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FEDERAL RESERVE B A *
OF MEW YORK
Fiscal Agent of the United States
[
Circular No. 10112 1
November 28, 1986
J
PROPOSED REGULATIONS GOVERNING THE TREASURY
COMMERCIAL BOOK-ENTRY SYSTEM (“TRADES”)
To All Banking Institutions, and Others Concerned,
in the Second Federal Reserve District:
Enclosed is a copy of proposed regulations issued by the Treasury Department to govern
U.S. Treasury securities in the commercial book-entry system (“TRADES”), which are expected to
be published for comment in the F e d e r a l R e g is te r today. These proposed rules have been revised on
the basis of comments received on the original proposal published last March 14.
Please note that the comment period is for 30 days from the date the proposed regulations actu
ally appear in the F e d e r a l R e g iste r. You may call (202) 376-4320 to verify the closing date for the
comment period.
All interested parties should submit their comments to:
Office of the Chief Counsel
Bureau of the Public Debt
E Street Building
Washington, D.C. 20239-0001
We would appreciate receiving a copy of any such comments; please send them to Don. N.
Ringsmuth, Associate General Counsel of this Bank.
Questions on the regulations may be directed, at this Bank, either to Mr. Ringsmuth
(212-720-5007), or to MarySue Sullivan, Assistant Counsel (212-720-5025).
E.
G e r a l d C o r r ig a n ,
P re s id e n t.
December 2, 1986
To the Addressee:
A copy of the Treasury's book-entry proposal referred to in the
enclosed circular (Cir. No. 10112) will be furnished upon request
(Tel. No. 212-720-5216).
Circulars Division
FEDERAL RESERVE BANK OF NEW YORK
Cm
(M A e i? ,
Billing Code 4 8 1 0 - 1 0
DEPARTMENT OF THE TREASURY
FISCAL SERVICE
BUREAU OF THE PUBLIC DEBT
31 CFR PART 357
REGULATIONS GOVERNING BOOK-ENTRY TREASURY
BONDS, NOTES, AND BI LLS
(DEPARTMENT OF THE TREASURY
CIRCULAR,
A GE NC Y:
PUBLIC DEBT SERIES NO.
2-86)
Bureau of the Public Debt
Fiscal Service
Department of the Treasury
ACTION:
Proposed rulemaking
SUMMARY:
On M ar ch 1 4 ,
of
a proposed
held
in
the
ru le
1986,
(the
the
Departm ent p u b lis h e d a p o r t i o n
"March R u l e " )
commercial b o o k -e n tr y
system ,
T r e a s u r y / R e s e r v e Automated Debt E n t r y
8846.
A separate
book-entry
Book-Entry S e c u r itie s
and f i n a l
that
system,
w ill
govern s e c u r i t i e s
now r e f e r r e d
Sy s te m
("TRADES").
51
the
FR
the
TREASURY DIRECT
System ("TREASURY D I R E C T " ) ,
was i m p l e m e n t e d
in
m id -1986,
reg u latio n s
in
TREASURY DIRECT w er e p u b l i s h e d
known as
t o as
a p p lic a b le
on May 1 6 ,
to
s e c u ritie s
1986.
held
51 FR 1 8 2 6 0 .
2
Upon f i n a l
fin a l
of
adoption,
t h e TRADES r e g u l a t i o n s ,
TREASURY DIRECT r e g u l a t i o n s ,
the
Code o f
Federal
b o o k -e n try m arketable
The
requested
the
proposed
s p e c ific
rule
that
of
o p p o rtu n ity
n o tice
TRADES i s
set
d iscu s sio n
response
of
to
adopting
C e rtain
Subpart
rule
the
that
p u b lic
revised
forth
the
s p e c ific
t h o s e comments,
issues
form
the
the
to
of
the
or
the
the D e p a rtm e n t,
comments
provide
of
and i d e n t i f i e d
com plexity of
that
and
e
Several
c la rific a tio n
rece ive d ,
a second
The D e p a r t m e n t
1986
contained
analyses
raised
requested
of
responded w i t h
a d v is in g
those
again
in
comment p e r i o d .
ru le
for
in terested
51 FR 2955 9
s e c u ritie s
th at
a
p r o p o s e d f or m w i t h
proposed
below,
s o lu tio n s.
d e ta ile d
G iven
comment.
in August
31
govern a l l
t h e March R u l e
required
ru le .
in proposed
357 o f T i t l e
a number o f co m pl ex i s s u e s
commenters
a th irty -d a y
The
for
contained
wo uld be p u b l i s h e d
for
1986).
raised
and i n c o r p o r a t i o n
for
rule
p ro visio n
not
several
pub lished
revised
19,
the proposed
re visio n
the
issues
the
s e c u ritie s .
re sp o n d ed t o
refin e m e n t
raised ,
which w i l l
a n a lys is
received
technical
rep u b lish
that
fo rm P a r t
comments and p r o p o s e d
a d d itio n a l
afte r
Treasury
d iscu s sio n
comment l e t t e r s
issues
R e g ulations,
sectio n -b y-sectio n
a d e ta ile d
w ill
together w ith
a
(August
held
in
p r e c e d e d by a s e c t i o n - b y - s e c t i o n
comments
and,
rece ive d ,
cha nges made
where a p p r o p r i a t e ,
rea'sons
in
for
suggested changes.
of
the p r o v is io n s
D were p u b l i s h e d
in
set
fin a l
fo rth
below i n
f o r m as p a r t
of
S u b p a r t A and
the
fin a l
ru le
3
for TREASURY DIRECT.
completeness.
They are reprinted here for clarity and
Where revisions are proposed* they are explained
below in the section-by-section discussion.
DATE °
Comments must be
p u b lic a tio n
in
the
r e c e i v e d on o r b e f o r e
[30
days a f t e r
C h ie f
Counsel*
FEDERAL R E G IS T E R ] .
ADDRESS i
Send comments
Bureau o f
the
P u b lic
to
Debt*
the O f f i c e
E Street
of
the
B u ild in g *
W ashington*
DC
20239-0001.
FOR FURTHER INFORMATION CONTACT:
A tto rn e y -A d v is o r*
A ttorney
V irg in ia
(202)535-4890*
and S p e c i a l
A s s is ta n t,
or
Rutledge*
Cynthia
Reese*
S enio r
(202)376-4320.
SUPPLEMENTARY INFORMATION:
In te re s te d
rulem aking
rece ive d
the
by s u b m i t t i n g
before
co n sid ered
of
in
for
the
the
rulem aking
w ritten
e x p ira tio n
those
are
hearing
of
of
is
the
the
in
comment p e r i o d
fin a l
after
in
and i f
ru le .
the
At
th is
it
is
w ill
the
e x p ira tio n
the p r e p a r a t i o n
contem plated*
be c l e a r l y
be s c h e d u l e d .
to p a r t i c i p a t e
comments and s u g g e s t i o n s .
received
rece ive d *
process w i l l
a hearing w i l l
in v ite d
may be c o n s i d e r e d
No p u b l i c
a hearing
are
p rep aratio n
Departm ent*
comment p e r i o d
ru le .
persons
but
if
of
d eterm in ed
enhan ced by o r a l
be
option
of
the
the
w ritte n
that
Those
fin a l
requests
the
p resen tatio n *
4
DISCUSSION OF THE COMMENTS RECEIVED:
SUMMARY
The Department received 28 comment letters on the proposed
rule, as published on March 14, 1986.
The comments ranged from
brief letters simply supporting the project of replacing the
existing book-entry regulations (Subpart 0 of 31 CFR Part 306 and
31 CFR Part 350, hereinafter collectively referred to as MSubpart
O w ) to very detailed letters that included discussions of
numerous issues and proposed specific regulatory language to
resolve them.
The Department thanks all of those who submitted
comments and is especially appreciative of the time and effort
that went into the more detailed letters.
The majority of comments were favorable, either explicitly
or implicitly.
Ten comment letters expressly supported the
proposed rule, although most suggested modifications of varying
degrees.
Fifteen other commenters proposed modifications or
expressed concerns about specific provisions of the proposed rule
but did not oppose its adoption.
One bank that submitted a
comment letter suggested that the proposed rule was unnecessary
but specifically expressed concern only about the requirement of
the March Rule to send written confirmation of transfers.
Two
commenters in a joint letter expressed opposition to the proposed
rule and suggested retention of Subpart O with only a single
5
modification.^/
The Department believes that most if not all of
the concerns raised by these commenters have been addressed by
the revision set forth below* which includes a number of the
suggested modifications.
Not surprisingly* several of the comment letters*
including
all of the most detailed ones* dealt at some length with the
issue of resolution of competing claims that was discussed in
detail in the section-by“Section analysis of the March Rule.
Most of the letters mentioning the issue favored a uniform
Federal rule.
The more detailed comments* almost without
exception* favored adoption of some form of a bona fide purchaser
rule and some form of priority for clearing liens.
In the
revised proposed rule printed below, the Department has adopted
this approach.
In addition*
several commenters focused on the warranties
and duties of book-entry custodians set forth in the March Rule.
Some commenters suggested broadening the warranties and including
warranties of transferors other than book-entry custodians.
In
contrast, several banks suggested that* given the rather
stringent banking regulations governing custody of customer
securities* banks should not be required to make any warranties
*7
In a joint letter* four commenters, including the two
referred to above* opposed the adoption of the March Rule* as
proposed, but differed in their suggested modifications and
submitted individual letters setting out their proposals.
As a
result* the joint letter has not been counted separately here*
although it is included in the total of 28 comment letters
mentioned above.
%
6
under
the
Treasury
out
c ertain
set
out
of
d ifferen ces
s p e c ific
s e c u ritie s
requirem ents
A th ird
the
reg u latio n s*
tran sfer
elim in a tin g
out
area
in
ru les
s till
focus
R elated
a d d itio n a l
rules
governing
attachm ent
w er e
included
area
of
other
boo k-entry
ex e m pt
fro m t h e
on t h e
in te ra c tio n
Two commenters
D ep artm en ts
fo rth
grants
A
below.
the
between
of
s e c u rity
rele v a n t
the
need
alth ough
act
for
a ll
of
the
and p e r f e c t i o n
involved
the
of
s e c u rity
in te ra c tio n
commenters
custodians
su b ject
reg u latio n s*
the
of
transfers
th e March R u l e *
Three
Departm ent's
s p e c ific
in
comment
la w *
governin g
were p r o p o s e d *
comments q u e s t i o n e d
One f i n a l
the
rules
and t r a n s f e r s
refo rm u latio n s
that
number o f
and t h e
commenters p r o p o s e d
on b o o k - m a r k i n g as t h e
transfer*
that
o f * con firm ations
rule*
Several
be tw ee n
s e c u ritie s
V arious
suggested
pro visio n
the proposed
d is tin c tio n
w ith
r e g u l a t i o n s , w h ic h
t o bank cus tom er s, ,
them selves*
in te re s ts .
reg u latio n s
the
p ointed
f o c u s e d on by commenters was t h e m e c h a n i c s o f
o w n ersh ip o f whole
in te re s ts
the banking
governing
tran sactio n s
the
w o u ld
between
rules
set
The bank comme nt ers a l s o
the
s p e c ific a lly
to
fo reig n
O ther
re g u latio n s
of
l a w be
comments
and S t a t e
law
focused
in
a
areas.
subm itting
au th o rity
Section
a jo in t
comment l e t t e r
to prom ulgate
3121 o f T i t l e
S e c r e t a r y broad a u t h o r i t y
31 o f
rules
questioned
such as
the U n ite d
to e s t a b lis h
the
those
States
terns
set
Code
and
7
conditions on which Treasury securities are issued.
The Supreme
Court recognized the breadth of this authority in Free v. Bland,
369 U.S. 663 (1962), in which the Court concluded that Treasury
regulations governing ownership of savings bonds validly
preempted community property rights in the bonds that might
otherwise have existed under State law.
The Secretary's
authority also supports establishing rules such as those set
forth below describing how to transfer interests in book-entry
Treasury securities.
A primary concern of these two commenters was that the
proposed rule would require significant changes in the current
structure of clearing arrangements for Treasury securities.
This
was not the intention of the Department, and the Department
believes that the concerns underlying this comment have been
eliminated for the most part by the revisions to the March Rule
that are set forth below.
SECTION-BY-SECTION DISCUSSION
Section 357.1.*/
This section provides that the new rule will
apply to securities transactions occurring on or after a
_*/ Because of the addition of some new sections, certain of the
sections contained in the March Rule have been renumbered.
Unless otherwise indicated, section numbers in this discussion
refer to the sections as numbered below.
Where appropriate for
clarity, the section number preceding the discussion of comments
and changes to any given section is followed by a bracketed
number indicating the section number or numbers of the same
provision as published in the March Rule.
A
8
s p e c ifie d
of
date,
p u b lic a tio n
which i s
of
the
Two commenters
a n tic ip a te d
ru le
in
requested
d es crib in g
the d ate o f
be a p p l i e d
to a repurchase
e ffe c tiv e
p o in t,
date
one o f
a c t i o n s ” in
make c l e a r
e ffe c tiv e
the
the
date
to
proposed
A side
in
in clu d e
for
the
ru le
firs t
step
that
is
issue
of
the
the b a s ic
more t h a n
w o u l d be
structure
the
term
repurchase
and f o r
to
the
of
that
transfers
of
for
T h is would
before
tra n s a c tio n
the
to
change w o u l d n o t
be
proposed
in
ru le .
th at
or
a lim ite d
the
re s u lt
date
As
in ten d ed
s e c u ritie s .
p rin c ip a l
e ffe c tiv e
w h ile
s h o u l d be a p p l i e d
to
Both
on r e d e m p t i o n
t o be e x p r e s s l y
tran sactio n s
a s e c u rity
Departm ent b e lie v e s
the
'’ t r a n s
in vo lvin g
in te re st
of
c o v e r e d by
S ection
the
relevan t.
N evertheless,
which
the
in te re s ts
are
th is
second s t e p .
section
of
the
S u b p a r t 0 w o u l d be
’’ t r a n s a c t i o n s ” was
and pa y m e n ts o f
transactions
rule
how t h e
before
t h e w or d
in itia te d
suggested d r a f t i n g
transfers
in te re s t
proposed
the
w ould
To c l a r i f y
"tra n s fe rs .”
agreements
in
date
ru le
ru le
in itia te d
date.
t h e word
w ou ld be a p p l i c a b l e
t h e M arch R u l e ,
c o n s titu te
to
repurchase
agreements,
payments o f
the proposed
but completed a f t e r w a r d ,
c o n s is te n t w ith
us e d
of
agreement t h a t
3 5 7 .1 (a )
f ro m t h e
repurchase
a p p lic a b ility
as t o how t h e
commenters s u g g e s t e d c h a n g i n g
Section
the
fo ri.
c la rific a tio n
b u t com pleted a f t e r
th at,
a p p lic a b le
fin a l
t o be 60 da y s a f t e r
357.1
two o r more
in
a s e c u rity ,
d e s c r i b e d ab o ve w i l l
be
the
the
9
appropriate one as a general rule:
each transfer should be
viewed separately for purposes of determining the applicability
of these regulations.,
At the same time, the Department
recognizes that having a single transaction subject to different
rules depending upon the timing of each step in the transaction
in some cases may cause unnecessary complexity.
Furthermore, for
transactions such as secured loans that will be initiated before
but will continue beyond the effective date of this rule, the
Department recognizes that the parties to such a transaction may
wish to have the entire transaction governed by this rule.
To provide flexibility for such transactions, the Department
has added a new sentence to Section 357.1(b) that permits
selection of either the existing regulations or the new Part 357.
The provision requires an agreement in writing and applies only
to transactions that will bridge the effective date specified in
Section 357.1(a).
The March Rule provided that a transaction involving a
transfer would be deemed to have occurred for purposes of this
section on the date on which occurs the act that constitutes a
transfer as described in this Part.
One commenter suggested that
if Section 357.1(b) were intended to describe when a transaction
occurs for all purposes of the proposed rules, then Section
357.1(b) should state that a transaction occurs "at the time” of
transfer rather than on the date of transfer, since several
transfers of a security can occur on a single day.
The
10
Department has not adopted this change since Section 357.Ifb) 'was
intended to have the limited purpose of describing when a
transaction occurs for purposes of the effective date set forth
in Section 357.1(a).
The Department has added wording to Section
357 o1(b ) to clarify this point*
Section 357*2.
provision.
This section is the basic governing law
The March Rule provided that the rights and
obligations of the United States would be governed by applicable
Federal law.
The rights and obligations of others would be
governed by applicable Federal law, and to the extent not
inconsistent with Federal law, by State and local law.
As noted above, questions as to the interaction of these
rules with State law arose in connection with several comments.
For example, one commenter suggested that, in proposing a rule on
the transfer and pledge of Treasury securities, the Department
should be cautious about creating rules resulting in different
consequences for holding Treasury securities than would be the
case for other uncertificated securities governed solely by State
law. In particular, this commenter suggested that it would be
unwise to ignore existing State law on secured transactions which
represent the working out of relative rights of parties to a
transaction.
