Federal Register / Vol. 66, No. 92 / Friday, May 11, 2001 / Rules and Regulations 24229

1 12 U.S.C. 371c(a)(2). 2 12 U.S.C. 371c–1(a)(2)(D).

of the Paperwork Reduction Act of 1995,

44 U.S.C. 3501 et seq.

List of Subjects in 12 CFR Part 250

Banks, banking, Federal Reserve

System.

For the reasons set forth in the

preamble, the Board amends 12 CFR

part 250 as follows:

PART 50—MISCELLANEOUS

INTERPRETATIONS

1. The authority citation for part 250

continues to read as follows:

Authority: 12 U.S.C. 78, 248(i) and 371c(f).

2. Section 250.243 is added to read as

follows:

§ 250.243 Applicability of section 23A of

the Federal Reserve Act to loans and

extensions of credit by an insured

depository institution to a nonaffiliate to

enable the nonaffiliate to purchase an asset

through an affiliate of the institution that is

acting exclusively in an agency or

brokerage capacity in the transaction.

(a) The attribution rule of section 23A

of the Federal Reserve Act (12 U.S.C.

371c) provides that ‘‘a transaction by a

member bank with any person shall be

deemed to be a transaction with an

affiliate to the extent that the proceeds

of the transaction are used for the

benefit of, or transferred to, that

affiliate.’’ 1 The Board has considered

the question of whether a loan or

extension of credit by an insured

depository institution (‘‘depository

institution’’) to an unaffiliated borrower

who uses the proceeds of the transaction

to purchase an asset through an affiliate

of the institution that is acting

exclusively as an agent or broker in the

transaction should be subject to the

attribution rule because of the limited

benefit that the affiliate receives when it

acts only as an agent or broker in the

transaction. The Board believes that a

loan by a depository institution to an

unaffiliated borrower who uses the

proceeds of the loan to purchase an

asset through an affiliate of the

institution that is acting exclusively in

an agency or brokerage capacity is not

covered by section 23A if the affiliate

retains no portion of the loan proceeds

as a fee or commission for its services.

(b) A somewhat different analysis is

required when the affiliate acting as

agent or broker in the transaction retains

a portion of the loan proceeds as a fee

or commission. In such a case, the

portion of the loan not retained by the

affiliate as a fee or commission still

would be outside the coverage of section

23A. On the other hand, the portion of

the loan retained by the affiliate as a fee

or commission would be subject to

section 23A because it represents

proceeds of a loan by a depository

institution to a third party that are

transferred to, and used for the benefit

of, an affiliate of the institution. The

Board hereby grants an exemption from

section 23A for such fees and

commissions.

(c) The Board notes that this

interpretation would not apply if the

securities or other assets purchased by

the third-party borrower through the

affiliate of the depository institution

were issued or underwritten by, or sold

out of the inventory of, another affiliate

of the depository institution. In such a

case, proceeds of the loan from the

depository institution would be

transferred to, and used for the benefit

of, the affiliate that issued, underwrote,

or sold the asset on a principal basis to

the third party.

(d) The Board also notes that the

transactions described above (including

the loan to the third-party borrower and

any fee or commission paid to the

affiliate of the depository institution out

of the loan proceeds) would be subject

to the market terms requirement of

section 23B, which applies to ‘‘any

transaction in which an affiliate acts as

an agent or broker or receives a fee for

its services to the bank or any other

person.’’ 2

3. Section 250.244 is added to read as

follows:

§ 250.244 Exemption from section 23A of

the Federal Reserve Act for certain loans

and extensions of credit by an insured

depository institution to a nonaffiliate to

enable the nonaffiliate to purchase

securities through a registered brokerdealer affiliate of the institution that is

acting exclusively as riskless principal in

the securities transaction.

