40816 Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices

1Repurchase agreements, generally used by

owners of securities as financing vehicles are, in

certain respects, closely analogous to securities

lending. Repurchase agreements however, are not

the direct focus of these guidelines. A typical

repurchase agreement has the following

distinguishing characteristics:

—The sale and repurchase (loan) of U.S.

government or federal agency securities.

—Cash is received by the seller (lender) and the

party supplying the funds receives the collateral

margin.

—The agreement is for a fixed period of time.

—A fee is negotiated and established for the

transaction at the outset and no rebate is given to

the borrower from interest earned on the investment

of cash collateral.

—The confirmation received by the financial

institution from a borrower broker/dealer classifies

the transaction as a repurchase agreement.

included in the FDIC’s requests to OMB

for renewal of this collection. All

comments will become a matter of

public record.

Dated at Washington, D.C., this 25th day of

July, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97–20045 Filed 7–29–97; 8:45 am]

BILLING CODE 6714–01–M

FEDERAL DEPOSIT INSURANCE

CORPORATION

Revised Policy Statement on

Securities Lending

AGENCY: Federal Deposit Insurance

Corporation (FDIC).

ACTION: Notice of revised policy

statement.

SUMMARY: As part of the FDIC’s

systematic review of its regulations and

written policies under section 303(a) of

the Riegle Community Development and

Regulatory Improvement Act of 1994

(CDRI), the FDIC is adopting revisions

recently made by the Federal Financial

Institutions Examination Council

(FFIEC) to its policy statement on

securities lending (policy statement).

The policy statement provides guidance

to insured depository institutions about

conducting securities lending in a safe

and sound manner. The FDIC is

adopting certain minor changes to the

policy statement which the FFIEC has

made to update outdated and

duplicative cross-references to other

supervisory documents, but is otherwise

retaining the policy statement in its

present form.

EFFECTIVE DATE: July 30, 1997.

FOR FURTHER INFORMATION CONTACT:

William A. Stark, Assistant Director,

(202/898–6972), Kenton Fox, Senior

Capital Markets Specialist, (202/898–

7119), Division of Supervision; Jamey

Basham, Counsel, (202/898–7265), Legal

Division, FDIC, 550 17th Street, N.W.,

Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION: The FDIC

is conducting a systematic review of its

regulations and written policies. Section

303(a) of the CDRI (12 U.S.C. 4803(a))

requires the FDIC, the Office of the

Comptroller of the Currency (OCC), the

Board of Governors of the Federal

Reserve System (FRB), and the Office of

Thrift Supervision (OTS) (collectively,

the federal banking agencies) to each

streamline and modify its regulations

and written policies in order to improve

efficiency, reduce unnecessary costs,

and eliminate unwarranted constraints

on credit availability. Section 303(a)

also requires each of the federal banking

agencies to remove inconsistencies and

outmoded and duplicative requirements

from its regulations and written

policies.

The FFIEC developed the Policy

Statement to provide general

supervisory guidance to insured

depository institutions that lend their

own securities or customers’ securities

to securities brokers, commercial banks,

and others. The policy statement

requires banks to establish written

policies and procedures governing

securities lending operations. Areas

addressed in the policy statement

include recordkeeping, administration,

credit analysis, credit limits, collateral

management, and the use of finders. The

OCC, FRB, and FDIC adopted the policy

statement, with the FDIC’s adoption

taking place on May 6, 1985. 2 FDIC,

Law, Regulations, and Related Acts

(FDIC) 5249.

On July 21, 1997, FFIEC published a

notice making minor changes to the

Policy Statement, in order to update

certain outdated cross-references to

other supervisory documents. 62 FR

38991. First, the extended discussion of

how to report securities lending

activities on the Consolidated Reports of

Condition and Income (call report) has

been replaced with a cross-reference to

the call report instructions themselves,

which have superseded the material in

the Policy Statement. Second, footnote

3, which recited the types of collateral

a broker/dealer was permitted to pledge

under the FRB’s Regulation T (12 CFR

220.16), has been removed because it no

longer accurately reflected all types of

collateral permitted under Regulation T.