The Department agrees that, as a general proposition,
caution should be exercised in varying or preempting State law.
11
However,
the
Department notes
that
S u b p a rt 0 a l r e a d y preempt S t a t e
ev e n w i t h
issues
the m i n i m a l i s t
com pletely
q uestions
the
to
become t h e
book-entry
p rin c ip le s
are
fu rth e r
ru les
le g a l
F in a lly ,
of
may be
the
”U C C " ) .
some o f
yet
t o be
re la tio n s h ip s
transferred
s u b jec t
of
re e v a lu a te d .
government
G iven
of
rig h ts
Recent
the
in
the
in
transfer
law o f
concerning
of
of
rules
im portant
the
in
a c e rtific a te .
len d in g
property
have d e v e l o p e d ,
p a rtie s
the
recent
that
secured
as new t y p e s
is
that
and
r e e x a m i n e d and
tran sactio n s
in
such a p r o c e s s .
Department
u n ifo rm ity
government
f ro m
in te re s ts
the
ju st
such
stem f r o m some o f
tran sactio n s
re fle c ts
in te re s t
the
change
M atters
the U n ifo rm
suggests
the
respect
adopted
ev e n w h e r e
w he re
among t h e v a r i o u s
fo reg o in g ,
Federal
a rise
that
secured
that
w ith
body o f
have
8 of
of
questions
re s u lts .
a ris in g
d ealers
w ith o u t
litig a tio n
s e c u ritie s
p a rtic ip a n ts
that
Department notes
to
states
litig a tio n
resolved
these
p red ictab le
Furtherm ore,
the
a p p lic a tio n
an a c c e p t e d
a ll
many
in te rp re ta tiv e
of
to A r t i c l e
s e c u ritie s
has c o n t i n u e d
balance
the
1978
(the
are
are
the
provide
revisio n
the
government
and
g e n e ra lly
to
Furtherm ore,
As a r e s u l t ,
not
because not
Code
s e c u ritie s
that
operates
is
of
w hich l e a v e s
ap p ro p riate
litig a tio n .
there
of
not a l l
in
issues
concepts
the
s e c u ritie s ,
been a d o p t e d ,
fa ilu re s
of
Subpart 0 ,
the
although
re g u la tio n s
some e x t e n t o
a v a rie ty
com plicated
found
Commercial
hav e
su b ject
that
law ,
concerning
re g u la tio n s ,
e x is tin g
law to
approach o f
State
have a r i s e n
e x is tin g
have
to
the
continues
to b e lie v e
and c e r t a i n t y
s e c u ritite s
for
market w a rra n ts
12
s u p p la n tin g
in
State
law w i t h
Treasury book-entry
a Federal
s e c u ritie s .
ru le
In
d ra ftin g
the
D e p a r t m e n t has n o t a t t e m p t e d
to v a ry
law
rules
in
governing t ra n s a c tio n s
Instead*
the
of
that
rules
Departm ent's
balances
m a r k e t and p r o v i d e s
exp ectatio n s
m arket.
resolve
most n o t a b l y
commenter
Federal
Reserve
S ection
8-102(3)
boo k-entry
cated
the
in
for
the
a rb itra rily
also
of
proposed
provide
a ll
g ivin g
a ra tio n a l
e ffe c t
t h e Ma rch R u l e
to
of
the
State
p a rtic ip a n ts
e ffic ie n c y
the a re a
the
to
in
fa ile d
set
the
investor
and l i q u i d i t y
competing
ru le
ru le ,
s e c u ritie s .
have bee n v e r y u s e f u l
revisions
Banks as c l e a r i n g
of
t h e UCC.
s e c u ritie s
Federal
s u g g e s t e d an a p p r o a c h
eith e r
of
the
in
to
ach ieve
claim s.
pu b lish ed
The
below
or
to
in
and p l e d g e s o f
advantage
of
Treasury
throughout
it
s e c u ritie s
ju ris d ic tio n .
the
name o f
the
be
Federal
the
in
deem a l l
d e fin itiv e
form
in u n c e r t i f i
Reserve
Bank o f
t h e UCC as a d o p t e d by New Y o r k w o u ld g o v e r n a l l
providing
that
app ro ach would a l s o
bearer
transfers
not b e lie v e
This
w ou ld v i e w
as d e f i n e d
in
so t h a t
c e rta in ty
co rpo rations*
Bank o f New Y o r k
Re s e r v e
for m r e g i s t e r e d
th at
t o be h e l d
New Y o r k *
of
to
tra n sac tio n s
those d e f i c i e n c i e s .
Another
the
a framework
t h o s e a r e a s w her e
goals*
is
the
investm ent
in te re s ts
preserving
Departm ent b e l i e v e s
at
the
The comments r e c e i v e d
id e n tify in g
these
w h ile
goal
go v ern in g
is
s e c u ritie s .
u n ifo rm ity
t o be s u b j e c t
approach
and p e r h a p s
the m arket.
ap p ro p riate
This
H o w ev er *
for
to
the
the
has
the
a reasonable
the
e n tire
laws o f
le v e l
D e p a r t m e n t does
market
a sin g le
in
S ta te 's
13
Instead*
ap p ro p ria te
to
tra n sac tio n s
conceptual
the
Department
provide
in
approach of
preem ption of
w ith
the
fu rth er
proposed
the
ru le
law:
given
the
th e
broad a u t h o r i t y
re g u la tio n s
concluded
re la tin g
that
of
a better
the
taken
law w i l l
for
w ith
in
approach w i l l *
focuses
w ith
w he ne v er
the
a p a rtia l
(1979)*
in to
ap p ro p ria te ,
on b a l a n c e ,
rather
if
A fter
the
the
that*
the
ru le*
Departm ent
S tate
in
and
accordance
in
issues
con fusion
w ith
U. S. v .
from S ta te
l a w as
not
has
law
d erived
Federal
than e x c lu s io n ,
that
the
rule
e x p lic itly
because
as w o u l d be
that
th is
it
the
case
preem ption.
had n o t been c o v e r e d i n
w arra n ties*
less
a
prom ulgate
p rin c ip le s
for
of
between
The D e p a r t m e n t b e l i e v e s
cause
One comment n o t e d c e r t a i n
th at
to
to preempt
ap p licab le
law .
on d r a w i n g
Supreme C o u r t d e c i s i o n
reg u latio n s.
on i n c l u s i o n
lin e
the
d e a lt
that
m o tiva tin g
s e c u ritie s ,
is
Rule*
such a p a r t i a l
Department
a n tic ip a te s
715
incorporated
d e c is io n ,
d e a lt
by t h e
F o o d s * 440 U . S .
be
the
approach
The D e p a r t m e n t
K im bell
in terest
to T re a s u ry
com pletely.
approach
law under
the
focus a t t e n t i o n
Federal
for
not e x p l i c i t l y
any p r e c i s i o n
p r e e m p t i o n w o u ld u n n e c e s s a r i l y
is
l a w p r o v i s i o n was t h a t
t h e D e p a r t m e n t has c o n c l u d e d
w ith
it
the-M arch
r u l e s w o u ld be g o v e r n e d by S t a t e
in d es crib in g
To e m p h a s i z e
that
framework
Under
issues
p r e e m p t e d and n o n p r e e m p t e d S t a t e
lin e .
the b as ic
governing
State
co n sid eratio n *
d iffic u lty
its
to b e lie v e
government s e c u r i t i e s .
p a rtia l
in
in
continues
an y *
of
s p e c ific
areas
t h e M arch R u l e .
issuers
of
in
e x is tin g
Th e y a r e
in stru ctio n s
law
the
(S ection
8-306
of
14
the
UCC) ;
the
effect,
(S ectio n
8-311
proof
a tra n s fe ro r's
the
of
form al
of
if
any,
t h e UCC);
re q u is ite s ,
of unauth orised
a purch aser's
au th o rity
if
any,
of
in s tru c tio n s
rig h ts ,
(S ectio n
if
8 - 3 1 6 ’o f
transfers
any,
to
t h e UCC);
(S ection
8-319
and
of
the
UCC) .
Two o f
the
context
t h e s e w ou ld a p p e a r
of
"in s tru c tio n "
TRADES.
is
u n c e rtific a te d
tran sfer,
to
the
s e c u rity ,
of
the
issu er
tran sfer,
the
to
the
the
of
under
8-306
o rig in a to r's
the
of
Under S e c t i o n
8-311
of
or
of
an u n a u t h o r i z e d
purchasers,
release
in s tru c tio n
t h e UCC,
of
is
of
an
t h e UCC run
in s tru c tio n
sig n atu re,
an
of a
The w a r r a n t i e s
Section
in
an
f ro m p l e d g e .
person under
pledge,
of
re g is tra tio n
th ird
and c e r t a i n
t h e UCC,
issuer
or
in e ffe c tiv e n e s s
an u n a u t h o r i z e d
in a p p lic a b le
8-308(4)
t o any p e r s o n g u a r a n t e e i n g
and t o a d e b t o r
circum stances.
the
requesting
release
g u aranteein g
valu e,
assert
or
Section
as an o r d e r
an i n s t r u c t i o n
issu e r,
s p e c ia lly
for
defined
pledge,
o rig in a to r
U n de r
t o be g e n e r a l l y
or
to a purchaser
ce rta in
an owner may
in stru ctio n
a g a in s t
and an i s s u e r who r e g i s t e r s
an u n c e r t i f i c a t e d
sub ject
to
s e c u rity
lia b ility
for
a
upon
improper
re g is tra tio n .
In TRADES, book-entry securities are transferred
electronically on the books of Federal Reserve Banks and in many
cases on the books of the book-entry custodians that comprise the
system.
Transfers on TRADES do not constitute registration for
purposes of Article 8 of the UCC, and an ”instruction,M as that
15
term
is
us e d i n
us e d
in
TRADES,,
us e d
to
request a tr a n s fe r
S ection
sections
are
Thus*
relevan t,
as t h e
of
the Departm ent
8-316
the
for
s e c u rity
to
of
the
must s u p p l y t h e
a u th o rity
to
s e ll.
re je c t
UCC p r o v i d e s
e n fo rcea b le
d ec isio n
request”
TREASURY DIRECT
believes
that
to
p rin c ip le s
by a c o u r t ,
(see
provisions
s e c u ritie s
u n d erlyin g
a n tic ip a te s
to
resc in d
the
a con tract
that
in
co m pl y g i v e s
tran sfer.
for
the
held
these
t h e y would
accordance
a g a i n s t whom e n f o r c e m e n t
is
sought,
met.
in a p p ro p riate
re g u la tio n s ,
to prom ulgate
since
spe ed w i t h w h i c h
s e c u ritie s
n e ith e r
tran sactio n s
of
a
tra n s fe ro r's
purchaser
the
8-319
of
the
s e c u ritie s
is
not
other
that
Federal
p rovisions
fre q u en tly
the
s i g n e d by t h e
b elieves
these
the
or unless
a s p e c ific
of
of
of
occur
it
party
s p e c ifie d
is
ru le
in
these
is
suited
in
the
to
the
government
m arket.
In te ra c tio n
another
The D e p a r t m e n t
tran sfero r
S ection
sale
some w r i t i n g
are
the
proof
is
c rite ria
unless
that
purchaser w ith
F ailu re
or
that
UCC p r o v i d e s
there
th at,
in
in a p p lic a b le
general
a n y p r o c e d u r e now
Foods.
Section
are
to
to a " tra n s a c tio n
a s e c u rity
the Departm ent
rule
Kim bell
correspond
more c o m p a r a b l e
To t h e e x t e n t
be a p p l i e d
rig h t
is
does n o t
t o an ^ I n s t r u c t i o n ”
TRADES.
w ith
It
3 5 7 .2 8 ).
re la tin g
in
t h e UCC,
issue
to avo id
requirem ents,
of
the
proposed
ru le
a d d r e s s e d by c o m m e n t e r s .
su b je c tin g
overseas
w ith
fo re ig n
Two commenters
them t o p o t e n t i a l l y
book-entry
l a w was
custod ian s
suggested
c o n flic tin g
le g a l
s h o u l d be e x e m pt
16
from
the
customer
proposed
ru le
unless
have made a v a l i d
of
a ny
state.
of
exem ption
T h e ir
to
choice
proposed
S ection
357.2
w o u l d hav e added a d e f i n i t i o n
to
S ection
the b o o k -e n try c u s to d ia n
of U nited
States
s o l u t i o n w ou ld ha v e
as p r o p o s e d i n
of
the
and
law or
its
the
law
add ed l a n g u a g e
M arc h R u l e
'“o v e r s e a s b o o k - e n t r y
and
cu sto d ian "
3 5 7 .3 .
Although the Department agrees with the basic concept* a
different solution was chosen that does not require defining a
new category of book-entry custodian.
3 5 7 .2 (c )
Instead* a new Section
simply provides that rights and obligations, other than
rights and obligations of the United States, arising out of
interests in securities maintained on the books of a book-entry
custodian at a place outside the United States are governed by
the foreign law applicable to the business of the book-entry
custodian, unless the book-entry custodian and its customer have
made a valid choice of United States law.
The Department believes this formulation reaches the same
results as those intended by the proposals of the two commenters
on this issue, but avoids some of the issues that might arise
unnecessarily by defining a separate category of book-entry
custodians.
For example, under the language proposed by one
commenter a book-entry custodian that qualified as an overseas
book-entry custodian and operated a custodial business in the
United States arguably could have claimed exemption from the
regulations even with respect to the U.S. custodial business by
17
v irtu e
of
In
q u a lific a tio n
a d d itio n ,
language
q u a lify
one commenter s u g g e s t e d a d d i n g
providing
that
as an o v e r s e a s
a branch
is
as an o v e r s e a s b o o k - e n t r y
a branch o f
book-entry
not a l e g a l
co rp o ra tio n .
Under
may c o n d u c t
cu s to d ial
e n tity
a dom estic
cu s to d ian ,
separate
the D e p artm ent's
Whether or
s p e c ific
s e c u r i t y w ou ld depend upon w h e r e
and wh at
arrangem ent
la w .is
rules
an o v e r s e a s
book-entry
custod ian
the U n ite d
c u s to d ia l
a c tiv itie s
of
the
d e s c rip tio n
the
custod ian .
maintenance
a ffe ct
the U n ite d
the
degree
U n ited
a c tiv itie s
should not
w hether
le v e l
States
question
of
of
IKS.
a sin g le
records
e n tity
the
respect
to
U n ited
any
are
c u s to d ial
fact
s u ffic ie n t
for
conducted
to d e fe a t
or
In
in
in
the
the
records
it
an e n t i t y
th at,
U n ited
m ain tain ed
necessary
in d iv id u a l
U n ited
exem ption,
w ill
the
to
case,
States
m aintained
t h a t may be d e t e r m i n e d by w h e t h e r
fe ll
agrees
the
or
the
g e n e ra lly
s e c u ritie s
b elieve
the
records
w o u ld q u a l i f y
records
35 7 .2 .
p e rm ittin g
that
The D e p a r t m e n t
b u t does n o t
on f a c i l i t i e s
back-up
provided
that
exemption
a c tiv ity
language
custodian
back-up
to S e c tio n
re lia n c e
is
of
the
States,
language
of
boo k-entry
of
alone,
add s p e c i f i c
States
book-entry
as an o v e r s e a s
outside
the
to m a in ta in
in
States
the
one commenter p r o p o s e d a d d i n g
fa c ilitie s
standing
to
te c h n ic a lly
and w i t h o u t
app ly w ith
a p p licab le
computing
the
although
may
in q u e s tio n .
F in a lly ,
w ith in
corpo ration
fo rm u la tio n ,
S tates.
m ain ta in e d
these
s p e c ific
from th e
business both w i t h i n
not
cu s to d ian .
or
in
the
be a
s p e c ific
18
arrangement
in
q u e s t i o n was
and w h e t h e r
it
had t h e
circum vent
the
Another
Section
tra n s a c tio n
State
appearance
a p p lic a b ility
commenter
357 ,2
that
in
tra n sac tio n .
a reasonable
re la tio n s h ip
S tates,
However,
able
to
its
select
for
relevan t
because
Federal
the
l a w as
Section 3 5 7 , 3 ,
the
ad d itio n
of
a sentence
of
the
re la tio n
the
State
the
law o f
to
to
is
im p lic it
a tran sactio n
m aintained
outside
the
business
law
in
of
in
lie u
the U n ited
of
ap p licab le
preem ption of
for
the
that
State
the
to
any
law b e a rin g
in
the
U n ited
an e n t i t y
States
s h o u l d be
ru le .
law
is
The
no l o n g e r
law d e s c r i b e d
p a rtie s
a
that
pr o p o se d
State
to
the
fo reig n
law t h a t
rule
p a rtie s
of
making a c h o ice
of
to
t o make a c h o i c e
The D e p a r t m e n t does a n t i c i p a t e
may s e l e c t
in te n d in g
t h e D e p a r t m e n t does n o t b e l i e v e
fo reig n
of
circum stances
re g u la tio n s ..
a reasonable
s e c u ritie s
cu s to d ial
question
the
sim ply
t o make a c h o i c e
The a b i l i t y
ru le
of
the
w ou ld ha v e e x p r e s s l y p e r m i t t e d
which b ea rs
proposed
of
suggested
a s e c u rity
or n a tio n
con ducting
reas o n a b le under
above.
to a t r a n s a c t i o n
may be i n c o r p o r a t e d
in to
a p p lic a b le
d ecisio n .