(a) A loan or extension of credit by an

insured depository institution

(‘‘depository institution’’) to any person

other than an affiliate of such depository

institution is exempted from section

23A of the Federal Reserve Act (12

U.S.C. 371c) if—

(1) The loan or extension of credit is

on terms that are consistent with safe

and sound banking practices; and

(2) The proceeds of the loan or

extension of credit are used to purchase

a security through an affiliate of the

depository institution that is a brokerdealer registered with the Securities and

Exchange Commission, where

(i) The affiliate is acting exclusively as

a riskless principal in the securities

transaction; and

(ii) The security is not issued or

underwritten by, or sold out of the

inventory of, any affiliate of the

depository institution.

(b) This grant of exemption is

applicable to a loan or extension of

credit covered by paragraph (a) of this

section even if a portion of the proceeds

of the loan or extension of credit is used

by the borrower to pay a riskless

principal mark-up to the affiliate,

provided that the mark-up is

substantially the same as, or lower than,

those prevailing at the same time for

comparable transactions with or

involving other nonaffiliated

companies, in accordance with section

23B of the Federal Reserve Act (12

U.S.C. 371c–1).

4. Section 250.245 is added to read as

follows:

§ 250.245 Exemption from section 23A of

the Federal Reserve Act for certain loans

and extensions of credit by an insured

depository institution to a nonaffiliate made

pursuant to a preexisting line of credit.

Section 23A of the Federal Reserve

Act (12 U.S.C. 371c) shall not apply to

an extension of credit by an insured

depository institution (‘‘depository

institution’’) to any person other than an

affiliate of such depository institution

if—

(a) The proceeds of the loan or

extension of credit are used to purchase

a security from or through an affiliate of

the depository institution that is a

broker-dealer registered with the

Securities and Exchange Commission;

and

(b) The loan or extension of credit is

made pursuant to, and consistent with

any conditions imposed in, a

preexisting line of credit that was not

established in contemplation of the

purchase of securities from or through

an affiliate of the depository institution.

By order of the Board of Governors of the

Federal Reserve System, May 3, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–11607 Filed 5–10–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

12 CFR Part 250

[Miscellaneous Interpretations; Docket No.

R–1104]

Application of Sections 23A and 23B of

the Federal Reserve Act to Derivative

Transactions With Affiliates and

Intraday Extensions of Credit to

Affiliates

AGENCY: Board of Governors of the

Federal Reserve System.

24230 Federal Register / Vol. 66, No. 92 / Friday, May 11, 2001 / Rules and Regulations

1Section 23A originally was enacted as part of

the Banking Act of 1933 and applied only to banks

that were members of the Federal Reserve System.

Congress amended the Federal Deposit Insurance

Act in 1966 to extend section 23A to insured

nonmember banks. 12 U.S.C. 1828(j). In 1989,

Congress further extended the coverage of section

23A to insured savings associations. 12 U.S.C. 1468.

Congress enacted section 23B of the Federal Reserve

Act as part of the Competitive Equality Banking Act

of 1987, and has subsequently expanded its scope

to cover the same set of depository institutions as

are covered by section 23A.

2 GLB Act section 121(b)(3) (codified at 12 U.S.C.

371c(f)(3).

ACTION: Interim rules with request for

public comments.

SUMMARY: The Board of Governors of the

Federal Reserve System is adopting on

an interim basis rules to address the

application of sections 23A and 23B of

the Federal Reserve Act to credit

exposure arising out of derivative

transactions between an insured

depository institution and its affiliates

and intraday extensions of credit by an

insured depository institution to its

affiliates. The rules require institutions

to adopt policies and procedures

reasonably designed to monitor,

manage, and control credit exposures

arising out of the transactions and

clarify that the transactions are subject

to section 23B.

DATES: The interim rules are effective

January 1, 2002. Comments must be

submitted on or before August 15, 2001.

ADDRESSES: Comments should refer to

Docket No. R–1104 and should be sent

to Ms. Jennifer J. Johnson, Secretary,

Board of Governors of the Federal

Reserve System, 20th Street and

Constitution Avenue, NW., Washington,

DC 20551 (or mailed electronically to

regs.comments@federalreserve.gov).