These two changes will also eliminate

unnecessary duplication and reduce the

possibility of error in the event of future

changes to the call report instructions or

Regulation T. Third, two citations to

Prohibited Transaction Exemptions

issued by the Department of Labor

concerning securities lending programs

for employee benefit plans covered by

the Employee Retirement Income

Security Act have been corrected.

Consistent with the goals of the CDRI

review, the FDIC is adopting FFIEC’s

modifications to the Policy Statement,

thereby eliminating certain outdated

and duplicative material contained

therein. The modified Policy Statement

reads as follows.

Federal Financial Institutions

Examination Council Supervisory

Policy

Securities Lending

Purpose

Financial institutions are lending

securities with increasing frequency. In

some instances a financial institution

may lend its own investment or trading

account securities. More and more

often, however, financial institutions

lend customers’ securities held in

custody, safekeeping, trust or pension

accounts. Not all institutions that lend

securities or plan to do so have relevant

experience. Because the securities

available for lending often greatly

exceed the demand for them,

inexperienced lenders may be tempted

to ignore commonly recognized

safeguards. Bankruptcies of brokerdealers have heightened regulatory

sensitivity to the potential for problems

in this area. Accordingly, we are

providing the following discussion of

guidelines and regulatory concerns.

Securities Lending Market

Securities brokers and commercial

banks are the primary borrowers of

securities. They borrow securities to

cover securities fails (securities sold but

not available for delivery), short sales,

and option and arbitrage positions.

Securities lending, which used to

involve principally corporate equities

and debt obligations, increasingly

involves loans of large blocks of U.S.

government and federal agency

securities.

Securities lending is conducted

through open-ended ‘‘loan’’ agreements,

which may be terminated on short

notice by the lender or borrower.1 The

objective of such lending is to receive a

safe return in addition to the normal

interest or dividends. Securities loans

are generally collateralized by U.S.

government or federal agency securities,
Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices 40817

2Brokers and dealers registered with the

Securities and Exchange Commission are generally

subject to the restrictions of the Federal Reserve

Board’s Regulation T (12 CFR part 220) when they

borrow or lend securities. Regulation T specifies

acceptable borrowing purposes and any applicable

collateral requirements for these transactions.

cash, or letters of credit.2 At the outset,

each loan is collateralized at a

predetermined margin. If the market

value of the collateral falls below an

acceptable level during the time a loan

is outstanding, a margin call is made by

the lender institution. If a loan becomes

over-collateralized because of

appreciation of collateral or market

depreciation of a loaned security, the

borrower usually has the opportunity to

request the return of any excessive

margin.

When a securities loan is terminated,

the securities are returned to the lender

and the collateral to the borrower. Fees

received on securities loans are divided

between the lender institution and the

customer account that owns the

securities. In situations involving cash

collateral, part of interest earned on the

temporary investment of cash is

returned to the borrower and the

remainder is divided between the lender

institution and the customer account

that owns the securities.

Definitions of Capacity

Securities lending may be done in

various capacities and with differing

associated liabilities. It is important that

all parties involved understand in what

capacity the lender institution is acting.

For the purposes of these guidelines, the

relevant capacities are:

Principal: A lender institution

offering securities from its own account

is acting as principal. A lender

institution offering customers’ securities

on an undisclosed basis is also

considered to be acting as principal.

Agent: A lender institution offering

securities on behalf of a customer-owner

is acting as an agent. For the lender

institution to be considered a bona fide

or ‘‘fully disclosed’’ agent, it must

disclose the names of the borrowers to

the customer-owners (or give notice that

names are available upon request), and

must disclose the names of the

customer-owner to borrowers (or give

notice that names are available upon

request). In all cases the agent’s

compensation for handling the

transaction should be disclosed to the

customer-owner. Undisclosed agency

transactions, i.e., ‘‘blind brokerage’’

transactions in which participants

cannot determine the identity of the

counterparty, are treated as if the lender

institution were the principal. (See

definition above.)

