[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: <a href="/cdn-cgi/l/email-protection#6b190e0c1845080406060e051f182b0d0e0f0e190a07190e180e191d0e450c041d"><span class="__cf_email__" data-cfemail="fc8e999b8fd29f9391919992888fbc9a9998998e9d908e998f998e8a99d29b938a">[email protected]</span></a>. 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,

[[Page 54308]]

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


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