Comments addressed to Ms. Johnson

also may be delivered to the Board’s

mail room between the hours of 8:45

a.m. and 5:15 p.m. weekdays and,

outside of those hours, to the Board’s

security control room. Both the mail

room and the security control room are

accessible from the Eccles Building

courtyard entrance, located on 20th

Street, NW., between Constitution

Avenue and C Street, NW. Members of

the public may inspect comments in

Room MP–500 of the Martin Building

between 9 a.m. and 5 p.m. weekdays.

FOR FURTHER INFORMATION CONTACT:

Pamela G. Nardolilli, Senior Counsel

(202/452–3289), or Mark E. Van Der

Weide, Counsel (202/452–2263), Legal

Division; Michael G. Martinson,

Associate Director (202/452–3640), or

Heidi W. Richards, Assistant Director

(202/452–2598), Division of Banking

Supervision and Regulation; Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

Background

Sections 23A and 23B of the Federal

Reserve Act are intended to limit the

risks to an insured depository

institution (‘‘institution’’) from

transactions with its affiliates.1 Sections

23A and 23B also limit the ability of an

institution to transfer to its affiliates the

subsidy arising from the institution’s

access to the Federal safety net.

Section 23A achieves these goals in

three major ways. First, it limits the

aggregate amount of an insured

depository institution’s ‘‘covered

transactions’’ with any single affiliate

(other than a financial subsidiary of the

institution) to no more than 10 percent

of the institution’s capital and surplus,

and the aggregate amount of covered

transactions with all affiliates combined

(including financial subsidiaries of the

institution) to no more than 20 percent

of the institution’s capital and surplus.

Covered transactions include purchases

of assets from an affiliate, extensions of

credit to an affiliate, guarantees issued

on behalf of an affiliate, and certain

other transactions that expose an

institution to an affiliate’s credit or

investment risk.

Second, the statute requires all

covered transactions between an

insured depository institution and its

affiliates to be on terms and conditions

that are consistent with safe and sound

banking practices, and prohibits an

institution from purchasing low-quality

assets from its affiliates. Finally, the

statute requires that an insured

depository institution’s extensions of

credit to affiliates and guarantees issued

on behalf of affiliates be appropriately

secured by a statutorily defined amount

of collateral.

Section 23B protects an insured

depository institution by requiring that

transactions between the institution and

its affiliates be on market terms; that is,

on terms and under circumstances that

are substantially the same, or at least as

favorable to the institution, as those

prevailing at the time for comparable

transactions with unaffiliated

companies. The market terms

requirement of section 23B applies to

any covered transaction (as defined in

section 23A) with an affiliate as well as

a broad range of other transactions, such

as a sale of securities or other assets to

an affiliate and a contract for the

payment of money or furnishing of

services to an affiliate.

The Gramm-Leach-Bliley Act (‘‘GLB

Act’’) requires the Board to adopt, by

May 12, 2001, final rules under section

23A to ‘‘address as covered transactions

credit exposure arising out of derivative

transactions between [insured

depository institutions] and their

affiliates and intraday extensions of

credit by [insured depository

institutions] to their affiliates.’’2 The

Board is adopting the interim final rules

explained below pursuant to the

amendments to section 23A contained

in the GLB Act.

Explanation of Interim Rules

A. Derivative Transactions

Derivative transactions between an

insured depository institution and its

affiliates generally arise either from the

risk management needs of the

institution or the affiliate. Transactions

arising from the bank’s needs typically

arise when an institution enters into a

swap or other derivative contract with a

customer but chooses not to hedge

directly the market risk generated by the

derivative contract or is unable to hedge

the risk directly because the institution

is not authorized to hold the hedging

asset. In order to manage the market

risk, the institution may have an affiliate

acquire the hedging asset. The

institution would then do a ‘‘bridging’’

derivative transaction between itself and

the affiliate maintaining the hedge.