Directed Agent: A lender institution

which lends securities at the direction

of the customer-owner is acting as a

directed agent. The customer directs the

lender institution in all aspects of the

transaction, including to whom the

securities are loaned, the terms of the

transaction (rebate rate and maturity/

call provisions on the loan), acceptable

collateral, investment of any cash

collateral, and collateral delivery.

Fiduciary: A lender institution which

exercises discretion in offering

securities on behalf of and for the

benefit of customer-owners is acting as

a fiduciary. For purposes of these

guidelines, the underlying relationship

may be as agent, trustee, or custodian.

Finder: A finder brings together a

borrower and a lender of securities for

a fee. Finders do not take possession of

the securities or collateral. Securities

and collateral are delivered directly by

the borrower and the lender without the

involvement of the finder. The finder is

simply a fully disclosed intermediary.

Guidelines

All financial institutions that

participate in securities lending should

establish written policies and

procedures governing these activities.

At a minimum, policies and procedures

should cover each of the topics in these

guidelines.

Recordkeeping

Before establishing a securities

lending program, a financial institution

must establish an adequate

recordkeeping system. At a minimum,

the system should produce daily reports

showing which securities are available

for lending, and which are currently

lent, outstanding loans by borrower,

outstanding loans by account, new

loans, returns of loaned securities, and

transactions by account. These records

should be updated as often as necessary

to ensure that the lender institution

fully accounts for all outstanding loans,

that adequate collateral is required and

maintained, and that policies and

concentration limits are being followed.

Administrative Procedures

All securities lent and all securities

standing as collateral must be marked to

market daily. Procedures must ensure

that any necessary calls for additional

margin are made on a timely basis.

In addition, written procedures

should outline how to choose the

customer account that will be the source

of lent securities when they are held in

more than one account. Possible

methods include: loan volume analysis,

automated queue, a lottery, or some

combination of these methods.

Securities loans should be fairly

allocated among all accounts

participating in a securities lending

program.

Internal controls should include

operating procedures designed to

segregate duties and timely management

reporting systems. Periodic internal

audits should assess the accuracy of

accounting records, the timeliness of

management reports, and the lender

institution’s overall compliance with

established policies and procedures.

Credit Analysis and Approval of

Borrowers

In spite of strict standards of

collateralization, securities lending

activities involve risk of loss. Such risks

may arise from malfeasance or failure of

the borrowing firm or institution.

Therefore, a duly established

management or supervisory committee

of the lender institution should formally

approve, in advance, transactions with

any borrower.

Credit and limit approvals should be

based upon a credit analysis of the

borrower. A review should be

performed before establishing such a

relationship and reviews should be

conducted at regular intervals thereafter.

Credit reviews should include an

analysis of the borrower’s financial

statement, and should consider

capitalization, management, earnings,

business reputation, and any other

factors that appear relevant. Analyses

should be performed in an independent

department of the lender institution, by

persons who routinely perform credit

analyses. Analyses performed solely by

the person(s) managing the securities

lending program are not sufficient.

Credit and Concentration Limits

After the initial credit analysis,

management of the lender institution

should establish an individual credit

limit for the borrower. That limit should

be based on the market value of the

securities to be borrowed, and should

take into account possible temporary

(overnight) exposures resulting from a

decline in collateral values or from

occasional inadvertent delays in

transferring collateral. Credit and

concentration limits should take into

account other extensions of credit by the

lender institution to the same borrower

or related interests. Such information, if

provided to an institution’s trust

department conducting a securities

lending program, would not be

considered material inside information

and therefore, not violate ‘‘Chinese

Wall’’ policies designed to protect

against the misuse of material inside

information. Violation of securities laws
40818 Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices

3 Employee Benefit Plans subject to the Employee

Retirement Income Security Act are specifically

required to collateralize securities loans at a

minimum of 100 percent of the market value of

loaned securities (see section concerning Employee

Benefit Plans).

4 The level of margin should be dictated by level

of risk being underwritten by the securities lender.

