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FED ER A L RESER VE BANK OF NEW YORK f Circular No. 7 3 2 1 1 L January 15, 1974 J Corrected Text of Voluntary Foreign Credit Restraint Guidelines Effective January 1, 1974 To A ll Banks and Other Financial In stitution s in the Second Federal R eserve D is tr ic t: Our Circular No. 7310, dated December 28, 1973, contained the text of revised Voluntary Foreign Credit Restraint Guidelines, effective January 1, 1974, issued by the Board of Governors of the Federal Reserve System. Printed below is the corrected text of those guidelines, which supersedes the text of the guide lines contained in Circular No. 7310. Our Foreign Department (Telephone No. 212-791-5694 or 212-791-5690) will be pleased to con fer with you on any questions regarding the guidelines. Questions on the reports to be filed under the guidelines should be directed to our Balance of Payments Division (Telephone No. 212-791-5557). Additional copies of this circular will be furnished upon request. A lfred H a y e s , President. Federal Reserve Foreign Credit Restraint Guidelines * I. G E N E R A L PURPOSE In order to help to strengthen the U .S . balance o f payments, U .S . financial institutions are asked to restrain their foreig n credit and investments, except credit that finances U .S . exports. W ith in these re straints, they are asked to give priority to' m eeting the credit needs o f developing countries. II. A. BANKS Ceilings for Nonexport Financing 1. Basic restraint on nonexport financing A bank is requested not to hold claims on foreigners or other foreign assets in excess o f its ceiling. 2. Banks previously with ceilings A bank that had a ceiling under the guidelines in fo rce Decem ber 31, 1973 (hereinafter, “ the previous guidelines” ) shall have a ceiling equal to the greater o f : a. 104 per cent o f its ceiling under the previous guidelines, o r b. $10,000,000. 3. Banks previously without ceilings a. A bank that did not have a ceiling under the previous guidelines may adopt a ceiling equal to ( a ) 2 per cent o f its total assets, as o f Decem ber 31, 1970 o r ( b ) $10,000,000, w hichever is the larger. A bank established subsequent to Decem ber 31, 1973 may adopt ♦ N O T E : The present version o f the guidelines is based on the text o f the previous guidelines, issued Novem ber 11, 1971, and amended M arch 9, N ovem ber 7, and Decem ber 1, 1972, and July 19 and Decem ber 26, 1973. It replaces a consolidated text issued upon adoption o f the Decem ber 26, 1973 amendments. C orporation or o f an A greem ent Corporation may count the outstanding amount o f its borrow ings from foreigners as offsets to its claims on foreigners and to its other foreign assets, provided those borrow ings are o f an original maturity o f 3 years or more. Such bor row ings w ould include debentures, prom issory notes, or other debt obligations o f the dom estic subsidiary to a foreigner. T he amount o f the offset at any time would be equal to the amount o f the outstandings after de ducting ( i ) any repayments o f principal and ( i i ) in the case o f convertible debt issues, any conversions. T his offsetting principle may be used to reduce the value o f foreign assets o f the subsidiary in com puting the value o f foreign assets to be consolidated fo r re porting purposes with those o f the parent institution; any excess o f outstanding borrow ings o f the subsidiary over foreign assets o f the subsidiary may not be used to reduce the reportable value o f foreign assets o f the parent institution. a ceiling equal to 2 per cent o f its total assets, month b y month. A bank established between Decem ber 31, 1970 and D ecem ber 31, 1973 m ay adopt a ceiling equal to 2 per cent o f its total assets as o f the end o f the first year o f operation. b. T he purpose o f making a ceiling available to a bank that did not have one is to enable the bank to engage directly in foreign financing. T he ceiling should not be used to purchase from other U .S . financial insti tutions loans that the latter have already extended to foreign ers. T h e ceiling should be used on ly where the bank ( a ) takes the initiative to arrange credit that it extends, ( b ) assumes the principal burden o f ju d gin g the creditworthiness o f the borrow er, and ( c ) bears responsibility fo r the administrative details concerning the extension and the repayment o f the credit. c. B e fo re adopting a ceiling under this subpara graph, a bank should consult with the Federal R eserve Bank in the district in which it is located to apprise itself o f the guidelines and reporting requirements and to n o tify the Federal R eserve Bank o f the amount o f its ceiling. 4. 