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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
April 28, 1966.
CONFIDENTIAL (FR)
TO:
Federal Open Market Committee
FROM:
Mr. Holland
Revisions of proposed
SUBJECT:
new instruments governing foreign
currency operations
Attached are revised drafts of the new instruments governing
System foreign currency operations proposed by the Secretariat in a
memorandum to the Committee dated February 18, 1966.
The main revisions are those discussed at the meeting of the
Committee on April 12, 1966. These consist of the addition of certain
language to the first sentence of paragraph 3 of the Authorization and
the deletion of certain language in paragraph 1(E) of the directive,
both recommended by Mr. Young; and the addition of a new final paragraph
to the Authorization (paragraph 10) relating to reporting requirements,
along the lines of a suggestion by Mr. Heflin. One other textual change
is proposed, involving a minor stylistic improvement in paragraph 2(A)
of the directive.
These changes are shown by use of cancelled type for
deletions and capital letters for additions.
In addition, the dollar limit on commitments to deliver
foreign currencies to the Stabilization Fund, given in paragraph 1(C)1
of the Authorization, has been changed from $100 million to $200 million
equivalent to correspond to the amendment of the existing continuing
authority directive made by the Committee at its April 12 meeting.
Robert C. Holland, Secretary,
Federal Open Market Committee.
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CONFIDENTIAL
April
1966
28,
(FR)
Proposed new Authorization for
System foreign currency operations
1.
The Federal Open Market Committee authorizes and directs
the Federal Reserve Bank of New York, for System Open Market Account,
to the extent necessary to carry out the Committee's foreign currency
directive:
A.
To purchase and sell the following foreign currencies
in the form of cable transfers through spot or forward transactions on
the open market at home and abroad, including transactions with the U.S.
Stabilization Fund established by Section 10 of the Gold Reserve Act of
1934, with foreign monetary authorities, and with the Bank for Inter-
national Settlements:
Austrian schillings
Belgian francs
Canadian dollars
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Netherlands guilders
Swedish kronor
Swiss francs
B.
To hold foreign currencies listed in paragraph A
above, up to the following limits:
(1)
Currencies held spot or purchased forward, up
to the amounts necessary to fulfill outstanding forward commitments;
(2)
Other currencies held spot or purchased forward,
up to the amount necessary for System operations to exert a market
influence and not exceeding $150 million equivalent; and
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(3)
Sterling purchased on a covered or guaranteed basis
in terms of the dollar, under agreement with the Bank of England, up to
$200 million equivalent.
C.
To have outstanding forward commitments undertaken under
paragraph A above to deliver foreign currencies, up to the following
limits:
(1)
Commitments to deliver to the Stabilization Fund
foreign currencies in which the United States Treasury has outstanding indebtedness, up to $200 million equivalent;
(2)
Commitments to deliver Italian lire, under special
arrangements with the Bank of Italy, up to $500 million equivalent; and
(3)
Other forward commitments to deliver foreign
currencies, up to $275 million equivalent,
D.
To draw foreign currencies and to permit foreign banks
to draw dollars under the reciprocal currency arrangements listed in
paragraph 2 below, provided that drawings by either party to any such
arrangement shall be fully liquidated within 12 months after any amount
outstanding at that time was first drawn, unless the Committee, because
of exceptional circumstances, specifically authorizes a delay.
2.
The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account with the following foreign
banks, which are among those designated by the Board of Governors of
the Federal Reserve System under Section 214.5 of Regulation N, Relations
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-3with Foreign Banks and Bankers, and with the approval of the Committee
to renew such arrangements on maturity:
Amount of
Arrangement
(millions of
Period of
Arrangement
dollars equivalent)
Foreign Bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Netherlands Bank
Bank of Sweden
Swiss National Bank
(months)
50
100
250
750
100
250
450
250
100
50
150
12
12
12
12
3
6
12
12
3
12
6
150
6
150
6
Bank for International Settlements
(System drawings in Swiss francs)
Bank for International Settlements
(System drawings in authorized
European currencies other than
Swiss francs)
3.
All transactions in foreign currencies undertaken under
paragraph 1(A) above shall be at prevailing market rates and
NO ATTEMPT
SHALL BE MADE TO ESTABLISH RATES THAT APPEAR TO BE OUT OF LINE WITH
UNDERLYING MARKET FORCES.
Insofar as is practicable, foreign currencies
shall be purchased through spot transactions when rates for those currencies
are at or below par and sold through spot transactions when such rates are
at or above par, except when transactions at other rates (i) are
specifically authorized by the Committee, (ii) are necessary to acquire
currencies to meet System commitments, or (iii) are necessary to acquire
currencies for the Stabilization Fund, provided that these currencies are
resold forward to the Stabilization Fund at the same rate.
4.
It shall be the practice to arrange with foreign central
banks for the coordination of foreign currency transactions.
In making
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operating arrangements with foreign central banks on System holdings of
foreign currencies, the Federal Reserve Bank of New York shall not commit itself to maintain any specific balance, unless authorized by the
Federal Open Market Committee.
Any agreements or understandings concern-
ing the administration of the accounts maintained by the Federal Reserve
Bank of New York with the foreign banks designated by the Board of Governors under Section 214.5 of Regulation N shall be referred for review
and approval to the Committee.