Factors to be considered in determining whether to

require margin above the recommended minimum

include: the type of collateral, the maturity of

collateral and lent securities, the term of the

securities loan, and the costs which may be

incurred when liquidating collateral and replacing

loaned securities.

would arise only if material inside

information were used in connection

with the purchase or sale of securities.

Procedures should be established to

ensure that credit and concentration

limits are not exceeded without proper

authorization from management.

When a lender institution is lending

its own securities as principal, statutory

lending limits may apply. For national

banks and federal savings associations,

the limitations in 12 U.S.C. 84 apply.

For state-chartered institutions, state

law and applicable federal law must be

considered. Certain exceptions may

exist for loans that are fully secured by

obligations of the United States

government and federal agencies.

Collateral Management

Securities borrowers pledge and

maintain collateral at least 100 percent

of the value of the securities borrowed.3

The minimum amount of excess

collateral, or ‘‘margin’’, acceptable to the

lender institution should relate to price

volatility of the loaned securities and

the collateral (if other than cash).4

Generally, the minimum initial

collateral on securities loans is at least

102 percent of the market value of the

lent securities plus, for debt securities,

any accrued interest.

Collateral must be maintained at the

agreed margin. A daily ‘‘mark-tomarket’’ or valuation procedure must be

in place to ensure that calls for

additional collateral are made on a

timely basis. The valuation procedures

should take into account the value of

accrued interest on debt securities.

Securities should not be lent unless

collateral has been received or will be

received simultaneously with the loan.

As a minimum step toward perfecting

the lender’s interest, collateral should

be delivered directly to the lender

institution or an independent third

party trustee.

Cash as Collateral

When cash is used as collateral, the

lender institution is responsible for

making it income productive. Lenders

should establish written guidelines for

selecting investments for cash collateral.

Generally, a lender institution will

invest cash collateral in repurchase

agreements, master notes, a short-term

investment fund, U.S. or Eurodollar

certificates of deposits, commercial

paper or some other type of money

market instrument. If the lender

institution is acting in any capacity

other than as principal, the written

agreement authorizing the lending

relationship should specify how cash

collateral is to be invested.

Investing cash collateral in liabilities

of the lender institution or its holding

company would be an improper conflict

of interest unless that strategy was

specifically authorized in writing by the

owner of the lent securities. Written

authorizations for participating accounts

are further discussed later in these

guidelines.

Letters of Credit as Collateral

Since May 1982, letters of credit have

been permitted as collateral in certain

securities lending transactions outlined

in Federal Reserve Regulation T. If a

lender institution plans to accept letters

of credit as collateral, it should establish

guidelines for their use. Those

guidelines should require a credit

analysis of the financial institution

issuing the letter of credit before

securities are lent against that collateral.

Analyses must be periodically updated

and reevaluated. The lender institution

should also establish concentration

limits for the institutions issuing letters

of credit and procedures should ensure

that they are not exceeded. In

establishing concentration limits on

letters of credit accepted as collateral,

the lender institution’s total outstanding

credit exposures from the issuing

institution should be considered.

Written Agreements

Securities should be lent only

pursuant to a written agreement

between the lender institution and the

owner of the securities specifically

authorizing the institution to offer the

securities for loan. The agreement

should outline the lender institution’s

authority to reinvest cash collateral (if

any) and responsibilities with regard to

custody and valuation of collateral. In

addition, the agreement should detail

the fee or compensation that will go to

the owner of the securities in the form

of a fee schedule or other specific

provision. Other items which should be

covered in the agreement have been

discussed earlier in these guidelines.

A lender institution must also have

written agreements with the parties who

wish to borrow securities. These

agreements should specify the duties

and responsibilities of each party. A

written agreement may detail:

Acceptable types of collateral (including

letters of credit); standards for collateral

custody and control, collateral valuation

and initial margin, accrued interest,

marking to market, and margin calls;

methods for transmitting coupon or

dividend payments received if a

security is on loan on a payment date;

conditions which will trigger the

termination of a loan (including events

of default); and acceptable methods of

delivery for loaned securities and

collateral.