6. F o r the are those submitted Decem ber Sales o f foreign assets a. Sales without recourse. Banks are requested not to sell foreign assets that are subject to the guideline ceilings, without recourse, to a U .S . resident other than a financial institution participating in the Federal R e serve F oreign Credit Restraint P rogram or other than a direct investor subject to the F oreign Direct Investment P rogram administered by the Departm ent o f Com m erce. 7. U.S. agencies and branches o f f oreign banks b. A U .S . agency or branch o f a foreign bank hold ing m ore than $10,000,000 in foreign assets o f types subject to restraint ( “ covered assets” ) should not incur a “ net foreign position ” greater than its “ base net foreign position,” as explained in “ d ” below. c. The “ base net foreign position ” is the value resulting fro m subtracting from “ covered assets,” as o f June 30, 1973, 96 per cent o f total liabilities to non-U .S . residents as o f June 30, 1973. H ow ever, fo r an agency or branch that started operating a fter June 30, 1973, the “ base net foreign position” shall be zero. Foreign borrowings In principle, the restraints under these guidelines are im posed on gross foreign assets, including gross claims on foreigners. H ow ever, certain liabilities to foreigners m ay be counted as offsets to foreign assets, provided that the liabilities arise from borrow in gs abroad that substitute fo r direct investment capital outflow from the U nited States. Such offsetting may be done in the m anner described below. d. A n agency or branch with a “ base net foreign position” that showed an excess o f the respective liabilities over “ covered assets” should maintain at least an equal excess o f total foreign liabilities over “ covered assets;” an agency or branch with a “ base net foreign position” that showed an excess o f “ covered assets” over the respective liabilities should not hold a greater excess o f “ covered assets” over total foreign liabilities. a. Banks, bank holding companies, Edge A ct Cor porations, and Agreem ent Corporations. A bank, a bank holding com pany, an “ E dge A c t” C orporation, or an “ A greem en t” C orporation may not count its b o rro w ings from , or its other liabilities to, foreigners as offsets to its claims on foreigners and other foreign assets. e. F or the purpose o f calculating liabilities under ( a ) through ( d ) , residents o f P uerto R ico, the V irgin Islands and other territories and possessions included in the definition o f the United States fo r T reasury F oreign E xchange R eports should be treated as residents o f the U nited States. b. Domestic subsidiaries. A dom estically chartered nonbank subsidiary ( f o r exam ple, a so-called Delaware su bsidiary) o f a bank holding com pany, o f an E dge A ct purpose o f calculating the ceiling, total assets shown in the Official R eport o f C ondition to the relevant supervisory agency as o f 31, 1970. a. A n agency or branch o f a foreig n bank will be acting in accordance with the spirit o f the guidelines if its holdings o f foreign assets o f types subject to restraint do not exceed $10,000,000 and if its foreign lending and investments otherwise correspond to the provisions o f the guidelines that U .S . banks are requested to observe. b. Sales with recourse. A bank that sells a foreign asset that is subject to its ceiling, with recourse, to a U .S . resident should continue to report that asset under its ceiling, unless the U .S . resident is a financial insti tution participating in the Federal R eserve F oreign Credit Restraint P rogram or is a direct investor subject to the F oreign D irect Investment Program administered by the Departm ent o f Com m erce. 5. Total assets 2 B. D. Exclusions 1. Applicability to banks and bank-related financial institutions E xport credits 1. a. Basic exemption. E x p o rt credits, defined in Part IV -3 , are exem pted from restraint under these guidelines. These include credits o f the type previously subject to General and E x p o rt T erm -L oa n Ceilings. Banks should maintain adequate inform ation and oth er wise take all reasonable measures to provide assurance that credits meet the definition b efore treating them as exempted. General T h e guidelines are applicable to all U .S . banks (ex clu siv e o f trust departments o f com m ercial banks, which should fo llo w the guidelines fo r nonbank financial institutions in Part I I I ) , to their dom estically chartered subsidiaries at any level, and to bank holding com panies and their dom estically chartered subsidiaries at any level, except where those subsidiaries are covered by other U .S . capital restraint program s as noted in b. Acquisition o f previous foreign export credits. subparagraph 3b and to U .S . agencies and branches o f foreign banks. T he purpose o f the exem ption fo r exp ort credits is to ensure that, as o f N ovem ber 11, 1971, no restraint is applied to the granting o f credit that will finance U .S . ' 2. Edge A ct and A greem ent Corporations exports. A bank should report under its ceiling any outstanding loans that it purchases or repurchases from a. Policy o f limiting aggregate ceilings. It is a foreigner, including its ow n branch, if that loan fi intended that the establishment o f new E dge A ct C or nanced U .S . exports shipped (o r financed U .S . services porations or A greem ent C orporations not result in the perform ed abroad ) p rior to N ovem ber 11, 1971. expansion o f aggregate ceilings under these guidelines. 