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FEDERAL RESERVE BOARD WASHINGTON A D D R E S S OFFICIAL C O R R E S P O N D E N C E T O T H E FEDERAL RESERVE BOARD X-6697 September 6, 1930& SUBJECT: E l i g i b i l i t y f o r rediscount of acceptances f o r Grain S t a b i l i z a t i o n Corporation. Dear S i r ; There i s enclosed f o r your information a copy of a l e t t e r addressed by the Federal Reserve Board to Hon. Alexander Legge, Chairman of the Federal Farm Board with respect to the e l i g i b i l i t y f o r r e d i s c o u n t by Federal r e s e r v e banks of c e r t a i n b a n k e r s ' acceptances proposed to be i s s u e d under acceptance c r e d i t s to be granted to the Grain S t a b i l i z a t i o n Corporation by a number of a c c e p t i n g banks i n accordance with the terms of an agreement between the Grain S t a b i l i z a t i o n Corporation, the Continental I l l i n o i s Bank and Trust Company of Chicagoi as corporate t h i s t e e , Mr. William P . fcopf, of Chicago, I l l i n o i s , a s i n d i v i d u a l t r u s t e e * various a c c e p t i n g banks, and' the Federal Farih Board, which agreement i s aunmari z e d i n the l e t t e r . By Order of the Federal Be serve Boai*d. Very t r u l y yours, E. M. McClelland, Assistant Secretary. •* Enclosures. TO GOVERNORS AHD CHAIRMEH OF ALL FEDERAL RESERVE BANKS. X-6697-a COPY September 5, 1930. Hon. Alexander Legge, Chairman, Federal Farm Board, Washington, D. C. Sir: I have the honor to advise you t h a t bankers' a c c e p t ances drawn by The Grain S t a b i l i z a t i o n Corporation with m a t u r i t i e s not i n excess of n i n e t y days, secured by warehouse r e c e i p t s , shipping documents and o t h e r s i m i l a r documents of t i t l e f o r r e a d i l y marketable s t a p l e s , and accepted by r e s p o n s i b l e banks or bankers i n accordance with the Federal Reserve Board's understanding of the terms of the t e n t a t i v e agreement enclosed i n your l e t t e r of August 29, 1930, are e l i g i b l e f o r rediscount by Federal r e s e r v e banks when p r e s e n t e d f o r rediscount i n the usual manner with the endorsement of a member bank of the Federal Reserve System other than the a c c e p t i n g bank. The B o a r d ' s understanding of the agreement under which these acceptances a r e to be i s s u e d and the other r e l e v a n t f a c t s p e r t a i n i n g t h e r e t o a r e s t a t e d i n a more d e t a i l e d memorandum enclosed h e r e w i t h . By Order of the Federal Reserve Board. Very t r u l y yours, E. M. McClelland, Assistant Secretary. Enclosure. 141 I COPY X - 6 6 9 7-15 September 4 , 1930# Hon. Alexander Legge, Chairman, Federal Farm Board, Washington, D. C. The Federal Reserve Board has received your l e t t e r of August 29th i n q u i r i n g whether c e r t a i n bankers' acceptances proposed to he i s s u e d under acceptance c r e d i t s to he granted to The Grain S t a b i l i z a t i o n Corporation by a number of a c c e p t i n g hanks i n accordance with the terms of a t e n t a t i v e d r a f t of an agreement between The Grain S t a b i l i z a t i o n Corporation, the Continental I l l i n o i s Bank and Trust Company of Chicago, I l l i n o i s , a s cor-: p o r a t e t r u s t e e , Mr. William P. Kopf of Chicago, I l l i n o i s , as i n d i v i d u a l t r u s t e e , various a c c e p t i n g banks, and the Federal Farm Board, w i l l be e l i g i b l e f o r r e d i s c o u n t by Federal reserve banks. From the t e n t a t i v e d r a f t of t h i s proposed agreement enclosed i n your l e t t e r , i t appears t h a t : 1. The Grain S t a b i l i z a t i o n Corporation w i l l r e q u e s t a number of d i f f e r e n t accepting banks to e s t a b l i s h i n i t s favor acceptance c r e d i t s which s h a l l not exceed i n the aggregate the sum of $30,000,000 a t any one time o u t s t a n d i n g , such c r e d i t s t o be a v a i l e d of by d r a f t s payable not more than n i n e t y days a f t e r s i g h t drawn from time to time by The Grain S t a b i l i z a t i o n Corporation upon the r e s p e c t i v e accepting banks and accepted by such accepting banks, no d r a f t to mature l a t e r than J u l y 31, 1931. 