Use of Finders

Some lender institutions may use a

finder to place securities, and some

financial institutions may act as finders.

A finder brings together a borrower and

a lender for a fee. Finders should not

take possession of securities or

collateral. The delivery of securities

loaned and collateral should be direct

between the borrower and the lender. A

finder should not be involved in the

delivery process.

The finder should act only as a fully

disclosed intermediary. The lender

institution must always know the name

and financial condition of the borrower

of any securities it lends. If the lender

institution does not have that

information it and its customers are

exposed to unnecessary risks.

Written policies should be in place

concerning the use of finders in a

securities lending program. These

policies should cover the circumstances

in which a finder will be used, which

party pays the fee (borrower or lender),

and which finders the lender institution

will use.

Employee Benefit Plans

The Department of Labor has issued

two class exemptions which deal with

securities lending programs for

employee benefit plans covered by the

Employee Retirement Income Security

Act (ERISA)—Prohibited Transaction

Exemption 81–6 (46 FR 7527 (January

23, 1981), supplemented 52 FR 18754

(May 19, 1987)), and Prohibited

Transaction Exemption 82–63 (47 FR

14804 (April 6, 1982) and correction

published at 47 FR 16437 (April 16,

1982)). The exemptions authorize

transactions which might otherwise

constitute unintended ‘‘prohibited

transactions’’ under ERISA. Any

institution engaged in lending of

securities for an employee benefit plan

subject to ERISA should take all steps

necessary to design and maintain its

program to conform with these

exemptions. Prohibited Transaction

Exemption 81–6 permits the lending of

securities owned by employee benefit
Federal Register / Vol. 62, No. 146 / Wednesday, July 30, 1997 / Notices 40819

plans to persons who could be ‘‘parties

in interest’’ with respect to such plans,

provided certain conditions specified in

the exemption are met. Under those

conditions neither the borrower nor an

affiliate of the borrower can have

discretionary control over the

investment of plan assets, or offer

investment advice concerning the

assets, and the loan must be made

pursuant to a written agreement. The

exemption also establishes a minimum

acceptable level for collateral based on

the market value of the loaned

securities.

Prohibited Transaction Exemption

82–63 permits compensation of a

fiduciary for services rendered in

connection with loans of plan assets

that are securities. The exemption

details certain conditions which must

be met.

Indemnification

Certain lender institutions offer

participating accounts indemnification

against losses in connection with

securities lending programs. Such

indemnifications may cover a variety of

occurrences including all financial loss,

losses from a borrower default, or losses

from collateral default. Lender

institutions that offer such

indemnification should obtain a legal

opinion from counsel concerning the

legality of their specific form of

indemnification under federal and/or

state law.

A lender institution which offers an

indemnity to its customers may, in light

of other related factors, be assuming the

benefits and, more importantly, the

liabilities of a principal. Therefore,

lender institutions offering

indemnification should also obtain

written opinions from their accountants

concerning the proper financial

statement disclosure of their actual or

contingent liabilities.

Regulatory Reporting

Securities borrowing and lending

transactions should be reported by

commercial banks according to the

Instructions for the Consolidated

Reports of Condition and Income and by

thrifts according to Thrift Financial

Report instructions.

By order of the Board of Directors.

Dated at Washington, D.C. this 22nd day of

July, 1997.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97–19964 Filed 7–29–97; 8:45 am]

BILLING CODE 6714–01–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Agency for Toxic Substances and

Disease Registry

[ATSDR–121]

Notice of Availability of Administrative

Reports of Health Effects Studies

AGENCY: Agency for Toxic Substances

and Disease Registry (ATSDR),

Department of Health and Human

Services (HHS).

ACTION: Notice.

SUMMARY: This notice announces the

availability of administrative reports of

20 ATSDR health effects studies and

associated publications.

FOR FURTHER INFORMATION CONTACT:

Jeffrey A. Lybarger, M.D., MS, Director,

Division of Health Studies, Agency for

Toxic Substances and Disease Registry,

1600 Clifton Road, NE., Mailstop E–31,

Atlanta, Georgia 30333, telephone (404)

639–6200.

