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.... r . . r .. L- _ ,_; _; ~--1 FEDERAL RESERVE BOARD WASHINGTON X-3175 July 27. 1921. SUBJECT; Banksrs• acceptances drawn by cooperative rrarksting associations against warehouse receipts covering agricultural corr~.oditics Dear Sir: For your information, there is enclosed herewith a copy of a ruling reeently issued by the Federal Reserve Board with respect to bankers' acceptances drawn by cooperative marketing associations against warehouse receipts covering non-perishable agricultural commodities.· Yours very truly, (Enclosure) .. 'ID GOVERNORS AND F. R. AGENTS • G o v e r n o r. r- ,-. C" ::_ ..A::; X-3l75a July 20, 1921. SUBJECT: Bankers' acceptances drawn by cooperative marketing associations against warehouse receipts covering agricultural corr~odities. Dear Sir; The Federal Reserve Board has considered the ouestion presented by you as to the eligiblli ty of bankers' acceptances drawn by cooperative marketing associations against warehouse receipts covering non-perishable agricultural comnodi ties. Tte Board understands the facts upon w~ich your request for a ruling is predicated to be as follows: Each association is a corporation organized without capital, and its members consist exclusively of producers of the particular ,crop which the association is organized to market. Each producert as a condition of membership in the association, signs a standar1 form of agreement upder the tern1s of which he agrees to sell and deliver his cron to the association. This agreement provides in substan~e that title to the commodity so delivered shall pass to the assoclation at the tin.c of delivery, that the transaction between the producer and the association is a sale, and ti:at the association shall have absolute control over the comrr.odities celiver<?d with the unqualified right to re-sell or hypothecate. The price at which the corrmodi ty is sold by the producer to the association is not fixed at the time of that sale, but the agreerr.ent provides trat all of the commodities delivered to the association shall be pooled according to grades and re-sold, and t"lJe association agrees to -pay to each producer the average price realiaed by the association upon the re-sale of the commodity in the·pool to which the producer has contributed, less a pronortionate part of the association's ~xpenses. Th~ corrmodities are to be stored in warehouse~s in·.lep:mucnt of th8 association and negotiable warehouse receipts is~lJ.Gd th-:Jr.ofor. l'lP question -presented to the Federal Reserve Board for a ruling is wheth(:!r drafts drawn by such associations against these warehouse receipts will be eligible for acceptance by member bariks and whether after acceptance the drafts will be eligible for rediscount by Federal Reserve Banks. Section •• 13 of the Federal Reserve Act provides that: ".Any Federal Reserve Bank rr.ay discount acceptances of the kinds hereinafter described, which have a ~.aturity at the time of discount of not more than three months sight, exclusive of days of grace. which are endQrsed by at least one member bank." -2- X-3175a "Any member bank may accept drafts ot·bills of exchange drawn upon it having not more than six months sight to run, exclusive of days of grace, * * * which grow out of transactions involving the domestic shipment of goods, provided ship~ing documents conveying or securing title are attached at the time of acceptance; or which are secured at the time of acceptance by warehouse receipt or other such document conveying or securing title covering readily marketable staples." The Federal Reserve Board is of the op1n1on ttat a draft drawn by an association operc.ting under the plan described above is eligible for acceptance by msm~er banks when secured at the time of acceptance by a warehouse receint of t:1e kind referred to in tr.P. above .statement of facts, and that after acceptance such a draft . will be eligi!Jle. for rediscount 1)Y Federal Reserve Batiks provid3d it complies in all respGcts with the regulations of the Federal Reserve Board. The law requires that a warehouse receipt, in order to be the basis of an eligible tankers' acceptance, stall be a document "conveying or securing title covering readily rrarketable staples." There is no question but that the warehouse receipts described in the above statement of facts comply with this requirement of the law, since according to that statement, they are negotiatle warehousG receipts covering readily marketable staples, the absolute and unqualified ownership of which has been conveyed to the association. The Board has not, however, undertaken to examine t~e forrr1s of agreements entered into between the associations in cuestion and their members but assumes that these agreements. have the legal effect which they are stated to have. If, · in a particular case, any ~uestion should arise as to the proper construction of t:tese or other agreements, that question would be prin:.llrily fbr the determiru...tion of the banks u.gainst which the dr:...fts :...re dr.:...wn nnd the Federal Reserve Bz:~.nks to which the ncceptc..nce s nre offered for rediscount. In your letter you st<lte that 11 The accept ....nces will probaoly be ninety duy acceptances with an ~greement for one or possibly two renewuls, depending upon the cor:nn;odity." A member bi.lnk cannot <lccept an original or renew~l draft unless it is drawn in corrmliance witT the terms of Section 13 of the Federal Reserve Act ~nd conseQuently ~ member bank cannot agree unconditionally to accept a renew~.l draft but can only agree to accept in the event that the renewal draft is eligible for acceptance under tre terms of the law. Furthermore, tte Bo:.:.rd has ruled thc..t w:tere it is kno;vn that a six months credit is reQtlirad it is irnpro"Oer to dri.lW two ninety d..J.y acceptances in order to tr~e them at all ~times eligible for reciiscount by Federal Reserve Banks, and that in such a case the orie;inal acceptance should be drawn for the full six months y.,eriod. If, hcwever, at tre time the original acceptance is drawn it is rec.sonable to e:.ntici:pate that the transaction will be liquidated within a period of three . ) ") t:""·! ·"',I,..-.. '-.." . ,__ 1 -3- X-3175a. months, a. ninety day acceptance may be issued in the first instance, and u renewal acceptance may be issued at the end of the oinety day period, if, because of abnormal or unforseen developments, li~uida tion has not been completed at tbat time. The Board understands that it is reasonable to anticipate that the sale and liquidation of tJ::e corrmodities held by the assoc5.~Uons at any given tin;e will be completed within ninety days from that time. If thjs is so, there is no objection to tte issuance of ninety day acceptances in the first instance. There 1 s enclosed herewith a ccpy of the Board's regulations.Section B of Regulation A deals with the el) gibil:i. ty of bamersr acceptances for rediscount by Fecie:r::~.l pc_,,~,.. cr, '3'.1rks and your particular attention is directed to subdiv:!.sion (b)(5) of that section. This subdivision relates to acceptances age..~ 1;;0 v.a:::-ehrc'~se receipts and other simile.r documents covering readily rr.e.f.r;eta~le staples, and prescribes under what circumstances it is proper ;.';:!: the accepting bank tore· lease the origine~ documents. It should be understood, of course, that a Federal Reserve Batik is under no ooligation to rediscoU+~t ~n acceptance offered to it, even though the acceptance is technically eligible for rediscount. It is the function of a Federal Reserve Bank, when eligible pa.per is offered to it, to determine in the exercise of its sound discretion whether the paper is desirable as an investment for the barik. Yours very truly, (Signed) W. P. G. HARDING, G o v e r n or • ..
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