This section includes all of the defined terms
for purposes of Part 3 5 7 ,
including definitions already published
in final form in the final TREASURY DIRECT rule,
51 FR 1 8 2 6 0 ,
Certain new definitions have been added, and certain definitions
previously published have been revised.
revisions are described below.
The additions and
19
The d e f i n i t i o n s
""clearing
of
of
"c le a r in g
’
foank^” " c l e a r i n g
’
s e r v i c e s ” a r e new and a r e
S ection
357.15*
The d e f i n i t i o n
of
a new p r o v i s i o n
""depository
e xp lain ed
d ea lin g
in
w ith
l i e n , ” and
the
c learin g
i n s t it u t io n ” p re v io u s ly
t h e TREASURY DIRECT r u l e
has a l s o
its
the
context
of
” is s u e ” is
defined
t o mean s e c u r i t i e s
a p p lic a b ility
The
term
in
a s in g le
CUSIP number.
id e n tify
s e c u ritie s
S e c u ritie s
of
Id e n tific a tio n
two new p r o v i s i o n s *
been
included
the
same i s s u e
by t h e
P rac tices .
Sections
the
The
3 57 .12 (c )
lie n s .
included
357.15.
id e n tifie d
number a s s i g n e d
Committee
term
in
below because o f
new S e c t i o n
A CUSIP number i s
the
d iscu ssio n
by
to
on U n i f o r m
" is s u e ” is
us e d
in
and 3 5 7 . 1 4 ( e ) .
This manner of defining an issue applies to securities of
the same interest rate and maturity that generally are issued on
a single day* as well as the principal and interest components
separated under the Department's STRIPS program.
Whether or not
a security is eligible for STRIPS is determined by the offering
circular for that security.
If a security is stripped* each
component is given a different CUSIP number.
Interest payments
stripped from securities of different maturities but which are
due on the same day will bear the same CUSIP number and are
indistinguishable from one another.
Therefore* once stripped*
the interest payments due on the same date are treated, for
purposes of this rule* as a single issue.
The definition of "person" has been revised to include
20
governmental
e n titie s .
The d e f i n i t i o n
s p e c ific a lly
for
in
that
purposes o f
response
to
of
" s e c u r i t y ” has been exp an de d t o p r o v i d e
a bo o k-en try Treasury
State
and l o c a l
comments t h a t
m ight o th e rw is e
be c o n s i d e r e d
law.
c la rific a tio n
is
State
p ro visio n
or
is
not
Federal
Reserve
U n ited
States,
to
th e
legal
for
however,
Banks,
that
was made
a boo k-entry
s e c u rity
various
of
some pur poses*,
consequences.
Section
sub ject
when a c t i n g
o b lig a tio n s
UCC as a d o p t e d by t h e
to
a s e c u rity
c la rific a tio n
purposes o f
d iscu s sed under
intended,
the
the
im p ortan t
law p r i n c i p l e s
is
an " i n t a n g i b l e ” f o r
u n p re d ic tab le
of
This
in d ic ated
which could c r e a t e
also
s e c u rity
the
in co rp o ratio n
357.2
above.
the U n ite d
as f i s c a l
an i s s u e r
The
agents
The
States
of
under A r t i c l e
the
8 of
states.
The March Rule defined a "book-entry custodian" as a person
other than the Department or a Federal Reserve Bank that in the
the ordinary course of its business maintains book-entry
securities accounts for others.
The definition also specifically
provided that a book-entry custodian could have a security
interest in securities held for another person and also could
hold securities for its own account.
A comment was made proposing that the definition of
"book-entry custodian” be expanded to state specifically that the
book-entry custodian may be the transferor of the security or
security interest, because the usual meaning of the term
^custodian" is an independent third party-
This proposal may
have also been prompted by the discussion of Section 357.13(d) in
the section-by-section analysis of the March Rule, which
suggested in another context that an effective transfer of a
security interest would require the involvement of a third party
having no interest in the transaction giving rise to the security
inte rest.
The Department does not believe that an amendment of the
definition of "book-entry custodian" is necessary-
However, it
should be emphasized that, notwithstanding any statement to the
contrary in the discussion of the March Rule, under the proposed
rule an entity may be both the book-entry custodian and the
transferor of a security or a limited interest.
The Department
recognizes that many repurchase agreements are structured in
precisely this way.
Although a greater degree of protection may
be gained by using a third-party custodian for such transactions,
the parties are not required to do so under these regulations.
In response to a suggestion in the comments, the Department
considered adding definitions of the terms "transferor" and
"transferee," but concluded that the meaning of these terms is
sufficiently clear in the context of the rule.
Several commenters proposed additional defined terms in
connection with new regulatory language they had proposed.
Exclusion of these proposed definitions for the most part
22
d e p e n d e d upon t h e
as d i s c u s s e d
S ection
of
the
elsew here
35 7 .1 0 .
in te re s t
U n ited
to
provides
States
that
is
are
date
d escrib es
paid
the u n d e rly in g
the
at
the
that
tim e
cu s to d ian ,
upon
by w h i c h
the
o b lig a tio n
payment
R e s e r v e Ban k.
It
re c e ip t
pa ym en t a v a i l a b l e
issue,
a n a ly s is .
procedure
and p r o v i d e s
a Federal
must make t h e
to
se c tio n -b y -s e c tio n
discharged
a book-entry
of
response
th is
section
an a c c o u n t a t
a custom er,
on t h e
This
in
and p r i n c i p a l
cred ited
for
D epartm ents
to
is
also
of
the
a pay men t
customer
re c e ip t.
One Federal Reserve Bank noted that the time frame specified
for making payments available might be difficult to comply with
because the mechanics of crediting such payments may involve
end-of-day batch processing.
It is the Department's
understanding, however, that depository institutions consider the
funds available at the beginning of the day even where the actual
paperwork regarding the credit may not be completed until the end
of the day.
The Department believes this is the correct view and
notes that no depository institutions or other entities that
might be affected by the rule made a similar comment.
No change
to the rule was made.
S ection
b oo k-entry
a v a ila b le
357 .10 (d )
custod ian
to
has been m o d i f i e d
t o make p r i n c i p a l
a c u s to m e r
s u b je c t
to
any
t o make t h e d u t y o f
and i n t e r e s t
rig h ts
c u s t o d i a n may hav e as a s e c u r e d p a r t y u n d e r
a
____ _
a
p ay m e n ts
the b o o k -e n tr y
a w ritte n
s e c u rity
23
agreement*
The original provision was not intended to override
any claim that the book-entry custodian might have to such
payments arising from an express agreement with a customer.
Section
of
3 5 7 .1 1 .
Section
transferee
in
8-301
upon a c q u i s i t i o n
the
p rio r
the
tran sfer.
One commenter
that
the
in terest
rig h ts
u p p e r-tie r
its
In
altern atives?
e ith e r
p rin c ip a l
in te re s t
in
the
holder,
a s e c u rity
suggested
to
is
the
a nd ,
book-entry
agent,
i n w h ic h case
it
of
rig h ts
that
book-entry
of
are
rule
a
a lim ite d
in te re s t
th is
be amended
rule
custodian
a transferee
cus to d ian
appear
book-entry
tra n sac tio n
th e
there
or
the
s h e lte r
"t r a n s f e r o r 9 includes
1
that
T h i s w o u ld
ou r v i e w ,
or
rig h ts
own b o o k - e n t r y
custod ian .
in c o n s is te n t.
describes
and t h e
ra tio n a le
that
the
reference
holder
The
m od el ed a f t e r
It
of
is
8.
a s e c u rity .
the
357.11
of A r tic le
t o make c l e a r
to
Section
both
e ffe c tin g
should
succeed
has a g a i n s t
any
t o be i n t e r n a l l y
two m u t u a l l y
cu stod ian
is
e x c lu s iv e
actin g
therefore,
is
the p r i o r
cu s to d ian
is
acting
as a
custom er.
the
of
its
has no r i g h t s
in
the
s e c u rity
as an
independent
Another commenter suggested a substantial revision of
Section 3 5 7 . 1 1 as part of its approach to reintroduction of the
concept of a bona fide purchaser.
A major feature of this
commenter's proposal was to rely on State law to determine the
consequences of a transfer. This commenter felt that the 8shelter
8
rule®8 as stated in proposed Section 3 5 7 . 1 1 ,
absent a bona fide
purchaser rule, would have the substantive effect of creating a
set
of
Federal
provide
that
purposes
change
these
of
and p r o p o s e d c h a n g i n g
a transfer
State
since
rules
rig hts,,
it
would be an e f f e c t i v e
law.
in
that*
c o lla te ra l
9-504(4)
of
in te ra c tio n
that
State
in
fact*
of
is
would
ju s t
look
9-504(4)
357.2
to
State
covered
transfers
of
of
Transfer
con vey s
of
of
Federal
a d is p o s itio n
to
is
as
the
purchaser
provided
in
where
w ith
by th e
were
the
of
the
supply
357.12
s e c u ritie s
in te re s ts
in
a s e c u rity
to
question
that
law to
[Sections
changes
Section
at
Department
the
rule
in
Section
3 5 7 .13 .
the
tim e
of
the
the
expressed
resu lt
of
in
d ictated
in co n s isten c y
357.2
in
discussed
litig a tio n
a n tic ip a te s
for
and 3 5 7 . 1 3 ) .
a ll
w o u ld be
the
to a r i s e
of
Section
that
ideas
Section
to
which p r o v i d e d
it
the
that
rig h ts .
w o u ld be u s e f u l
The q u e s t i o n
a F e d e r a l R e s e r v e Bank o r
of
Section
t h e March R u l e *
th e UCC.
s e c u r i t y was deemed t o o c c u r
books
it
the d e b to r*
re g u la tio n s *
such an i s s u e
357.12
s e c u rity
of
a set
m i g h t be v i e w e d as p r e c l u d i n g
S ection
of
suggested t h a t
these
Furthermore*
for
for
of
The commenter was c o n c e r n e d
Section
has bee n e l i m i n a t e d
above.
basis
l a w w oul d be n o t a p p l i c a b l e
357.11
by S e c t i o n
the
the c o l l a t e r a l *
t h e UCC.
in c o n s is te n t w ith
S ection
357.2
by a s e c u r e d p a r t y
rig h ts
for
th is
upon d e f a u l t
d e b to r's
tran sfer
to
from t h e d i s c u s s i o n
One commenter a l s o
c la rify
language
The D e p a r t m e n t has n o t a d o p t e d
follow s
are,
the
it
a court
d e c isio n .
The March R u le
357.12
and t r a n s f e r s
A transfer
an e n t r y
a b oo k-entry
is
of
a
made on t h e
custod ian .
i n t e r e s t was deemed t o o c c u r
(i)
at
the
time an entry is made on the books of a Federal Reserve Bank or a
book-entry custodian;
(ii) at the time written notification is
received by a book-entry custodian; or (iii) where the secured
party is to be the book-entry custodian,, when the security is
received in an account for the transferor of the security
inte rest and a written agreement is executed.
Several commenters indicated that they believed the proposed
rule made an unnecessary distinction between transfers of
ownership and transfers of security interests, and that the
correct characterization of a transaction should be left to other
law*
It was pointed out that a single transaction may be subject
to different characterizations for different purposes.
This is
especially true for repurchase agreements and reverse repurchase
agreements, which constitute a substantial portion of the daily
activity in the government securities market.
One commenter also
suggested that the transfer provisions in the March Rule might
require modification of the back office procedures to give full
recognition in account titles and records to pledges of
securities.
The proposed solution suggested by some commenters
was to combine into a single provision the rules for transfers of
securities and transfers of limited interests in securities.
In drafting the proposed rule, the Department did not intend
to require new procedures on the part of book-entry custodians.
Instead, the Department drafted provisions that conformed to
existing practices in various parts of the market.
By providing
26
alternative methods of transfer, the Department believes it
provided sufficient flexibility so that no single entity would be
required to significantly restructure its operations.
In
addition, the Department recognized the importance of variable
characterization described above and intended to permit parties
to accomplish a repurchase transaction without necessarily
characterizing it as either an outright sale and repurchase or as
a secured transaction.
The flexibility to do this was preserved
by explicitly recognizing in the proposed rule that a transfer
that may appear on the books of a book-entry custodian to be a
transfer of outright ownership may also serve as merely a
transfer of a security interest.
Since repurchase agreements
customarily contain language that constitutes a sale and
repurchase as well as alternative language describing the grant
of a security interest, it would have been possible under the
proposed rule to take the position either that the transaction
was a sale and repurchase or that it was the grant of a perfected
security interest.
Given the number of comments on the point that the
Department received, the Department decided to make certain
changes that will more clearly preserve flexibility. However,
the Department was reluctant to go quite as far as the drafting
solutions proposed by two of the commenters that would have
completely combined within a single descriptive phrase transfers
of ownership of securities and transfers of limited interests.
The Department felt that although a certain flexibility should be
-
27
preserved, the rule should not encourage intentional ambiguity*
The refore,
instead of using a single descriptive phrase,
the
Department chose to combine Sections 3 5 7 * 1 2 and 3 5 7 * 1 3 as
originally proposed into a single new Section 3 5 7 . 1 2
that is
structured in a manner similar to Section 8 - 3 1 3 of the UCC.
addition,
In
the Department has substituted the term "limited
interest" for the term "security interest" in recognizing that
there are a whole range of limited interests in property other
than security interests.
Under the new Section 3 5 7 . 1 2 ,
certain
of the transfer methods may apply to both transfers of securities
and transfers of limited interests while others, by their terms,
are confined to transfers of limited interests*
The Department
felt that although a certain flexibility should be preserved,
the
rule should not encourage intentional ambiguity.
Two commenters also suggested that what constitutes a
transfer should not be limited to the single act of crediting a
securities account.
The commenters suggested that any entry that
permits identification of an interest in favor of the transferee
should be sufficient to constitute a transfer.
The Department
agrees with this approach and has adopted language similar to
that suggested in the comment letters.
Another commenter also suggested changing the word "books"
to "records" in the proposed rule to avoid an implication that a
transfer cannot occur until end-of-the-day reconciliation of a
book-entry custodian's books.
The Department believes that any
28
such implication is eliminated by the change discussed in the
preceding paragraph.
Two commenters also recommended that the use of subaccounts
be specifically authorized as a means of accomplishing a transfer
since the computer programs of several clearing banks are
structured to permit their use.
We understand that what happens
operationally is that a dealer may effect a transfer to its
customer by directing the dealer's clearing bank to move
designated securities into a subaccount of the dealer's account
on the books of the clearing bank that specifically identifies
the dealer's customer as the transferee.
The Department believes
that it is not necessary to add specific language referring to
subaccounts since the transaction as described falls within the
terms of the general transfer rule.
However, the Department
notes that the use of subaccounts raises an interpretative issue
with potentially significant consequences for the dealer and its
clearing bank that would not be resolved by adding proposed
language explicitly authorizing the use of subaccounts.
The
basic question is who is acting as the book-entry custodian for
the customer?
Since the entry reflecting the transfer may be
made on clearing bank's books rather than on internal records of
the dealer, arguably the clearing bank may be the book-entry
custodian for the dealer's customer and would therefore be
subject to the provisions setting forth book-entry custodian
warranties and other duties with respect to the transfer to that
customer.
However, it is unlikely that this reflects the
2S
expectations of either the clearing bank* the customer* or the
dealer.
An implicit assumption of the transfer rules and the rules
describing the duties and warranties of book-entry custodians has
been that a transfer is recorded on the books of the entity with
whom the transferee deals and that will maintain the security for
the transferee* whether or not* between the transferee and that
entity* their dealings are expressly characterized as involving a
custodial arrangement.
Under this view* if a dealer engages in a
repurchase transaction with another entity where the dealer
retains control of the security* then the dealer would constitute
a book-entry custodian for purposes of these rules.
To take into account the assumption just described and to
avoid a result that would view the clearing bank in the
hypothetical described above as the book-entry custodian for the
dealer's customer*
the proper view is that subaccounts within a
dealer's account on the books of the clearing bank should be
viewed as constituting part of the dealer's records as well as a
part of the records of the clearing bank.
Under this view, the
use of a subaccount clearly falls within the general description
of a transfer* and it is the dealer that must carry out the
duties and warranties of a book-entry custodian with respect to
that transfer.
It should also be noted that a subaccount
transfer may constitute a segregation of customer securities
that* in accordance with new Section 3 5 7 . 1 5 ( c ) *
prevents
30
assertion of a clearing lien unless expressly agreed to by the
dealer's customer.