Other derivative transactions between

an insured depository institution and its

affiliate are affiliate-driven. An

institution’s affiliate may enter into an

interest-rate or foreign-exchange

derivative with the institution in order

to accomplish the asset-liability

management goals of the affiliate. For

example, an institution’s holding

company may hold a substantial amount

of floating-rate assets but issue fixedrate debt securities to obtain cheaper

funding. The holding company may

then enter into a fixed-to-floating

interest-rate swap with its subsidiary

insured depository institution to reduce

the holding company’s interest-rate risk.

Insured depository institutions and

their affiliates that seek to enter into

derivative transactions for hedging (or

risk-taking) purposes could enter into

the desired derivatives with unaffiliated

companies. Institutions and their

affiliates often choose to use each other

as their derivative counterparties,

however, in order to maximize the

profits of and manage risks within the

consolidated financial group.

The Board believes that derivative

transactions between an insured

depository institution and an affiliate

are subject to section 23B under the

Federal Register / Vol. 66, No. 92 / Friday, May 11, 2001 / Rules and Regulations 24231

3 In addition to applying to covered transactions

as defined in section 28A, the market terms

requirement of section 23B applies broadly to,

among other things, ‘‘[t]he payment of money or the

furnishing of services to an affiliate under contract,

lease, or otherwise.’’ 12 U.S.C. 371c–1(a)(2)(C).

Institution-affiliate derivatives generally involve a

contract or agreement to pay money to the affiliate

or furnish risk management services to the affiliate.

express terms of the statute.3 The Board

has not ruled on the question of whether

derivative transactions between an

insured depository institution and its

affiliates are covered transactions under

section 23A.

Derivative transactions between an

insured depository institution and an

affiliate resemble section 23A covered

transactions in many respects. Such

transactions may expose institutions to

the credit risk of their affiliates.

Although the typical institution-affiliate

derivative transaction does not create

current credit exposure for the

institution at the inception of the

transaction, an institution may incur

current credit exposure to an affiliate

during the term of a derivative

transaction and nearly always faces

some amount of potential future

exposure on such a transaction. The

credit exposure on a derivative

transaction with an affiliate poses a risk

to the safety and soundness of the bank

that is similar in many respects to the

risk posed by a loan to an affiliate, and

may be more volatile and indeterminate

than the credit exposure created by a

loan.

Determining the appropriate

treatment for derivative transactions

under section 23A is a complex and

important endeavor. In light of the

complexities of the subject matter and

in light of the May 12, 2001, statutory

schedule in the GLB Act, the Board is

taking the following two steps to

address institution-affiliate derivative

transactions under sections 23A and

23B. First, the Board is publishing this

interim rule, which (i) requires, under

section 23A as amended by the GLB

Act, that an institution establish and

maintain policies and procedures

reasonably designed to manage the

credit exposure arising from the

institution’s derivative transactions with

affiliates and (ii) clarifies that

institution-affiliate derivative

transactions are subject to the market

terms requirement of section 23B. The

policies and procedures must at a

minimum provide for monitoring and

controlling the credit exposure arising

from the institution’s derivative

transactions with each affiliate, and all

affiliates in the aggregate, and ensuring

that the institution’s derivative

transactions with affiliates comply with

section 23B. In addition, the interim

rule defines the term ‘‘derivative

transaction’’ to mean any derivative

contract covered by the Board’s capital

adequacy guidelines (which includes

most interest-rate, currency, equity, and

commodity derivative contracts) and

any similar derivative contract,

including credit derivative contracts.

Second, the Board has included

provisions in the proposed Regulation

W issued concurrently with this interim

rule to address further the credit

exposure associated with derivative

transactions. Regulation W proposes a

set of questions on measures in addition

to those contained in this interim rule

that could be applied to institutionaffiliate derivative transactions under

section 23A. In connection with this

interim rule and proposed Regulation

W, the Board solicits public comment

on the most appropriate treatment under

section 23A of the credit exposure

arising from derivative transactions.

