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FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE T O T H E FEDERAL RESERVE BOARD 2-6415 November 8, 1929. SUBJECTt Soling of the Federal Reserve Board permitting more l i b e r a l use of Domestic Bankers' Acceptances. Dear S i r : Thp. General Committee on Bankers' Acceptances at i t s meeting in March, 1926, adopted a report containing a statement of broad general principles regarding correct practices in the granting of domestic bankers' acceptance credits, and recommending that the Federal Reserve Board make more l i b e r a l railings with reference to the use of domestic acceptance % in certain specified respects. This report was considered and approved by the Governors' Conference of March, 1926. The Federal Reserve Board acted upon the matter in June, 1928, and approved the report in so f a r as i t contained a statement of the broad general principles regarding correct practices in the granting of domest i c bankers' acceptance credits, but with the understanding that such approval should not be construed as revoking or qualifying any of the Board's existing rulings. The Board stated at that time that i f the broadened use of bankers' acceptances was found to be hampered by the existing rulings, i t would consider the question of revoking or qualifying such rulings provided a s t a t e ment of specific f a c t s arising in actual cases was submitted. (See X-6066-a). At the request of the Governors' Conference, there have now been submitted to the Board six specific examples of transactions which i t i s claimed may not be financed by bankers' acceptances under the existing rulings of the Board. These are submitted as i l l u s t r a t i v e of the cases in which i t has been recommended that acceptance credits be permitted. Five of these six examples have to do with the period of time which should be permitted in the case of a bankers' acceptance drawn by the purchaser^ of goods to finance their domestic shipment, while the sixth example has to do with the proposal to permit bankers' acceptances against readily marketable staples placed with an independent converter or processor who gives a proper receipt therefor. The following f a c t s may be regarded as typical of the f a c t s of the f i r s t f i r e specific examples submitted: A firm i n Hew York City purchases certain staples from a s e l l e r in a western X-6415 —2— c i t y who ships the same and draws a sight draft on the purchaser in New York' with b i l l of lading attached. This d r a f t and b i l l of lading attached are sent in the customary way to a bank in New York, Bank A, designated by the purchaser. The l a t t e r then draws a 90 day b i l l on Bank A, which i s accepted by the bank, having at the time in i t s possession the b i l l of lading covering the staples in process of shipment. The acceptance i s then discounted by the purchaser and the proceeds used to pay the sight d r a f t and to obtain the release of the b i l l of lading. I t does not require 90 days for the completion of the shipment of goods, only a r e l a t i v e l y short time being necessary for t h i s purpose. I t i s recommended to the Federal Reserve Board that the b i l l drawn by the purchaser be considered e l i g i b l e f o r acceptance by Bank A when i t has a maturity consistent with the usual and customary credit time prevailing in the particular business. The Federal Reserve Board has given careful consideration to t h i s recommendation in the l i g h t of the report submitted by the General Committee on Bankers' Acceptances and with regard for i t s previous rulings on similar questions. In accordance with i t s ruling of June, 1928, approving the general principles l a i d down in the report of the General Committee on Bankers' Acceptances, the Board now rules that a draft drawn by the purchaser of goods in accordance with the typical statement of f a c t s assumed above, is eligible for acceptance by a member bank when i t has a maturity consistent with the usual and customary credit time prevailing i n the particular business, and provided that a l l other relevant requirements of the law and of the Board's Regulations are complied iri'th. Under the f a c t s stated the accepting bank has possession of the b i l l of lading at the time of the acceptance of the d r a f t drawn upon i t , and t h i s i s believed to be a substantial compliance with the requirement of the law that shipping documents conveying or securing t i t l e be attached a t the time of acceptance. From a p r a c t i c a l standpoint i t enables the bank to r e t a i n a more e f f e c t i v e l i e n upon the release of the goods to the purchaser on a trust receipt. The ruling of the Federal Reserve Board set f o r t h above may be i n some respects inconsistent with previous rulings of the Board to the e f f e c t that bankers' acceptance credits should not be usdd for the purpose of furnishing working c a p i t a l . (See for example, 1920 Federal Reserve Bulletin, page 1301; 1923 Federal Reserve Bulletin, page 158). Such previous rulings of the Board with regard to working capital may accordingly be regarded as superseded or q u a l i f i e d by the ruling contained herein to the extent of any such inconsistencies, but no f u r t h e r . Xr6415 —3— The Federal Reserve Board, has not taken action on the proposal to permit "bankers' acceptances against readily marketable staples placed with an independent converter or processer who gives a proper receipt therefor as i l l u s t r a t e d by the f a c t s of the sixth specific example submitted to the Board. By order of the Federal Reserve Board. Very truly yours, E. M. McClelland, Assistant Secretary. TO GOVERNORS OF ALL F. R. BANKS
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