Settlement & Asset Services

Build America Bonds (“BAB”) - Frequently Asked Questions

What are Underwriting’s requirements for Build America Bonds – Tax Credits only?

  • Underwriting requests that the Participant submit the “Combo” bond with the Tax Credit rate and payment frequency via UW Source by populating the “Interest Rate” field with the Tax Credit rate and the “Payment Frequency Type” field with the tax payment frequency.
  • The Participant must also include “Build America Bonds – Tax Credit” in the Legal Description field of UW Source.
  • Underwriting also recommends that the Participant submit all of the individual Tax Credit CUSIP numbers via a spreadsheet upload or vendor feeds into UW Source prior to the closing of the offering, and populate the following fields as indicated:
    • Zero Coupon set to “Yes”
    • Security Offering Amount = 1
    • Underwriter take down amount = 0
    • Maturity Par Amount = 0
    • Do not enter any Interest Feature data

This will ensure that when the client is ready to “strip” the “Combo” bond via DWAC, these CUSIP numbers will be DTC eligible.

What are Underwriting’s requirements for Build America Bonds – Interest and Tax Credits?

  • Currently, Underwriting requests that the Participant submit the Interest rate and payment frequency via UW Source in the same manner they would submit information on a typical interest paying security.
  • They should then populate the “Additional Description" field in UW Source to identify the offering as having a Tax Credit component.
  • Underwriting also recommends that the Participant submit all of the individual Tax Credit CUSIP numbers via a spreadsheet upload or vendor feeds into UW Source prior to the closing of the offering and follow the instructions above. This will ensure that when the client is ready to “strip” the “Combo” bond via DWAC, these CUSIP numbers will be DTC eligible.

How can I identify an issue as having a Tax Credit Component?

The Prelimnary Offical Statement (“POS”) and Offical Statement (“OS”) will contain Tax Credit language. In the second quarter of 2010, DTC will have indicators in GWIZ, DWIZ and ELISC files that identify Tax Credit Components.

Where do I find the Tax Credit Rate?

The Tax Credit Rate should be supplied by the Lead Underwriter or found in the Prospectus. The POS and Final OS will also contain this information. In the second quarter of 2010, DTC will have indicators in GWIZ, DWIZ and ELISC files that identify Tax Credit Components. Are these issues part of the New Issue Dissemination Service (“NIIDS”)?

If BABs are classified as a “Municipal Security” requiring dissemination, as determined by the MSRB, then the securities will become a part of NIIDs. There currently is no official NIIDs indicator to determine that the security is a Build America Bond.

How are the Tax Credit events announced?

Today, they are not announced at all. DTC is enhancing its SMF with the appropriate indicators so that announcements will be automatically generated. There will also be new function codes to identify the Tax Credit Announcements which will be displayed in DIVA and the DIVANN files.

How do I “strip” the tax credit for trading?

The Agent and/or the Participant can use the DWAC Function to strip the tax credit.

How is DTC handling issues that have a cash interest component and a tax credit component?

Currently, DTC is strictly servicing the interest component. DTC requires that the agent send a notice to DTC twenty (20) days prior to each Tax Credit quarterly payment date to ensure DTC removes the announcement with no cash allocation.

When will DTC support tax credit announcements?

DTC plans to begin supporting tax credit announcements in the second quarter of 2010. There will be new function codes to identify the Tax Credit Announcements which will be displayed in DIVA and the DIVANN files.

How are the Tax Credits matured off?

Positions are removed similar to a Redemption with no cash allocation. Based on the notice from the agent 20 days prior to the payment date. The REDM file will display matured items.

What will a DTC position look like?

The positions will be held as a Municipal bond in lots of a thousand

How would a client initiate the stripping of the principal and tax credit?

In order to initiate stripping, the client should contact the DTC Participant bank that custodies their securities.

If you strip the CUSIP and then decide to trade the “whole CUSIP” again, how do you account for all the tax credits? Can this be done?

The “Combo” bond would have to be put back together less any Tax Credits that have subsequently been redeemed. This is not currently being done.

Is DTC aware of any “Combo” bonds that have been “stripped” to date?

Currently, all of the “Combo” bonds remain intact.

If a Tax Credit payment date has passed, can the beneficial owner trade that security in the secondary market?

No, the beneficial owner still has the right to claim the Tax Credit for Income Tax reporting, but that security can no longer be traded in the secondary market.

Who has the responsibility of keeping track of the beneficial owners of each Tax Credit security?

The DTC Participant bank that custodies the security for the beneficial owner has the responsibility of tracking the Tax Credit and providing a client statement reflecting the value of that Tax Credit.

Has the IRS provided guidance to address the stripping of the Tax Credit and information reporting of it?

No, we are awaiting guidance from the IRS.

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