TO THE OFFICER IN CHARGE OF SUPERVISION
AT EACH FEDERAL RESERVE BANK
Under the Government Securities Act of 1986 (GSA), the U.S.
Department of the Treasury is responsible for issuing regulations implementing the
GSA. Section 403.5(d) of the Treasury's GSA-related regulations (17 CFR
403.5(d)) require government securities broker-dealers to issue a confirmation for
repurchase transactions by the end of the day on which a transaction is initiated
and on any day on which a substitution occurs.
Over the past few years, the Federal banking agencies have received
numerous questions about whether daily confirmation disclosures for sweep repo
accounts are necessary under the Treasury's regulations. The banking agencies
staffs consulted with Treasury and were advised that daily confirmations provide
fundamental customer protection and that Treasury will not permit any exclusions
from the confirmation requirements, except for situations involving foreign
corporations, partnerships, or trusts, or non-U.S. citizens residing outside the
United States.
In order to communicate this Treasury position to all banking
organizations who may be subject to the Treasury's GSA regulations, the Federal
banking agencies' staffs, working in conjunction with Treasury representatives,
prepared a suggested letter that should be disseminated to all the domestic and
foreign banking organizations supervised by the agencies. A copy of the suggested
letter is attached. We request that you send it to all banking organizations
supervised by the Federal Reserve in your District, except for bank holding
companies and nonbank subsidiaries. The other banking agencies have sent, or are
in the process of sending, a similar letter to the banks they supervise.
If you have any questions concerning this matter, please contact
Susan Meyers, Senior Securities Regulation Analyst, at (202) 452-2781.
Deputy Director
Dear ____________________:
Background
Regulations issued under the Government Securities Act (GSA) by the
U.S. Department of the Treasury require daily confirmations for overnight hold-in-custody (HIC) repurchase agreement transactions. This applies to banks that are
offering HIC repurchase agreement programs, commonly termed "sweep repos."
Board staff and the staffs of the other Federal banking agencies have
received questions about whether daily confirmation disclosures for "sweep repo"
accounts are necessary. Several banks have commented that daily confirmations
for sweep repos are unnecessary, burdensome, and costly. They have requested
permission to issue confirmations less frequently than daily; some have suggested
that monthly account statements could be issued at the customer's option.
This advisory notifies you that Treasury has informed the banking
agencies that the GSA regulations currently do not permit other than daily
confirmations for such transactions.
The Bureau of the Public Debt, a Treasury bureau, is responsible for
administering the regulations implementing the GSA. Its regulations at 17 CFR
403.5(d) require financial institutions and government securities broker-dealers
engaging in HIC repurchase transactions to issue confirmations for such repurchase
transactions by the end of the day in which a transaction is initiated. The
regulations also require confirmations to be issued at the end of any other day in
which substitution of securities occurs. These confirmation requirements apply to
all repurchase transactions in which the selling institution keeps control of the
underlying securities. It is our understanding that the operational requirements for
a daily sweep repo program currently require institutional control of the underlying
securities.
In December 1992, the Federal Financial Institutions Examination
Council's Regulatory Burden Study Group, in consultation with Treasury, reviewed
the issue of whether daily confirmations are burdensome. The study affirmed
Treasury's long-standing position that daily confirmations provide fundamental
customer protection because they have significant value to investors in identifying
the specific securities transactions that are the subject of the repurchase
transactions. According to Treasury, confirmations also permit customers to verify
that securities of an appropriate type and value are allocated to the transactions.
In addition, the GSA regulations do not permit any other exclusions from the
confirmation requirements except for situations involving foreign corporations,
partnerships, trusts, or non-U.S. citizens residing outside of the United States. In
such situations these entities must provide written notification that they are
waiving the right to receive confirmations.
Treasury also advised us that the provisions of Section 403.5(d) of its
GSA regulations require daily confirmations of sweep repos because they are
recurring transactions, generally giving rise to a new repurchase transaction daily.
Treasury also advised that the requirement that the confirmation take place by the
end of the business day means that the confirmation be sent prior to opening for
the next day of business. Thus, for overnight sweep repurchase agreements, the
confirmation must be available for delivery to the customer before or at the start of
the bank's next business day. As an alternative to mailing confirmations, Treasury
has issued an interpretation stating that a facsimile is an acceptable means of
complying with the written confirmation requirements of Section 403.5(d)(1)(ii),
provided the counterparty has agreed to accept confirmations by this method. An
unsuccessful fax transmission, however, does not relieve the bank of its obligation
under this section. If fax transmissions are unavailable to any customer at any
time or for any reason, the bank must provide written confirmation by mail or other
appropriate means.
References
Letters similar to this are being sent to banking organizations
supervised by the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation.
Background information and interpretations regarding the importance
of customer confirmations and the specific regulatory requirements pertaining to
repurchase agreement transactions are contained in the preambles to the following
four rulemaking initiatives: 52 FR 19642, May 26, 1987; 52 FR 27910, July 24,
1987; 53 FR 8598, March 15, 1988; and, 53 FR 28978, August 1, 1988. For
rulemaking proposals that address the requirements for overnight HIC repurchase
transactions, including sweep repos, you should reference 52 FR 19658-59, May
26, 1987; 52 FR 27919, July 24, 1987; 53 FR 8600, March 15, 1988; and 53 FR
8981-82, August 1, 1988. Section 403.5(d) contains rules applicable to financial
institutions that engage in hold-in-custody repurchase transactions. These rules
parallel the GSA requirements that apply to brokers and dealers that are not
financial institutions.
If your banking organization has questions or needs an interpretation
of these confirmation requirements or other GSA-related regulations, write the
Bureau of the Public Debt, Government Securities Regulations Staff, Washington,
DC, 20239, or call them at (202) 219-3632.
|
||||||||||||||