One commenter p o i n t e d
out
b o o k -e n tr y custod ian
taking
m ight
s e c u rity
agree
fu lfillm e n t
fo rth
the
in
that
of
the
in
a s e c u rity
some c o n d i t i o n
Section
that
3 5 7 .1 2 (a )(5 ).
in te re s t
in
delayed
between
the
effective n ess
in terest
To p r o v i d e
of
from i t s
w o u ld n o t a r i s e
a d d itio n
D e p a r t m e n t has added new l a n g u a g e
perm its
some c i r c u m s t a n c e s
to
for
the
customer
u n til
requirem ents
set
such s i t u a t i o n s ,
as S e c t i o n
a lim ite d
a
357 .12 (b )
in terest
which
by a g r e e m e n t
p a rtie s .
Several commenters expressed concern in a variety of ways
that the March Rule suggested that a book-entry custodian could
make an effective transfer simply by marking its books and
without regard to whether that custodian actually maintained any
of the appropriate securities itself either directly on the books
of a Federal Reserve Bank or through another book-entry
custodian.
The March Rule had been structured as it was in part
to express the idea that at all times after a book-entry
custodian marks its books in favor of a customer, that customer
has rights as against its book-entry custodian to the amount of
securities so transferred to the customer regardless of the
specific time at which the book-entry custodian itself may have
acquired such securities.
However, in light of the comments
received, the Department has reconsidered this issue and
concluded that, although the underlying assumption is correct,
31
t h e M ar ch R u l e may have a p p e a r e d
that
in te n d ed *
reg u lato ry
ownership
language
of
of
lin k
is
accounts*"
on t h e
s e c u ritie s
the
ne e d f o r
books o f
at
a Federal
FR 8 8 4 9 *
d escrib e
entry
for
incorporated
a means o f
concluded
these
the
that
the
is
the
d e fin itio n a l
the
commenters
stored.
concept of
at
This
that
event
of
S ection
tran sfers
and
This
as a " c h a i n
data w i l l
ru le s .
co n stitu te
S ection
made.
a w ritin g
not
wou ld have
some p o i n t
requirem ent
in
include
the
seemed t o
but
an
has
3 5 7 .1 2 (d )
as
The D e p a r t m e n t
was u n n e c e s s a r y
required
tim e,
"w ritte n "
The D e p a r t m e n t
in to
is
of
an e n t r y .
phrases
that
the
that
it
in co rp o rate
so l o n g
suggested
data
not
only
be e x p e c t e d
into
be s i m p l y an e v i d e n t i a r y
the
issue
by
to
rules
in
litig a tio n .
3 5 7 .1 2 (e )
is
a new p r o v i s i o n
d es crib in g
cross-system
b e t w e e n TREASURY DIRECT and TRADES.
Several
in te re s t
Ba nk .
as t o wh at may c o n s t i t u t e
wh at w o u l d more a p p r o p r i a t e l y
the
between
t h e March R u le
language
when an e n t r y
provided
include
cus to d ian
d e fin itio n s
recording
transfer
Departm ent d id
be d i s p l a y a b l e
be
of
d es crib in g
as g u i d a n c e
However,
w h a t means o f
purposes
from
n .2.
Two com menters p r o p o s e d s i m i l a r
that
Reserve
in
to
a lin k
a boo k-entry
w h a t was d e s c r i b e d
51
an i m p a c t d i f f e r e n t
the Departm ent d ec id e d
expressing
re fle c te d
m aintenance
required
Therefore*
t o ha v e
comm ent er s
provided
in
suggested t h a t
Section
3 5 7 .1 3 (c )
the n o t i c e - t y p e
of
the
s e c u rity
M arch R u l e
be
32
e lim in a te d ,
rig h ts
because
and o b l i g a t i o n s
cu s to d ian
and t h e
d iscu s sio n
re ta in in g
of
the
357 .13 (c )
the
that
It
c u s t o d i a n may r e j e c t
in te re s t.
Since
a lte rn a tiv e
in te re s ts ,
to
other
357.13
e n fo rc e a b ility
the
secured
party
th ird
s e c u rity
3 5 7 .1 4 ].
and t h e
above,
of
transform ing
commenters p r o p o s e d
provide
that
that
in
a
of a s e c u rity
the n o t i c e - t y p e
useful
tra n s fe rrin g
se c u rity
sim ply
This
to e lim in a t e
It
section
in te re s t
e n fo rc e a b ility
also
to
several
bet we en
in te re s ts
a c o ro lla ry
covers
sets
the
out
bet we en t h e
the
rules
grantor
of a s e c u rity
the
th is
commenters
tran sfers
and o t h e r
of
lim ite d
su g gestio n,
term ination
and
in te re s t
of
a
v irtu a lly
attachm ent,
and t r a n s f e r
p e rfe c tio n ,
some commenters n o t e d
a ll
that
recommended m i n i m i z i n g
s e c u ritie s
in te re s ts
some o f
recommended e l i m i n a t i n g
a d d itio n ,
out t h a t
a p a rtic u la rly
met hod s o f
of a s e c u r ity
p a rtie s .
d is tin c tio n
s e c u rity
the
in te re s t.
As n o t e d
the
effe ct
in
in te re s t.
[Section
for
ag a in s t
suggested
Department d e c id e d
sec u rity
these
pointed
any such n o t i c e
would c o n s t i t u t e
the
the
n o tice-typ e
S ection
no c o a m e n t e r
in te re st
the
e x p lic itly
book-entry
s e c u rity
be tw ee n t h e b o o k - e n t r y
was a l s o
Some o f
ru le
as t o t h e
w er e d e s c r i b e d
w o u ld have
system.
that
the u n c e r t a i n t i e s
w o u ld e x i s t
March R u l e .
a paper
a lte rn a tiv e
that
of
secured p a r t y
Section
TRADES i n t o
the
p rim a rily
these
and t r a n s f e r s
in
the
a s e c u rity
t er m s
As
commenters a l s o
d is tin c tio n s
of
s e c u ritie s .
of
b et w ee n
in te re s t.
'’ g r a n t 55,
In
- 33 '''creation"
and
"v a lid ity "
other
p rovisions
terms
created
that
that
since
secured
lending,
th e ir
3 57 .1(b )
of
a s e c u rity
in
the
p rovision
is
also
us e d
and s u g g e s t e d
that
these
some o v e r l a p
d ra ftin g
suited
to
the
the
noted
a source
of
the
another
these
was o u t s t a n d i n g
rules
p rio r
in
for
of
confusion
event.
in
to
of
adoption
of
the
the
was
area
in
fe lt
of
that
make t h e
transfer
e xp lain ed
3 5 7 .1 (b ),
d eterm in in g
in
term
c le a r.
As a l r e a d y
purposes
the
It
re la tiv e ly
to a t r a n s a c t i o n
to
ru le
the
comment on S e c t i o n
only
some o f
proposed
appeared
p iv o ta l
in
con text.
m ea ni ng wou ld be
s ig n ific a n t
of
is
t h e March R u le
in te re s t
a p p lic a b ility
that
of
d iscu ssio n
are
them have been te r m s used
One commenter a l s o
Section
in
seemed b e s t
of
ru le,
in te re s t
confusion.
there
to above,
a ll
a sec u rity
proposed
ad m itted ly
referred
was used
the
unnecessary
Although
terms
of
of
that
the
a s e c u rity
th is
ru le
in
fin a l
form.
Two o f
S ection
of
the
357.14
of
attachm ent.
concept
fe lt
in
that
M ar ch R u le
t h e M ar ch R u l e
the
carving
in te re s ts
the
suggested
The D e p a r t m e n t
three
e xtrao rd in ary,
for
comraenters
out
a s e c u rity
to
t h a t w o u ld
included
of
in te re s t
an owner o f
e lim in a te
F irs t,
attachm ent,
be e l i m i n a t e d
f ro m
approaches
attachm ent
two r e a s o n s .
requirem ents
should n o t
belonging
for
a lte rn a tiv e
as b a s i c
the
property.
the
to
concept
as a s e p a r a t e
the
Departm ent
none o f w h i c h
is
p re re q u is ite s
bundle
of
rig h ts
The D e p a r t m e n t
and
34
believes that it is precisely in the case of secured transactions
that many of the uncertainties under Subparf 0 have arisen.,
In
drafting the proposed rule, one of the Departments primary goals
was to eliminate that uncertainty.
It seemed advisable, whenever
possible, to cast the proposed rule in terms of concepts, such as
both attachment and perfection, that have well-established
significance in secured transactions.
The second reason for adoption of the concept of attachment
is that the Department wanted to establish that if automatic
perfection of a security interest lapsed, the security interest
itself would not lapse but would merely become unenforceable
against third parties.
Although it may be the rare case in which
such a question should arise, making no provision for it seemed
to leave an unnecessary gap.
Because of the criticism of its incorporation in the March
Rule, the Department has eliminated use of the term "attachment”
but has not eliminated the three basic requirements associated
with attachment of a security interest.
In doing so, it was
noted that one of the commenters recommending elimination of the
concept also would have retained two of the requirements of
attachment — - that the debtor have rights in the collateral and
that the secured party give value,,
Two comments agreed, in principle, with the requirement of a
written security agreement as an element of perfection of a
35
s e c u rity
in te re s t.
req u irem en t,
Two o t h e r
however,
unnecessary except
The D e p a r t m e n t
requirem ent
accordin g
for
the
case o f
w ritte n
c ertain
cases,
and i n
agrees
discerned
i .e. ,
of
in
it
is
p e rfe c tio n
act
of
the
c o n f i r m e d upon
request.
of
As
a re s u lt,
a g r e e m e n t has been e l i m i n a t e d
ca s e
these
tran sfer
to
set
of
perfect
fo rth
other
the
the
in
s e c u rity
sec u rity
Section
The March R u le
p e rfe c tio n
days.
of
s e c u rity
or
only
if
in te re s t
w ritin g .
t
s e c u rity
357 .13 (a )
provided
the
there
the
for
lie n
357 .15 .
to
req u ire
cu s to d ian .
a
requirem ent
In
in te re s t
of
rules
those
w ill
In
and
a
in
the
cases,
be s u f f i c i e n t
basic
requirem ents
been c o m p l i e d w i t h .
for
or
a period
"tem porary"
of
7 calendar
i n t e r e s t w ou ld c o n t i n u e
s e c u rity
In
can be
cu s to d ian
f ro m t h e s e
were a t r a n s f e r
and t h e
should be*a
a s e c u rity
"autom atic"
in te re s t
lie n .
S ection
as s um in g t h e
hav e
for
s e c u rity
in
p e rfe c tio n .
in te re s t,
a sec u rity
Thereafter,
perfected
methods o f
of
boo k-entry
w ritte n
of
agreement
a boo k-entry
the
ca s e o f
ap p ro p ria te
in te re s ts
records
is
does n o t depend on
some o t h e r
f ro m t h e
the
The c l e a r i n g
p e rfe c tio n ,
of
agreement
in
an a ly s is
p e rfe c tio n ,
th is
and a r e q u i r e m e n t
lie n .
the
to
any c l e a r i n g
a w ritten
p e rfe c tio n
a g r e e m e n t bec au se
types
a w ritte n
case
to a c le a r in g
autom atic
or
the
that
are discussed
book-m arking
other
that
autom atic
p rio rity
requirem ents
s ta tin g
in
tem porary p e r fe c tio n
comments o b j e c t e d
of
the
s e c u rity
a g r e e m e n t we re
to
be
or
the
reduced
to
36
Several
the
comments u r g e d
autom atic
in te re s ts
about
in
to
the
same s e c u r i t y .
th ird
p a rtie s
the
comment,
th is
however,
The
w ithout
in te re s t
ris k
to a l l
perfected
taking
by
other
concerned
a s e c u rity
h a v i n g any means t o
e xists.
As p o i n t e d
w o u ld be m i t i g a t e d
out
in
by a bona
one
fid e
concept.
revised
p e rfe c tio n .
purchaser
th ird
in te re s t
These comments w e r e
or purchasers
such an i n t e r e s t ,
d eterm in e whether
purchaser
a sec u rity
method s h o u l d be s u b o r d i n a t e d
innocent
s u b jec t
that
ru le
The
rules
pro visio n
p arty
re ta in s
also
in
e s p e c ia lly
p e rfe c tio n
and n o t
over
those
re fle c te d
concept of
contain
Section
could p r e v a i l
in te re s ts ,
the
au tom atic
a m o d i f i e d bona
fid e
3 5 7 . 1 4 u n d e r w h i c h an i n n o c e n t
p a rtie s
perfected
having p e r f e c t e d
o n l y by means o f
on t h e books o f
s e c u rity
auto m atic
a b oo k-entry
cu s to d ia n .
Although
p e rfe c tio n
comments
period
le n t
adequate.
the
comment e n d o r s e d
to
the
support
This
Several
of
one
ru le
to
21 days p r o v i d e d
the
re ta in s
view
the
th in g s,
transfer
in te re s t.
that
of
that
the
in
the
S ection
a s e c u rity
the
in te re s t
to
law,
7-day p erio d
other
was
7-day p e rio d .
t h e methods o f
357 .14 (d )
in te re s t
autom atic
e x is tin g
comm ent er s e x p r e s s e d c o n c e r n a b o u t
M ar ch R u l e w h i c h d e s c r i b e d
s e c u rity
lengthening
Section
term in atin g
had p r o v i d e d ,
c o u l d be t e r m i n a t e d
a designee
or
3 5 7 .1 4 (d )
successor
a
among o t h e r
by a
in
in te re s t
37
of
the
grantor
was t h a t
granted
th is
of
the
s e c u ritie s
in te re s t
term inate
s u b jec t
the
to the
to
term
term in atio n
"successor
s itu a tio n
where
in
s e c u rity
provide
fle x ib ility
the
under
means
th is
c learin g
another
account
cu sto d ian
require
at
a c learin g
from t h e
th e
m a in ta in in g
of
d e a le r's
cle a rin g
bank o r
a s e c u ritie s
deb tor.
to provide
or
included
sim ply
so lely
to
term inate
the
by
to
the
For
The
for
acq u ired
in te re s t.
would
its
to perm it
by t h e
in to
tra n sfer
lie n
had
a custom er.
section
was
a s e c u rity
in stru ctio n
a s e c u rity
to
in te re s t
"designee"
that
by t r a n s f e r r i n g
was ad d ed s i m p l y
term inating
on t h e
in te re st
th is
a .dealer
bank c o u l d
in te re st
had been m er ged
and n o t
p ro visio n ,
bank
transfers
The te r m
for
c le a rin g
a s e c u rity
the debtor
e n tity .
as
of
in ten d
in te re s t"
another
its
The c o n c e r n e x p r e s s e d
t o mean t h a t
s e c u rity
The D e p a r t m e n t d i d n o t
u n ila te ra l
in te re s t.
c o u l d be i n t e r p r e t e d
a s e c u rity
u n ila te ra lly
sec u rity
debtor
exam ple,
if
a
d e a le r-c u s to m e r,
c le a rin g
to
account
account
another
at
to
book-entry
a Federal
Reserve
Bank.
B e ca us e
added
to
the
the
phrase
Section
in te re s t
of
comments d e s c r i b e d
"by or w i t h
3 5 7 .1 3 (e )
requires
to c l a r i f y
the agreement
secured p a r t y .
Ho w ev er ,
is
to
not
intended
s e c u ritie s ,
the
it
suggest
above,
agreement
that
of
such as a d e a l e r
Departm ent
the
secured p a r t y "
te rm in a tio n
both
the
s h o u l d be n o t e d
that
of
the
a v a lid
of
debtor
that
a s e c u rity
and t h e
th is
p ro visio n
reh yp o th ecatio n
m i g h t do w i t h
customer
has
of
s e c u ritie s
38
p u r c h a s e d on m a r g i n ,
in te re s t
on w h i c h
w o u ld
the
term inate
the
in itia l
s e c u rity
r e h y p o t h e c a t i o n was b a s e d .
One commenter a l s o w o u l d have added a d e f i n i t i o n
to
Section
deb t.
be
357.3
t o make
it
clear
The D e p a r t m e n t b e l i e v e s
r e a c h e d by l o o k i n g
to
t h a t value
that
State
th is
is
of
includes
the
antecedent
re s u lt
l a w as d e s c r i b e d
"valu e”
above
that
in
w o u ld
Section
357 .2.
The same commenter a l s o
the
concept of
id e n tific a tio n
s e c u rity
toward
where
but
is
w ith
the
s e c u rity
lie n
not
possib le
p u r c h a s e d by t h e
to
dea ler
The D e p a r t m e n t does n o t
requirem ent
s e c u rity .
that
It
a p p ro p ria te ly
the
appears
is
s e c u rity
in te re s t
cle a rin g
account.
is
in
they
1
effe ct
are
in
in
the
requires
b e lie v e
that
u n c ertain ty
the
a ll
unsegregated
Because
of
lie n
account.
th is
that
its
that
the
of
reg u latio n s
to
point
s e c u ritie s
to
day
c re d it.
im p ly
any
w o u l d more
its e lf.