As noted above, regardless of how the

Board ultimately decides to address

credit exposure on derivative

transactions between an institution and

an affiliate under section 23A, these

transactions are subject to the market

terms requirement of section 23B.

Accordingly, each institution should

have in place credit limits on its

derivatives exposure to affiliates that are

at least as strict as the credit limits the

institution imposes on unaffiliated

companies that are engaged in similar

businesses and are substantially

equivalent in size and credit quality.

Similarly, each institution should

monitor derivatives exposure to

affiliates in a manner that is at least as

rigorous as it uses to monitor derivatives

exposure to comparable unaffiliated

companies. In addition, each institution

should price, and require collateral in,

derivative transactions with affiliates in

a way that is at least as favorable to the

institution as the way the institution

would price, or require collateral in, a

derivative transaction with comparable

unaffiliated counterparties.

Although the Board continues to

explore and analyze the complex issue

of how best to address institutionaffiliate derivative transactions under

section 23A, the Board has not made a

determination at this time that the credit

exposure arising from such derivatives

ought to be made subject to all the

requirements of section 23A. The Board

continues to collect information

regarding the derivatives practices of

insured depository institutions and asks

for additional data on such practices in

order to assist the Board in determining

whether the approach set forth in the

interim rule would suffice to prevent

institutions from incurring material

credit exposure to affiliates on

derivative transactions. It appears that

several of the larger insured depository

institutions that participate in the

derivatives markets increasingly manage

credit risk arising from derivatives

exposure to financial institutions by

requiring such counterparties to post

collateral. The Board understands that

these institutions generally require full

collateralization of their current credit

exposure (i.e., positive net mark-tomarket values recalculated daily based

on the previous day’s exposures) on

derivative transactions with financial

institutions above a relatively small

threshold amount.

The Board requests information

regarding (i) how institutions currently

measure, monitor, and limit derivatives

credit exposure to unaffiliated

companies; (ii) whether institutions

include an estimate of potential future

exposure in their measurement of credit

exposure to unaffiliated derivatives

counterparties and, if so, how

institutions estimate potential future

exposure on a derivative transaction;

(iii) in what circumstances and to what

extent institutions require unaffiliated

counterparties to post collateral to

secure derivatives credit exposure; (iv)

what types of collateral institutions

accept to secure derivatives credit

exposure (and what haircuts are used

for the various collateral types); (v) how

often institutions mark to market (and

require additional collateral with

respect to) their derivative transactions

with unaffiliated counterparties; (vi)

how institutions price derivative

transactions with unaffiliated

counterparties; and (vii) how large the

uncollateralized derivatives credit

exposures are that institutions have to

unaffiliated companies.

After a more complete review and

analysis of the credit risk mitigation

practices of insured depository

institutions participating in the

derivatives markets and of the public

comments received on this interim rule

and Regulation W, the Board may

decide to subject credit exposure on

institution-affiliate derivatives to some

or all of the requirements of section

23A.

B. Intraday Extensions of Credit

As noted above, the GLB Act requires

the Board to address as covered

transactions under section 23A the

credit exposure arising from intraday

extensions of credit by insured

depository institutions to their affiliates.

Depository institutions regularly

provide transaction accounts to their

affiliates in conjunction with providing

24232 Federal Register / Vol. 66, No. 92 / Friday, May 11, 2001 / Rules and Regulations

4 12 U.S.C. 371c(f)(3)(B).

payment and securities clearing

services. As in the case of unaffiliated

commercial customers, these accounts

are occasionally subject to overdrafts

during the day that are repaid in the

ordinary course of business. The Board

has not to date ruled on whether these

or other types of intraday credit

extensions are covered transactions

under section 23A or are subject to the

market terms requirement of section

23B.