2. b. One-bank-owned corporations. A n E dge A ct or A greem ent C orporation that is ow n ed by one bank and that, under the previous guidelines, had a ceiling separate from that o f its parent bank may continue to have a ceiling separate fro m that o f its parent or may com bine its ceiling with that o f its parent. Canada T h e extension o f credit to residents o f Canada or other acquisition o f Canadian assets is exem pted from restraint under these guidelines. 3. i) T h e ceiling to w hich it w ould be entitled if it did not com bine w ould be calculated as under Section A -2 fo r the corporation as a separate entity. Securities o f certain international institutions A ll direct obligations o f international institutions o f which the U nited States is a mem ber are exem pted from a bank’ s ceiling. 4. ii) A n E dge A ct or A greem ent C orporation that is ow ned by one bank and that was established after M arch 3, 1965, should share the ceiling o f its parent bank. Insurance and guaranty settlements o f O P IC c. A foreign asset acquired directly or through pur chase o f a participation in a pool o f foreign assets, provided the foreign asset o r the participation is covered by a payment guarantee issued by the U .S . Overseas Private Investment C orporation (O P I C ) under its insurance and guaranty claims settlement au thority, is exem pted from an institution’s ceiling. C. i) Separate ceilings. A n E dge A ct or A greem ent C orporation that is ow ned by m ore than one bank o r by a multibank holding com pany will have a ceiling sepa rate from that o f its parent and fro m those o f the banks in its parent holding com pany. T h e corp oration ’s ceil ing is to be determ ined in accordance with Section A -2 or, as appropriate, A -3 . ii) Transfer o f parent’s ceiling. T o acquire or to increase a ceiling, such an E dge A ct or A greem en t C o r poration may receive from on e or m ore o f its parent banks (in clu din g banks o f its parent holding com p a n y) a share o f the ceilings o f the parent o r parents. O n ce tran sferred to the corporation, the ceiling should not be tran sferred in whole o r in part back to the parent o r parents, except to meet unforeseen and overriding developm ents. I f any such exceptional need fo r trans fer should arise, the corporation and its parent or parents should consult in advance with the Federal R eserve Banks in their respective districts. Banks over ceilings Banks are expected to observe their ceilings throughout the m onthly reporting periods. Banks are not expected routinely to sell foreign assets immediately p rior to the reporting date or otherwise engage in “ w indow dressin g” activities. A bank whose foreign assets are in excess o f its ceiling or otherw ise conflict with these restraints and which does not show im provem ent will be expected periodically to discuss with the Federal R eserve Bank in its district the steps it has taken and that it proposes to take to bring the amount o f its foreign assets into con form ity with these guidelines. Multibank-owned corporations d. Domestic subsidiaries o f Edge A ct and A g ree ment Corporations. T h e foreign assets o f dom estically chartered subsidiaries o f 3 E dge A ct and A greem ent C orporation s (n et o f foreig n b orrow in gs offset under S ection A -5 b , a b ov e) should be consolidated with the foreig n assets o f the parent corporation fo r the p u r poses o f the guidelines. 3. E. 1. Bank holding companies 2. b. Holding companies with one bank. A h old ing com pany with one bank, which bank subsidiary has a ceiling under these guidelines, together with that bank subsidiary and any nonbank subsidiary should report on a consolidated basis. H ow ever, the ceiling is to be calculated on the basis o f the ceiling o f the bank sub sidiary. Furtherm ore, to m inimize changes from earlier established procedures, any nonbank subsidiary that was reporting prior to D ecem ber 1, 1969, to the D e partment o f C om m erce under the F oreign D irect In vestm ent P rogram or to a Federal R eserve Bank under the nonbank financial institution part o f the guidelines should not report under these bank guidelines. Substitute loans Banks should not extend to U .S . resident subsidiar ies, or branches, o f foreign companies, loans that other wise might have been made by the banks to the foreign parent or other affiliate o f the com pany or that normally would have been obtained abroad. 