It
is
agreement
c learin g
attaches
the
bank
a s p e c ific
agreement
structure,
a view
s e c u rity
extension
on t h i s
the
c le a rin g
bank d u r i n g
a c learin g
that
of
made w i t h
to
be t i e d
c learin g
that
provide
sub ject
s p e c ific
the
that
to
the
th e
extension
in
be c l a r i f i e d
comment i s
c re d it
a flo a tin g
that
is
by a d e a l e r
p in p o in t
understanding
d rafted
the
it
a one-for-one
by a c l e a r i n g
that
be h a n d l e d
D epartm ent's
g e n e ra lly
th e
that
granted
may be e x t e n d e d
that
require
Presum ably,
clea rin g
cred it
it
" v a l u e ” does n o t
in te re s t.
th e
suggested
the
bank has a
in
the
d e a le r's
c le a rin g
s e c u ritie s
lie n
w h ile
39
Section
issue
357.14
of
d e ta il
This
re s o lu tio n
in
the
a lte rn a tiv e
of
one o f
Ma rc h R u l e .
the
of
considered
s p e c ific a lly
and s u g g e s t i o n s
competing
that
to
decided
State
in v ite d
Although
law .
the
to
in
several
March
leave
H o w ev er ,
comments on t h e
the
issues
claim s.
One o f
the
s p e c ific
D e p a r t m e n t was t h e
bona
fid e
The
firs t
for
the
concern
tie re d
d e a lin g
a lte rn a tiv e s
con sid ered
by t h e
three
was a t h e o r e t i c a l
book-entry
that
the
rig h ts
D e p a r t m e n t was
in
the
c re d it
to
d e a le r
a b ility
government
ru le
the
con ce rn s w i t h
The
adoption
of
transactions
can o c c u r
th ird
such a r u l e .
such a r u l e
ban ks
d ea lers
received e ig h t
to
use
a ffe c tin g
at
in
a
a
any t i m e
after
concern expressed
affe c t
s e c u ritie s
that
the
by
the
market
if
extend d a i l y
loans.
The D e p a r t m e n t
s e c u ritie s
lim ite d
could
th e g o v e r n m e n t
clearing
of
the
second was a more p r a c t i c a l
a BFP p r o v i s i o n
of
w ith
a tra d itio n a l
s tru c tu rin g
o f a BFP may be o f
The
of
M arc h R u l e ,
co n c e r n a b o u t
BFP s t a t u s .
that
th is
In
a sec u rity
and l i q u i d i t y
im p aired
ru le.
sys te m where
acq uires
e ffic ie n c y
in
environm ent.
concept
book-entry
tran sferee
it
provisions
("BFP")
expressed
tra n s fe re e 's
the
s p e c ific
incorporation
purchaser
Departm ent
of
to
th e
was d i s c u s s e d
p rio r
Department u l t i m a t e l y
discussed
d ea lin g w ith
See 51 FR 8 8 4 8 - 5 0 .
competing claim s
Departm ent a ls o
two s e c t i o n s
c om pe tin g c l a i m s
a p p r o a c h e s were
p u b lic a tio n ,
re s o lu tio n
is
c o lla te ra liz e
comments t h a t w e r e
th e ir
addressed
>
40
to
th is
d e a lin g
issue.
w ith
of
commenters
issue
of
not
suggest
A fter
approach
the
three
added
carefu l
three
clearin g
d e a le rs ,
claim s
firs t
BFP r u l e
clearing
lie n s
commenters
b an k,
competing
the
s im ila r
A s s o c ia tio n .
These
the
im portance
government
of
th e
s e c u ritie s
role
of
played
m arket.
In
for
a d d itio n ,
resolving
commenters
the
357.14
the
favored
although
a
they d id
of
For
a p p ro a c h
suggested
The D e p a r t m e n t
by
has
and a new p r i o r i t y
357.15.
th is
approach
government
law o f
commenters,
issue
lie n s .
claim s,
atto rn eys
B a nk in g and B u s i n e s s
commenters on t h e
and a - p r o v i s i o n
above.
Section
C o rp orations,
other
to
sug gestin g
and an ad hoc g r o u p o f
include
D e p a r t m e n t has a d o p t e d an
to
S ection
in
for
l a n g u a g e ,,
an a s s o c i a t i o n
three
other
proposals
t h a t w oul d
a lte rn a tiv e s
referred
in
rule
c le a rin g
co n sid eratio n ,
co m p e ti n g
for
for
and f o u r
of
s p e c ific
s e c u ritie s
purchaser
reg u lato ry
commenters
p ro visio n
m ajor
claim s,
on p r i o r i t i e s
a m odified
The
p rio rity
s p e c ific
to
fid e
to
suggested o t h e r
competing
ru le
claim s
a bona
providing
three
Federal
commenters p r o v i d e d
competing
in co rp o ra tio n
exp ressly
Three
include
s e c u ritie s
f ro m t h e
Section
on
t h e A m e r i c a n Bar
as w e l l
as a number
competing c la im s ,
by c l e a r i n g
exam ple,
a
banks
a ll
in
of
em phasized
the
one commenter
stated;
As c u r r e n t l y s t r u c t u r e d , t h e g o v e r n m e n t s e c u r i t i e s
m arket could not o p e ra te e f f i c i e n t l y w it h o u t d a i l y
e x t e n s i o n s o f c r e d i t by c l e a r i n g banks bec ause
c l e a r i n g banks r o u t i n e l y p e r m i t t r a n s f e r s o f
s e c u r i t i e s from t h e i r a c c o u n t s w i t h a F e d e r a l R e s e r v e
Bank even though t h e f u n d s t o pa y f o r such t r a n s f e r s
41
imay n o t be a v a i l a b l e t o
s e v e r a l hours a f t e r the
As t h e
Department
claim s
issue
fu lly
in
recognized
the
of
the
in
March R u l e ,
c o lla te ra liz e d
requirem ents
t h e c l e a r i n g bank u n t i l
t r a n s f e r o f such s e c u r i t i e s .
to
s a tis fy
bank
an u n l i m i t e d
to
ba nk s
cle a rin g
s e c u ritie s
d e a le r,
in
since
a d e a le r's
on i t s
such e x t e n s i o n s
the
safety
BFP r u l e
th e ir
c le a rin g
own b o o k s ,
tran sfers
investors
the
for
Departm ent d ec id e d
commenters
but
referred
exp ressly
over
those
a BFP.
of
provides
favoring
to
th e
lower
the
for
of
a ll
the
of
c red it
approach
to
th e
upper
views
in te re s ts
banks
of
to
suggested
th is
lo w e r-tie r
the
three
a BFP r u l e
lie n
lie n s ,
w ill
have
in clu d in g
which
as
a more g e n e r a l
book-entry
357.14
as a good
e x p re s s ly provides
fa ith
transferee
if
that
it
cu stod ian s
a transferee
acq uired
the
fu lly
approach,
clearin g
if
customers
by t h e
incorporate
cle a rin g
o ff
to
to d e a le r s ,
w oul d p r o v i d e
tie r
in
same s e c u r i t i e s
q u a lify in g
that
in te re s t
clea rin g
a q u a lify in g
claim s
an a p p r o a c h
claim
must be
a s ig n ific a n t
s e c u ritie s
the
t h a t would
The D e p a r t m e n t
only
c re d it
rule
over
tie rs .
Section
q u a lify
that
other
p rio rity
p referab le
the
a ll
adopt
t o above
provide
p rio rity
need
extension s
to
competing
c o u l d be c u t
those
To b a l a n c e
th e ir
of
w ou ld c r e a t e
account
as BFPs.
c o lla te ra liz e
the
and sou ndness
s e c u rity
who w o u ld q u a l i f y
ag a in s t
of
reg u lato rs.
Adoption o f
ris k
the d is c u s s io n
its
may
in te re s t
42
for
valu e,
in
To q u a l i f y
acq u ire
is
to
p a ra lle l
for
s e c u rity
free
e lim in a te s
of
the
a ll
th is
custodian
to
d elivery
claim s.
of
of
su b jec t
same i s s u e
One commenter
provide
that
account
in
c learin g
transfers
corp o ratio n ,
believes
th e
that
s e c u rity
in
Such a r u l e
to
decided
rules
that
to
property.
e ffe ct,
intended
a s e c u rity
include
corp o ratio n
at
th is
c le a rin g
w ith
a
rule
beyond w h a t
The D e p a r t m e n t
given
that
book-entry
in
D e p a r t m e n t has n o t
BFP r u l e
on t h e books o f
q u a lify
S ection
the
evidence
TREASURY DIRECT.
on t h e
included
of
The
the
reg istra tio n
any a s s e r t i o n
same
a
as a BFP.
357.21
form o f
con clu sive
the
s h o u ld
f ro m TRADES t o TREASURY
unneeded.
that
also
not
f ro m TRADES t o an
could
transfers
transfers
for
and g e n e r a l l y
transfers
to p r e c lu d e
t im e
corpo rations.
the
transferee
is
held
to
the
for
TREASURY DIRECT i s
is
fu n g ib le
This
As
takes
the
s e c u ritie s
s e c u ritie s
provides
not
that
that
of
for
such a p r o v i s i o n
TREASURY DIRECT
claim s
suggested
TREASURY DIRECT or
Departm ent
DIR EC T,
for
are
(5).
tra c in g .
to
the
one must
or
transferee
resu lt
claim s.
section,
(3),
the
m ain ta in s .
be an a p p r o p r i a t e
s e c u ritie s
th is
of
In
tra c in g
its e lf
adverse
requirem ent
a good f a i t h
adverse
p o s s ib ility
book-entry
co n sid ers
concept,
of
3 5 7 .1 2 (a )(1 ),
common l a w
as a B F P one must t a k e
BFP
notice
purposes o f
u nd er S e c t i o n
somewhat th e
tra d itio n a l
on e 's
and w i t h o u t
as a t r a n s f e r e e
a s e c u rity
q u a lify
the
good f a i t h
of
a
of ownership.
of adverse
The D e p a r t m e n t has
books o f
a clearin g
reasons d e s c rib e d below
a c le a rin g
lie n
p rio rity
for
43
The same commenter also suggested a provision that would
permit explicitly the transfers of limited interests in
securities to TREASURY DIRECT accounts.
The commenter stated
that, but for language in Section 3 5 7 . 2 5
of the TREASURY DIRECT
rules stating that the Department will not recognize any claims
of security interests, many secured parties, including public
bond trustees, would use TREASURY DIRECT for secured
transactions.
The Department is considering the possibility of
allowing TREASURY DIRECT to be used for trust indentures but
believes any revision would require a change to the TREASURY
DIRECT provision rather than the provisions set forth below.
In dr afting its modified BFP rule, as suggested by one
comraente r , the Department chose the phrase "good faith
transferee " rather than "bona fide purchaser" to highlight the
fact that, as described below, under these proposed rules the
rights of a purchaser who acquired a security in good faith,
for
value and without notice of adverse claims are somewhat less
broad than the rights of the traditional bona fide purchaser,
Although a s a matter of semantics the phrases are virtually
synonymous , the Department believes it is appropriate to use a
phrase tha t is somewhat less recognized as a legal term of art
than is th e phrase "bona fide purchaser."
Unde r Section 357.14, the interest in a security of a
transferee who qualifies as a good faith transferee would be
subject to two categories of potential adverse claims.
First,
44
Section 357.15 provides generally that a qualifying clearing lien
will have priority over all other interests in a security
including that of a good faith transferee.
In effect, the rule
provides that any transferee acquiring a security through a
dealer or other entity that acquires securities through a
clearing arrangement is deemed to have constructive notice of any
clearing lien attaching to the transferee's security.
The
details of the clearing lien priority are set forth in the
discussion of Section 357.15 below.
In addition to the provision for a priority of a clearing
lien, a good faith transferee's interest may be limited by the
claims of other good faith transferees claiming the same security
through the same book-entry custodian.
Three of the commenters
offering specific proposals to deal with competing claims
recommended adoption of a similar rule.
As one commenter noted,
"in those cases in which the adverse claimants are customers of
the same book-entry custodian," the application of a strict "last
in time" priority rule produces an arbitrary result.
All
customers of the same book-entry custodian will generally have
precisely the same relationship with the book-entry custodian and
all should share pro rata the risk that the book-entry custodian
will not have enough securities of the appropriate issue to
satisfy all of the claimants.
The rule would provide that such
customers are good faith transferees but only to the extent of
their pro rata share of the appropriate securities.
This
provision is not intended to preempt other federal law, such as
the Bankruptcy Code or the Securities Investor Protection Act, on
the distribution of assets in an insolvency.
A fourth comment letter that addressed the issue of
competing claims also would have specified that transferees may
qualify as bona fide purchasers under certain circumstances.
However,
instead of a specific provision dealing with clearing
liens this commenter would have provided more generally that the
rights of any lower-tier transferee would always be subject to
the rights of higher-tier transferees.
To mitigate generally
favoring the upper-tiers over the lower tiers, this commenter
also suggested a provision whereby a lower-tier transferee could
protect its interests by requesting segregation of its
securities.
However,
the Department is reluctant to adopt the
remainder of this proposal which essentially would rely on
segregation of securities.
Our primary concern is that
segregation is not currently a regulatory requirement that is
enforced by periodic inspection of books and records.
Furthermore,
recent litigation suggests that even where
segregation is used, it is not always maintained so as to protect
properly all fully-paid securities held for customers.
Legislation has been enacted that would provide for regulation of
brokers and dealers in government securities and that would grant
both the rulemaking and enforcement authority necessary to
establish a reliable system of segregation of customer
46
securities.
However, until such a system is in place, the
Department is reluctant to promulgate a rule that relies so
heavily on segregation as a means of protecting an investor's
inte rests .
An added concern is that to provide effective protection of
the lowest tier under this proposal, segregation must occur at
every level in the chain of accounts.
Given that each tier
generally only has knowledge of those with whom it deals
directly, such a requirement would leave too much to chance and
generally would make protected status of a customer at a lower
tier depend upon too many events beyond that customer's control
and upon facts it could not verify.
Two other commenters,
in a joint letter, favored retaining
Subpart 0 with one modification to correct what the commenters
identified as the sole interpretative issue that has arisen under
the existing regulations.
The issue arose in Wichita Federal
Savings & Loan Association v. Comark, 610 F. Supp. 406
(S.D.N.Y.), vacated, 610 F. Supp. 418 (1985).
The commenters'
concern with the court's decision in that case is that it would
have allowed a secured party, such as a clearing bank, to be
ousted of its security interest by the unilateral act of its
dealer-customer.
Although the court's decision was vacated, the
commenters suggest that, in order to prevent any similar decision
in subsequent litigation, the existing regulations be amended to
state explicitly that entities holding securities directly on the
47
books of a Federal Reserve Bank shall be deemed to be in the sole
and exclusive possession of the securities.
Although the
proposal certainly would resolve the one interpretative issue
raised by Comark and eliminate any uncertainty for entities
holding securities on the books of a Federal Reserve Bank, we
believe it does not adequately take into account other
interpretative questions that have been raised under Subpart 0.
Furthermore,
the proposal does not take into account the multiple
interrelationships that exist in the government securities
market.
In addition to the comments discussed above, one other
commenter appeared to favor adoption of the State law concept of
a bona fide purchaser, but felt that the proposed rule would
provide only interim benefit in light of the then-pending
legislation that would establish regulation of brokers and
dealers in government securities.
by Congress on October 6, 1986.)
(Such legislation was enacted
The Department believes this
comment is based on a misperception about the types of regula
tions that Treasury may promulgate pursuant to the legislation.
Although such regulations may include requirements concerning
safekeeping of customer securities,
it is unlikely that such
regulations would become the sole basis for establishing
substantive rights in securities or that they would be the basis
for resolving all competing claims to securities.
Section 357.15
Under this new section, a qualifying clearing
48
lien is one which arises under a written agreement between a
book-entry custodian and an entity providing clearing services.
Clearing services are defined as delivering and receiving
securities and payments for securities on behalf of other
persons.
A qualifying clearing lien may be asserted only by a
depository institution maintaining a book-entry securities
account at a Federal Reserve Bank through which the entity
provides clearing services.
The Department considered providing clearing lien priority
for entities not having direct access to a Federal Reserve Bank.
However, given that a qualifying clearing lien may defeat the
interests of a dealer's customers,
it seemed advisable to limit
the category of entities that could assert clearing lien
priority.
Furthermore,
the Department believes that the level of
clearing services engaged in by institutions not having accounts
directly with a Federal Reserve Bank is so small that it would
not justify opening up the availability of the clearing lien
priority to a whole new range of institutions.
The Department intends for the provision as drafted to
permit clearing lien priority for all entities currently
performing clearing services for a significant number of
government securities dealers.
The Department recognizes that,
in some cases, a portion of the clearing services performed by a
depository institution through a securities account at a Federal
Reserve Bank may be carried out by an operating subsidiary or an
49
affiliate under common control with such depository institution.
However, the Department has assumed that the actual extension of
credit which requires the clearing lien is extended by the
depository institution rather than the subsidiary or the
affiliate.
