. Before discussing
these approaches, it may be helpful to
illustrate how conflicting claims to
securities may arise in a tiered bookentry system. Essentially, competing
claims may be categorized as either
vertical or horizontal.
Vertical conflicting interests in
securities are claims between two or
more of the entities in a chain of
accounts.2 For example, a conflict could
arise between a dealer's clearing bank
and the dealer’s customer when the
clearing bank has extended credit to the
dealer to finance the dealer’s positions
in securities and has taken a security
interest in securities in the dealer’s
clearing account as collateral for the
loan. Conflicts also can arise between
entities further separated in the chain of
accounts.
Under current practice, customer
securities frequently are segregated 3
from dealer securities that may become
subject to the clearing bank lein. If such
segregation has not occurred, then the
clearing bank’s lien may conflict with
the claims of the dealer’s fully-paid
customers.
A different set of competing claims
are those that may be viewed as
horizontal competing claims. These
claims arise not from the
interrelationships of entities in a chain
of accounts but from some undisclosed
defect in the right of a transferor to
transfer a security. For example, a
2 The term "chain of accounts" includes the
Federal Reserve Bank on whose books a security is
maintained, the ultimate owner of the security, and
the intermediate book-entry custodian or custodians
between that Federal Reserve Bank and the
ultimate owner. For instance, in the example used to
illustrate the tiered nature of the book-entry system
near the beginning of the background discussion
above, the chain of accounts includes the
appropriate Federal Reserve Bank, Clearing Bank,
National Dealer, Local Dealer, and Individual
Investor. A chain of accounts may include fewer
tiers than the example or, in some cases, a greater
number of tiers. In addition, a chain of accounts will
not necessarily include clearing banks or dealers. It
may be made up of financial institutions with other
types of interrelationships, such as banks and their
correspondent banks.
3 Segregation, as used in this document, refers to
the process of separating on the clearing bank’s
books securities that have been fully paid for by
customers of the dealer from all other securities
held by the dealer through the clearing bank. The
segregation occurs when, upon instructions from the
dealer, securities are moved by the clearing bank
from the dealer's general clearing account to a
separate account as to which the clearing bank
disclaims any liens.
transferor ostensibly transferring full
ownership of a security might have
granted a security interest to a third
party. Claims against the security
between the secured party and the
transferee would, in a sense, be linked
horizontally through the transferor that
transferred the security in violation of
the security interest.
Although there are numerous
hypothetical examples that might give
rise to competing claims, the
circumstances in which competing
claims will require resolution probably
are limited. Conflicts between vertical
claims for the most part will arise only
in the event of the insolvency of a bookentry custodian and even then only to
the extent that customer securities have
not been segregated from securities as
to which another entity in the chain has
a lien.
Conflicts between horizontal claims
also appear to be limited. The
probability of horizontal claims of the
type described in the example above
should be diminished once a security
interest is perfected by a transfer of the
security interest, as described in
§ 357.14(b).
In spite of the foregoing, it is clear that
some cases will arise that require
resolution of competing claims. The
Department has considered three
different approaches to the problem.
1. The first approach would be to
provide a specific rule in these
regulations that incorporates the theory
of the traditional bona fide purchaser
(“BFP”) rule into the book-entry system.
Under the traditional rule, as between
two good faith purchasers of property
that are without notice of the other’s
claim, the last in time to purchase wins
by cutting off any prior adverse claim.
There are several problems with
incorporating a traditional BFP rule.
First, the theory of the BFP rule
developed at a time when all securities
were issued in physical form and
purchasers took delivery of the
certificates, As a result, the concept
does not translate easily into a system
where transfers of securities occur by
book-entry. This is the case whether the
system is a pure book-entry system,
such as TRADES, or a system based on
securities issued in physical form that
are immobilized at some level in
aggregate accounts so that transfers of
smaller denominations occur by bookentry. As noted below, the drafters of
revised Article 8 declined to adopt a
broad BFP rule, and the Department is
reluctant to proceed with such a
significant deviation from Article 8
without the benefit of comments from
market participants.
8849
Second, a BFP rule may give investors
at all levels an unwarranted sense of
security. The utility of the BFP rule in a
book-entry system may be limited by
the fact that vertical competing claims
of upper-tier book-entry custodians
theoretically may attach after the
interest of an entity further down the
chain of ownership. Since BFP status
protects only against prior adverse
claims, this raises the question of what,
if any, practical value follows from
adoption from a BFP provision.
Third adoption of a BFP provision
could advesely affect the liquidity of the
government securities market. Clearing
banks provide daily credit to dealers to
assist them in financing their
transactions. Such credit extensions are
possible only if the regulators of the
banks supplying credit are satisfied that
such loans are consistent with safety
and soundness concerns which in
general requires that they be fully
collateralized.
It is possible that alterations to the
traditional BFP rule could addres some
of these concerns. For example, a BFP
rule could be fashioned to confer BFP
status only with respect to horizontal
claimants or vertical claimants.4
Although the Department has
considered such alternatives, designing
rules that conform to the current
operational structure of the government
securities market would appear to
create unworkable levels of complexity.
Commentors who favor either a BFP or
modified BFP rule are requested to
provide specific suggestions on how
such a rule would operate.
2. A second alternative would be to
establish a rule that favored a particular
class of participants in the government
securities market without regard for the
order in time of the claims in question.
Such a rule could be fashioned always
to favor lower-tier claims over upper-tier
claims or vice versa. Although such a
rule would greatly simplify the
resolution of competing claims, it
appears to be unjustifiably arbitrary.
Furthermore, a rule favoring the lowertier claims could present safety and
soundness problems for clearing banks
and other upper-tier entities, and thus
liquidity problems for dealers, to an
even greater extent than was suggested
4
Such a rule could further provide that a
purchaser of a government security obtain BFP
status after a specified period of time [e.g. 24 hours).
Such an approach would be predicated on the
assumption that after that period of time the
securities could be segregated in a customer
account as described in footnote 3. While the
Department has considered such as alternative, it
does not appear to deal satisfactorily with problems
associated with the failure to segregate customer
securities at all levels in the chain of accounts.
8850
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
above because the lower tier claims
would defeat all claims, not just claims
that arose prior in time.
3. The third approach, and the one
chosen by the Department, is to permit
competing claims to be resolved under
state law. The Department recognizes
that, like the two alternatives already
discussed, this approach has some
disadvantages. As already mentioned in
the background discussion, current state
law on uncertificated securities is in a
state of flux. Nineteen states have
adopted the 1978 revisions to Article 8
of the Uniform Commercial Code.
