1. Reclassification of Marketable Securities Held By Federal Agencies By Tom Sears Accountant Bureau of the Public Debt April 12, 2007

2. What are Marketable Treasury Securities? Marketable, or non-GAS, Treasury securities include bills, notes, bonds and Treasury Inflation- Protected Securities (TIPS) that are available for purchase and resale on the secondary market or through Legacy Treasury Direct. A secondary market is considered an “exchange or over-the-counter market where securities are bought and sold subsequent to original issuance.”

3. Which Federal Agencies Can Purchase Marketable Securities? Federal agencies who have specific investment authority granted by Congress may purchase marketable Treasury securities. Two ways a federal agency can purchase marketable Treasury securities are: From the U.S. Treasury through the Legacy Treasury Direct system From the secondary market through an independent brokerage firm

4. Why Reclassify? Marketable Treasury securities bought by federal agencies, when first reported, are classified in the BPD accounting system as “N” or “Held by the Public”. In order to accurately report outstanding securities that are held by the public and ones that are held by federal agencies, BPD must reclassify these marketables held by the federal agencies as “F” or “Federal”. The amounts to be reclassified include the principal amount of the marketable security, the original discount and premium, the amortization, and the interest paid and accrued.

5. Reclassification Process The Debt Reclassification process is done monthly by BPD and was initially done because of a request by the Government Accountability Office (GAO) in FY 1997. Notification Process The purchase of marketable Treasury securities through Legacy Treasury Direct only requires notification of account number to BPD. Purchasing marketable Treasury securities through an independent brokerage firm requires notification to BPD within 3 calendar days of the purchase. According to the Intragovernmental Business Rules (Bulletin No. 2007-03), “If Trading Partners purchase non-GAS marketable Treasury securities, they must inform BPD of such purchases within 3 calendar days.” http://www.fms.treas.gov/tfm/vol1/07-03.html

6. Legacy Treasury Direct Application Information Application Form http://www.treasurydirect.gov/forms/sec5182.pdf

7. Facts Currently, BPD reclassifies marketable securities for 6 funds. The total average monthly outstanding PAR amount that is held by the 6 funds is $5.0 billion. If an agency reports investment activity (subclass 88 & 98) on their Statement of Transactions (SF224, 1219, or 1220), BPD will recognize the investment through a reconciliation process that compares the MSPD to the MTS. BPD is researching to see if other agencies hold marketable Treasury securities and are not reporting them as such.

8. Reporting Requirements Marketable security activity must be reported to FMS via the SF224, SF1219 or SF1220. An agency which invests in non-GAS marketable securities is required to include the investments in their appropriate SGLs for Treasury securities. SGL 1610, 1611, 1612 or 1613

9. Treasury Financial Manual Part 2 – Chapter 4300 TFM Part 2, Chapter 4300 – Reporting Instructions for Accounts Invested in Department of the Treasury Securities “provides detailed reporting instructions for disclosing principal, premium, discount, inflation compensation, and earned interest on accounts invested in the Department of Treasury securities.” This TFM has recently been updated by BPD to include guidelines when investing in marketable Treasury securities and is now currently with FMS awaiting approval.

10. IFCS Reporting Investments in marketable Treasury securities are fiduciary intragovernmental transactions. Agencies are required to report fiduciary transactions such as Investments with the Bureau of the Public Debt to IFCS. BPD reports investments in non-GAS Treasury securities to IFCS but some agencies do not. This results in intragovernmental elimination differences.

11. Pricing of Securities There are intragovernmental elimination issues because of different pricing methods used by BPD and the federal agencies that hold non-GAS Treasury securities. Federal agencies amortize any discount or premium based on the purchase price paid to the broker. BPD amortizes based on the average selling price of the security when it was initially sold. BPD is currently in the process of working with an agency to parallel the pricing methods to determine the appropriate reporting by BPD and the reporting agency.

12. Financial Reporting Team Jill Stalnaker (304) 480-5288 Stephanie Claypoole (304) 480-5142 Carol Berg (304) 480-5143 Kent Hasbargen (304) 480-5175 Teri Magers (304) 480-5146 Tom Sears (304) 480-5118

13. Questions?