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REC'D IN RECORDS SECTION
JAN 20 1971
T E L E GR A M
FEDERAL RESERVE COMMUNICATIONS SYSTEM
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
CONFIDENTIAL (FR)
January 19, 1971
Hayes - New York
Heflin - Richmond
Mayo - Chicago
Francis - St. Louis
Swan - San Francisco
This is with reference to possible Federal Reserve program of matched
sale-purchase transactions with member banks to help moderate Euro-dollar
repayments, as outlined in staff memorandum dated January 11, 1971, which
Committee discussed on preliminary basis at meeting on January 12.
Considering the many factors that must be taken into account before
decision can be made as to whether such a program should be implemented,
and the need to coordinate plans and operations with other Government
agencies interested in problem, Chairman Burns proposes the following
three-stage approach to decision-making on this matter:
Stage 1:
Determination as to whether a majority of Committee agrees
in principle with proposed amendment of continuing authority directive as
a useful contingency plan, to be acted on finally at a subsequent time if
deemed necessary.
If this approach seems to be a likely one to Committee,
staff will continue working on it.
In this connection, the draft amendment
to the directive attached to staff memorandum of January 11 has been further
refined, and is shown in present draft form at end of this telegram along
with comments on substantive changes from previous draft.
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TELEGRAM
FEDERAL RESERVE COMMUNICATIONS SYSTEM
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
-2Stage 2:
(If determination under stage 1 is favorable.)
Formal vote
by FOMC to adopt such an amendment to continuing authority directive,
thereby authorizing Subcommittee named in amendment to proceed if and
as needed with actualcperations.
Presumably Chairman will call for this
formal Committee vote if and when developments make it desirable for System
to be in a position to undertake promptly such operations.
If circumstances
permit, formal vote will be called for only at or after a meeting at which
Committee has had full opportunity to discuss matter.
Stage 3:
If circumstances require, action by Subcommittee to instruct
Account Manager to undertake actual operations, within limits established
by amendment to directive, and with such specific instructions from
Subcommittee as appear desirable.
In Chairman Burns' judgment, action under stage 1 is advisable now
for purposes of orderly planning and coordination with other agencies.
Mr. Solomon and I will be telephoning you later today or tomorrow to provide
further background on procedure and substance.
Please advise following
that telephone conversation whether or not you would agree in principle,
as a basis for contingency planning, to an amendment of continuing authority
directive by the addition of a paragraph 4 along the following lines:
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"4. For the purpose of tempering the impact of Euro-dollar movements
on the United States balance of payments, the Committee authorizes and
directs the Federal Reserve Bank of New York, for the System Open Market
Account, to enter into special agreements
with member banks ('paragraph 4
agreements') providing for the sale of U.S. Government securities by the
Reserve Bank to the member bank on a cash or regular delivery basis, and
for the purchase by the Reserve Bank from the member bank of the same
amount of the same issues of securities within a specified period, subject
to the following conditions:
"A. A member bank shall be eligible to buy and sell
securities under paragraph 4 agreements in an amount equal
to a specified percentage of its (1) daily average deposits
subject to § 204.5(c) of Federal Reserve Regulation D,
(2) daily average total of the net balances and assets
described in § 213.7(a)(1) and (2) (reduced by its daily
average deposits subject to § 204.5(c)), and (3) foreign
branches' daily average holdings of securities under paragraph 4 agreements and the Export Import Bank program announced
January 15, 1971, each for the latest computation period as
described in the specified sections. The percentage, which
shall be the same for all member banks, shall be specified
from time to time by the Committee, or on behalf of the
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Committee by a Subcommittee consisting of the Chairman and
the Vice Chairman of the Committee and the Vice Chairman
of the Board of Governors (or in the absence of the Chairman
or of the Vice Chairman of the Board of Governors the
members of the Board designated by the Chairman as alternates, and in the absence of the Vice Chairman of the
Committee his alternate).
"B. The aggregate amount of securities held by member
banks under paragraph 4 agreements shall not exceed $2 billion
at any time.
"C. Paragraph 4 agreements, which shall be non-transferable,
shall be arranged so as to provide a net yield to the member bank
closely related to the current market rate on Euro-dollar deposits
of comparable maturity.
"D. Within the limitations set forth above, the terms of
paragraph 4 agreements, and the timing and size of offerings of securities under
such agreements, shall be subject to such directions
as may be issued from time to time by the Committee, or on behalf
of the Committee by the Subcommittee referred to in 4A above."
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-5In addition to clarifying changes, text given above incorporates
the following substantive changes from earlier draft:
Introductory language:
Next-to-last clause calls for repurchase
of securities "within a specified period" rather than "within (blank)
weeks."
Staff still recommends a
4 -week maturity, once introductory
period is passed; this change is suggested to allow for the introductory period, and other deviations from 4-week maturity that Subcommittee
may possibly find desirable on technical grounds.
4A:
Technical changes have been made to conform with
current proposed amendments to Board regulations.
4B:
Limit on aggregate amount of security holdings
(left blank in previous draft) has been written as $2 billion.
Staff
memo had recommended an initial authorization of $1-1/4 billion, but
now believes it would be desirable to permit somewhat greater leeway,
to reduce possible need for later amendments to increase leeway.
4C:
Text now calls for net yield to member bank
"closely related to the current market rate on Euro-dollar deposits
of comparable maturity";
previous draft had called for net yield
"not more than (blank) basis points in excess of current market rate
on one-month Euro-dollar deposits."
Under previous language, staff
maximum
had contemplated specifying a/spread of perhaps 5/8 point, although
it recommended beginning actual operations with a spread of 1/8 point.
Present judgment is that it would not be desirable to indicate publicly
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-6how large a spread the System is willing to allow, particularly if
there is found to be no need to go as high as 5/8 point.
"one-month" to "comparable" maturity is
Change from
suggested in view of possibility
that some agreements may be for maturities other than 4 weeks.
HOLLAND
ALB :nlo
DATE
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@FedFRASER