2 . I n order to secure the accepting banks a g a i n s t l o s s , the S t a b i l i z a t i o n Corporation w i l l d e l i v e r to the t r u s t e e s only the following documents of t i t l e f o r wheat: 3. (a) Negotiable domestic r a i l r o a d b i l l s of l a d i n g ; (b) n e g o t i a b l e domestic or f o r e i g n steamship b i l l s of lading; (c) Negotiable warehouse r e c e i p t s i s s u e d by warehouses i n terminal markets which a r e bonded and under Federal or S t a t e l i c e n s e ; (d) Custodian c e r t i f i c a t e s i s s u e d by the Board of Trade of the City of Chicago. The S t a b i l i z a t i o n Corporation w i l l a t a l l times have i n 1 4 2 - 2 - X-6697-b the possession of the t r u s t e e s as s e c u r i t y documents of t i t l e f o r wheat having a market value equal to 125$ of the t o t a l face amount of acceptances outstanding ( i n c l u d i n g those forwarded f o r a c c e p t a n c e ) , l e s s the amount of any cash deposited "by the S t a b i l i z a t i o n Corporation with the t r u s t e e s . 4 . A l l d r a f t s drawn by the S t a b i l i z a t i o n Corporation f o r acceptance by any of the accepting banks w i l l be payable i n d o l l a r s a c e r t a i n number of days a f t e r date to the order of the S t a b i l i z a t i o n Corporation a t the Continental I l l i n o i s Bank and Trust Company and w i l l be duly endorsed i n blank by the S t a b i l i z a t i o n Corporation. 5. A l l such d r a f t s w i l l be d e l i v e r e d by the S t a b i l i z a t i o n Corporation with w r i t t e n forwarding d i r e c t i o n s to the t r u s t e e s , which*. a f t e r r e g i s t e r i n g them and p l a c i n g an i d e n t i f y i n g number on them, w i l l forward them to t h e r e s p e c t i v e accepting banks f o r acceptance; and a l l banks a c c e p t i n g d r a f t s so i d e n t i f i e d and r e g i s t e r e d by the t r u s t e e s w i l l be e n t i t l e d to the s e c u r i t y a f f o r d e d by the agreement and by the pledge from time t o time of documents of t i t l e f o r wheat, money, or o t h e r things pursuant to the agreement. 6 . The h o l d e r s of t h e d r a f t s accepted under t h i s agreement ( o t h e r than the bank which has accepted the same) must look s o l e l y to the g e n e r a l c r e d i t of the p a r t i c u l a r bank which accepted such d r a f t s and w i l l have no r i g h t s whatsoever i n or to the c o l l a t e r a l deposited pursuant to t h i s agreement, such c o l l a t e r a l being deposited s o l e l y f o r the b e n e f i t and p r o t e c t i o n of the a c c e p t i n g banks. 7. The S t a b i l i z a t i o n Corporation agrees to deposit with the corporate t r u s t e e f o r the account of t h e r e s p e c t i v e accepting banks Chicago funds i n cash equal to the face amount of d r a f t s accepted by the r e s p e c t i v e a c c e p t i n g banks on the date of the r e s p e c t i v e m a t u r i t i e s of such d r a f t s , t o g e t h e r with any charges and expenses which s h a l l have accrued thereon; and t h e corporate t r u s t e e w i l l n o t i f y the r e s p e c t i v e accepting banks of the r e c e i p t of such d e p o s i t and r e q u e s t forwarding i n s t r u c t i o n s * 8. Each accepting bank, r e g a r d l e s s of p r i o r i t y and time of acceptance, w i l l be secured equally and r a t a b l y i n p r o p o r t i o n t o i t s acceptances executed under t h i s agreement, except as to acceptances f o r which cash has been d e p o s i t e d as provided in the agreement. 