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11_50 W. P. G. HARDING •. GoVERNOR ALBERT STRAUSS. VIti GoVIRNOI ADOLPH C. MILLER CHARLES S. HAMLIN EX-OFFICIO MKMBKRI CARTER GLASS SECRET.,R';\o,-rHI TREASURY CHAfiiiAR J. A. BRODERICK. FEDERAL RESERVE BOARD JOHN SKELTON WILLIAMS COIII"TIIOLUR OP TH! CURI!IIENCY SKRIT~IY L. C. ADELSON. ASSISTANT SICRITARY W. T. CHAPMAN. ASSISTANT SICRITART W. M. IMLAY. FISCAL AGENT WASHINGTON ADDRU8 REPLY TO FED£RAL RESERVE BOARD . September 19 J 1918. X-1213 SUBJECT: Redisco~mts between Federal ReserJe Panks. Dear Sir~ A:':te;::- cc.refully considering the sever.l.l suggested plans for lessening the cls~·ical WC~rk connected with , the han<iling of red.:..scounts between Federal Reserve Banks 1 the Board has concluded that no rraterial change should be made at this time in present methods, which, it is understood, closely follow the procedure adopted in handling discounts for memoer banks. An outline of the clerical work connected with the handling ot rediscounts between Federal Reserve Banks, as provided by the Boardts ciL cular letter X-212 of June 15,1917, and the accomprtnying memoranda,_ is given belcw· for the purpose of simplifying and rr.aking as uniform as practicable the methods used by all Federal Reserve Banks. ~vo rr~thods are outlined whereby Reserve Banks desiring accommodation for a period short of the actual maturity of the rediscounted paper rray repurchase such p.aper from the lending Reserve .D.:ink before rr.aturity by rr.aking the necessary transfer of funds through the Gold Settlement Fund. (1) MATURITIES AND CLASSES OF PAPER REDISCOUNTED: When a Federal.. Reserve Bank rediscounts paper with another bank it is necessary for the discounting bank to furnish the rediscounting bank and the Federal Reserve Board with a statement on schedule BD-4 or 7, showing the identification number,. narre of each rraker 1 class of paper rediscounted as called for by X-1213 r .. ' form 38_. and particularly the amount of each item sec1.1red by· govenur.ent obligat:l.oa'.J., also duo data~ face amou~t 15:1 an<! rate at which rediscounted. It will no·; be necessary to give the naxr.es of endorsers on schedules BD-4 or 7 in reporting rediscounts. Paper thus rediscoUnted will be carried on the .'tookd. of the lending bank in the sam3 nannar as paper discounted for tt.~t:nber bankR~ It will be necessa.:ry also to telegraph the lending bank sufficient data ~egarding maturities of paper to enable it to furnish the Board an m.turity distribution of its bill ~oldings of ment. l'he total amount the following Friday r~discoun~ed wi~h the for the Board's weekly state- paper secured by government obligations ~so .• .· . ~~ould be telegraphed. · (2) ENDORSDf.:BT: Rediscounted paper rmst be endorsed .'by the borrowing ~nk. Rubber stamp endorsement is recoumended and may be made in blank or substantially as below: Pay to the order of any Federal Beserve Bank or Federal Reserve Agent. FEDERAL RESERVE BANK OF BOOTON c.q*Bullen, Cashier (3) UIEARHED DISOOUNT:Rediscounted pape~ should be classifie~ on schedules BD-4 or 7. in accordance with naturity dates .. The ·follOWing hypoth~tical example is given to illustrate a simple method of . co~puting. • discount: Number. of days to · us.tur.i ty · 37 38 Face amoUX).t of all paper .having maturity Shown in preceding column. $1,000,000 1.,50Q,OOO 1 1 000I '()QO Rate at which discounted. . 4-3/4"' .. . Unearned discciunt · .. $4aal.94 7~520.83 48 2~000,000 5,2'17. '78 12, 6,6. 6·'1 54 550,000 450.000 3,918·. 75 3.325.00 $6,5QO,OOO $37,590.97 40: .56 . Net credit (face amount less unearned discount)' $6,462,409.03 . . X-1213- • 1_52 The discounting bank should credit gold settlement fund - sus- pense ac :;ount on f or:n 34 for the account of the borrowi.."lg bank with the face amount of the paper with a later adjustment for unearned discount. In case it is necessary to protect the reserves of the borrowing bank, an irrmediate transfer througr. the gold settlen;ent fund rray be effected. (4) RELEASE FOR Pl\Y:!v.IENT: Rediscounted paper rray be rebated or taken up by the borrowing bank befC're rraturity upon payment through th~ gold settlement ftmd of the face amount of the paper less the amount of unearned discount. Unearned discount on notes taken up bafore maturity nay be calculated in the saree rranner as indicated in paragraph 3. Suppose, for example, that all paper rediscounted as above was taken up at the expiration of 35 days from the time it was rediscounted, then unearned discount would be figured as Number of days to naturity foll~ns: Face amount of all paper having naturity shown in previous column Rate at which discounted Unearned discount .