The clearing lien priority is further limited by requiring
that the clearing bank acquire it in good faith.
This
requirement is intended to exclude the availability of the
priority only in cases where an institution has engaged in
egregious practices.
It is not intended to suggest that a
clearing bank is under an obligation, as a general proposition,
to investigate whether or not a dealer's customers may have a
claim to the same securities that are subject to the clearing
lien.
For example,
the majority of book-entry securities
transfers are completed without human intervention through
computer links between Federal Reserve Banks and depository
institutions.
The electronic transmissions usually contain
information about parties involved in the underlying transaction.
That information is ordinarily reviewed only by the book-entry
custodian which is doing business with the ultimate transferee.
The mere presence of that type of information should not affect
the good faith of other book-entry custodians involved in a
transfer.
A clearing bank must be able to rely on its
dealer-customer in identifying securities that are available to
use as collateral for credit extended by the clearing bank.
I____________________________
i
50
There are three other limitations to the clearing lien
priority in addition to the requirement of good faith.
First,
the priority is available only to the extent of credit actually
extended in providing clearing services.
This limitation serves
to preclude assertion of the priority for other extensions of
credit by a bank to its dealer customer.
For those credit
extensions, the Department believes that the entity extending
credit outside a clearing arrangement whereby the entity finances
the purchase of the securities used as collateral should bear any
risk that the customer is using as collateral securities to which
others might have legitimate claims.
As another limitation, the proposed rule specifically
provides that a clearing lien may not be asserted against
securities segregated as fully paid customer securities on the
clearing bank's books.
Although, as was discussed above, the
Department chose not to link protection of lower tiers to
segregation of securities, since segregation is not a currently
required practice,
the Department nevertheless believes that
where segregation is maintained,
it should be given its intended
effect.
Two of the commenters favoring a clearing lien priority and
adoption of a BFP rule would have given similar effect to
segregation on the books of a clearing bank.
However, these
proposals would have gone further and precluded assertion of a
clearing lien once the clearing bank received a notice to
51
segregate from its dealer customer.
Such a rule would appear to
create a problem similar to that discussed above in connection
with the Comark case:
a clearing lien could be effectively
terminated by the unilateral action of someone other than the
entity that is a secured party.
Although in many cases the rule
may not present a problem because there will be more than enough
collateral in the account subject to the clearing lien, it would
appear to create an unacceptable level of uncertainty given the
amount of credit extended by clearing banks on a regular basis.
As a final limitation, the clearing lien priority is
effective only against claims of third parties.
It may not be
asserted to defeat an interest granted by the clearing bank
itself.
Two commenters proposed that provisions be added to the
proposed rule to permit a clearing corporation to qualify for the
proposed clearing lien priority.
A clearing corporation would be
defined using the definition of clearing corporation set forth in
Article 8 of the UCC, with certain changes intended to permit
inclusion of existing registered clearing agencies.
The Department believes that there currently are no entities
involved in the Treasury securities market that would fall within
the definition of a clearing corporation.
However,
it has been
brought to the Department's attention that more than one proposal
is being considered by entities in the private sector,
including
\
52
one of the commenters referred to above, that would establish a
clearing corporation for Treasury securities.
The proposals are
aimed at establishing a system for netting daily transactions
among major participants to cut down on the number of actual
transfers of securities that take place and to diminish the
amount of funds that will actually move over fedwire.
The
Department believes that such an arrangement, properly
structured, could enhance the efficiency of the market and has no
wish to discourage full exploration of the possible approaches to
netting and resolution of the various legal issues that would
arise in structuring a netting arrangement.
However, given the
preferred position of a clearing lien under the proposed rule,
the Department is reluctant to include provisions at this time
that would allow assertion of the clearing lien by an entity of
yet undetermined character.
The Department believes that as the
proposals become more concrete it will be easier to evaluate the
appropriate way in which the arrangement may be taken into
account in the regulations.
A clearing lien priority may well be
appropriate and the Department believes that such amendments to
the rule as may be necessary would not require significant
restructuring of the rules and would be relatively easy tc
accomplish.
For these reasons, the Department decided not to
include provisions dealing with clearing corporations at this
time .
Section 357.16 [Section 357.15].
This section describes the
duties of a book-entry custodian to provide confirmations and
t
53
acknowledgments.
The March Rule combined the duties and
warranties of a book-entry custodian in a single section numbered
357.15.
In these rules, the warranty provisions are in a new
Section 357.17 discussed below.
The March Rule stated that a book-entry custodian must send
confirmation of a transfer Of a security to the transferee no
later than the close of business on its next business day after
the day on which the transfer entry is made.
The rule also
provided that a book-entry custodian must send an acknowledgment
of (i) the entry of a security interest on its books, or (ii) the
receipt of notice of a security interest, by the close of
business on its next business day after the day on which the
entry is made or the notice is received,
respectively.
Several comments were received relating to the use of the
terms "confirmation'1 and "acknowledgment."
It was suggested that
the term "transaction statement" or "acknowledgment" be used in
place of "confirmation" because of the potential confusion over
the existing usage of the term "confirmation" and a possible
implication that compliance with rules on confirmations
promulgated by the Securities and Exchange Commission or other
regulatory authorities might be required.
On the other hand,
another comment urged the elimination of the term
"acknowledgment" in favor of the term "confirmation" because of
the latter term's accepted meaning in the securities industry.*
*
54
This rule retains the term "confirmation” in connection with
security transfers and the term "acknowledgment” in connection
with transfers of limited interests.
The term "confirmation" is
used in a general sense and is intended to refer to the existing
practice of the issuance of a memorandum setting out the relevant
details of a trade.
It is not intended to imply that compliance
with other regulatory requirements would automatically be
required.
sense.
The term "acknowledgment" is also used in a general
A term other than "confirmation" was chosen in connection
with transfers of limited interests (including security
interests), because it did not appear that the procedure set
forth in the rule would necessarily correspond to existing
te rmi nology.
With respect to acknowledgments of limited interests marked
on the books of a book-entry custodian, the March Rule stated
that an acknowledgment must be sent to both the transferor and
transferee of the security interest, on the assumption that both
parties would have an established customer relationship with the
book-entry custodian.
Two comments pointed out that, in such a
situation, it is likely that the book-entry custodian will not
have a customer relationship with the secured party, and that the
book-entry custodian may know nothing about the secured party
other than the secured party's name.
For this reason, a
provision was added to this rule to the effect that if the
book-entry custodian does not have the address of the transferee
of the limited interest, then the transferee's acknowledgment *
#
*
shall be sent to the transferee at the address of the transferor.
It should be noted that because the notice-type transfer of
a security interest (Sec. 357 .13(c) of the March Rule) has be en
eliminated,
the corresponding requirements for acknowledgment of
that type of transfer have al so been eliminated.
It should
further be noted that since a cknowledgments are only required for
transfer of a limited interes t by the book-marking method und e r
Section 357.12(a)(4), a clear ing bank would not be required to
provide confirmation of its c learing lien to a dealer because a
transfer of a security intere st in those circumstances occurs
under Section 357.12(a)(5).
The March Rule also included a provision (Se c . 357 .15(d))
that stated that a book-entry custodian must pr ov id e to a
customer, or to another person designated by th e cu s tome r , upon
written request,
information as to the interest s of any custome rs
of the book-entry custodian in a security in wh ich the requesting
customer has an interest, as shown on the books o f that
book-entry custodian.
This provision has been re ta ined, but in
response to a number of comments,
several clari f ica t ions have
been made.
Several comments raised a ques tion about the meaning of the
”
te rm ^security1 in this context and expressed concern about a
viola tion of confidentiality if dis closure of the interests of
other customers in securities of th e same issue would be
56
required.,
The language in paragraph (c) of this section has been
clarified to indicate that only customer interests "in that same
security” need be disclosed.
For example, assume that a
book-entry custodian ("book-entry custodian II” ) maintains
$500,000 of Treasury notes of a particular issue in its account
at another book-entry custodian ("book-entry custodian #2").
A
customer of book-entry custodian #1, who owns a $5,000 Treasury
note of that same issue, as reflected on book-entry custodian
#l's books, requests a statement under Sec. 357.16(c) of these
rules.
The statement book-entry custodian |1 would be required
to provide would relate only to the $5,000 Treasury note owned by
the customer.
However, book-entry custodian #1 would be required
to identify any interests that affect either that particular note
or the entire aggregate amount of notes maintained on the books
of book-entry custodian #2 for the account of book-entry
custodian #1.
A statement issued by a book-entry custodian under Section
357.16(c) must reflect the interests recorded on the book-entry
custodian's books, and interests granted by, or in favor of, the
book-entry custodian, as of the date the customer's request is
received.
A book-entry custodian has no obligation to advise the
requester of changes that occur thereafter, unless the customer
subsequently requests another statement.
This rule also
recognizes that to constitute an adequate request from a
customer, the request must be in writing, must provide the
address to which a response is to be furnished, and must be
I
57
received in the department of the book-entry custodian
responsible for maintaining records of book-entry securities.
A suggestion was made that the regulations should cover the
question whether a standing request by a customer must be
honored, and if so, when the request would become stale.
This
suggestion was not adopted because the Department is of the
opinion that this is a matter that can be resolved by agreement
between a book-entry custodian and its customer.
A number of banking institutions objected in principle to
the confirmation requirements, pointing out that under rules of
the Federal Reserve and other regulatory agencies, they are
already subject to confirmation and record-keeping requirements
in effecting securities transactions for customers.
The
Department agrees that if these financial institutions are
already subject to such requirements, there would be little
purpose in subjecting them to another set of requirements.
Therefore,
this section of the regulations has been amended to
provide that if a book-entry custodian is subject to Federal
banking regulation requiring that a confirmation be furnished to
a customer for whom it effects a securities transaction,
then the
book-entry custodian is not subject to the confirmation
requirements of these regulations, provided the book-entry
custodian is in compliance with the banking regulation.
Several comments also expressed the view that a book-entry
*
i
58
custodian and customer should be permitted to agree to waive the
confirmation requirements, such as in a case where a customer
only wishes to receive a statement periodically, in lieu of a
confirmation of each transaction.
Under these rules, a waiver is
permissible only if it is specifically authorized by other
Federal regulations.
The Department is reluctant to sanction a
waiver in other cases, because it appears such a practice could
be used to undermine the protections intended to be provided by
this section.
Section 357.17 [Section 357.15).
The March Rule provided that by
sending a confirmation of a transfer of a security, a book-entry
custodian would (i) warrant to its transferee, and any subsequent
transferee,
that it had made an appropriate entry on its books,
or that such an entry would be made before the book-entry
custodian next opens for business, and (ii) warrant the
book-entry custodian's good faith and authority.
The warranty of
good faith and authority included a warranty that the security
described was free of claims of, or claims created by, the
book-entry custodian, except as specifically noted on the
confirmation; and a warranty that, to the knowledge of the
book-entry custodian, the security described was free of claims,
except as specifically noted on the confirmation.
The March Rule
also provided that by issuing a confirmation upon the request of
a customer, a book-entry custodian would warrant to its customer
that the information provided therein was accurate.
n
9
59
This section changes* to some extent, the warranties given
by a book-entry custodian, and also includes warranties for other
transferors of a security or security interest.
Most of the comments that addressed warranties agreed that
it is appropriate for a book-entry custodian to give certain
warranties, although one financial institution objected to the
warranties on the basis that they would not encourage any greater
degree of care on the part of the book-entry custodian.
Department agrees with the majority of the comments.
The
Although
warranties admittedly provide only limited protection to
investors, such protection may have a beneficial effect.
Also,
as pointed out by the comments, under existing law, an
"intermediary" warrants its good faith and authority.
(See
Section 8-306(3) of the UCC.)
One
financial
custodian
damages
l arge
for
for
the
limitation
general
t hey
are
This
breach
damages
between
n ot be
breach
l osses.
damages
that
should
for
institution
for
of w a r r a n t y ,
section
to
does
consequential
consequential
the
add r e s s
The
Department
c ould be
securities
is not u n c o n s c i o n a b l e .
rule,
a book-entry
not
of w a r r a n t y
the
that
in v i e w of
of w a r r a n t y .
breach
parties
liable
suggested
damages
or
potential
the
is of
limited
of
the
view
by a g r e e m e n t
provided
it is n o t e d
are not
for
measure
transaction,
Also,
special
that
recoverable
as
the
a
unless
foreseeable.
I
i
60
The March Rule provided that the book-entry custodian's
warranty to a transferee would arise upon the sending of a
confirmation.
A comment was made to the effect that the warranty
should attach at the time the books are marked (i .e . , the time of
transfer)
rather than when the confirmation is sent.
The
Department agrees that it is desirable for the warranty to attach
at the time an entry is made, because this will normally occur at
an earlier point in time than the time when the confirmation is
sent.
Consequently, paragraph (a) of this section states that a
book-entry custodian's transfer warranty arises in connection
with the actual transfer of a security or an interest in a
security in accordance with Section 357.12.
The March Rule also provided that the warranty of a
book-entry custodian would run to its transferee and any
subsequent transferee.
Two comments urged that the warranty run
only to the immediate transferee, for reasons of consistency with
existing law and the inability,
in any event, of a subsequent
transferee to trace a book-entry security.
The Department agrees
that each transferor should only give a warranty to the party
with whom it deals, and this section has been changed
accordingly.
Several comments expressed concerns about the warranty that
a security is free of claims of, or claims created by, the
book-entry custodian, and other claims of which the book-entry
custodian has knowledge, except as specifically noted on the
A
61
confirmation.
custodian,
With respect to "claims of" the book-entry
two financial institutions pointed out that it may be
difficult to describe a book-entry custodian's claims against its
customer specifically, since many different circumstances could
result in a lien or charge under the applicable custody or other
agreement, and that such circumstances may not be known at the
time a confirmation is sent.
Because the claims between a
book-entry custodian and its customer should already be known to
the customer,
there is no purpose in requiring that these claims
be noted on a confirmation.
Thus, the language relating to
"claims of" a book-entry custodian has been deleted.
In connection with the claims of third parties of which the
book-entry custodian has knowledge,
several banks commented on
their potential exposure if notices of claims are received at an
office other than where the customer's account is maintained.
Although these comments were prompted primarily by the provision
on notice-type transfers of security interests (Section 357.13(c)
of the March Rule), which has been eliminated in this proposed
rule, the Department has considered whether it would be
appropriate to define what constitutes "knowledge" of claims by a
book-entry custodian.
The Department has concluded that because
of the many types of organizations involved and the
unpredictability of the potential factual situations,
difficult to prescribe such a rule.
it would be
It should be noted, however,
that the Department would not consider a general disclaimer by
the book-entry custodian noted on the confirmation acceptable
62
compliance
A
the
of
t hat
time
of
issue
transfer
the
is
to the
an
does
not
electronic
m ade
in the
The
book-entry
that
security being
custodian's
custodian's
warranty
in p a r a g r a p h
that
security
the
security
the
books
Federal
Another
custodian's
warranty
customer's
a court
proposal
warranty
transfers
that
transfers with
realities
of
the
Thus,
and
such a
a precision
trading
of
the
to
has
to w a r r a n t
in the
been
include
of
a warranty
the
book-entry
custodian
in
the b o o k - e n t r y
authority
section
to
Department
custodian
or all of an a m o u n t
made
was
of g ood
to
or on the
the e f f e c t
faith
a s e c u r i t y w ill
of c o m p e t e n t
book-entry
this
book-entry
account except
was
of
the
same
custodian
books
on
of a
Bank.
comment
that
the v i e w
that,
securities
is a c t u a l l y p r e s e n t
account.
faith
of
to e f f e c t
Nonetheless,
in an a c c o u n t
of a n o t h e r
Reserve
(a)
is part
maintained
of
(a).
be m a d e
quantity
for a b o o k - e n t r y
of g ood
expanded
is of
transferred
own
should
account
to the
system.
paragraph
contemporaneous
ti m i n g
correspond
it is a p p r o p r i a t e
book-entry
and all
the
believes
the
a sufficient
Department
on
actually
a warranty
transferor's
transferee
focus
requ i r e d u n d e r
that
transfer,
transferees.
provision would
that
the w a r r a n t i e s
s u g g e s t i o n was
at
other
with
not
upon
to p r o v i d e
custodian who
a b asis
acts
and a u t h o r i t y
be
transferred
instructions
juri s diction.
that
The
from
rationale
for a F ederal
n e g l i g e n t l y or
a book-entry
should
include
from a
the
for
customer
this
claim against
fraudulently
A
in
a
or
a
63
transferring
Department
reason
added
securities
has d e c i d e d
that
it does
protection
Paragraph
applicable
security,
Such
to any
o ther
rightful
faith.
book-entry
interest
the
The
is
that
g ive
certain
(b)
warranties
u nder
of
this
inadvertently
the
the
a nd
of
the
any
eliminated
to
is
interest
t hat
in'a
Reserve
the
the
the
a
security
transferee
in a d d i t i o n
is
in g o o d
that w h e r e
of
Bank.
transfer
is a c t i n g
provides
warrant
or
an
that
to the
other
custodian.
added
is not
in
are
to be
a transferor
among
righ t f u l
the b e a r e r
would
on
(Section
of
a
such
t hat
the
8-306 of the UCC).
definitive
states
concept
equivalent
give
should
the
the
them a warranty
warranty
in those
U nder
based
the
to c o m m e n t s
custodian
purchaser.
which
law,
response
a book-entry
to the
transferor
an
transferor
is d e e m e d
applicable
or
transferor
in effect,
s e curity,
the
for
that
or a F e d e r a l
and e f f e c t i v e ,
security
elimination
that
rules
a warranty
transferee
section
it will
warranties
With
out
that
w a r r a n t y was
is e f f e c t i v e
pointed
The
realistically create
adds
States
by a b o o k - e n t r y
transfer
the
a nd
is a lso
currently
definitive
in t h e s e
of a s e c u r i t y
to its
a s eller w h i c h
a book-entry
bearer
section
warrants
transferor
it
it w o u l d
the U n i t e d
r i ghtful
g iven
regulations
that
this
in a security,
warranties
also
appear
transferor
custodian
transfer
stating
of
and e f f e c t i v e
Paragraph
to i n c l u d e
of a c u s t o m e r .
i n vestors.
than
a transferor
not
not
for
(c)
f r o m an a c c o u n t
fiction,
also would
t hat
have
commenters
have
been
not a d o p t e d
64
the revised UCC Article 8 (applicable to uncertificated
securities ).
