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Treasury Wants to Fix Reporting Gaps

July 31, 2002

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WASHINGTON (AP) _ The U.S. Treasury wants more information from very large bondholders so it can detect market manipulation more easily, according to a new proposal published Wednesday in the Federal Register.

Treasury put forward changes to its ``large position reporting requirement″ rule, which governs irregular surveys of the largest holders in Treasury securities. The change was also announced as part of Treasury’s quarterly refunding policy announcements.

One of the biggest changes in the new rule eliminates exemptions that previously allowed some large holders not to file. Last summer, when Treasury conducted its most recent test call of the reporting system, one large holder used the loophole to get out of filing a report.

In the past, this loophole may have been abused by holders who stretched the definition of when it should apply, the proposal said. A Treasury official said that last summer’s test call was one of the main catalysts for the proposed changes.

``With a test report, the idea is to see if we get what we want. It didn’t seem to do that fully,″ the official told reporters in a background briefing Wednesday.

The official said no holders broke the rules in last year’s test call. ``Everyone who responded complied with the rule as required,″ the official said. However, Treasury is now trying to be more clear about what the information it wants, he said.

About 10 large bondholders will be required to take part in the large position reports and related test calls, Treasury said in its proposal. It said the extra information should not create an undue burden, even though it will require more work on behalf of survey respondents. The calls apply to those who hold $2 billion or more of a given securities issue.

``We would like to reiterate that large positions are not inherently harmful, and that there is no presumption of manipulative or illegal intent on the part of the controlling entity merely because its position is large enough to be subject to Treasury’s rules,″ Treasury said.

Comments on the proposed rule are due by Sept. 16, 2002.

Under the new rule, securities holders would need to include more specific data on their net trading position. Besides submitting the total position, holders would need to break out each of the five components that comprise that total.

Holders also would need to submit more information on their exposure to ``fails,″ or incomplete transactions. Current rules require large holders to report on their net fails position; the changed rule would also require information on the gross par amount of outstanding fails.

Another change covers holders’ gross financing position, an overall account of their holdings. The proposed change would require holders to break out repurchase-agreement and reverse-repurchase-agreement portfolio components by maturity classification and duration.

Exemptions connected with the gross financing position would be eliminated under the new rule. Treasury is particularly concerned with the so-called ``right to substitute″ securities that are subject to certain custody conditions.

``We are particularly concerned that in certain situations a market participant might be relying on the ‘right to substitute’ provision ... in cases where the counterparty may not have a remaining, immediate, exercisable, explicitly documented right to substitute securities with respect to the particular transaction,″ Treasury said.

Treasury is interested in all comments on the proposal, the department said.

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