Because of the limited applicability of
the Article 8 BFP rule to uncertificated
securities generally, it appears that,
where the law of any of these nineteen
states is applicable, any vertical or
horizontal claim to a security, as
described above, always will be subject
to prior adverse claims. The only thing
that might cut off prior claims would be
the purely practical problem, referred to
above, that a prior claimant may not be
able to trace the security against which
it has a claim to a subsequent purchaser.
In those states that have not adopted the
revised Article 8, it is possible that the
traditional BFP rule might be applied to
resolve competing claims. As a result,
the third approach initially may not
achieve an optimum degree of either
certainty or uniformity as to the
outcome of cases involving competing
claims.
Nevertheless, the Department believes
that this third approach is the most
feasible at this time. Several factors
contributed to this decision. Some of the
difficulties with attempts to fashion a
bona fide purchaser rule that could be
applied to a tiered book-entry system
have already been described.
Furthermore, the Department notes that
the drafters or revised Article 8
themselves severely limited
applicability of the Artisle 8 BFP rule to
uncertificated securities, no doublt in
recognition of theoretical and practical
difficulties such as those noted here.
From the foregoing discussion
concerning competing claims to bookentry securities, it should be apparent
that the interests of investors who have
fully paid for their securities would be
best protected by an enforceable
segregation requirement that will assure
that such securities will be free of any
liens—at least after the close of
business on the purchase date. Such a
rule would be beyond the scope of the
Department’s current statutory authority
for promulgating regulations governing
book-entry securities. The Department
has submitted a bill to Congress
providing for the regulation of
government securities dealers and
containing specific rulemaking authority
for promulgating a segregation
requirement and enforcement it through
inspection of books and records. The
Department believes that this bill is a
necessary step to providing optimal
security for the government securities
market. Absent adoption of this bill or
similar legislation, it appears that no
regulatory action can resolve, to the
maximum extent possible, the complex
questions that arise from either vertical
or horizontal competing claims.
Section 357.12. This proposed rule
contains two parallel rules for effecting
transfers of book-entry securities.
Section 357.12(a) provides the rule for
effecting transfers on the books of the
Federal Reserve Banks. The proposed
rule is intended to apply only to
transactions among Federal Reserve
Banks and entities that otherwise are
permitted to maintain a book-entry
securities account at a Federal Reserve
Bank. The rule applies to all
transactions of the books of a Federal
Reserve Bank involving one or more
such entities including the initial
issuance of securities, whether the entity
acquired the securities for its own
account or for the account of a
customer. If the entity acquired the
securities for the account of a customer,
then § 357.12(b) would apply to entries
made on the books of the entity to show
the customer's interest. Because
subsections (a) and (b) each apply to
transfers at different levels in the bookentry system, they are not alternative
transfer rules to be applicable
depending upon the choice of the parties
to a given transaction.
Under §357.12. a transfer of a security
is accomplished at the time an entry is
made on the books of either a Federal
Reserve Bank or a book-entry custodian
crediting the security to the securities
account maintained for the transferee at
such Federal Reserve Bank or bookentry custodian. Making an entry on an
entity’s books crediting securities to a
transferee’s account is intended to
describe the same action more
commonly referred to as “marking the
books.” The rule is intended to describe
an act that is a part of a standardized
system of bookkeeping through which a
book-entry custodian keeps a record of
securities held for specific customers. In
keeping with the foregoing, the term
“books” as used throughout the
proposed rule and the section-by-section
analysis, was chosen because it
connotes such a system of records.
However, it should be clear that the
term “books” does not require the
presence of tangible objects such as
journals and ledgers in order to have an
effective transfer since the entire bookentry system is predicated upon the use
of computer entries as the means of
effecting transactions and storing
information. Although the Department
does not believe it is feasible to define
the relevant act more precisely because
of operational differences that may exist
in the bookkeeping methods of various
book-entry custodians, the Department
specifically invites comments on this
point and suggestions as to any
potential refinements of the relevant
phrase.
This type of tranfer can be used for
both transfers of ownership and
transfers of security interests
comparable to pledges of definitive
securities. Both types of transactions
would be recorded simply as transfers
on the relevant entity’s books and the
entity will view the transferee as the
owner. For those transactions in which
the transferee is merely a secured party,
the nature of the interest being
transferred and the relationship
between the transferor and the
transferee will be set forth in the
security agreement that is required
under §357.14 below for attachment and
perfection of the security interest.
Unlike the similar rule of section 8313(l)(d) of Article 8, the sending of a
confirmation to the transferee under
§ 357.12 is not a prerequisite to an
effective transfer. However, sending
confirmation is required as an
independent duty of a book-entry
custodian under § 357.15(a) below.
There were several considerations
that led the Department to structure the
rule in this way. It seemed inadvisable
to require both book-marking and the
sending of confirmation, as in Article 8.
because such an approach made the
effectiveness of a transfer to a
transferee depend upon two separate
actions that must be taken by a bookentry custodian, and might therefore
increase the risk that an effective
transfer would not be accomplished. For
example, even if a book-entry
custodian’s books had been marked to
show the transferee’s interest, if
insolvency of the book-entry custodian
intervened so that confirmations were
never sent, then there would have been
no effective transfer to the transferee.
Failure to effect the transfer might have
a detrimental effect on the transferee’s
rights in a liquidation of the book-entry
custodian. To allow a transferee’s rights
to be affected by a fortuity such as
whether or not the ministerial act of
sending confirmation had been
accomplished seems and unreasonable
result.
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Because book-entry custodians
frequently mark their books prior to
sending out a confirmation, it seemed
appropriate to have a transfer
completed at the earliest parcticable
time in order to protect the rights of the
investor. For these reasons, bookmarking was selected as the single event
necessary to accomplish an effective
transfer. To diminish the risk that a
book-entry custodian would not mark its
books as required, § 357.15(f) provides
that the confirmation constitutes a
warranty that the book-entry custodian
has in fact marked its books.
An alternative solution would have
been to require both book-marking and
confirmation but to have the time of
effectiveness relate to the time of bookmarking. If book marking were the
earlier of the two events, then once the
confirmation had been sent the transfer
would be deemed effective as of the
earlier date. Such a rule would
temporarily suspend a transferee’s rights
but would not ultimately delay the time
of effectiveness if a confirmation
ultimately was sent. Such a rule,
however, like the first alternative,
makes the transferee’s rights depend
upon two actions of the book-entry
custodian rather than one, and thereby
increases the risk that an effective
transfer would not be accomplished. For
that reason, this alternative was
rejected.
