[Federal Register Volume 73, Number 183 (Friday, September 19, 2008)]
[Rules and Regulations]
[Pages 54307-54309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-21792]
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FEDERAL RESERVE SYSTEM
12 CFR Part 223
[Regulation W; Docket No. R-1330]
Transactions Between Member Banks and Their Affiliates: Exemption
for Certain Securities Financing Transactions Between a Member Bank and
an Affiliate
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Interim final rule with request for public comment.
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SUMMARY: In light of the continuing unusual and exigent circumstances
in the financial markets, the Board has adopted, on an interim final
basis, a regulatory exemption for member banks from certain provisions
of section 23A of the Federal Reserve Act and the Board's Regulation W.
The exemption increases the capacity of member banks, subject to
certain conditions designed to help ensure the safety and soundness of
the banks, to enter into securities financing transactions with
affiliates.
DATES: The interim final rule became effective on September 14, 2008.
Comments must be received on or before October 31, 2008.
ADDRESSES: You may submit comments, identified by Docket No. R-1330, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
E-mail: [email protected]. Include docket number in
the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information.
Public comments may also be viewed electronically or in paper form
in Room MP-500 of the Board's Martin Building (20th and C Streets, NW.)
between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Mark E. Van Der Weide, Assistant
General Counsel, (202) 452-2263, Legal Division, or Norah M. Barger,
Deputy Director, (202) 452-2402, Division of Banking Supervision and
Regulation, Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, NW., Washington, DC 20551. For the
deaf, hard of hearing, and speech impaired only, teletypewriter (TTY),
(202) 263-4869.
SUPPLEMENTARY INFORMATION: In light of the ongoing dislocations in the
financial markets, and the potential impact of such dislocations on the
functioning of the U.S. tri-party repurchase agreement market, the
Board has adopted on an interim basis the following exemption from
section 23A of the Federal Reserve Act (12 U.S.C. 371c) and the Board's
Regulation W (12 CFR part 223). The exemption will facilitate the
ability of an affiliate of a member bank (such as an SEC-registered
broker-dealer) to obtain financing, if needed, for securities or other
assets that the affiliate ordinarily would have financed through the
U.S. tri-party repurchase agreement market. The exemption is subject to
several conditions designed to protect the safety and soundness of the
member bank.
First, the member bank may use the exemption to finance only those
asset types that the affiliate currently finances in the U.S. tri-party
repurchase agreement market.
Second, the transactions must be marked to market daily and subject
to daily margin maintenance requirements,
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and the member bank must be at least as over-collateralized in its
securities financing transactions with the affiliate as the affiliate's
clearing bank was in its U.S. tri-party repurchase agreement
transactions with the affiliate on September 12, 2008. The Board
expects the member bank and its affiliate to use standard industry
documentation for the exempt securities financing transactions (which
would, among other things, qualify the transactions as securities
contracts or repurchase agreements for purposes of U.S. bankruptcy
law).
Third, to ensure that member banks use the exemption in a manner
consistent with its purpose--that is, to help provide liquidity to the
U.S. tri-party repurchase agreement market--the aggregate risk profile
of the exempt securities financing transactions must be no greater than
the aggregate risk profile of the affiliate's U.S. tri-party repurchase
agreement transactions on September 12, 2008. The exemption, therefore,
permits an affiliate to obtain financing from its affiliated member
bank for securities positions that the affiliate did not own or finance
in the U.S. tri-party repurchase agreement market on September 12,
2008, but only if the new positions in the aggregate do not increase
the overall risk profile of the affiliate's portfolio.
Fourth, the member bank's top-tier holding company must guarantee
the obligations of the affiliate under the securities financing
transactions (or must provide other security to the bank that is
acceptable to the Board). Any member bank that intends to use a form of
credit enhancement other than a parent company guarantee must consult
in advance with Board staff. An example of the type of other security
arrangement that may be acceptable to the Board would be a pledge by
the affiliate or parent holding company to the member bank of a
sufficient amount of additional liquid, high-quality collateral.
Fifth, a member bank may use the exemption only if the bank has not
been specifically informed by the Board, after consultation with the
bank's appropriate Federal banking agency, that the bank may not use
this exemption. If the Board believes, after such consultation, that
the exempt securities financing transactions pose an unacceptable level
of risk to the bank, the Board may withdraw the exemption for the bank
or may impose supplemental conditions on the bank's use of the
exemption.
Consistent with its purpose to ameliorate potential temporary
dislocations in the U.S. tri-party repurchase agreement market, the
exemption will expire on January 30, 2009, unless extended by the
Board.