SUPPLEMENTARY INFORMATION: Sections

104(i) (1), (7), (8), and (9) of the

Comprehensive Environmental

Response, Compensation, and Liability

Act (CERCLA), as amended (42 U.S.C.

9604(i) (1), (7), (8), and (9), provide the

Administrator of ATSDR with the

authority to conduct pilot studies and

epidemiologic and other health studies,

and to initiate health surveillance

programs to determine the relationship

between human exposure to hazardous

substances in the environment and

adverse health outcomes.

On February 13, 1990, ATSDR

published in the Federal Register (55

FR 5136) a final rule entitled, ‘‘Health

Assessments and Health Effects Studies

of Hazardous Substances Releases and

Facilities.’’ The primary purpose of that

rule, which created a new regulation at

42 CFR part 90, was to set forth general

procedures that ATSDR will follow

relating to certain agency activities,

including the conduct of health effects

studies. Section 90.11 of the regulation

concerns the reporting of results of

health assessments and health effects

studies, and provides that reports of

health effects studies conducted under

section 104(i) of CERCLA be available to

the general public upon request.

Availability: The reports of the health

effects studies and associated

publications in the following list are

now available through the U.S.

Department of Commerce, National

Technical Information Service (NTIS),

5285 Port Royal Road, Springfield,

Virginia 22151, telephone 1–800–553–

6847 or 703–487–4650. There is a

charge for these items as determined by

NTIS.

Health effects study NTIS document

Number

Southbend Subdivision Health Outcomes Study, Harris County, Texas, ATSDR/HS–95–57 .................................................... PB95–265518

Biologic Indicators of Exposure to Lead, RSR Smelter Site, Dallas, Texas, ATSDR/HS–95–59 ............................................... PB95–265500

Fort Hall Air Emissions Study, Fort Hall Indian Reservation, Fort Hall, Idaho, ........................................................................... PB96–109046

A Population-Based Case-Control Study of Lung Cancer Mortality in Four Arizona Smelter Towns, ATSDR/HS–95–61 ........ PB96–109038

McClellan Air Force Base Cross-Sectional Health Study, Sacramento, Sacramento County, California, ATSDR/HS–95–62 .. PB96–138144

Lead and Cadmium Exposure Study, Galena, Kansas, ATSDR/HS–95–63 ............................................................................... PB96–138151

National Exposure Registry, Trichloroethylene (TCE) Subregistry, Followup 1 Technical Report, ATSDR/HS–96–64 ............. PB96–157573

National Exposure Registry, Volatile Organic Compounds Registry, 1,1,1-Trichloroethane (TCA) Subregistry, Baseline and

Followup 1 Technical Report, ATSDR/HS–96–65.

PB96–172101

Evaluating Individuals Reporting Sensitivities to Multiple Chemicals, California Department of Health Services, ATSDR/HS–

96–66.

PB96–187646

The Occurrence of Neural Tube, Heart, and Oral Cleft Defects in Areas With National Priorities List Sites: A Case-Control

Study, California Department of Health Services, California Birth Defects Monitoring Program, ATSDR/HS–96–67.

PB96–109632

National Exposure Registry, Dioxin Subregistry, Baseline and Followups 1 and 2 Technical Report, ATSDR/HS–96–70 ....... PB96–196613

The Rocky Mountain Arsenal Pilot Exposure Study, Part II: Analysis of Exposure to Diisopropylmethylphosphate, Aldrin,

Dieldrin, Endrin, Isodrin, and Chlorophenylmethsulfone, Colorado Department of Public Health and Environment Disease

Control and Environmental Epidemiology Division, Denver, Colorado, ATSDR/HS–96–68.

PB96–162151

Reproductive, Neurobehavioral, and Other Disorders in Communities Surrounding the Rocky Mountain Arsenal, Colorado

State University, Department of Environmental Health, Fort Collins, Colorado, ATSDR/HS–96–69.

PB96–178058