Regulations Governing United States Treasury Certificates of Indebtedness, Treasury Notes, and Treasury BondsState and Local Government Series

The Department of the Treasury (Department or Treasury) is issuing in final form an amendment to its regulations governing State and Local Government Series (SLGS) securities. It has been brought to the attention of the Department that the SLGS securities program can be misused when subscriptions for SLGS securities are used as a cost-free interest rate hedge or option (option) for speculation in open market securities. This final rule clarifies that the use of SLGS securities for option purposes is prohibited. The purpose of the SLGS securities program is to assist state and local government issuers of tax-exempt bonds in meeting certain Federal tax restrictions, not to provide a cost-free option. Treasury is considering first, whether it would be consistent with the purposes of the SLGS securities program to allow SLGS securities to serve as options if Treasury were appropriately compensated and second, if the answer to the first question is affirmative, whether there is a practical way for the Department to charge for the use of SLGS securities as options. Neither question, however, has yet been answered. Unless Treasury does determine that it would be both advisable and practical to allow SLGS securities to serve as options if Treasury is appropriately compensated, the use of SLGS securities for such purpose will continue to be an inappropriate use of SLGS securities.