5.
Foreign currency holdings shall be invested insofar as
practicable, considering needs for minimum working balances.
Such
investments shall be in accordance with Section 14(e) of the Federal
Reserve Act.
6.
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) is authorized to act on behalf of the Committee when it is
necessary to enable the Federal Reserve Bank of New York to engage in
foreign currency operations before the Committee can be consulted.
All
actions taken by the Subcommittee under this paragraph shall be reported
promptly to the Committee.
7.
The Chairman (and in his absence the Vice Chairman of the
Committee, and in the absence of both, the Vice Chairman of the Board
of Governors) is authorized:
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A.
With the approval of the Committee, to enter into any
needed agreement or understanding with the Secretary of the Treasury
about the division of responsibility for foreign currency operations
between the System and the Secretary;
B.
To keep the Secretary of the Treasury fully advised
concerning System foreign currency operations, and to consult with the
Secretary on such policy matters as may relate to the Secretary's
responsibilities; and
C.
From time to time, to transmit appropriate reports
and information to the National Advisory Council on International
Monetary and Financial Policies.
8.
Staff officers of the Committee are authorized to transmit
pertinent information on System foreign currency operations to appropriate officials of the Treasury Department.
9.
All Federal Reserve Banks shall participate in the foreign
currency operations for System Account in accordance with paragraph 3 G (1)
of the Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.
10.
THE SPECIAL MANAGER OF THE SYSTEM OPEN MARKET ACCOUNT FOR
FOREIGN CURRENCY OPERATIONS SHALL KEEP THE COMMITTEE INFORMED ON CONDITIONS
IN FOREIGN EXCHANGE MARKETS AND ON TRANSACTIONS HE HAS MADE AND SHALL RENDER
SUCH REPORTS AS THE COMMITTEE MAY SPECIFY.
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REVISED DRAFT
April 28, 1966.
CONFIDENTIAL (FR)
Proposed new Foreign currency directive
1.
The basic purposes of System operations in foreign
currencies are:
A.
To help safeguard the value of the dollar in inter-
national exchange markets;
B.
To aid in making the system of international payments
more efficient;
C.
To further monetary cooperation with central banks
of other countries having convertible currencies, with the International
Monetary Fund, and with other international payments institutions;
D.
To help insure that market movements in exchange
rates, within the limits stated in the International Monetary Fund
Agreement or established by central bank practices, reflect the interaction of underlying economic forces and thus serve as efficient guides
to current financial decisions, private and public; and
E.
To facilitate growth in international liquidity in
accordance with the needs of an expanding world economy; by providing
currencies.
of
holdings
reciprocal
for
2.
Unless otherwise expressly authorized by the Federal Open
Market Committee, System operations in foreign currencies shall be
undertaken only when necessary:
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- 2-
A.
To cushion or moderate fluctuations in the flows of
international payments, if such fluctuations are (1) ARE deemed to reflect
transitional market unsettlement or other temporary forces and therefore
are expected to be reversed in the foreseeable future; and (2) are
deemed to be disequilibrating or otherwise to have potentially destabilizing effects on U.S. or foreign official reserves or on exchange
markets, for example, by occasioning market anxieties, undesirable
speculative activity, or excessive leads and lags in international
payments;
B.
To temper and smooth out abrupt changes in spot
exchange rates, and to moderate forward premiums and discounts judged
to be disequilibrating.
[Whenever supply or demand persists in
influencing
exchange rates in one direction, System transactions should be modified,
curtailed, or eventually discontinued pending a reassessment by the
Committee of supply and demand forces;
C.
markets.
To aid in avoiding disorderly conditions in exchange
Special factors that might make for exchange market instabilities
include (1) responses to short-run increases in international political
tension, (2) differences in phasing of international economic activity
that give rise to unusually large interest rate differentials between
major markets, and (3) market rumors of a character likely to stimulate
speculative transactions.
Whenever exchange market instability threatens
to produce disorderly conditions, System transactions may be undertaken
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if the Special Manager reaches a judgment that they may help to
reestablish supply and demand balance at a level more consistent with
the prevailing flow of underlying payments.
In such cases, the Special
Manager shall consult as soon as practicable with the Committee or, in
an emergency, with the members of the Subcommittee designated for that
purpose in paragraph 6 of the Authorization for System foreign currency
operations; and
D.
To adjust System balances within the limits established
in the Authorization for System foreign currency operations in light of
probable future needs for currencies.
3.
System drawings under the swap arrangements are appropriate
when necessary to obtain foreign currencies for the purposes stated in
paragraph 2 above.
4.
Unless otherwise expressly authorized by the Committee,
transactions in forward exchange, either outright or in conjunction
with spot transactions, may be undertaken only (i) to prevent forward
premiums or discounts from giving rise to disequilibrating movements
of short-term funds;
(ii) to minimize speculative disturbances; (iii)
to supplement existing market supplies of forward cover, directly or
indirectly, as a means of encouraging the retention or accumulation of
dollar holdings by private foreign holders;
(iv) to allow greater
flexibility in covering System or Treasury commitments, including commitments under swap arrangements;
(v) to facilitate the use of one
currency for the settlement of System or Treasury commitments denominated
in other currencies; and (vi) to provide cover for System holdings of
foreign currencies.
@FedFRASER