A third alternative would have been
to have only the confirmation be the
prerequisite to an effective transfer. This
alternative was rejected both because it
might delay the effectiveness of a
transfer, as described above, and
because it might discourage appropriate
record-keeping. In the event of
insolvency of a book-entry custodian,
the most fundamental evidence of
customers' interests in book-entry
securities will be that book-entry
custodian's own books. As a result, it is
the marking of the book-entry
custodian’s own books. As a result, it is
the marking of the book-entry
custodian’s books that should be the
minimum requirement for effecting a
transfer.
Based upon all of the foregoing, it was
concluded that the best approach would
be to make an effective transfer depend
solely upon the act of marking the
books. At the same time, the
Department agrees with the conclusion
of the drafters of Article 8 that it is
advisable for transferees to receive
confirmations so that there is some
evidence outside the book-entry
custodian’s books of the transferee’s
interest in the security. As a result,
issuance of confirmations is set out as
an independent requirement for bookentry custodians. Because the use of
confirmations appears to be already
widely used, the requirment should not
add a new burden to commercial
practice. In any case, the Department
believes that regardless of any legal
requirements to issue them,
confirmations will be demanded by
transferees as a matter of prudent
business practice.
As a final matter, consideration has
been given to the scope of the transfer
rules just discussed. The Department
has concluded that the rules should
represent the exclusive means for
transferring ownership of Treasury
book-entry securities. The proposed rule
is not, however, intended to supplant
creation of equitable interests in
securities under established principles,
nor would it preclude the creation of
interests in book-entry securities by
private agreement. However, to have
title that is good against third parties, it
would be necessary to have an effective
transfer under the proposed rules.
Section 357.13. Section 357.13 provides
specific methods for transferring a
security interest in addition to the
pledge-type transfer described above
under § 357.12. Note that effecting a
transfer under any of the provisions of
this section may be only one of the
requirements for perfection of the
security interest. See § 357.14 below.
It is anticipated that, under §§357.13
(a) and (b), the books of the Federal
Reserve Bank or the book-entry
custodian will continue to reflect the
ownership of the security by the
transferor of the security interest, but an
added notation would also reflect the
identity and interest of the secured
party. For example, the securities could
be placed in a .collateral account that
reflects the identity of both the owner
and the secured party.
Note that, as specified in § 357.17(a)
below, the class of entities that may
acquire security interests under
§ 357.13(a) is limited to Federal Reserve
Banks, the United States, entities
entitled to recordation of a security
interest on the books of a Federal
Reserve Bank solely by virtue of an
express requirement of Federal law or
the order of a Federal court, and entities
that have a special agreement with a
Federal Reserve Bank for recording
security interests. The inclusion of
entities that have special arrangements
with a Federal Reserve Bank for
recording security interests does not
create a new method for perfecting
security interests in securities nor does
it expand the class of entities for which
recordation of security interests on the
8851
books of a Federal Reserve Bank is
available. The proposed rule merely
describes current practice under which,
in very limited circumstances, individual
Federal Reserve Banks will agree to
record security interests on such terms
and conditions as they deem
appropriate, for certain entities,
primarily governmental units, that are
not otherwise eligible to maintain any
accounts with the Federal Reserve Bank.
Sections 357.13 (b) and (c) provide
two methods for transferring security
interests at levels of the book-entry
system below the Federal Reserve
Banks. Note that under §§ 357.15 (b) and
(c) below a book-entry custodian is
required to send and acknowledgment
of the transfer to the transferor of the
security interest and, under § 357.16(b),
to the secured party. Note also that
neither § 357.13(b) nor 357.13(c) is
applicable if the transferor’s book-entry
custodian is also the secured party. A
special rule is provided in § 357.13(d), as
discussed below, for transfers of
security interests to a book-entry
custodian from its own customer.
The transfer method provided in
§ 357.13(b) essentially is parallel to the
method described in § 357.13(a); the
primary difference is the entity on
whose books the security interest is
recorded. Section 357.13(c) provides an
additional method for transferring a
security interest that is essentially
parallel to the method described in
Section 8—
313(l)(h)(i) of Article 8 of the
Uniform Commercial Code. Unlike the
§ 357.13(b) method, under § 357.13(c) the
parties to a secured transaction can
transfer a security interest without
depending upon the actions of the bookentry custodian who may be a third
party with no direct interest in the
transaction. The Department recognizes
that permitting the transfer of a security
interest solely by means of sending
notice to the book-entry custodian on
whose books the transferor appears
raises several questions. For example,
should it be necessary to establish in
court that a security interest had been
transferred in accordance with
§ 357.13(c), it would be necessary for the
secured party to establish that
appropriate notice was actually
received by the book-entry custodian.
Without cooperation by the book-entry
custodian this could prove difficult
unless the notification had been hand
delivered or delivered by registered
mail. Such a proof problem would
appear to limit severely the usefulness
of such a rule.
An added difficulty is presented by
the fact that there is some case law
suggesting that a book-entry custodian
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has the right to refuse notice under
Section 8-313(l)(h)(i). If applied to the
similar provision in the Department's
regulations, such case law would also
appear to limit the utility of the security
interest transfer method of § 357.13(c).
Still another set of difficulties arises
when the rule is considered from the
point of view of a book-entry custodian
that might receive notification of a
security interest under § 357.13(c). For
example, one might ask whether notice
to a single branch of a large bank is
notice received by a book-entry
custodian for purposes of the rule. If so,
then the rule would create operational
problems for a book-entry custodian
since it would be possible to receive
notice of a security interest at one office
and subsequently receive fraudulent
instructions to sell the security at
another office. If the book-entry
custodian sells the security based on the
owner’s instructions, should it then be
viewed as having violated a duty owed
to the secured party? May such a duty
be imposed when the book-entry
custodian has taken no affirmative
action recognizing either the security
interest or the secured party?
Clearly, the § 357.13(c) method of
transferring a security interest has many
questions that were left open by the
drafters of Article 8 and have not been
resolved by case law. The Department
nevertheless has chosen to include the
method because it may provide a
desirable alternative in some cases that
permits transfer, and therefore
perfection, of a security interest without
the direct involvement of a book-entry
custodian. Although such a method of
perfection leaves open the risk that a
book-entry custodian might transfer
inadvertently a security in which a
§ 357.13(c) security interest has been
granted, the Department notes that the
same risk is already present under the
provisions of § 357.14, which permits
automatic perfection of security
interests in certain circumstances for a
limited period of time without requiring
a transfer on the book-entry custodian
in accordance with either § 357.12 or
357.13.
