The Depository Trust & Clearing Corp. last week released guidance on how it will support new taxable Build America Bonds entering the municipal market.
The DTCC has different guidelines depending on whether the Build America Bonds are issued as direct payment or tax-credit bonds. Under the direct-payment method, an issuer receives the 35% federal subsidy, while with the tax-credit bonds, investors receive a federal tax credit, which may be stripped and sold to other investors.
In addition to the normal procedures for making issues eligible at the Depository Trust Co., underwriters of direct-payment issues should now include "Build America Bonds - Direct Payment" in the legal description field in UW Source - visible through the global wizard GWIZ function on the Participant Terminal System/Participant Browser Service. There are no changes to the clearing and settlement or asset services processes on the direct payment issues.
For tax-credit BABs, underwriters should include "Build America - Tax Credit" in the legal description field of UW SOURCE.
For a strip of the tax credit, DTCC recommends underwriters upload the details on a spreadsheet once the primary issue has been filed. The firm should use these values when submitting the spreadsheet: zero coupon set to "yes"; security offering amount = 1; underwriter takedown amount = 0; maturity par amount = 0. No entry should be made in the interest feature data.
The tax-credit bonds also require some changes to asset services procedures. Forty-five days before the "strips" maturity date, the agent should e-mail DTC to submit a notice of redemption. DTC will generate a maturity announcement with a 0.000001 rate and note it is a Build America Bond - Tax Credit with no cash allocation in the comments field.
DTC will "remove the position for all current holders" on the date of maturity. It will notify firms through a number of report mechanisms.
There will be no changes to the clearance and settlement procedures for the tax-credit bonds.