3. Management o f liquid assets A bank should not hold its ow n funds abroad in liquid form fo r short-term investment purposes whether such investments are payable in foreign currencies o r in U .S . dollars. T his is not intended to preclude its main taining necessary w ork ing balances held with its ow n foreign branches or with foreign correspondents. c. Holding companies with more than one bank. A multibank holding com pany should share the ceiling o f on e or m ore o f its banks. 4. Transactions fo r customers W 'hile recognizing that it must follow a custom er’s instruction, a bank should discourage customers from placing liquid funds outside the U nited States. A bank should not place with a custom er foreign obligations that, in the absence o f the guidelines, it w ould have acquired or held fo r its ow n account. Consolidation o f ceilings o f bank subsidiaries o f holding companies. A bank subsidiary (inclu din g a d. bank, E dge A ct C orporation, o r A greem ent C orpora tion ) o f a bank holding com pany may elect to con soli date its ceiling with that o f on e o r m ore o f the holding com pan y’s other bank subsidiaries on ly if each bank subsidiary involved in the contem plated consolidation had a ceiling under the guidelines in effect p rior to N ovem ber 11, 1971. Such election should be made k now n in advance to the respective Federal R eserve Banks. C eilings adopted under the subsequent guide lines should not be consolidated. Ceilings that were consolidated b efore M arch 9, 1972, in con form ity with the guidelines may remain consolidated. 5. U.S. branches and agencies o f foreign banks Branches and agencies o f foreign banks located in the United States are requested to act in accordance with the spirit o f these guidelines and, as they m ay be requested from time to time, to consult with the Federal R eserve Bank in the district in which they are located. A U .S . agency o r branch o f a foreign bank that holds $10,000,000 or m ore o f foreign assets o f types subject to restraint should make every reasonable effort to ensure that its foreign assets and foreign liabilities are kept throughout the m onthly reporting periods, as well as on the en d-of-the-m on th reporting dates, at levels consistent with its “ base net foreign position .” Each agency and branch o f a foreign bank may adopt an individual “ base net foreig n position.” A lterna tively, one o r m ore agencies o r branches o f a particular foreign bank m ay consolidate positions to which they w ould be entitled. O n ce consolidated, they should henceforth report as a unit under the guidelines. Foreign branches and foreign subsidiaries o f U.S. banks and banking institutions a. T h e guidelines are not intended to restrict the extension o f foreign credit by foreign branches, or foreign subsidiaires, o f ( i ) U .S . banks, ( i i ) E dge A ct C orporations, or ( i ii) A greem ent C orporations, except as the result o f the restraints on banks, and on E dge and A greem ent C orporations (an d their dom estic sub sid iaries), with respect to foreign credit to, or foreign investm ent in, such foreign branches o r foreign sub sidiaries. 6. Banks without ceilings A bank that has not adopted a ceiling will be acting in co n fo rm ity with the objectives o f the Guidelines (a ) if its foreign assets o f types subject to restraint d o not exceed the lesser o f ( i ) $500,000 or ( i i ) 2 per cent o f its en d -of-1 9 7 0 total assets and ( b ) if those foreign assets are otherwise in con form ity with the Guidelines, b. Claims o f a bank’ s, or banking institution’s, d o m estic offices on its foreig n branches and foreig n sub sidiaries (in clu din g permanent capital invested in, as well as balances due from , such fo re ig n branches and foreig n subsidiaries) represent foreign assets subject to the guidelines. Department o f Commerce program and nonbank financial institution guidelines Banks should avoid making loans that w ould directly or indirectly enable borrow ers to use funds abroad in a manner inconsistent with the Department o f C om m erce F oreign D irect Investment P rogram or with the guidelines fo r nonbank finanical institutions. a. Holding companies as banks. A bank holding com pan y is to be treated as a bank fo r the purpose o f these guidelines. 