9» The Federal Farm Board has loaned and/or w i l l loan f u r t h e r sums to t h e S t a b i l i z a t i o n Corporation to bo secured by a l i e n on s a i d securi t y subordinate i n a l l r e s p e c t s to the l i o n of the accepting banks. 10. The S t a b i l i z a t i o n Corporation warrants and a g r e e s t h a t a l l wheat pledged under t h i s agreement and a l l documents of t i t l e t h e r e f o r s h a l l be f r e e of a l l l i e n s , claims and encumbrances whatsoever, and t h a t , except f o r the l i e n c r e a t e d by the agreement, i t w i l l a t a l l times have f u l l and a b s o l u t e t i t l e to such wheat and the documents of t i t l e t h e r e f o r and w i l l maintain f u l l insurance covering a l l wheat so pledged a g a i n s t a l l customary r i s k s , including f i r e , l i g h t n i n g and tornado. 11. The S t a b i l i z a t i o n Corporation w i l l have the r i g h t (a) to «"» %3 ** X-6697M) i o b t a i n the r e l e a s e of any documents of t i t l e pledged under t h i s agreement by d e p o s i t i n g with the t r u s t e e s cash equal to 80$ of the then market value t h e r e o f , (b) to regain p o s s e s s i o n of any cash so deposited rrith the t r u s t e e s (except cash deposited to pay maturing acceptances) by d e p o s i t i n g with the t r u s t e e s documents of t i t l e having a market value equal to 125$ of the amount of cash to be withdrawn, and (c) to s u b s t i t u t e f o r documents of t i t l e h e l d by the t r u s t e e s other documents of t i t l e r e p r e s e n t i n g wheat of a value equal to t h a t represented by the documents of t i t l e withdrawn. 12. Whenever the value of the wheat pledged f a l l s below 125$ of t h e t o t a l face value of outstanding acceptances ( l o s s the amount of cash d e p o s i t e d ) , the t r u s t e e s may demand a d d i t i o n a l c o l l a t e r a l ; and whenever t h e current market value of the wheat pledged exceeds such amount, the S t a b i l i z a t i o n Corporation with t h e concurrence of t h e Federal Farm Board, may obtain the r e l e a s e of such excess. 13. Upon the f a i l u r e of the S t a b i l i z a t i o n Corporation to deposit with the corporate t r u s t e e f o r the account of any accepting bank cash equal to the f a c e amount of any d r a f t s accepted on the m a t u r i t y date t h e r e o f , or upon o t h e r d e f a u l t on the p a r t of t h e S t a b i l i z a t i o n Corporation, the t r u s t e e s i n t h e i r d i s c r e t i o n may, and upon the request of a c c e p t i n g banks which have accepted 25$ or more of the t o t a l f a c e amount of outstanding acceptances shall., a c c e l e r a t e and mature immediately the o b l i g a t i o n s of the S t a b i l i z a t i o n Corporation to pay to the accepting banks the f u l l f a c e value of a l l o u t standing d r a f t s , and thereupon the t r u s t e e s a r e a u t h o r i z e d to s e l l any or a l l of the pledged p r o p e r t y a t p u b l i c or p r i v a t e s a l e and t o apply the n e t proceeds of such s a l e pro r a t a toward the payment of the o b l i g a t i o n s of the S t a b i l i z a t i o n Corporation to the accepting banks, whether the acceptances a r e due or n o t , and to pay any s u r p l u s thereover f i r s t to the Federal Farm Board and then to the S t a b i l i z a t i o n Corporation as t h e i r r e s p e c t i v e i n t e r e s t s may appear. 14. The accepting banks w i l l have the r i g h t t o proceed d i r e c t l y a g a i n s t the S t a b i l i z a t i o n Corporation by s u i t or otherwise f o r any f a i l u r e to p l a c e them i n funds to meet the payment of acceptances, but s h a l l have no r i g h t to enforce t h e i r r i g h t s a g a i n s t the c o l l a t e r a l except through the t r u s t e e s as provided i n the agreement. 