Based on the foregoing discussion,
comments are specifically requested on
the utility and the advisability of
including a method of transferring
security interests like the one in
proposed § 357.13(c).
Section 357.13(d) provides the only
method by which a security interest may
be transferred to a book-entry custodian
from that book-entry custodian’s own
customer. The Department concluded
that a separate rule was appropriate to
emphasize that, except for the limited
class of transactions covered by
§ 357.13(d), an effective transfer of a
security interest requires the
involvement of a third party having no
interest in the transaction giving rise to
the security interest. In other words, the
book-entry custodian marking its books
to reflect a security interest under
§ 357.13(b), or receiving notice of a
security interest under § 357.13(c),
should be acting solely in its capacity as
a custodian and not for its own account.
An added reason for a separate rule is
that the transfer methods described in
§ 357.13(b) and (c) do not necessarily
describe any step that operationally
would be taken by a book-entry
custodian in taking a security interest
from its own customer. Since it is clear,
however, that a book-entry custodian
must be able to take such a security
interest, the Department concluded that
a separate rule such as § 357.13(d)
would avoid any temptation to interpret
§ 357.13(b) loosely in order to cover a
book-entry custodian’s security interest.
Such a broad interpretation of the
concept of book-marking could dilute
the idea, emphasized in the discussion
of both § 375.3 and 357.12, that bookmarking constitutes an act that is part of
a standardized system of bookkeeping.
For the foregoing reasons, the
Department drafted § 357.13(d) to
provide that, for a book-entry custodian
taking a security interest in customer
securities, the transfer of the security
interest occurs at the later of: (1) The
time that the security itself is transferred
to the customer under § 357.12(b) or (2)
the time that a written security
agreement is executed by the customer
granting the security interest to its bookentry custodian. Note that, as with all
secured transactions under these rules,
a transfer is only one of the steps
relevant to achieving an enforceable
long-term security interest.
Section 357.14. Article 8 contains
provisions on the creation and
perfection of security interests that were
formerly included in Article 9. Under
Article 8, the concept of attachment of a
security interest has been eliminated,
i.e., it is not possible to create an
unperfected security interest in a
security. The proposed rules, however,
maintain the distinction between
attachment, which is enforceable as
between the parties to a security
agreement, and perfection, which is
good against third parties. This was
considered desirable because in certain
situations, in order to obtain a perfected
security interest, the secured party might
be forced to rely on the actions of a
book-entry custodian that has an
interest in the security adverse to that of
the secured party. If a security interest
has attached but is unperfected, the
secured party will have some avenue of
recovery that would not be available if
attachment were eliminated as a distinct
event. If a security interest is perfected,
it shall be perfected for purposes of any
relevant state law on priority of security
interests, including those rules found in
Article 9 of the Uniform Commercial
Code.
Article 8 has been criticized for not
providing a method of perfection that
gives adequate notice of security
interests to third parties. However, for a
book-entry system, the only method of
perfection that would provide adequate
notice to the public would appear to be
centralized public filing. That method
was considered to be unacceptably
burdensome in light of the current
volume of government securities
transactions. Therefore, the proposed
rule adopts a rule similar to Article 8
which provides a rule that generally a
transfer is a necessary incident to a
perfected security interest. However,
§ 357.14(b) provides for “automatic”
perfection for a limited period of time
without requiring a transfer.
The automatic perfection described in
§ 357.14(b) parallels a provision for
certificated securities contained in
Article 9. It is available to all secured
parties and is intended to provide a
grace period until the usual steps for
perfection take place. However, the 21day period provided in the Uniform
Commercial Code has been shortened to
seven days because a shorter period of
time should be sufficient, given the
rapidity of transactions in government
securities. Comments specifically are
solicited on the appropriateness of this
time period.
It should be noted that the relevant
time period is measured in calendar
days rather than business days. This
approach was chosen because a
workable definition of business days did
not appear feasible. The seven-day
period was chosen with the recognition
that it would normally include two
nonbusiness days and that for some
transactions the seven-day period would
end on a nonbusiness day so that the
transfer required for continued
perfection would have to be
accomplished before the end of the
period.
Long-term perfection can only be
achieved by meeting two additional
requirements. First, either a transfer of
the security to the secured party in
accordance with § 357.12(b) must have
occurred or a transfer of the security
interest in accordance with § 357.13
must have been accomplished. Second,
the security agreement must be written.
To meet this requirement, either the
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
security agreement may have been in
writing at the time of attachment or the
security agreement may be reduced to
writing after attachment. The
Department intends that the collateral
described in the security agreement may
be either a specified security or it may
be the securities account itself so that
the security interest attaches to any
securities in the specified account at the
time of attachment. Comments are
requested as to the appropriateness of
requiring written security agreements as
part of the process of perfection,
particularly with regard to transactions
in which the security that constitutes the
collateral is transferred to the secured
party under § 357.12(b).
Section 357.15. The proposed rule sets
forth several duties of book-entry
custodians. Section 357.15(a) provides
that a book-entry custodian shall
provide a transferee with confirmation
of a transfer pursuant to § 357.12(b). The
reasons for requiring confirmation have
already been discussed in the analysis
of § 357.12(b) itself.
The rule further provides in § 357.15(f)
that by sending the confirmation, the
book-entry custodian: (1) Warrants that
either an entry has been made in the
book-entry custodian’s records, or that
such an entry will be made before the
book-entry custodian next opens for
business, crediting such security to a
securities account maintained for the
transferee and (2) warrants its own good
faith and authority with respect to the
transfer. As specified in § 357.15(f), the
warranty of good faith and authority
includes, but is not limited to, certain
warranties that the security described in
the confirmation is free of claims of
third parties. The warranty concerning
claims of or created by the book-entry
custodian is expressed in absolute terms
since it is intended to cover security
interests that the warranting book-entry
custodian itself may have granted. The
warranty concerning claims of other
customers of the book-entry custodian
covers claims not created by the bookentry custodian and therefore is limited
to claims of which the book-entry
custodian has knowledge. For example,
security interests that have been
transferred pursuant to § 357.13(b) or (c)
would be covered by the warranty. The
warranty, as expressed in the proposed
rule, is based on recognition that where
a book-entry custodian transfers a
security from Customer A to Customer
B, the book-entry custodian is acting
only as agent for the two customers and,
therefore, appropriately can only
warrant as to adverse claims of which it
has knowledge.