$ _ __ $l,OOO,OOC 2 3 1,500,000 1,000,000 5 z,ooo,ooo 13- 19 21 550,000 450,000 Total $_ __ $6~500,000 Net credit (face amount less unearned discount) $. ~-------------------- (5) RELEASE FOR COLLECTION: Rediscounted paper released to the borrowing bank for'collection should be endorsed (rubber stamp) by the Federal Reserve Agent of the borrowing bank) substantially as below: Pay to the order of the Federal Reserve Bank of Boston for collection for the account of F.-H. CURTISS FEDERAL RESERVE AGENT. •• X-1213 When this endorseuent is used, written instructions substantially as fallows should a.ccompany the delivery of the paper to the bank: (Date) Federal Re3e!"Ve Bank of _______ Dear Sir: I hand you herewith for collection and credit of the Federal Reserve Bank of_ fer the account of the Federal Reserve Agent at _ _ _ _ _ _ _ _the foJLII[ing corrmercial paper~ which has been held in trust for the Federal Reserve Agent named. Please advise the Federal Reserve Bank to this effect. W.at:urity Amount Maturity Amount Very truly yours¥ Federal Reserve Agent. Receipt of the above described commercial paper is hereby acknowledged. Assistart Cashier .. -------------~~------------------------------------------------------------------ 'l'llhen payrr.ent is received by the borrovving Federal Reserve Bank for rediscounted paper collected by it,· proper transfer through the Gold Settlement Fund should be made to the credit of the lending Federal Reserve Bank with appropriate advice to the Federal Reserve Agent. (6) BORROWING FOR FIXED PERIODS: Under the Federal Reserve Acti any accorrmodation extended by one Federal Reserve Bank t< another must be in the form of rediscounts, and therefore borrowing for fixed periods on X-1213 -5- -... promissory or collateral notes would require an amendment to the Federal Reserve Act. In case, however, a Federal Reserve Bank is reasonably sure that it will not :need :J..ccozrrr.odation for the entire period for which paper under rediscount has to run, an agreement zray be entered into, whereby., if the accorrrr.odation is desired for say 15~30 or 45 days, discount way be calculated for the period for which the accorrmodation is desired. Under this plan all paper zrust have a rraturity of at least or beyond the period for which acconn:odation is required. \Nhile the calculation of unearned discount for fixed periods will be permitted, the lending Federal Reserve Bank rr.ust classify the paper on form 38 according to the actual zraturities and without regard to the period for which discount has been figured. Paper released upon payment by the borrowing bank will a~in be taken into its bill holdings. No report covering this latter transaction need be furnished to the Federal Reserve Board. REDISCOUNTS UHDER PARAGRAPH 6. Bank 11 .A 11 arranges to rediscount $10,000,000 of corrn:ercial paper with bank ·"B" for 30 days at 4-3/4%. (Face amount of paper $10,004.,372. Discount $ .) Debit and credit entries zray be made as below: .... X-1213 BANK "A" At time of Debits Gold Settlement FUnd Unearned discount redisq~t: Credits $ ___ Bills discounted, members $_ _ __ --- $ At expiration of 30 days: Bills discounted# members BANK 11 B" At Debits Bills discounted,other F .R. banks Gold Settlement Fund $_ __ tirr~ $_ __ vf rediscount: $_ _ __ Credits Gold Settlement Fund Unearned discount $____ $____ At expiration of 30 days: Gold Settlement Fund $____ Bills discounted 1 other F.R. banks $_ __ , Debit and credit entries r.r.ade by both bank "A" and bank "B'' at the expiration of the 30-day period will be reduced by amounts rebated, if any. Any necessary adjustment in unearned discount account rray be made at the time the periodic proof is taken to determine whether the amount held in the account ·is sufficient to cover interest unearned on discounted paper o;r at the ~xpiration o'f the period for which the paper was rediscounted. Yours very truly# Secretary. Approved; Governor. 1.55
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