4. Conformity with objectives of guidelines 4 fo r exam ple, with t'he request against holding funds abroad in liquid form except fo r necessary w orking balances. F. A m on g the foreign assets that are subject to the guideline ceiling ( “ covered assets” ) , institutions are asked to give priority to credits which directly benefit the econom ies o f developing countries. Reporting Each U .S . bank (w hether or not it has a ce ilin g ), and each U .S . agency and branch o f a foreign bank, that on a reporting date had $500,000 or m ore in foreign assets (w hether or not subject to restraint under the guidelines) should file a M onthly R eport on F oreign Assets ( f o r U .S . Banks or fo r U .S . A gencies and Branches o f F oreign Banks, as appropriate) with the Federal Reserve Bank in the D istrict in which the institution is located within 15 days after the end o f the reporting period. (F o rm s are available at the Federal R eserve B anks.) III. A. Institutions may invest in noncovered foreign assets generally as desired. H ow ever, they are requested to refrain from making any n on export loans o r invest ments, noncovered as well as covered, that appear to be inconsistent with other aspects o f the U .S . balance o f payments program . A m on g these are the fo llo w in g : a. N on covered credits under this program that sub stitute directly fo r loans that com m ercial banks w ould have made in the absence o f that part o f the program applicable to them. N O N B A N K F IN A N C IA L INSTITU TIO N S b. N on covered credits to developing country sub sidiaries o f U .S . corporations that w ould not have been permitted under the Department o f C om m erce F oreign Direct Investment P rogram if made by the U .S . parent directly. T his part o f the guidelines applies to all U .S . non bank financial institutions, including: trust companies, trust departments o f com m ercial b a n k s; mutual savings banks ; insurance com p a n ies; investment com panies ; financial com p a n ies; em ployee retirement and pension fu n d s ; college endowm ent fu n d s ; charitable founda tio n s ; U .S . branches o f foreign insurance companies and o f other foreign nonbank financial corp ora tion s; and holding com panies (other than bank holding com panies) whose dom estic assets consist prim arily o f the stock o f operating nonbank financial institutions. In vestment underw riting firms, securities brokers and dealers, and investment counseling firms also are co v ered with respect to foreign financial assets held fo r their ow n account and are requested to in form their custom ers o f the program in those cases where it ap pears applicable. c. Credits to U .S . borrow ers that w ould enable them to make foreign loans and investments inconsis tent with the F oreign D irect Investment P rogram . d. Credits to U .S . subsidiaries and branches o f foreign companies that otherwise w ould have been made to the foreign parent or that w ould substitute fo r funds norm ally obtained from foreign sources. C. 1. b. $2,000,000. 2. M inus equity securities o f com panies established in developed countries (e x ce p t Canada) that are in cluded in Section C -l but had been sold to A m erican investors after Decem ber 31, 1972. 3. Plus, or minus, the difference between sales p ro ceeds and “ carryin g” value o f covered equities sold after Decem ber 31, 1972, to other than A m erican in vestors o r in other than U .S . markets. O n each rep ort ing date, “ carryin g” value should be the value reflected in the institution’s report (o n F orm F R 3 9 2 R -6 8 ) fo r Decem ber 31, 1967, in the case o f equities held on that date, and it should be cost in the case o f equities p u r chased after that date. Ceiling Each institution is requested to limit its aggregate holdings o f foreign assets covered by the program to no m ore than its ceiling as described in Section C, except fo r special situations discussed in Section J, below. Liquid foreign balances Institutions generally are expected to hold no foreign deposits or foreign m oney market instruments, except such minimum w orking balances abroad as are needed fo r the efficient conduct o f its foreign business acti vities. T he greater o f : a. 105 per cent o f its ceiling as o f D ecem ber 31, 1972, or Ceiling and Priorities 2. Calculation of ceiling T he ceiling fo r each nonbank financial institution will be: Business whose principal activity is the leasing o f property and equipment, and which are not ow ned or controlled by a financial institution, are not defined as financial institutions. Real estate investment trusts whose assets consist prim arily o f real property as co n trasted with financial assets (su ch as m ortgages) also are not covered by these Guidelines. 1. Conform ity with objectives o f guidelines 4. Applicability to financial institutions B. Developing countries 3. D. Covered assets — subject to ceiling F oreign financial assets subject to the ceiling (c o v ered assets) include investments o f the follow in g types (bu t see exclusions in Section E ) : 5 1. L iquid funds in all foreig n countries. T his cate g o ry com prises foreign bank deposits, including de posits in foreign branches o f U .S . banks, and liquid m on ey market claims on foreig n obligors, generally d e fined to include marketable negotiable instruments m a turing in one year o r less. wise take all reasonable measures to provide assurance that credits meet the definition before treating them as exempted. 