The imposition of such warranties on
book-entry custodians cannot guarantee
that the facts so warranted will prove to
be the case, nor will they likely improve
a transferee’s position vis-a-vis the
book-entry custodian or its receiver or
other legal representative in the event of
its insolvency. However, expressly
stating the warranties in these
regulations should have two beneficial
effects. First, it will encourage investors
to demand confirmations, even though
they are not required for effective
transfers. Second, it may instill a greater
sense of caution in book-entry
custodians that might otherwise fail to
keep accurate records of customers’
positions as well as their own positions,
whether through negligence or wilful
action.
Section 357.15(b) requires a bookentry custodian to send
acknowledgement of the transfer of a
security interest under § 357.13(b) to
both the transferor of the security
interest and the secured party. Requiring
acknowledgment to both parties to the
secured transaction is based upon the
assumption that if a book-entry
custodian formally records a security
interest on its records, the secured
party, as well as the transferor of the
security interest, will have established a
customer relationship with the bookentry custodian, whether solely as a
result of the secured transaction or as a
result of other transactions with or
through the book-entry custodian.
Section 357.13(c) requires a bookentry custodian to send
acknowledgment of the receipt of notice
of the transfer of a security interest in
accordance with § 357.13(c). In this case,
sending acknowledgment to the secured
party is not required since it may be a
third party with whom the book-entry
custodian has no formal customer
relationship and receipt of notice of a
security interest under § 357.13(c),
standing alone, is not a sufficient basis
for imposing that relationship.
Section 357.15(d) requires a bookentry custodian to provide to a
customer, or a third person designated
by the customer, upon written request,
information as to all interests of any
customers of the book-entry custodian
in a security in which the requesting
customer has an interest as shown on
the books of that book-entry custodian.
For purposes of this section, a customer
may be either the owner of a security or
a person having a security interest in
such security that is reflected in the
book-entry custodian’s books in
accordance with § 357.13(b). The bookentry custodian must also identify
security interests for which it has
8853
received notice in accordance with
Section 357.13(c), and any security
interest in favor of or granted by the
book-entry custodian. Furthermore,
§ 357.15(g) provides that by providing
information described in § 357.14(d), a
book-entry custodian warrants the
accuracy of all the information provided.
This provision and the accompanying
warranty provide a mechanism for
investors or third parties designated by
an investor to verify the investor’s
interest in a security and the existence
of any other interests in a security of
which the book-entry custodian has
knowledge.
Section 357.15(e) provides that any
confirmation or acknowledgment issued
pursuant to § 357.15 must be in writing
or in a form reducible to writing at the
option of the recipient. Such a
formulation is intended to permit
electronic confirmation messages which
may be printed in hard copy if the
recipient so chooses. The rule is not
intended to cover voice transmissions
that are recorded.
Section 357.16. The proposed rule
would provide that certain security
interests in book-entry securities
granted to the Department or to the
United States shall have priority over
any other security interest in such
securities regardless of when such other
security interest was created or
perfected. The proposed rule restates, in
a somewhat more limited fashion, the
priority rule that currently is stated in
§ 306.118(a) of the existing regulations.
Many security interests granted to the
United States protect the public because
they secure deposits that represent tax
and other monies owed to the United
States. Super-priority for such security
interests is considered appropriate
because the security interests run to the
benefit of the general public rather than
to a private entity or even to a single
governmental entity. For similar
reasons, the proposed rule also provides
that securities transferred to the United
States or the Department, acting in a
governmental capacity, shall be free of
all adverse claims.
Section 357.17. Section 357.17(a)
makes clear, as described above in the
analysis of § 357.13, that the recordation
of security interests on the books of the
Federal Reserve Banks is available only
in limited circumstances. The rule is
intended to cover the current practice of
placing securities in an account
designated as a collateral account in
which the interests of both the owner of
the security and the secured party are
noted and the security may be moved
out of the account only upon receipt of
instructions from both parties.
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Section 357.17(b) replaces a more
broadly worded provision in the existing
regulations that states, in effect, that
transfers or pledges of book-entry
securities on the books of the Federal
Reserve Banks have priority over any
transfer or pledge effected or perfected
on the book of a book-entry custodian
other than a Federal Reserve Bank.
Although the intended effect of both the
existing regulation and the proposed
rule are similar, the existing rule is over
broad and confusing.
The first sentence of § 375.17(b) is
similar to the rule found in Section 8207(1) of Article 8 that provides that the
issuer is entitled to treat the person
shown on its books as the person
exclusively entitled to exercise the
rights and powers of ownership. Under
the proposed rule, the Department and
the Federal Reserve Banks are entitled
to rely ^exclusively on the books of the
Federal Reserve Banks and treat the
entity appearing as the holder of a given
security on a Federal Reserve Bank's
books as the person entitled to transfer
the securities or security interests
therein or to receive payments of
principal and interest. The rule is only
intended to address the rights of the
United States, the Department, and the
Federal Reserve Banks and not to
express any determination of the rights
of an entity to book-entry securities as
against any other third party.
Sections 357.40-375.45. Except as
described below, these sections are
restatements of proposed rules already
published in connection with the
proposed rules relating to TREASURY
DIRECT. Section 357.42, as originally
published, has been deleted because the
preservation of existing rights is now
dealt with in § 357.1(a), as proposed
herein. Section 357.43 as originally
published has been renumbered as
§ 357.42 and is supplemented by a
separation into paragraphs (a) and (b)
and by the addition of the second
sentence in paragraph (b). Sections
357.44 as originally published has been
renumbered as § 357.43.
Section 357.44 as set forth below is
new. It simply provides that notices
arising from judicial proceedings
concerning disposition of securities
should be directed to the Federal
Reserve Bank or the book-entry
custodian on whose books appears the
interest in such security of the person
that the judicial proceedings are
directed against. The Department
believes that the proposed rule
describes what would be the
appropriate step in any case since the
specified entity is the only entity on
whose books a transfer of the security
may occur.
Procedural Requirements
The proposed rule is not considered
a “ major rule" for purposes of
Executive Order 12291. A regulatory
impact analysis, therefore, is not
required.
Although this rule is being issued in
proposed form to secure the benefit of
public comment, the notice and public
procedures of the Administrative
Procedure Act are inapplicable,
pursuant to 5 U.S.C. 553(a)(2). As no
notice of proposed rulemaking is
required, the provisions of the
Regulatory Flexibility Act (5 U.S.C. 601,
et seq.) do not apply.
List of Subjects in 31 CFR Part 357
Electronic funds transfer, Federal
Reserve System, Government securities.
Dated: March 7,1986.
Gerald Murphy,
Fiscal Assistant Secretary.