Existing business practices indicate

that the potential risk reduction benefits

afforded by full application of the

requirements of section 23A to intraday

credit exposures may not justify the

costs to banking organizations of

implementing these requirements at this

time. Intraday overdrafts and other

forms of intraday credit extensions are

generally not used as a means of

funding or otherwise providing

financial support for an affiliate. Rather,

these credit extensions typically

facilitate the settlement of transactions

between an affiliate and its customers

when there are mismatches between the

timing of funds sent and received

during the business day. Although some

risk exists that such intraday credit

extensions could turn into overnight

funding of an affiliate, this risk may be

sufficiently remote that application of

the strict collateral and other

requirements of section 23A would not

be warranted for the intraday credit

exposure. Moreover, mandating that

banks collateralize intraday exposures

could require banks to measure

exposures across multiple accounts,

offices, and systems on a global basis

and to adjust collateral holdings in real

time throughout the day. The Board is

concerned that few banks currently have

these capabilities and that they would

be very costly to implement.

As with institution-affiliate derivative

transactions, the Board is taking a twostep approach to addressing intraday

credit extensions by an institution to an

affiliate under sections 23A and 23B.

First, the Board is publishing this

interim final rule. The interim rule (i)

requires, under section 23A, that

institutions establish and maintain

policies and procedures reasonably

designed to manage the credit exposure

arising from the institution’s intraday

extensions of credit to affiliates and (ii)

clarifies that intraday extensions of

credit by an insured depository

institution to an affiliate are subject to

the market terms requirement of section

23B. The policies and procedures must

at a minimum provide for monitoring

and controlling the institution’s

intraday credit exposure to each

affiliate, and all affiliates in the

aggregate, and ensuring that the

institution’s intraday credit extensions

to affiliates comply with section 23B.

Second, the Board has proposed in

Regulation W an alternative approach

that would subject certain intraday

credit extensions to section 23A. The

Board specifically invites public

comment on whether the Board’s final

rule on intraday credit extensions under

section 23A should reflect the approach

taken in this interim rule, the approach

set forth in proposed Regulation W, an

approach that more fully subjects

intraday credits to section 23A, or

another approach.

C. Delayed Effective Date

The GLB Act authorizes the Board to

delay the effective date of its final rule

under section 23A on derivative

transactions and intraday credit

extensions ‘‘for such period as the Board

deems necessary or appropriate to

permit banks to conform their activities

to the requirements of the final rule

without undue hardship.’’ 4 Pursuant to

this authority, the Board has determined

to delay the effective date of these

interim final rules until January 1, 2002,

to allow institutions an appropriate

amount of time to put in place the

policies and procedures required by the

rules. The delayed effective date also

will provide the Board with an

opportunity to revise the interim rules

to reflect public comments as necessary.

Regulatory Flexibility Act

In accordance with section 3(a) of the

Regulatory Flexibility Act (5 U.S.C.

603(a)), the Board must publish an

initial regulatory flexibility analysis

with this rulemaking. The rules

implement provisions of section 121 of

the GLB Act that require the Board to

adopt final rules under section 23A of

the Federal Reserve Act to address as a

covered transaction the credit exposure

arising out of derivative transactions

between insured depository institutions

and their affiliates and intraday

extensions of credit by institutions to

their affiliates.

The interim rules require insured

depository institutions to establish and

maintain policies and procedures

regarding their derivative transactions

with affiliates and intraday credit

extensions to affiliates. The policies and

procedures required by the rules are

necessary to ensure that institutions

conduct these activities in a safe and

sound manner and to enable the Board

to execute properly its supervisory

function. These requirements apply to

all insured depository institutions,

regardless of size, engaged in these

activities. The Board believes that

institutions that engage in these

activities, in most cases, already have

policies and procedures in place to

manage the risks of these activities.

The Board specifically seeks comment

on the likely burden that the interim

rules will impose on insured depository

institutions that engage in derivative

transactions with affiliates or extend

credit on an intraday basis to affiliates.