The Board notes that any securities financing transactions between
the member bank and an affiliate are subject to the market terms
requirement of section 23B of the Federal Reserve Act (12 U.S.C. 371c-
1). Section 23B requires that financial transactions between a bank and
its affiliate be on terms and under circumstances (including credit
standards) that are substantially the same, or at least as favorable to
the bank, as those prevailing at the time for comparable transactions
with or involving nonaffiliates. Among other things, section 23B would
require the member bank to apply collateral haircuts to its affiliated
securities financing transaction counterparty that are at least as
strict as the bank would apply to comparable unaffiliated securities
financing transaction counterparties.
Administrative Procedure Act
Pursuant to sections 553(b) and (d) of the Administrative Procedure
Act (5 U.S.C. 553(b) and (d)), the Board finds that there is good cause
for making the exemption effective immediately on September 14, 2008,
and that it is impracticable, unnecessary, or contrary to the public
interest to issue a notice of proposed rulemaking and provide an
opportunity to comment before the effective date. The Board has adopted
the exemption in light of, and to help address, the continuing unusual
and exigent circumstances in the financial markets. The exemption will
provide immediate relief to participants in the U.S. tri-party
repurchase agreement market affected by the current turmoil. The Board
is soliciting comment on all aspects of the exemption and will make
such changes that it considers to be appropriate or necessary after
review of any comments received.
Regulatory Flexibility Act
The Regulatory Flexibility Act requires an agency that is issuing a
final rule to prepare and make available a regulatory flexibility
analysis that describes the impact of the final rule on small entities.
5 U.S.C. 603(a). The Regulatory Flexibility Act provides that an agency
is not required to prepare and publish a regulatory flexibility
analysis if the agency certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
5 U.S.C. 605(b).
Pursuant to section 605(b), the Board certifies that this interim
final rule will not have a significant economic impact on a substantial
number of small entities. The rule reduces regulatory burden on large
and small insured depository institutions by granting an exemption from
the Federal transactions with affiliates regime for insured depository
institutions that engage in securities financing transactions with
affiliates.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (44 U.S.C. 3506; 5
CFR 1320 Appendix A.1), the Board has reviewed the interim final rule
under authority delegated to the Board by the Office of Management and
Budget. The rule contains no collections of information pursuant to the
Paperwork Reduction Act.
Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Board to use
``plain language'' in all proposed and final rules. In light of this
requirement, the Board has sought to present the interim final rule in
a simple and straightforward manner. The Board invites comment on
whether the Board could take additional steps to make the rule easier
to understand.
List of Subjects in 12 CFR Part 223
Banks, Banking, Federal Reserve System.
Authority and Issuance
0
For the reasons set forth in the preamble, Chapter II of Title 12 of
the Code of Federal Regulations is amended as follows:
PART 223--TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES
(REGULATION W)
0
1. The authority citation for part 223 continues to read as follows:
Authority: 12 U.S.C. 371c and 371c-1.
0
2. In Sec. 223.42, add paragraph (n) to read as follows:
Sec. 223.42 What covered transactions are exempt from the
quantitative limits, collateral requirements, and low-quality asset
prohibition?
* * * * *
(n) Securities financing transactions. (1) From September 15, 2008,
until January 30, 2009 (unless further extended by the Board),
securities financing transactions with an affiliate, if:
(i) The security or other asset financed by the member bank in the
transaction is of a type that the affiliate financed in the U.S. tri-
party repurchase agreement market at any time during the week of
September 8-12, 2008;
[[Page 54309]]
(ii) The transaction is marked to market daily and subject to daily
margin-maintenance requirements, and the member bank is at least as
over-collateralized in the transaction as the affiliate's clearing bank
was over-collateralized in comparable transactions with the affiliate
in the U.S. tri-party repurchase agreement market on September 12,
2008;
(iii) The aggregate risk profile of the securities financing
transactions under this exemption is no greater than the aggregate risk
profile of the securities financing transactions of the affiliate in
the U.S. tri-party repurchase agreement market on September 12, 2008;
(iv) The member bank's top-tier holding company guarantees the
obligations of the affiliate under the securities financing
transactions (or provides other security to the bank that is acceptable
to the Board); and
(v) The member bank has not been specifically informed by the
Board, after consultation with the member bank's appropriate Federal
banking agency, that the member bank may not use this exemption.
(2) For purposes of this exemption:
(i) Securities financing transaction means:
(A) A purchase by a member bank from an affiliate of a security or
other asset, subject to an agreement by the affiliate to repurchase the
asset from the member bank;
(B) A borrowing of a security by a member bank from an affiliate on
a collateralized basis; or
(C) A secured extension of credit by a member bank to an affiliate.
(ii) U.S. tri-party repurchase agreement market means the U.S.
market for securities financing transactions in which the
counterparties use custodial arrangements provided by JPMorgan Chase
Bank or Bank of New York or another financial institution approved by
the Board.
By order of the Board of Governors of the Federal Reserve
System, September 14, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-21792 Filed 9-18-08; 8:45 am]
BILLING CODE 6210-01-P