A new Part 357 is proposed to be
added to subchapter B of Title 31, Code
of Federal Regulations, Chapter II, and
issued as Department of the Treasury
Circular, Public Debt Series No. 2-86, to
read as follows:
PART 357—REGULATIONS
GOVERNING BOOK-ENTRY
TREASURY BONDS, NOTES AND
BILLS (DEPARTMENT OF THE
TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 2-86)
Subpart A—General Information
Sec.
357.0
357.1
357.2
357.3
Dual book-entry system s.
Applicability.
G overning law.
Definitions.
Subpart B—Treasury/Reserve Automated
Debt Entry System (TRADES)
357.10 Payment of interest; paym ent at
maturity or upon call.
367.11 Rights acquired upon transfer,
attachm ent and perfection.
357.12 Transfers o f securities.
357.13 Transfers o f security interests.
357.14 Enforceability, attachment,
perfection and termination of a security
interest.
357.15 Duties and warranties of book-entry
custodians.
357.16 Priority o f interests of the United
States.
357.17 Rights of the United States and
Federal R eserve Banks with respect to
transfers on Federal R eserve Bank
records.
Subpart D—Additional Provisions
357.40 A dditional requirements.
357.41 W aiver of regulations.
357.42 Liability of Department and Federal
R eserve Banks.
357.43 Liability of transfers to and from
TREASURY DIRECT.
357.44 N otices of attachm ent for securities
in TRADES.
357.45 Supplem ents, am endm ents or
revisions.
Authority: 31 U.S.C. Chapter 31; 12 U.S.C.
391
Subpart A—General Information
§ 357.0 Dual book-entry systems.
Securities to which this Part applies,
as set forth in § 357.1, shall be
maintained in either of the following
two book-entry systems, and may be
transferred from one system to the other
in accordance with this Part:
(a) Treasury/Reserve Automated
Debt Entry System (TRADES). A
security is maintained in TRADES if it is
credited to a securities account
maintained at a Federal Reserve Bank.
See Subpart B for rules pertaining to
TRADES.
(b) TREASURY DIRECT Book-entry
Securities System (TREASURY
DIRECT). A security is maintained in
TREASURY DIRECT if it credited to a
TREASURY DIRECT account as
described in § 357.20.1 (See Subpart C
for rules pertaining to TREASURY
DIRECT.)
§357.1
Applicability.
(a) This Part applies to all
transactions in securities in book-entry
form that occur on or after [the date
which is 60 calendar days after the date
of publication of this Part in final form],
except that:
(1) A security may not be transferred
to or maintained in TREASURY DIRECT
unless the offering circular applicable to
such security specifies that it is eligible
to be maintained in TREASURY
DIRECT or until such time as the
Secretary announces that such security
has become eligible to be maintained in
TREASURY DIRECT: and
(2) Nothing contained in the rules set
forth in this Part shall limit or restrict
existing obligations of the United States
with respect to any security issued and
outstanding prior to the date such
security becomes eligible to the
maintained in TREASURY DIRECT. In
addition, these rules shall not affect the
rights the parties have acquired in a
transaction in such outstanding
securities that occurred prior to [the
date which is 60 calendar days after the
date of publication of this part in final
form] and that was rightful and effective
1 TREASURY DIRECT accounts will be
maintained through a system administered by the
Federal Reserve Bank of Philadelphia, acting as
fiscal agent of the United States, Such accounts may
be accessed by investors in accordance with
Subpart C through any Federal Reserve Bank or the
Bureau of Public Debt.
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
under the regulations and law then
applicable to such outstanding security.
(b) A transaction involving a transfer
of a security or a security interest will
be deemed to have occurred for
purposes of this section on the date on
which occurs the act that constitutes a
transfer of a security or of a security
interest as described in this Part.
(c) This part supplements, amends,
and modifies the regulations contained
in Department Circular No. 30, current
revision (31 CFR Part 306) and
Department Circular, Public Debt Series
No. 26-76 (31 CFR Part 350), and to the
extent that the rules contained in this
Part are inconsistent with the
regulations contained in Circular Nos.
300 and 26-76, the rules of this Part shall
control, subject only to the limitation set
forth in paragraph (a)(2) of this section.
§ 357.2 Governing law.
The rights and obligations of the
United States and the Department with
respect to securities to which this Part
applies are governed solely by
applicable Treasury regulations,
including the regulations of this Part, the
offering circular, the announcement
and/or notice of the offering, and other
applicable Federal law (hereinafter
collectively referred to as “applicable
Federal law”). The rights and
obligations arising out of interests in
securities, other than rights and
obligations of the United States, are
governed by applicable Federal law,
and, to the extent not inconsistent with
such applicable Federal law, by state
and local law. For example,
determinations as to what constitutes a
valid security agreement or what rights
a secured party shall have upon default
should be determined in accordance
with state or local law.
§ 357.3 Definitions.
In this Part, unless the context
indicates otherwise:
“Bill” means an obligation of the
United States, with a term of not more
than one year, issued at a discount,
under Chapter 31 of Title 31 of the
United States Code, in book-entry form.
“Bond” means an obligation of the
United States, with a term of more than
ten years, issued under Chapter 31 of
Title 31 of the United States Code, in
book-entry form.
"Book-entry custodian” is a person
other than the Department or a Federal
Reserve Bank, that in the ordinary
course of its business maintains bookentry securities accounts for other
persons. A book-entry custodian may
have a security interest in securities
held for another person and also may
hold securities for its own account.
8855
“Department” means the United
States Department of the Treasury and,
where appropriate, the Federal Reserve
Banks acting as fiscal agents of the
United States.
“Entity” means any person except an
individual.
“Federal Reserve Bank" or “Reserve
Bank” means a Federal Reserve Bank or
Branch.
“Note” means an obligation of the
United States, with a term of at least
one year, but of not more than ten years,
issued under Chapter 31 of Title 31 of
the United States Code, in book-entry
form.
“Person” means and includes an
individual, corporation, company,
association, firm, partnership, trust,
estate, and any other similar
organization.
“Secured party” is a person in whose
favor there is security interest.
“Security” means a bond, note, or bill,
each as defined above in this section,
and any other obligation issued by the
Department that, by the terms of the
applicable offering circular, are made
subject to this Part. Solely for purposes
of this Part, it also means the interest
and principal components of a security
eligible for Separate Trading of
Registered Interest and Principal of
Securities (“STRIPS”), if such security
has been divided into such components
by the express terms of the offering
circular under which the security was
issued and the components are
maintained separately on the books of a
Federal Reserve Bank.