The March Rule contained a provision stating that by sending
a confirmation upon specific request of a customer, a book-entry
custodian would warrant that the information provided therein is
accurate.
One comment was made to the effect that this provision
should be deleted in the case of banks, which are already held to
a high standard of care.
The provision has been retained as
paragraph (d) of this section because it does not appear to
create any new administrative burden for book-entry custodians.
Paragraph (e) of this section retains the provision in
Section 357.15(f)(1) of the March Rule that by sending a
confirmation of a transfer, a book-entry custodian warrants that
it has made a transfer entry or that such an entry will be made
before the book-entry custodian next opens for business.
Although a book-entry custodian's warranty will arise under
paragraph (a) of this section upon the transfer of the security
or an interest in the security,
rather than upon the sending of a
confirmation, it is necessary to provide some assurance that an
entry actually has been made or will be made before the
book-entry custodian next opens for business.
Thus, paragraph
(e) provides that by sending a confirmation of transfer in
accordance with Section 357.16(a) or pursuant to a similar
requirement under other Federal regulation, a book-entry
custodian warrants that it has made a transfer entry as described
6S
in Section 357.12(a)(3) or that such an entry will be made before
the book-entry custodian next opens for business.
Paragraph (f) of this section provides that the warranties
described in this section may not be disclaimed or limited by
agreement.
It is noted that the obligations of good faith,
diligence,
reasonableness and care prescribed by the Uniform
Commercial Code may not be disclaimed by agreement, although the
parties may by agreement determine the standards by which the
performance of such obligations is to be measured if such
standards are not manifestly unreasonable (See Section 1-102(3)
of
the UCC).
Paragraph (f) of this section makes clear that the
warranties in these rules preempt other provisions of law which
might permit the disclaimer or variation of warranties by
agreement.
The warranties in these rules are intended to set
standards for good faith, reasonableness, and care in the
applicable transactions.
Section
357.18.
T his
section,
transfer
is
fu l f i l l e d ,
comments
on
the M a r c h Rule
Federal
the
rule
on
obligation
altered
or
is new.
securities
of
to
(see U C C
describes
It was
ad d e d
the e f f e c t
transfers,
a transferor
eliminated
which
that
when
in
r e sponse
to
to
by p r e s c r i b i n g
the e x i s t i n g
to d e l i v e r
a duty
State
a s e c u r i t y had
a
l aw on
been
s 8-314).
Paragraph (a) of this section states that a book-entry
custodian fulfills its duty to transfer a security at the time it
66
makes an entry on its books or instructs another book-entry
custodian or Federal Reserve Bank to make an entry or it
instructs its book-entry custodian or Federal Reserve Bank to
transfer the security to TREASURY DIRECT.
The intent is that the
action that must be taken is the action that is appropriate for
the circumstances.
For example, if a customer of a book-entry,
custodian (BEC #1) which maintains an account at another
book-entry custodian (BEC #2) instructs BEC #1 to transfer a
security to a purchaser who maintains an account at a third
book-entry custodian (BEC 13), then BEC #1 has fulfilled its duty
to transfer at the time it instructs BEC #2 to make a transfer
entry.
Paragraph
book-entry
Sta t e s ,
its
book-entry
an e n t r y or
the
above,
its d u t y
to
to t r a n s f e r
the
In a d d i t i o n ,
in the
Reserve
or
the
time
an e n t r y on
or
security
action
the
manner
other
Bank,
at
custodian
the a p p l i c a b l e
custodian
a transferor
transfer
to m ake
book-entry
circumstances.
book-entry
that
a Fed e r a l
custodian
another
described
provides
custodian,
fulfills
instruct
make
(b)
its
Fed e r a l
than
a
the U n i t e d
it
instructs
books
or
Reserve
to
Bank
to
to T R E A S U R Y D I R E C T .
sho u l d
be
transferor
required
by
appropriate
must
the
instruct
As
to
its
book-entry
custodian.
Section 357.19 [357.16].
Section 357.16 of the March Rule dealt
with the priority of interests of the United States.
It provided
that a security interest in a security transferred to the United
67
States to secure deposits of public money* deposits to Treasury
tax and loan accounts* or pursuant to a similar requirement of
Federal statute or regulation, shall be superior to any other
interest in the security.
It also provided that a security
transferred to the United States shall be free of adverse claims,
unless the security was acquired in a transaction in which the
United States was acting in a proprietary,
governmental, capacity.
rather than
Those provisions have been retained and
redesignated as Section 357.19 of this rule.
Comments
be
included
Reserve
been
were
on
Bank
the
for
that
as
other
parties
without
a security
such
to
interest
the
As
as
noted
security
a "secret
of
interests
circumstances
to the
benefit
is u n l i k e l y
any
t hat
securities
of
the g e n e r a l
limitation
Sta t e s
these
granted
could
raised
that
off
if an
the
or a d e a l e r w o u l d
States
claims
individual
States,
be
have
the
to the U n i t e d
cut
example,
or a F e d e r a l
provisions
comments
should
interests
of
were
of
subordinated
States.
described
in w h i c h
some
to the U n i t e d
discussion
there w o u l d
and
For
bank
in f avor
in the
of
lien"
the U n i t e d
in the
Ot h e r
not i c e .
a clearing
under
interest
interest
that
the U n i t e d
securities
a security
operate
others
of
effect
customers.
could
to g r a n t
to the
ability
to c l a i m
segregated
possibility
made
of
the M a r c h
the U n i t e d
because
p ublic.
be c o m p e t i n g
a security
States
the
As
Rule,
a priority
is a p p r o p r i a t e
security
interests
a practical
customer
interest
has
for
matter,
run
it
interests
in
been granted
to
68
secure Treasury tax and loan and similar accounts, because such
securities are transferred on the books o f a Federal Reserve Bank
.
to a specific account maintained for the United States.
This section relates only to interests of the United States
and the Department.
It does not address the interests of a
Federal Reserve Bank arising from its extension of credit to a
clearing bank.
See Section 357.IS with respect to the clearing
lien of a Federal Reserve Bank.
Another comment made the suggestion that in lieu of the
distinction between a "proprietary" and "governmental" capacity
used in this provision, that a "commercial"/"governmental"
distinction would be preferable, based on concepts in statutes
such as the Foreign Sovereign Immunities Act.
The comment was
also made that the qualification that priority treatment would
only apply to transfer of a security to the United States when
the United States is acting in a "governmental" capacity should
apply as well to transfers of security interests to the United
States .
The Department has decided to retain the term "proprietary"
because the suggested concept of a "commercial" capacity does not
appear to be illuminating in this context.
Arguably, the nature
of every securities transaction is "commercial."
With respect to
the application of the governmental/proprietary concept to
transfers of security interests,
the Department is of the view
69
that
transfers
required
security
by Federal
governmental
the
of
concept
interests
statute
in nature,
the U n i t e d
or
of
regulation
it
and
in this part
to
is
this
are
States
as
inherently
thus u n n e c e s s a r y
to
introduce
provision.
A new sentence was added to the end of Section 357.19 to
clarify that a security or a limited interest in a security
required by statute or regulation that is transferred to the name
of
any executive department of the United States has the same
priority as a security or limited interest transferred expressly
to the United States or the Department.
The term "executive
department" is defined in 5 U.S.C. S 105.
Section 357.20.
This section, which is new, describes the
general authority of the Federal Reserve Banks, as fiscal agents
of the United States, to issue, service, maintain, and transfer
book-entry securities, and to make related payments of principal
and interest.
The provision simply restates a similar rule in
Section 306.116 of Subpart 0.
Section
provided
would
is
357.21 [357.17].
that
be e n t i t l e d
credited
security
that
the U n i t e d
as
the
and w o u l d
entity.
section
to
of
This
these
Section 357.17(b) of the March Rule
and the F e deral R e s e r v e Banks
States
t reat
entity
in w h o s e
account
entity
exclusively
entitled
to t r a n s f e r
not
liable
be
the
provision
rules.
now
for
acting
appears
on
the
a security
the
instruction
in p a r a g r a p h
(b)
of
of
this
70
One comment was made that this provision could be
interpreted to permit the United States or a Federal Reserve Bank
to exercise a right of set-off against securities in an account
where the interests of third parties could be jeopardized.
This
section is not intended to address the property claims of the
United States or a Federal Reserve Bank and is intended solely to
enable the Federal Reserve Banks to continue to operate the
Fedwire securities transfer mechanism through automated
transmissions that are not reviewed by Federal Reserve Bank
personnel.
The property claims of a Federal Reserve Bank that
may arise from extensions of credit to banks must be established
or perfected as provided for in other parts of these regulations.
Policy matters associated with such claims are being addressed
separately by the Board of Governors of the Federal Reserve
System.
Section 357.42.
rule provided,
Paragraph (b) of Section 357.42 of the proposed
in part, that in the event that the United States
is unable to make a payment when due, the liability of the United
States would be limited to the amount of the payment.
This
provision has been retained.
One comment was made suggesting that the provision be
amended to state that for principal payments that are not made
when due, interest at the contract rate would continue to accrue.
This suggestion has not been adopted because the Department has
no authority to pay interest after the maturity of a security and
71
no funds have been appropriated for that purpose.
Section 357.44.
This section, which is unchanged from the March
Rule, states that notices of judicial proceedings affecting a
security are to be directed to the Federal Reserve Bank or
book-entry custodian, as appropriate, whose books show the
interest of the person against whom the proceedings are directed.
A suggestion was made that the provision be changed to
provide that an enforcement order is not effective until the
Federal Reserve Bank or book-entry custodian receives written
process or notification at the appropriate location.
The
Department has decided not to expand the provision as suggested
because it is intended to be merely informational in approach.
It is not intended to reach substantive questions of the
effectiveness of notices or orders.
PROCEDURAL REQUIREMENTS:
The proposed rule is not considered a
"major rule" for purposes of Executive Order 12291.
impact analysis, therefore,
A regulatory
is not required.
Although this rule is being issued in proposed form to
secure the benefit of public comment, the notice and public
procedures of the Administrative Procedure Act are inapplicable,
pursuant to 5 U.S.C. 8553(a)(2).
As no notice of proposed
rulemaking is required, the provisions of the Regulatory
72
Flexibility Act (5 U.S.C. 0601, et seq.) do not apply.
List of Subjects in 31 CFR Part 357:
Electronic funds transfer, Federal Reserve System,
Government securities.
Dated :
^Q\J 2 0 BB6
Fiscal Assistant Secretary
Part 357 of subchapter B of Title 31, Code of Federal
Regulations, Chapter II, is proposed to be amended by adding
Sections 357.0,
357.1 and 357.2, by revising Section 357.3 , by
adding Subpart B, Section■357.42, and 357.44, to read as follows
PART 357— REGULATIONS GOVERNING BOOK-ENTRY TREASURY BONDS, NOTES
AND BILLS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT
SERIES NO. 2-86)
SUBPART A — GENERAL INFORMATION
Sec .
357.0
Dual book-entry systems.
357.1
Applicability.
357.2
Governing law.
357.3
Definitions.
SUBPART B— Treasury/Reserve Automated Debt Entry System
(TRADES)
357.10
Payment of interest; payment at maturity or upon call.
357.11
Rights
357.12
Transfers.
357.13
Enforceability,
acquired upon
transfer
perfection
a nd p e r f e c t i o n .
and
termination
of a s e c u r i t y
interest.
357.14
Good
357.15
Clearing
357.16
Duties
357.17
Warranties.
357.18
Duty
357 .19
Priority of interests of the United States.
357.20
Authority
of the
357.21
Rights
the U n i t e d
with
faith
transferee.
lien priority.
of b o o k - e n t r y
custodians.
to transfer.
of
respect
Fed e r a l
Reserve
States
to t r a n s f e r s
records.
Subpart
D —
Additional
Provisions
on
and
Banks.
Federal
Fed e r a l
Reserve
Reserve
Banks
Bank
75
357o40
Additional
357.41
Waiver
357.42
L i a b i l i t y of D e p a r t m e n t
and
35 7 . 4 3
Liability
to and
35 7 . 4 4
Notices
357.45
Supplements,
Authority:
of
requirements.
regulations.
for
transfers
of a t t a c h m e n t
31 U.S.C.
for
amendments
Chapter
or
31;
F e deral
from
securities
Reserve
TREASURY
in
revisions
12 U.S.C.
Banks.
8391
DIRECT.
TRADES.
76
Subpart A
Sec.
—
357.0
General
Dual
Securities
Section
357.1,
book-entry
other
book-entry
to w h i c h
shall
sys t e m s ,
in a c c o r d a n c e
(a )
A
and may be
with
B for
set
of
f r o m one
Automated
Debt
in T R A D E S
if
credited
pertaining
system
two
to the
is m a i n t a i n e d
to a T R E A S U R Y
Reserve
to a
Bank.
to TRADES.
System
in T R E A S U R Y
DIRECT account
See
(TRADES).
it is c r e d i t e d
at a F e d e r a l
rules p e r t a i n i n g
security
in
following
Entry System
T R E A S U R Y D I R E C T Book-entry S e c u r i t i e s
A
the
f orth
this Part:
Section 3 5 7 . 2 0 of this Part._l/
T7
as
in e i t h e r
transferred
account maintained
Subpart
D I R E C T ).
is
applies,
be m a i n t a i n e d
is m a i n t a i n e d
securities
(b)
systems.
this Part
Treasury/Reserve
security
See
Information
(TREASURY
DIRECT
if
as d e s c r i b e d
in
Subpart
C for
it
rules
to T R E A S U R Y DIRECT.
T R E A S U R Y D I R E C T a c counts are m a i n t a i n e d t h r o u g h a s y s t e m
a d m i n i s t e r e d by the Federal R e s e r v e Bank of P h i l a d e l p h i a , a c t i n g
as f i s c a l a g e n t of the U n i t e d States.
S u c h a c c o u n t s m a y be
a c c e s s e d by i n v e s t o r s in a c c o r d a n c e w i t h S u b p a r t C t h r o u g h any
F e d e r a l R e s e r v e B a n k or the B u r e a u of the P u b l i c Debt.
77
Sec.
3 57.1
(a)
Ap p l i c a b i 1 i t y .
