How the Commercial Book-Entry System Works

The Commercial Book-Entry System is the electronic recordkeeping network through which nearly all marketable U.S. Treasury securities are owned and transferred. There are no paper certificates. Ownership exists as digital entries kept across a tiered chain of Federal Reserve Banks, depository institutions, and broker-dealers, and if you buy a Treasury bill, note, or bond through a brokerage account, this is the system holding it for you.¹

The Three Tiers

The system has three layers, and each layer keeps records only for the participants directly below it.

At the top, the Federal Reserve Banks run what is called the National Book-Entry System. They maintain accounts for the U.S. Treasury itself, for depository institutions, for foreign central banks, and for most government-sponsored enterprises.

In the middle sit banks and other depository institutions. They hold accounts at the Federal Reserve, and in turn they keep book-entry accounts for their own customers: brokers, dealers, institutional investors, and trusts.

At the bottom are the brokers, dealers, and financial institutions that maintain accounts for everyone else, including individual investors and corporations.¹

The practical point of this structure: neither the Treasury nor the Federal Reserve keeps a record of you. Your relationship is with whichever broker or bank holds your account. If something goes wrong with your holdings, you resolve it with that firm.

What It Means for You as an Investor

Because the system is tiered, payments move down through it in order. When the Treasury makes a coupon payment or returns principal at maturity, its obligation is discharged the moment the Federal Reserve Bank credits a top-tier participant’s account. From there, each intermediary credits its own customers in turn.²

So your right to be paid runs against your immediate intermediary, not against the United States. If your broker is slow to credit interest to your account, your recourse is with the broker.¹

What you actually own, in legal terms, is a “security entitlement.” That is the bundle of rights your broker or bank creates by recording the security in your account. It is not the same as directly owning the underlying bond. The entitlement gives you rights against your intermediary, governed by a mix of federal rules (31 CFR Part 357, known as the TRADES regulations) and state law. Only participants holding accounts directly at the Federal Reserve have a direct claim against the United States for interest and principal.²

What You Can Hold in the System

Every marketable Treasury security exists only as an electronic record. None of these have a physical form.

Treasury bills, sold at a discount, with terms from four weeks to 52 weeks.³
Treasury notes, paying interest every six months, with maturities of two to ten years.
Treasury bonds, maturing in 20 or 30 years, also paying semiannual interest.
Treasury Inflation-Protected Securities (TIPS), whose principal adjusts with the Consumer Price Index.
Floating Rate Notes, two-year securities whose interest rate adjusts to track short-term market rates.⁴
STRIPS, the separated interest and principal payments of notes and bonds, each trading as its own zero-coupon security. STRIPS can only be held in the commercial book-entry system and cannot be moved to TreasuryDirect.⁵

The minimum purchase for any marketable Treasury is $100, in $100 increments. Non-competitive bids at auction are capped at $10 million per bidder.⁶

If Your Broker Fails

Because your Treasuries are held through an intermediary, the question of what happens if that intermediary becomes insolvent matters. If your SIPC-member brokerage firm fails, the Securities Investor Protection Corporation works to restore your securities and cash. Treasury securities qualify for SIPC protection up to $500,000 per customer, which includes a $250,000 sublimit for cash.⁷

SIPC covers the custody function. It helps you get your assets back when the firm cannot return them. It does not protect against market losses or bad investment advice. Any broker-dealer registered with the SEC is automatically a SIPC member, with narrow statutory exceptions. If you hold Treasuries through a bank rather than a broker-dealer, different protections may apply depending on how the account is structured; SIPC coverage is not the same thing as FDIC insurance.

How It Compares to TreasuryDirect

You can also buy Treasury securities directly from the government through TreasuryDirect, an online system where your holdings are recorded on the books of the Treasury itself rather than through a chain of intermediaries.⁸

The two systems do different jobs. The commercial book-entry system is built for liquidity: because brokers and dealers operate inside it, you can sell on the secondary market during trading hours. TreasuryDirect is built for buy-and-hold investors. Selling a security held there first requires transferring it to the commercial system through a broker, which takes a step and some time. In exchange, TreasuryDirect removes the intermediary layer entirely, so there is no brokerage counterparty risk and no fees.

Securities can move in either direction between the two systems, with one exception: STRIPS can live only in the commercial book-entry system.⁹⁵

Taxes on the Interest You Earn

Interest on Treasury securities is subject to federal income tax but exempt from state and local income taxes. The exemption comes from 31 U.S.C. § 3124, which exempts obligations of the U.S. Government from taxation by any state or political subdivision. It does not extend to estate or inheritance taxes.¹⁰

For investors in high-tax states, that exemption can meaningfully raise the after-tax yield on Treasuries compared to other fixed-income holdings.

Your broker or bank reports Treasury interest to the IRS on Form 1099-INT, with the amount shown in Box 3 (interest on U.S. government obligations). The form is filed for any person receiving at least $10 in interest, and the intermediary reports under its own name and taxpayer identification number, not the Treasury’s.¹¹

Opening an Account and Buying Securities

To buy through the commercial book-entry system, you need an account with a participating broker-dealer or bank. Opening one requires a valid Taxpayer Identification Number or Social Security Number, your full legal name, permanent address, and bank account details for funding purchases and receiving payments.¹²

Getting the TIN right matters. If you provide an incorrect number, or if the IRS tells your broker the number does not match its records, your interest may be subject to backup withholding at 24 percent. The withheld amount is not lost; you can claim it as a credit on your tax return. But it ties up money that would otherwise be in your pocket.

Once the account is open, you can place orders for upcoming auctions or buy on the secondary market, specifying face value in multiples of $100.⁶ Secondary market trades now settle the next business day after the trade (T+1), following the SEC’s shortened settlement cycle that took effect in May 2024.¹³ Your broker updates its records to reflect the new holding and sends a confirmation showing the price and yield. Those account statements are your evidence of ownership. No certificates exist.

Passing Securities to Heirs

Many brokerage firms offer Transfer on Death (TOD) registration, which lets you name a beneficiary who inherits your Treasury holdings directly when you die, outside of probate. Whether a firm offers TOD is up to the firm, and the rules governing securities registration are set by state law rather than federal law.¹⁴

When a TOD beneficiary claims the account, the typical process involves sending a copy of the death certificate to the transfer agent and submitting an application for re-registration. If there is no TOD designation, the securities pass through the decedent’s estate and the process takes longer, usually requiring probate court. Setting up a TOD designation while you can is simple, and cleaning up a brokerage account without one can take months.

1
TreasuryDirect. The Commercial Book-Entry System
2
eCFR. 31 CFR Part 357 – Regulations Governing Book-Entry Treasury Bonds, Notes and Bills Held in TRADES and Legacy Treasury Direct
3
TreasuryDirect. Treasury Bills
4
TreasuryDirect. FAQs about Floating Rate Notes
5
TreasuryDirect. STRIPS
6
TreasuryDirect. Buying a Treasury Marketable Security
7
Securities Investor Protection Corporation. What SIPC Protects
8
eCFR. Regulations Governing Securities Held in TreasuryDirect
9
TreasuryDirect. Transferring From One System To Another
10
Office of the Law Revision Counsel. 31 USC 3124 – Exemption from Taxation
11
Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
12
Internal Revenue Service. Taxpayer Identification Numbers (TIN)
13
FINRA. Understanding Settlement Cycles – What Does T+1 Mean for You
14
Investor.gov. Transferring Assets