by Michael Scholl
Build America Bonds (BABs) are a component of the Obama administration's economic stimulus program included in The American Recovery and Reinvestment Act of 2009. DTCC's Depository Trust Company (DTC), which is processing these innovative instruments, added new fields to its systems to accommodate them.
The U.S. government has stated that it will support these offerings for the remainder of 2010. The bonds have already helped local governments in 48 states finance nearly $90 billion of new investment in schools, roads and other key infrastructure projects.
How BABs differ
Like municipal bonds, BABs are issued by states, municipalities or counties to finance their capital expenditures. These instruments differ from traditional municipal bonds in two key respects. For one version of the bonds, the income they generate is taxable (unlike municipal bonds), but the purchaser is eligible for a federal tax credit. For another version of the bonds, the issuer gets a subsidy from the federal government on the interest paid. These are called "direct pay" bonds.
"These distinctions meant DTC had to accommodate additional information on its processing files with new fields identifying tax credit data," said William Bainlardi, DTCC product manager, Asset Services. "If the holder of the bond has a $5,000 tax credit, it must be indicated on our files so it can be reported when the beneficial owner files the appropriate tax form with the government. DTC, in effect, becomes the recordkeeper for this tax information. Direct pay bonds are processed like other municipal bonds since no tax credit information is needed, and the government pays the subsidy directly to the issuer."
DTC participants are required to test changes for the taxable bond processing.
"We are committed to working with customers and the government to ensure the smooth implementation of economic-stimulus measures that require processing through DTC," said Patrick Kirby, DTCC managing director, Asset Services. @
[For more information on these file enhancements, contact William Bainlardi at firstname.lastname@example.org or 212.855.2354.]