For immediate release

The Federal Reserve Board announced Friday that it has established a private-sector Working Group on NewBank Implementation to further develop the concept of a dormant bank that would be available for activation, if necessary, to clear and settle U.S. government securities.

In a report released January 7, a previous private-sector panel, the Working Group on Government Securities Clearance and Settlement, recommended nine steps to mitigate risks to the financial system from the interruption or termination of the services of a clearing bank as the result of either operational or non-operational problems.

All of the major participants in the U.S. government securities markets depend on one of two commercial banks to settle their trades and facilitate financing of their positions. The September 11 terrorist attacks demonstrated how operational disruptions to a clearing bank's services could disrupt the trading, clearance, and settlement of government securities.

One of the first working group's nine recommendations, which were endorsed by the Board, called for the Board to establish a second panel focused on developing NewBank, a limited-purpose, dormant entity, ready for activation in the event that one of the two major clearing banks permanently exited the business, voluntarily or involuntarily, and no well-qualified bank stepped forward to purchase the exiting bank's clearing business.

The Board has asked the new working group to flesh out the NewBank concept and address any challenges to implementing it. Once those challenges have been successfully addressed, those that have agreed to own NewBank should take the necessary steps to implement the concept, including obtaining a limited-purpose bank charter. The Board asked the Working Group to prepare a report by late this year that summarizes its progress, identifies the remaining challenges that need to be addressed before a charter application can be submitted, and sets out a timetable for meeting those remaining challenges.

Michael Urkowitz, Senior Adviser to Deloitte Consulting, the chairman of the previous working group, has agreed to serve as chairman of the NewBank panel. The NewBank Working Group will include senior representatives of the two major clearing banks (J.P. Morgan Chase and The Bank of New York), the Fixed Income Clearing Corporation, The Bond Market Association, the Investment Company Institute, Cantor Fitzgerald Securities, Federated Investors, Fidelity Investments, Goldman Sachs & Co., Lehman Brothers, Merrill Lynch, Morgan Stanley & Co., Salomon Smith Barney (Citigroup), State Street Bank & Trust Co., and UBS Investment Bank.

Staff of the Federal Reserve, the Securities and Exchange Commission, the Department of the Treasury, the Federal Deposit Insurance Corporation, and the New York State Banking Department will participate as observers and technical advisers.

2004 Other announcements