PUBLIC SUBMISSION

As of: April 19, 2012
Received: April 18, 2012
Status: Pending_Post
Tracking No. 80ff3f6a
Comments Due: April 18, 2012
  Late comments are accepted
Submission Type: E-mail

Docket: BPD-2012-0001
Floating-Rate Notes

Comment On: BPD-2012-0001-0001
Public Input on the Development and Potential Issuance of Treasury Floating Rate Notes

Document: BPD-2012-0001-DRAFT-0011
Comment Letter


Submitter Information

Name: Alex Li
Address: United States, 
Organization: Deutsche Bank Securities

General Comment

Commenters are invited to submit views on the following questions:

1. Would FRNs attract new investors into the Treasury market for a sustained period of time?

With appropriate structure, maturity, reference index, and reset and coupon frequency, FRN
would appeal to money market funds and attract investors who seek stable value in Treasury
securities.

2. Would a Treasury FRN help meet the investment needs of retail and institutional investors?

Yes. We believe a Treasury FRN would be particularly appealing to money market fund
investors, especially those participants in 2a7 funds, who usually invest in securities with
less than 13 months in maturity, and in floaters with less than 2 years in maturity.

3. How liquid would you expect FRNs to be in the secondary markets?

If GSE floaters offer any guide, FRNs may not become as liquid as Treasuries. Most of the
GSE floaters are bought and held by investors, rather than being actively traded instruments.
Foreign central banks have not been actively involved with GSE floaters, and may not be so
with Treasury FRNs over the immediate horizon if they are introduced.

4. What is the ideal structure for a Treasury FRN?
a. What is the ideal final maturity for a Treasury FRN?

We prefer a 2-year final maturity for a Treasury FRN. A final maturity longer than 2 years
would make FRNs ineligible for some 2a7 funds that can invest in floaters.

b. What are the pros and cons of using the following reference rates for a Treasury FRN:
Treasury bills, a Treasury general collateral-based repurchase agreement (‘‘repo’’) rate, and
the federal funds effective rate? Are there any other reference rates that merit consideration?

We prefer using the federal funds effective rate as the reference rate, as it is a widely
understood and transparent short term interest rate. The drawback of using the Treasury bill
rate for FRNs is that they would not offer anything different from Treasury bills, except that
the FRNs avoid the rollover burden. The volatility in GC repo rates around month end and
quarter end makes them a less desirable reference rate.

c. What would be the appropriate coupon payment frequency of a Treasury FRN?

We recommend the Treasury have the FRN coupon payment in the same frequency as in the
interest rate reset. For example, if the rate is reset monthly, then the FRN should have a
monthly coupon. The only exception is that the FRN should have a quarterly coupon if the
interest rate rests daily.

5. What changes to trading, settlement and accounting systems would be needed to
accommodate FRNs?

We need to make changes to our trading, settlement and accounting systems to
accommodate FRNs if the Treasury launches the product. There are several issues that have
to be addressed, such as new analytics, pricing framework, reference index fixing, and P&L
calculation, etc.

6. Are there any other operational issues that Treasury should be aware of when deciding on
whether to issue FRNs?

Given the numerous IT and operational issues potentially involved, we recommend Treasury
provide sufficient lead time for dealers and customers to make changes to their trading
systems to accommodate FRNs.

7. Given the above considerations, are FRNs a useful debt management tool that Treasury
should consider?

Yes. We believe that FRNs are a useful debt management tool for the Treasury to reduce
debt rollover risk, achieve the lowest financing cost over time, and encourage further
participation from money market funds, particularly 2a7 funds, and investors who favor stable
value investment vehicles.