Administrative Procedure Act

The provisions of these rules are

effective on January 1, 2002, on an

interim basis. Pursuant to 5 U.S.C. 553,

the Board finds that it is impracticable

to issue these rules in proposed form

and that there is good cause to issue

these rules as interim final rules due to

the fact that the GLB Act requires the

Board to adopt final rules addressing the

credit exposure arising from derivative

transactions between institutions and

affiliates and intraday extensions of

credit from institutions to affiliates by

May 12, 2001. The Board is seeking

public comment on all aspects of the

interim rules and will amend the rules

as appropriate after reviewing the

comments.

Subject to certain exceptions, 12

U.S.C. 4802(b)(1) provides that new

regulations and amendments to

regulations prescribed by a Federal

banking agency that impose additional

reporting, disclosure, or other new

requirements on an insured depository

institution must take effect on the first

day of a calendar quarter that begins on

or after the date on which the

regulations are published in final form.

In accordance with this provision of the

Administrative Procedure Act, these

interim rules do not become effective

until January 1, 2002.

Paperwork Reduction Act

The Board has determined that the

interim rules do not involve a collection

of information pursuant to the

provisions of the Paperwork Reduction

Act of 1995 (44 U.S.C. 3501 et seq.).

Plain Language

Section 722 of the GLB Act requires

the Board to use ‘‘plain language’’ in all

proposed and final rules published after

January 1, 2000. In light of this

requirement, the Board has sought to

present its interim rules in a simple and

straightforward manner. The Board

invites comments on whether there are

additional steps the Board could take to

make the rules easier to understand.

List of Subjects in 12 CFR Part 250

Federal Reserve System.

Federal Register / Vol. 66, No. 92 / Friday, May 11, 2001 / Rules and Regulations 24233

For the reasons set out in the

preamble, the Board amends 12 CFR

part 250 as follows:

PART 250—MISCELLANEOUS

INTERPRETATIONS

1. The authority citation for part 250

is revised to read as follows:

Authority: 12 U.S.C. 78, 248(i), 371c(f) and

371c–1(e).

2. Section 250.247 is added to read as

follows:

§ 250.247 Application of sections 23A and

23B of the Federal Reserve Act to derivative

transactions between insured depository

institutions and their affiliates.

(a) Derivative transactions between an

insured depository institution and its

affiliates are subject to the market terms

requirement of section 23B(a)(1) of the

Federal Reserve Act (12 U.S.C. 371c–

1(a)(1)).

(b) An insured depository institution

must establish and maintain policies

and procedures reasonably designed to

manage the credit exposure arising from

its derivative transactions with affiliates

in a safe and sound manner. The

policies and procedures must at a

minimum provide for:

(1) Monitoring and controlling the

credit exposure arising from the

institution’s derivative transactions with

each affiliate and all affiliates in the

aggregate; and

(2) Ensuring that the institution’s

derivative transactions with affiliates

comply with section 23B.

(c) For purposes of this regulation,

derivative transactions include any

derivative contract listed in paragraphs

A. III. E. 1. a. through d. of appendix A

to 12 CFR part 225 and any similar

derivative contract, including credit

derivative contracts.

3. Section 250.248 is added to read as

follows:

§ 250.248 Application of sections 23A and

23B of the Federal Reserve Act to intraday

extensions of credit by insured depository

institutions to their affiliates.

(a) Intraday extensions of credit by an

insured depository institution to its

affiliates are subject to the market terms

requirement of section 23B(a)(1) of the

Federal Reserve Act (12 U.S.C. 371c–

1(a)(1)).

(b) An insured depository institution

must establish and maintain policies

and procedures reasonably designed to

manage the credit exposure arising from

its intraday extensions of credit to

affiliates in a safe and sound manner.

The policies and procedures must at a

minimum provide for:

(1) Monitoring and controlling the

credit exposure arising from the

institution’s intraday extensions of

credit to each affiliate and all affiliates

in the aggregate; and

(2) Ensuring that the institution’s

intraday extensions of credit to affiliates

comply with section 23B.

By order of the Board of Governors of the

Federal Reserve System, May 3, 2001.

Dated: May 3, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–11608 Filed 5–10–01; 8:45 am]

BILLING CODE 6210–01–P