2. A ll other claims on foreign obligors written, at date o f acquisition, to mature in 10 years or less. T his category includes bonds, notes, m ortgages, loans, and other credits. 3. A ll direct obligations o f international institutions o f which the United States is a member. 2. A ll financial assets in, or claims on residents o f, Canada. 4. L ong-term investments in all developing cou n tries (e x ce p t as noted in Section D - 4 ), including direct investment in subsidiaries and affiliates, credit instru ments o f the types and maturity described in Section B -4, and all equity securities issued by firms established in these countries. 3. N et financial investment in foreign branches, subsidiaries, and affiliates located in developed countries other than Canada. Such financial investment includes payments into equity and other capital accounts o f, and net loans and advances to, any foreign business in which the U .S . institution has an ownership interest o f 10 per cent or m ore. E xclu ded are earnings o f such a foreig n business if they are directly retained in its capital accounts. 5. E quity securities o f firms in developed countries other than Canada that have been acquired in U . S. markets from A m erican investors. (S e e Section D -6 .) 6. F oreign assets o f types subject to ceiling but acquired after D ecem ber 31, 1967, as “ free delivery” items — that is, acquired as g ifts or, in the case o f trust companies or trust departments o f com m ercial banks, deposited with the institution in new accounts. 4. L ong-term credits entered into after N ovem ber 11, 1971, to finance the construction o r operation o f foreign-built vessels unless the financing involves a c o r responding transfer o f capital by a direct investor under the F oreign D irect Investment P rogram . In cluded in this category are bonds, notes, m ortgages, loans, leases, and other credits. A credit is long-term if at least 10 per cent o f the amount to be repaid to the lender is scheduled, at the time o f acquisition, to be repaid after 10 years. 7. A foreign asset acquired directly o r through p u r chase o f a participation in a pool o f foreign assets, provided the foreign asset or the participation is covered by a payment guarantee issued by the U . S. Overseas Private Investment C orporation ( O P I C ) under its in surance and guaranty claims settlement authority, is exem pted from an institution’s ceiling. 5. L ong-term credits o f foreign obligors established in developed countries other than Canada. (L on g -term credits are as defined in paragraph 4 .) F. 1. A n y loan or investment acquired by a nonbank financial institution after June 30, 1968, that involves the advance o f funds to a dom estic corporation which is sim ply a financing conduit (com m on ly known as a “ D elaware subsidiary” ) and that in turn will transmit the funds to a foreign business is a foreign asset i f one or m ore foreigners ow n a m ajority o f the dom estic co r poration. T h e amounts o f such foreign loans or invest ments should be classified accordin g to the country where the funds are actually to be used, -not according to the residence o f the owners o f the dom estic corporation. 6. E quity securities (in clu din g A m erican D ep osi tary R eceip ts) o f foreign corporations established in developed countries other than Canada, except those acquired after Septem ber 30, 1965, in U .S . markets from A m erican investors. E xclu sion from ceiling norm ally will be indicated if, in acquiring an equity security that otherwise w ould be covered, the purchas ing institution receives a certificate o f p rior A m erican ow nership or brokerage confirm ation thereof. S ecuri ties acquired from a broker w h o purchased them from a foreig n er in anticipation o f early resale are! not deemed to be acquisitions from a prior A m erican in vestor. 2. I f U . S. residents, other than the lending institu tion, hold a m ajority ownership interest in the domestic corporation, no part o f a loan or o f an investment in such a corporation is to be regarded as a foreign asset o f the institution. 