15. The t r u s t e e s s h a l l hold a l l c o l l a t e r a l pledged with them f i r s t f o r the s e c u r i t y and p r o t e c t i o n of the accepting banks and then f o r the s e c u r i t y and p r o t e c t i o n of the Federal Farm Board* t 16# Hie agreement i s s u b j e c t to amendment "by the concurrence of the t r u s t e e s , the S t a b i l i z a t i o n Corporation, the Federal Farm Board, and the accepting banks which a t the time of such amendment have accepted a m a j o r i t y or more i n f a c e value of the acceptances then outstanding f o r which funds have not been f u r n i s h e d to such accepting banks by the S t a b i l i z a t i o n Corporation* above i s not intended as a complete statement of the p r o v i s i o n s of the t e n t a t i v e d r a f t of the agreement enclosed i n your l e t t e r ; but i t i n d i c a t e s the Federal Reserve Board's understanding as to the i - 4— 144 X-6697-1 e s s e n t i a l f e a t u r e s of the plan under which proposed acceptances a r e to be issued. While i t i s not so s t a t e d i n the agreement, i t i s assumed f o r the purpose of t h i s r u l i n g t h a t (a) a l l warehouse r e c e i p t s pledged with the t r u s t e e s pursuant to t h i s agreement w i l l "be i s s u e d by warehouses i n dependent of t h e Grain S t a b i l i z a t i o n Corporation w i t h i n the meaning and i n t e n t of the Regulations and r u l i n g s of the Federal Reserve Board, and (b) t h a t the custodian c e r t i f i c a t e s i s s u e d by the Board of Trade of the City of Chicago which a r e pledged with the t r u s t e e s e i t h e r a r e i n l e g a l e f f e c t warehouse r e c e i p t s issued by independent warehousemen or a r e otherwise s u f f i c i e n t to v e s t i n the holders v a l i d t i t l e to the g r a i n f o r which they a r e i s s u e d or a v a l i d l i e n thereon good and e n f o r c e a b l e as a g a i n s t a l l other p a r t i e s . I n the f i r s t clause of the preamble of the agreement i t i s s t a t e d t h a t the d r a f t s w i l l be payable not more than n i n e t y days a f t e r s i g h t ; but i n A r t i c l e 1 i t i s s t a t e d t h a t the d r a f t s so accepted s h a l l have m a t u r i t i e s not exceeding s i x months a f t e r s i g h t . The Federal Reserve Board u n d e r s t a n d s , however, and assumes f o r the purpose of t h i s r u l i n g , t h a t no d r a f t s w i l l be accepted with m a t u r i t i e s i n excess of n i n e t y days. This i s not intended as a r u l i n g to the e f f e c t t h a t d r a f t s with m a t u r i t i e s i n excess of n i n e t y days would be i n e l i g i b l e f o r r e d i s c o u n t by Federal r e s e r v e banks, but i s intended only to avoid for the p r e s e n t the n e c e s s i t y of making any r u l i n g on the a p p a r e n t l y academic question whether d r a f t s having a m a t u r i t y i n excess of n i n e t y days would be e l i g i b l e f o r rediscount. One purpose of the requirement of the Federal Reserve Act t h a t , i n order to be e l i g i b l e f o r acceptance by member banks or f o r r e d i s c o u n t by Federal r e s e r v e banks, d r a f t s growing out of t h e storage of r e a d i l y marketable s t a p l e s must be secured a t the time of acceptance by warehouse r e c e i p t s or other such documents conveying or s e c u r i n g t i t l e i s to enable the a c c e p t i n g banks e f f e c t i v e l y to r e q u i r e t h a t they be provided with funds with which to pay the acceptances on or b e f o r e t h e i r m a t u r i t y ; and the Board's r e g u l a t i o n s r e q u i r e t h a t the acceptor remain secured throughout the l i f e of the acceptance. The p r o v i s i o n contained i n A r t i c l e 13 of t h e t e n t a t i v e d r a f t of the agreement s u b s t a n t i a l l y to the e f f e c t t h a t the t r u s t e e s cannot be r e q u i r e d to s e l l any of the c o l l a t e r a l i n order to provide funds to pay maturing acceptances