“Security agreement” means an
agreement that creates or provides for a
security interest.
“Security interest” and “pledge” mean
an interest in a security, which interest
is acquired by a‘secured party to secure
payment or performance of an
obligation and is created by a security
agreement between the person having
such obligation and the secured party.
which they are maintained and by
crediting the amount of the redemption
proceeds, including both principal and
interest, where applicable, through a
Federal Reserve Bank to such reserve or
other account at a Federal Reserve Bank
as is designated by the entity to whose
securities account such securities have
been credited. See § 357.26 for the rules
governing payments with respect to
securities held in TREASURY DIRECT.
(c) The obligation of the Department
and the United States to make payments
of interest and principal on securities
held in TRADES shall be discharged at
the time payment in the appropriate
amount is credited to an account at a
Federal Reserve Bank as described in
paragraph (a) and (b) of this section in
accordance with the instructions of the
entity to whose securities account such
securities have been credited. See also
§ 357.26(b)(l)(iii).
(d) A book-entry custodian that is
maintaining securities on behalf of
another person shall, upon receipt of
any payment in accordance with
§ 357.10 (a) or (b) relating to such
securities, make such payment available
for withdrawal or use by such other
person at the earliest possible time on
such date of receipt and in any event not
later than the close of business on such
date of receipt.
Subpart B—Treasury/Reserve
Automated Debt Entry System
(TRADES)
§ 357.12 Transfers of securities.
§ 357.10 Payment of Interest; payment at
maturity or upon call.
(a) Interest on securities maintained in
TRADES shall be credited through a
Federal Reserve Bank to such reserve or
other account at a Federal Reserve Bank
as is designated by the entity to whose
securities account such securities have
been credited. See § 357.26 for the rules
governing payments with respect to
securities held in TREASURY DIRECT.
(b) Securities maintained in TRADES
shall be redeemed at maturity or upon
call by charging the securities account in
§ 357.11 Rights acquired upon transfer,
attachment and perfection.
(a) Upon transfer of a security in
accordance with § 357.12, the transferee
acquires the rights in the security that
the transferor had or had actual
authority to convey.
(b) Upon the attachment or perfection
of a security interest in accordance with
§ 357.14, the secured party acquires
rights only to the extent of the interest
transferred and to the extent described
in § 357.14. The creation or termination
of a security interest constitutes a
transfer of a security interest.
Transfer of a security to a transferee
occurs only:
(a) At the time an entry is made on
Federal Reserve Bank books that credits
such security to a securities account
maintained for the transferee; or
(b) At the time an entry is made on
the books of a book-entry custodian that
credits such security to a securities
account maintained for the transferee.
§ 357.13 Transfers of security interests.
Transfer of a security interest to a
secured party occurs only:
(a) At the time an entry is made on the
books of the Federal Reserve Bank on
8856
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
whose books the interest of the
transferor appears identifying such
security interest in favor of the secured
party; or
(b) At the time an entry is made on i
the books of the book-entry custodian
on whose books the interest of the
transferor appears identifying such
security interest in favor of the secured
party, which cannot be the book-entry
custodian making the entry; or
(c) At the time written notification of
the security interest is received by the
book-entry custodian on whose books
the interest of the transferor appears,
which book-entry custodian cannot be
the secured party. Such notification
must be signed by the transferor of the
security interest, which in the case of a
termination of a security interest in
accordance with § 357.14(d), or in the
case of an assignment of a security
interest, is the secured party; or
(d) If the secured party is to be the
book-entry custodian on whose books
the interest of the transferor of the
security interest appears, at the later of
(1] the time the security is transferred to
the transferor of the security interest in
accordance with § 357.12(b), or (2) the
time the transferor has executed a
written security agreement with the
book-entry custodian granting the bookentry custodian such security interest.
§ 357.14 Enforceability, attachment,
perfection and termination of a security
interest
(a) A security interest attaches to a
security, and is enforceable between the
grantor of the security interest and the
secured party, only if—
(1) The security interest has been
granted pursuant to a security
agreement between the grantor of the
security interest and the secured party,
(2) The grantor of the security interest
has rights in the security, and
(3) The secured party has given value.
The time at which a security interest
attaches shall be the time at which the
last of the above conditions for
attachment has occurred.
(b) A security interest becomes
perfected and enforceable against third
parties for a period of seven (7) calendar
days from the date on which it has
attached under paragraph (a) of this
section. Thereafter, a security interest
will continue to be perfected only if, no
later than the seventh day of the period
described above, (1) the security interest
has been transferred to the secured
party pursuant to § 357.13 or the security
has been transferred to the secured
party pursuant to § 357.12 and (2) the
security agreement referred to in
paragraph (a)(1) of this section has been
reduced to written form signed by the
grantor of the security interest and
containing a description of the
collateral. In the event that the
requirements described in paragraphs
(b) (1) and (2) of this section have not
been met within the seven-day period,
the security interest will become
unperfected and unenforceable against
third parties until the time at which both
requirements have been complied with,
and the security interest will be deemed
to be perfected only as of such time.
(c) A security interest that is perfected
in accordance with this section shall be
perfected for all purposes, including but
not limited to the applicability of any
state or local law concerning priority of
perfected security interests.
(d) A security interest in a security is
terminated by (1) transfer of the security
to the grantor of the security interest, a
designee of the grantor, or any successor
in interest of the grantor, or (2) written
release of the security interest signed by
the secured party.
§ 357.15 Duties and wsrrantiss of bookentry custodians.
(a) A book-entry custodian shall send
confirmation of a transfer of a security
under § 357.12(b) to the transferee no
later than the qlose of business on its
next business day after the day on
which the entry is made on the books of
the book-entry custodian that credits
such security to a securities account
maintained for the transferee.
(b) A book-entry custodian shall send
an acknowledgement of the transfer of a
security interest in accordance with
§ 357.13(b) above both to the transferor
and to the secured party by the close of
business on its next business day after
the day on which an entry is made on
the books of the book-entry custodian
identifying such security interest in
favor of such secured party.
(c) A book-entry custodian shall send
an acknowledgement of receipt of notice
of the transfer of a security interest in
accordance with § 357.13(c) to the
transferor of the security interest by the
close of business on its next business
day after the day on which the bookentry custodian receives such notice.