7. Investments made by trust departments o f com m ercial banks or by trust com panies with trust funds over which the trustee (o r co-trustee) has at least some influence over investment policy and not separately reported by another financial institution. E. G. Noncovered assets — exclusions T h e follow in g foreign financial assets are excluded from the guidelines c e ilin g : 1. E x p o rt credits, as defined in Part IV -3 . Institu tions should maintain adequate inform ation and oth er Credits to certain U. S. corporations 6 Leasing of physical goods T he foreign leasing activities o f firms that engage prim arily in the leasing o f physical assets (e.g., com puters, real property, ships, a ircra ft) and that are not ow ned or controlled by a U . S. financial institution are not subject to these guidelines. H ow ever, such activi ties are subject to these guidelines when they are under taken by nonbank financial institutions. H. Investment in certain foreign insurance ventures to liquid funds and ( b ) concerning possible conflict with program objectives, as noted in Section III-B -2 and B-4. N et investment in foreign insurance ventures should be reported. In the case only o f a foreign insurance venture in which a U .S . nonbank financial institution had an investment b efore 1965, if it is not feasible to segregate the net investment o f the U .S . nonbank finan cial institution, the latter may exclude from its foreign assets subject to ceiling the aggregate o f the larger o f the follow in g in each foreign country in which a foreign affiliate sells insurance: ( a ) 110 per cent o f assets held in the foreign country as reserve against insurance sold to residents o f that country by the foreign affiliate or ( b ) the minimum deposit o f cash or securities required by foreign authorities as a condition o f doin g insurance business in that country. I. T h e institution is expected to file an initial statement o f its holdings with its Federal R eserve Bank and thereafter to file a statement with the Bank within 20 days after the end o f any calendar quarter when its total holdings o f covered foreign assets have changed by as much as $100,000 since its previous report even though its total holdings remain below the minimum reporting levels stipulated in the guidelines. IV . T he follow in g definitions apply to both the bank and nonbank financial institution parts o f the guidelines. Reporting requirement 1. “ Claims on foreig n ers” are claims on foreigners held fo r an institution’s ow n account. F o r banks, they in clu d e : foreign long-term secu rities; d eferred pay ment letters o f credit described in T reasu ry Department Supplemental R eportin g Instruction N o. 1 (R e v is e d ), T reasu ry F oreign E xchange R eports, Banking F orm s, September 25, 1972; participations purchased in loans to fo r e ig n e r s ; loans to financial conduits incorporated in the U nited States, 50 per cent or m ore ow ned by fo re ig n e rs; and foreign assets sold, with recourse, to U .S . residents other than financial institutions partici pating in the Federal R eserve F oreign Credit Restraint P rogram or other than direct investors subject to the controls administered by the Departm ent o f Com m erce. T h ey also include foreign custom ers’ liability fo r ac ceptances executed, whether o r not the accepted drafts are held by the accepting bank. “ Claims on foreign ers” e x c lu d e : contingent cla im s ; unutilized c r e d its; claims held fo r account o f cu stom ers; and acceptances e x e cuted by other U .S . banks. Each nonbank financial institution holding, on any quarterly reporting date, covered assets o f $500,000 or m ore, or total foreign financial assets o f $5 million or m ore, should file a statistical report coverin g its total holdings on that date with the Federal R eserve Bank o f the Federal R eserve District in which its principal office is located. T he reports are due within 20 days follow in g the close o f each calendar quarter, and form s may be obtained from the Federal R eserve Bank. (S ee also Section J -2 .) J. Covered assets in excess of ceiling 1. In view o f the balance-of-paym ents objectives o f the program , covered investments o f nonbank financial institutions may be permitted to exceed the guideline ceiling to the extent that the funds fo r such investment are ( a ) borrow ed abroad fo r investment in the same country or in countries that are subject to the same or m ore liberal guideline restraint or ( b ) derived from equity securities issued by the nonbank financial insti tution and sold to residents o f foreign developed cou n tries (oth er than C anad a), provided that the nonbank financial institution prom ptly treats as a charge against its ceiling the amount o f any such equity securities at any moment it is unable to assure itself fu lly that any such securities continue in the possession o f such fo r eigners. (F o r reporting purposes, the amount o f such securities held by foreigners should be included with borrow in gs in foreign countries.) Thus, fo r the p u r pose o f the offset provision, funds borrow ed in the developed countries may be used to finance investments in these countries and elsewhere, but funds borrow ed in the developing countries should not be used to finance investment in the developed countries. A n y institution desiring to offset foreign b orrow in g against foreign investment, how ever, should discuss its plans with the Federal R eserve Bank b e fo re entering into such an arrangement. 