except a t the r e q u e s t of banks which have accepted 25$ or more of the t o t a l volume of acceptances i s s u e d pursuant to the agreement, i s i n c o n s i s t e n t with these p r o v i s i o n s of the law and of the B o a r d ' s r e g u l a t i o n s . The Board i s of the opinion, t h e r e f o r e , t h a t th e s e acceptances should not be considered e l i g i b l e for r e d i s c o u n t by Federal r e s e r v e banks u n l e s s t h i s p r o v i s i o n of the agreement i s modified so as to provide i n substance t h a t , upon the f a i l u r e of the S t a b i l i z a t i o n Corporation to d e p o s i t with the corporate t r u s t e e funds s u f f i c i e n t to pay maturing acceptances a t m a t u r i t y , the accepting bank s h a l l have the r i g h t , without the concurrence of any other bank, to r e q u i r e t h a t s u f f i c i e n t coll a t e r a l be s o l d to provide funds adequate f o r t h i s purpose and t h a t i t shall bo the duty of the corporate t r u s t e e immediately to s e l l s u f f i c i e n t c o l l a t e r a l and to pay over to the bank r e q u e s t i n g i t a s u f f i c i e n t amount of X-6697-b - 5 — the proceeds thereof to enable i t to meet any and a l l matured acceptances Issued "by i t pursuant to t h i s agreement. The Board understands t h a t i t w i l l "be p o s s i b l e to modify the agreement to t h i s e x t e n t and i s r u l i n g upon the question p r e s e n t e d with the understanding t h a t the agreement w i l l be so modified. I f the agreement i s modified i n the manner suggested i n tho preceding paragraph, and i f bankers' acceptances a r c i s s u e d , secured, and drawn i n f u l l compliance with the Federal Reserve Board's understanding of the proposed p l a n and the f a c t s p e r t a i n i n g t h e r e t o as s t a t e d i n t h i s l e t t e r , the Federal Reserve Board i s of the opinion t h a t such acceptances w i l l be e l i g i b l e f o r rediscount by Federal r e s e r v e banks when they have m a t u r i t i e s not i n excess of n i n e t y days and when they a r e o f f e r e d f o r r e d i s c o u n t i n the u s u a l manner with the endorsement of a member bank of the Federal Reserve System other than the accepting bank. While such acceptances w i l l be deemed e l i g i b l e f o r r e d i s c o u n t by Federal r e s e r v e banks, i t should be c l e a r l y understood t h a t the Fede r a l r e s e r v e banks a r e not required to rediscount them but may d e c l i n e to do so i n the e x e r c i s e of t h e i r banking d i s c r e t i o n . In view of the l a r g e volume of acceptances proposed to be i s s u e d , t h e r e f o r e , i t i s suggested t h a t i t would be advisable to consult w i t h , and a s c e r t a i n the a t t i t u d e o f , the Federal reserve banks to which i t i s expected t h a t these acceptances w i l l be o f f e r e d f o r r e d i s c o u n t , b e f o r e the proposed p l a n i s d e f i n i t e l y adopted. In your l e t t e r of August 29th i t i s s t a t e d t h a t an i d e n t i c a l arrangement, except a s to c e r t a i n p r o v i s i o n s as to hedging wheat, w i l l be entered i n t o by the Farmers National Grain Corporation; but you do not s p e c i f i c a l l y r e q u e s t a r u l i n g a t t h i s time with r e f e r e n c e to a c c e p t ances growing out of t h a t arrangement. The Federal Reserve Board, howe v e r , w i l l be g l a d to r u l e upon the e l i g i b i l i t y of such acceptances upon being informed as to the n a t u r e of the p r o v i s i o n s regarding the hedging of wheat and as to any o t h e r r e s p e c t s i n which t h a t agreement as f i n a l l y prepared may d i f f e r from tho agreement prepared on b e h a l f of the Grain S t a b i l i z a t i o n Corporation. By Order of tho Federal Reserve Board. Very t r u l y yours, E. M. McClelland, A s s i s t a n t Secretary,
@FedFRASER