(d) A book-entry custodian, upon the
written request of a customer (as
defined below), shall confirm to such
customer or a designee of such customer
(1) the interest in such security of such
customer and any other customer in
such security as such interests appear
on the books of the book-entry
custodian; (2) any security interest for
which the book-entry custodian has
received a notice in accordance with
§ 357.13(c); and (3) any security interest
in favor of the book-entry custodian, or
granted by the book-entry custodian to a
third party. For purposes of this
paragraph, a customer of a book/entry
custodian is any person whose interest
in a security, including a security
interest, is recorded on the books of the
book-entry custodian.
(e) Any confirmation or
acknowledgement issued pursuant to
this section must be delivered in writing
or in other form reducible to writing at
the option of the recipient of such
confirmation or acknowledgment.
(f) By sending a confirmation in
accordance with paragraph (a) of this
section, a book-entry custodian (1)
warrants to its transferee and any
subsequent transferee that the bookentry custodian has made an entry in its
books crediting the security described in
the confirmation to a securities account
maintained for its transferee, or that
such an entry will be made before the
book-entry custodian next opens for
business; and (2) warrants the bookentry custodian’s good faith and
authority; such warranty of good faith
and authority shall include in particular,
but shall not be limited to, (i) a warranty
that the security described in the
confirmation is free of any and all
claims of, or claims created by, the
book-entry custodian except as
specifically noted on the confirmation;
and (ii) a warranty that, to the
knowledge of the book-entry custodian,
the security described in the
confirmation is free of claims, except as
specifically noted on the confirmation;
(g) By sending a confirmation in
accordance with paragraph (d) of this
section, a book-entry custodian
warrants to its customer that the
information provided therein is
accurate.
§ 357.16 Priority of interests of the United
States.
A security interest in securities
transferred to the United States or the
Department to secure deposits of public
money, deposits to Treasury tax and
loan accounts, or any other security
interest in favor of the United States
that is required by Federal statute or
regulation and is transferred to the
United Sates or the Department, shall be
superior to any other interest created in
such securities, whenever created. A
security transferred to the United States
or the Department shall be free of any
adverse claims, whenever created,
unless the security was acquired in a
transaction in which the United States
or the Department was acting in a
proprietary rather than governmental
capacity.
Federal Register / Vol. 51, No. 50 / Friday, March 14, 1986 / Proposed Rules
§ 357.17 Rights of the United States and
Federal Reserve Banks with respect to
transfers on Federal Reserve Bank records.
(a) A transfer of a security interest on
the books of a Federal Reserve Bank
under § 357.13(a) may be made to a
person or entity other than a Federal
Reserve Bank or the United States only
pursuant to an order of a Federal court
or a specific requirement of Federal law
or by special agreement with the
Federal Reserve Bank on whose books
the transfer is to be recorded. In the
event that a security interest is
transferred on the books of a Federal
Reserve Bank pursuant to § 357.13(a),
that Federal Reserve Bank shall
recognize the interest of the secured
party only to extent expressly set forth
in the applicable Federal statute or
regulations, that Federal Reserve Bank’s
operating circulars and letters or by
specific agreement with the secured
party.
(b) Except as otherwise provided in
paragraph (a) of this section, and
notwithstanding any information or
notice to the contrary, the United States
and the Federal Reserve Banks shall be
entitled to treat the entity in whose
account a security is credited as the
entity exclusively entitled to effect
transfers of such security, to receive
interest and other payments with
respect to such security and otherwise
to exercise control over the security.
Subject only to any requirements to
recognize the interest of a secured party
as described in paragraph (a) of this
section, a Federal Reserve Bank that has
transferred a security or a security
interest according to the instruction of
the entity in whose account the security
is maintained, shall not be liable for
conversion or participation in breach of
fiduciary duty even though the
instructing entity had no right to issue
the instruction. The Federal Reserve
Bank shall be fully discharged by
completing the order of the entity in
whose account the security is
maintained.
Subpart D—Additional Provisions
§ 357.40 Additional requirements.
In any case or any class of cases
arising under these regulations, the
Secretary of the Treasury (“Secretary”)
may require such additional evidence
and a bond of indemnity, with or
without surely, as may in the judgment
of the Secretary be necessary for the
protection of the interests of the United
States.
§ 357.41
Waiver of regulations.
The Secretary reserves the rights, in
the Secretary's discretion, to waive any
provision(s) of these regulations in any
case or class of cases for the
convenience of the United States or in
order to relieve any person(s) of
unnecessary hardship, if such action is
not inconsistent with law, does not
impair any existing rights, and the
Secretary is satisfied that such action
will not subject the United States to any
substantial expense or liability.
§ 357.42 Liability of Department and
Federal Reserve Banks.
(a) The Department and the Federal
Reserve Banks may rely on the
information provided in a tender or
transaction request form and are not
required to verify the information. The
Department and the Federal Reserve
Banks shall not be liable for any action
taken in accordance with the
information set out in a tender or
transaction request form or evidence
submitted in support thereof.
(b) In the event that the United States
or the Department is unable to make a
payment when due, the liability of the
United States and the Department is
limited to the amount of the payment. In
the event that the United States or the
Department is unable to take any other
action with respect to securities to
which this Part applies, neither the
United States nor the Department shall
be liable for failure to take such action if
such failure to take action is due to an
event which is beyond the reasonable
control of the United States or the
Department. An event which is beyond
reasonable control includes but is not
limited to natural disasters, acts of God,
war or other civil comotion, accident,
computer or other equipment failure, or
the failure or interruption of electrical
power or of communications lines.
§ 357.43 Liability for transfers to and from
TREASURY DIRECT.
A depository or sending institution
that transfers to, or receives, a security
from TREASURY DIRECT is deemed to
be acting as agent for its customer and
agrees thereby to indemnify the United
States and the Federal Reserve Banks
from any claim, liability, or loss
resulting from the transaction.
§ 357.44 Notices of attachment for
securities in TRADES.
In the event of judicial proceedings in
which a person seeks to attach a
security maintained by a Federal
Reserve Bank for an entity’s account or
to obtain an order concerning
disposition of such securities, any notice
of attachment or other notice arising
from such judicial proceeding shall be
directed to the Federal Reserve Bank on
whose books such security is
8857
maintained. In all other cases in which a
person seeks to attach a security
maintained in TRADES or to obtain an
order concerning disposition of such
security, any notice of attachment or
other notice arising from such judicial
proceeding shall be directed to the bookentry custodian on whose books
appears the interest of the person
against whom the attachment or other
disposition is sought.
§ 357.45 Supplements, amendments or
revisions.
The Secretary may, at any time,
prescribe additional supplemental,
amendatory or revised regulation with
respect to securities.
[FR Doc. 86-5513 Filed 3-13-86; 8:45 am]
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