2. “ F oreign ers” in clu d e : individuals, partnerships, and corporations dom iciled outside the U nited States, irrespective o f citizenship, except their agencies or branches located w ithin the U nited S ta tes; branches, subsidiaries, and affiliates o f U .S . banks and other U .S . corporations that are located in foreign countries, and any governm ent o f a foreign country or official agency thereof and any official international or regional institu tion created b y intergovernm ental agreement, irrespec tive o f location. 3. “ E x p o rt C redit” means any claim on a foreigner fo r the dem onstrable financing ( a ) o f the export o f U .S . good s or ( b ) o f the p erform an ce abroad o f U .S . services. (Item s ( a ) and ( b ) are hereinafter referred to as “ ex p orts.” ) T o be demonstrable, the financing must relate to a specific, individual, identifiable export fo r which shipping docum ents or other docum ents evi dencing the exp ort are obtainable. E x p o rt credit m ay be direct or indirect. D irect credit is a credit that results in the direct acquisition o f a debt obligation o f a foreig n obligor. A n indirect credit is a credit extended to a foreign financial institution which, in consequence, itself acquires debt obligations o f obli 2. A n institution without a guideline ceiling may hold covered assets up to $2,000,000 if its investments are consistent with guideline restraints ( a ) with respect D E FIN ITIO N S 7 gors resident outside the U nited States. T h erefore, credit extended by a U .S . financial institution to a foreig n buyer o f U .S . exports directly or through a fo r eign financial institution may be an exp ort credit. A lso, an exp ort credit m ay be extended through purchase o f docum ented loan paper. o f U .S . goods incidental to the p erform an ce o f those services. A participation in export credits should be regarded as export credit o f the financial institution purchasing the participation. H ow ever, a participation in a pool o f loans w ould not be considered export credit by the institution purchasing the participation. T he cost o f freight in connection with exportation, the cost o f transport insurance in connection with e x portation, and the cost o f exp ort credit guarantees and exp ort credit insurance borne by the foreign buyer or the foreign financial institution may be included in the cost o f ex p ort fo r the purpose o f determ ining the am ount o f credit that is to be considered export credit. A n y element o f foreign duty is to be excluded fo r this purpose. A credit that is o f substantially longer maturity than is custom ary in international exp ort financing practice fo r the type o f transaction in question should not be regarded as an exp ort credit. 4. “ D eveloping countries” are all foreign countries other th a n : A b u Dhabi, Australia, Austria, the Bahamas, Bahrain, Belgium , Bermuda, Canada, D en mark, France, Germ any (F ed era l R e p u b lic), H on g K on g , Iran, Iraq, Ireland, Italy, Japan, Kuw ait, Kuw ait-Saudi A rabia, Neutral Z one, Libya, Liechten stein, L u xem bourg, M onaco, Netherlands, N ew Z ea land, N orw ay, Portugal, Qatar, R epublic o f South A frica , San M arino, Saudi A rabia, Spain, Sweden, Switzerland, and the U nited K ingdom ; and other than : Albania, Bulgaria, the P eople’s R epublic o f China, Cuba, Czechoslovakia, East Germ any, Estonia, H ungary, Com m unist-controlled K orea, Latvia, Lithuania, O uter M ongolia, P oland (inclu din g any area under its p rov i sional adm inistration), Rom ania, T ibet, U nion o f Soviet Socialist R epublics and the K u rile Islands, Southern Sakhalin, and areas in East Prussia that are under the provisional administration o f the U nion o f Soviet Socialist Republics, and Com m unist-controlled Vietnam. U .S . good s are good s grow n , produced, or m anufac tured in the U nited States. U .S . services p erform ed abroad should be services p erform ed outside the U nited States by U .S . dom iciled or U .S . incorporated com panies or by U .S . nationals tem porarily resident abroad. A particiular credit should be regarded as an export credit on ly if 85 percent or m ore o f its total amount finances U .S . exp orts. H ow ev er, a single credit agree ment exclusively fo r services may be broken dow n to exclu de n on -U .S . services. T h e ex p ort credit m ay thereby be identified as that portion o f credit financing the p erform an ce o f services by U .S . firms and U .S . nationals, as well as financing the purchase (o r lease) 8
@FedFRASER