This
Part
book-entry
calendar
B,
applies
form
d ays
a nd D of
(1)
that
after
this
A
occur
on or
the d a t e
P art
in
circular
applicable
such
to
time
as
has
TREASURY
DIRECT;
(2)
Part
shall
the
become
Nothing
or
is s u e d
a nd o u t s t a n d i n g
States
these
that
have
the
such
specifies
security
offering
in T R E A S U R Y
Secretary
in
that
DIRECT
announces
it
or
that
to be m a i n t a i n e d
the
rules
such
in
rights
to any
not
B,
and
D of
this
rightful
and
effective
and
s uch
in T R E A S U R Y
affect
occurred
after
in
the
prior
the d a t e
Part
under
in
to
duties
security
DIRECT.
rights
such
[the
date
of p u b l i c a t i o n
in f inal
the
this
security
in a t r a n s a c t i o n
that
days
f orth
to the date
s hall
acquired
set
existing
respect
prior
r ules
is 60 c a l e n d a r
that was
to or
DIRECT unless
with
securities
of S u b p a r t s A,
60
that:
to be m a i n t a i n e d
In addit i o n ,
parties
is
Subparts, ft,
transferred
be
restrict
United
eligible
of
in
and
contained
limit
[the d a t e w h i c h
except
eligible
of the
outstanding
form],
to be m a i n t a i n e d
security
becomes
a fter
in s e c u r i t i e s
of p u b l i c a t i o n
final
in T R E A S U R Y
is e l i g i b l e
which
transactions
security may not
maintained
u ntil
to all
form]
and
regulations
78
and
For
(b)
law then a p p l i c a b l e
purposes
Subpart
of d e t e r m i n i n g
B of this
Part
a transfer
a s e c u r i t y will
which
occurs
act
the
in this
s e ntence,
that
the p a r t i e s
or
more
transfers
s e c u r i t y and
paragraph
Part.
occurred
the
of
to a t r a n s a c t i o n
m a y agree
the
that w i l l
beyond
either
transaction
shall
be g o v e r n e d by a p p l i c a b l e
regulations
as
transactions
to
[the date w h i c h
of
S u b p a r t s A,
Part
supplements,
contained
revision
the
the
in s e c u r i t i e s
is 60 d ays
and D of
amends,
(31 C F R P art
rules
regulations
26-76
after
this
P art
Circular
P art
in this
350),
in C i r c u l a r
the
in
entire
the
of Part
entire
357.
i ssued
prior
of p u b l i c a t i o n
form]
this
regulations
No.
and
Nos.
in a
specified
300,
Circular,
Part are
two
Treasury
in final
the
involve
that
the d ate
and D e p a r t m e n t
(31 CFR
contained
or
that w e r e
and m o d i f i e s
306)
contained
357
to a d o p t i o n
in S u b p a r t 0 D e p a r t m e n t
D e b t S e r i e s No.
that
B,
by Part
that
be g o v e r n e d
For
on
the
interest
the d a t e
shall
(c)
of
in
preceding
a limited
in w r i t i n g
prior
the d ate
transfer
transaction
in e f f e c t
interest
in a s e c u r i t y as
For p u r p o s e s
or
on
in
a transaction
or a l i m i t e d
interest
continue
in a s e c u r i t y
s e ction,
constitutes
of a s e c u r i t y
that will
(a),
this
to have
limited
described
of
of a s e c u r i t y
be d e e m e d
the
s e c u r i t y or of
(a)
security.
the a p p l i c a b i l i t y of
to a t r a n s a c t i o n
accordance with paragraph
involving
to s uch o u t s t a n d i n g
current
Public
to the e x t e n t
inconsistent with
300 and
26-76,
79
the
rules
of
limitation
Sec.
357.2
(a)
this
set
ri g h t s
Department
applies
with
are
offering
collectively
The
and o b l i g a t i o n s
respect
referred
S tates,
governed
provided
(c)
the
in p a r a g r a p h
a nd
United
maintained
outside
are
States,
on
the U n i t e d
its
laws
by
this
to the
sect i o n .
of
this
paragraph
other
arising
law
Federal
out of
by a p p l i c a b l e
custodian
its
of
Part
of
the
the
law").
interests
of
law,
this
r i ghts
the
in
United
except
section,
as
territories
c o n d u c t e d at
of a j u r i s d i c t i o n o t h e r
a nd
at
a place
or p o s s e s s i o n s
if the b u s i n e s s
s uch place
than
of
in s e c u r i t i e s
custodian
law,
the
and o b l i g a t i o n s
interests
foreign
t e r r i t o r i e s or p o s s e s s i o n s ,
the
section.
of a b o o k - e n t r y
S t ates,
and
(hereinafter
Fed e r a l
t han
of
Part,
no t i c e
obligations
(b)
out
this
this
and/or
arising
and
St a t e s
Treasury
of
Federal
applicable
(c)
the b o o k s
such book- e n t r y
only
to w h i c h
"applicable
rights
obligations,
governed
to the
to as
than
Notwithstanding
rig h t s
of
the U n i t e d
announcement
and o b l i g a t i o n s
other
of
regulations
applicable
securities,
are
(a)(2)
to s e c u r i t i e s
the
the
other
r ights
subject
s o l e l y by a p p l i c a b l e
including
and
control,,
lav.
circular,
offering,
shall
in p a r a g r a p h
governed
regulations,
(b)
forth
Governing
The
Part
is
the U n i t e d
such book-entry
of
subject
S t ates,
80
custodian
and
applicable
Sec.
357.3
its c u s t o m e r
F ederal
have
l aw w i t h
not made
r espect
a valid
to such
choice
of
securities.
Definitions.
In this
Part,
unless
" B i l l ” me a n s
the
an o b l i g a t i o n
t erm of not m o r e
of T itle
context
31 of
than
indicates
of the U n i t e d
one year
the U n i t e d
otherwise:
S t ates,
issued u n d e r
St a t e s
Code,
with
Chapter
a
31
in b o o k - e n t r y
form.
"Bond"
m eans
an o b l i g a t i o n
t erm of more
Title
t han
31 of the
"Book-entry
Department
ordinary
for
of
have
for a n o t h e r
the U n i t e d
S t ates
Code,
is a p e r s o n
Reserve
with
31 of
in b o o k - e n t r y
form.
other
Bank,
than
that
maintains
persons.
a security
interest
the
in the
book-entry
A book-entry
in
securities
and also may h o l d
securities
its own a c c o u n t .
" C l e a r i n g bank"
defined
means
below but
described
a depository
excluding
in s u b p a r a g r a p h
institution,
a depository
(g),
a
Chapter
for other
person
States,
issued un d e r
its b u s i n e s s
accounts
custodian may
held
United
a Federal
co u r s e
securities
ten years,
custodian"
or
of
w h i c h has
as
institution
a book-entry
61
securities
which
it
provides
"Clearing
clearing
written
account
lien"
bank
at a F e d e r a l
clearing
m eans
or
providing
clearing
"Clearing
securities
other
granted
B a n k , pursuant
credit
extended
to a
to a
in
means d e l i v e r i n g
for
and
securities
receiving
on b e h a l f
of
persons.
Treasury
m eans
and,
acting
"Depository
section
the U n i t e d
where
as
fiscal
of
Un d e r
the
the
term
"depository
(a)
Any
i n s u r e d bank
an
A ny mutual
1 813
the
United
of
the
Act
as d e f i n e d
sav i n g s b a n k
or any bank w h i c h
in
S t ates.
under
Reserve
includes:
is e l i g i b l e
1813
or
application
12 U .S.C.
as d e f i n e d
in
(12 U. S . C .
12 U .S.C.
to m a k e
the
Reserve
Federal
institution"
bank
of
an e n t i t y d e s c r i b e d
is e l i g i b l e
insured
Federal
Reserve
19(b)
Department
the
of
means
Federal
Act,
become
agents
sec t i o n
a n y b ank w h i c h
States
appropriate,
institution"
19(b)
461(b)).
(b)
through
services.
and p a y m e n t s
"Department"
Banks
interest
Reserve
to s ecure
services"
Bank
services.
a security
Federal
agreement,
Reserve
1815;
in 12 U.S.C.
to m ake
to
82
application
to b e c o m e
an i n s u r e d bank u n d e r
12
U .S .C . 1815;
(c)
Any s a vings b a n k as d e f i n e d in 12 U.S.C.
any bank w h i c h
become
(d)
Any
an
is e l i g i b l e
insured
insured
bank
credit
to make
under
union
as d e f i n e d
credit union which
application
to b e c o m e
12 U.S.C.
(e)
Any
as d e f i n e d
insured
1724
or any
application
12 U.S.C.
(g)
For
the
347c,
as d e f i n e d
institution which
to b e c o m e
1726;
372,
an
insured
under
in 12 U.S.C.
to m a k e
institution
under
and
of
any
12 U.S.C.
248(o),
association
consists
institutions
referred
ifa.
to
342
to
except
paragraphs
an
is
o n l y of
(a)
of this d e f i n i t i o n .
any person
347,
or e n t i t y w h i c h
by or w h i c h
^Entity” means
to m a k e
1422 ;
is e l i g i b l e
wholly owned
(d)
in 12 U. S . C .
institution
in 12 U.S.C.
institution
purpose
and
1815;
is e l i g i b l e
ins u r e d
to
1781;
A ny m ember
(f)
an
or
application
12 U.S.C.
1752 or any
1813
individual.
through
83
"Federal
Federal
Reserve
Reserve
"Financial
deposit,
credit
time
Bank
an
in a d i r e c t
and has
deposit
under
Federal
"Incompetent"
medically
business
" I ssue"
affairs,
that
"Maturity value"
obligated
"Minor"
"Note"
210,
210
as
its
Part
to a g r e e
to
receive
amended
from
participation
210,
to
and h a s
of d i r e c t
or
an
receive
enrolled
credit
with
an
individual
incapable
except
that
of
who
legally,
of h a n d l i n g
a minor
his
is not
or
her
in
this
an
of age.
sec u r i t i e s ,
identified
is
by
the
is the a m o u n t
that
as
same
the
defined
CUSIP
number.
Department
is
to p a y w h e n a s e c u r i t y m a t u r e s .
means
majority,
a
Bank.
a group
is
agreed
not w i t h d r a w n
s o l e l y bec a u s e
means
sec t i o n ,
31 CFR Part
31 C FR Part
means
means
for p u r p o s e s
program under
or m e n t a l l y
incompetent
means,
is w i l l i n g
Reserve
Bank"
or Branch.
under
institution which
its
"Reserve
i n s t i t u t i o n w h i c h has
time,
payments
or
institution"
payments
to
B ank"
an
individual
who
is u n d e r
as d e t e r m i n e d by a p p l i c a b l e
means
an o b l i g a t i o n of
the
state
the U n i t e d
age of
law.
S t ates,
with
a
84
t e r m of
at
least
one year,
b ut
of n o t
y e ars,
issued un d e r
Chapter
United
S t ates
in b o o k - e n t r y
"Original
of
Code,
iss u e ” means
the T r e a s u r y
and
maintained
e ither
as used
or e n t i t y
security
"owner"
its
issuance
Reserve
is
registered
i ncludes
registration
transaction
name
all
r e quest
31 of the
by
the D e p a r t m e n t
Treasury
security
to
the
Treasury
or h e l d
Bank.
C,
means
a security
in m o r e
t hose
and are
ten
in b o o k - e n t r y a c c o u n t s
by
in S u b p a r t
in w h o s e
than
form.
offering
directly
a Federal
"Own e r , "
31 of T i t l e
of a m a r k e t a b l e
the p u b l i c
through
the
more
is
than
whose
authorized
the
r e g istered.
one
names
by
on a s e c u r i t y
i n d i v i d u a l (s )
this
held
name,
appear
Part
If a
the
on
term
the
to make
a
in T R E A S U R Y
DIRECT.
"Pe r s o n "
means
c ompany,
governmental
partnership,
and
trust,
includes
an
entity,
est a t e ,
individual,
association,
and
any
o ther
corporation,
firm,
similar
organization.
"Redemption” means
or p u r s u a n t
the
payment
to a call
for
terms of a s e c u r i t y .
of
a s e c u r i t y at m a t u r i t y ,
redemption
in a c c o r d a n c e
with
85
'"Representative"
legal
guardian,
includes
committee,
person
or e n t i t y
est a t e
of a d e c e d e n t ,
a trustee,
an e x e c u t o r ,
conservator,
a p p o i n t e d by a co u r t
whether
minor,
a bond,
in th is s e c t i o n , a nd
Depa r tmen t that,
this
by
the
note,
favor
as w e l l
as
the re is
terms
o f the
Separate
Pri n c i p a l
of
secu rity ha s b e e n d i v i d e d
the
e xpre ss
the
security was
maintained
te r m s
of
Trading
and
the
A
security
shall
purposes
of S t a t e
be d e e m e d
a
of R e g i s te r ed
("STRIPS” ), i f
such
compon ents
components
s e p a r a t e l y on the b ooks
to
Pa r t , i t a l s o
the o f f e r i ng c i r c u l a r
issued
sub j ect
c o m p o n e n t s of
into
the
appli c able
this
S ecur ities
defined
issue d b y
is m ade
of
inte re st a nd p r i n c i p a l
the
ea ch as
obligation
Sole ly for p u r p o s e s
Inter es t and
Bank.
the
or o t h e r w i s e .
or bill,
a n n o u n c e m e nt,
secur ity e l i g i b l e for
such
represent
incompetent,
in w h o s e
any o ther
ci rcula r or
Part
means
to
similar
inte res t .
" Secu ri ty " m e a n s
offer ing
or
a n d any
a p p o i n t e d by a c o u r t
"Secu red p a r t y 8 is a p e r s o n
’
secur ity
administrator,
by
unde r which
are
of a F e d e r a l
law.
GS e c u r i t y a g r e e m e n t ” m e a n s
security
inte r e s t .
a security
Reserve
an a g r e e m e n t
that
for
creates
a
86
"Security
interest"
security,
which
to s e c u r e
payment
is c r e a t e d
having
and
interest
" p ledge"
is a c q u i r e d
or p e r f o r m a n c e
security
number,
i d e n t i f y i n g num b e r "
account
as
"TRADES"
the
number
an
by a s e c u r e d
between
secured
or
interest
of an o b l i g a t i o n
by a s e c u r i t y a g r e e m e n t
such o b l i g a t i o n and
"Taxpayer
mean
the
in a
party
and
person
p arty.
"TIN"
means
or an e m p l o y e r
a social
identification
a p propriate.
is
the T r e a s u r y / R e s e r v e A u t o m a t e d
D ebt
Entry
System.
" T r a n s a c t i on
request"
ma intained
portfolio
"Transaction
request
prescribed
transaction
document
all
a request
of
s e c u r i tie
or
in T R E A S U R Y D I R E C T .
form"
means
for use by
a form
or
the D e p a r t m e n t
in T R E A S U R Y DIRECT.
that
the
to e f f e c t
re c o r d
in an a ccount m a ster
ch a n g e
forms
me a n s
to
of
req u e s t
term
includes
the D e p a r t m e n t has d e t e r m i n e d
required
by the
transaction
"TREASURY DIRECT"
System.
is the T R E A S U R Y
DIRECT
a
request
form.)
Securities
a
contains
elements
(This
s eries
Book-Entry
87
Subpart
Sec.
B — Treasury/Heserve
357ol0
Payment
of
Automated
interest;
Debt
payment
Entry System
at m a t u r i t y
(TRADES)
or u p o n
call.
(a)
Interest
credited
Reserve
on s e c u r i t i e s
to such
Bank
as
reserve
account
securities
have
which
redemption
where
(c)
The
to m a k e
held
the
p r oceeds,
payments
shall
appropriate
Federal
Reserve
of
as
at
of
shall
be
at a Federal
entity
Reserve
in T R A D E S
and
by
of
shall
the
to w h o s e
Bank
such
crediting
both
reserve
the
o ther
and
by
and
principal
be d i s c h a r g e d
is c r e d i t e d
the
and
of
(d)
Subject
to any
r ights
it m a y
the
at a
entity whose
Bank
was
charged.
the U n i t e d
States
on s e c u r i t i e s
time p a y m e n t
to an a c c o u n t
with paragraph
have
in
interest,
in
at a
section.
this
in a c c o r d a n c e
at
at
account
acc o u n t
the
Reserve
Department
interest
redeemed
the a m o u n t
principal
or
Federal
be
securities
is d e s i g n a t e d
such
amount
Bank
the
Federal
including
Bank
obligation
by
account
charging
to such
account
in T R A D E S
by
maintained
Reserve
securities
other
in T R A D E S
credited.
call
applicable,
Federal
such
maintained
or u pon
they are
at
been
Securities
maturity
or
is d e s i g n a t e d
securities
(b)
maintained
(a)
as a s e c u r e d
or
party
(b)
88
under a written security agreement, a book-entry custodian
that is maintaining securities on behalf of another person
shall, upon receipt of any payment in accordance with
paragraph (a) or (b) of this section relating to such
securities, make such payment available for withdrawal or
use by such other person at the earliest possible time on
such date of receipt and in any event not later than the
close of business on such date of receipt*
Sec. 357.11
(a)
Rights acquired upon transfer and perfection.
Upon transfer of a security in accordance with Section
357.12, the transferee acquires the rights in the security
that the transferor had or had actual authority to convey.
(b)
A transferee of a limited interest
security interest)
(including a
in a security acquires rights only to the
extent of the interest transferred and to the extent
described in Section 357.13.
The creation of a security
interest as described in Section 357.13(a) or the
termination of a security interest as described in Section
357.13(e) constitutes a transfer of a security interest for
purposes of this paragraph.
Sec. 357.12
(a)
Transfers
Transfer of a security or a limited interest (including
89
a security
interest)
in a s e c u r i t y
to a t r a n s f e r e e
occurs
only:
(1)
at
time
an e ntry
books
Bank
the
that
credits
account
maintained
(2) w i t h
r e spect
for
is m a d e
on
a security
the
to the
Federal
to a s e c u r i t i e s
transferee;
transfer
with Section
357.20(a),
entry
on the books
of
on w h o s e
books
the
identifying
such
transferee;
interest
at
the
Federal
the
at
the
time
interest
interest
time
Reserve
transferor
an entry
is m a d e
book-entry
custodian
securities
account maintained
that
and
otherwise
the
(4)
ot h e r
than
described
time
an
the
the
transfer
is made
on w hose
identifying
transferee;
or
favor
the
such
for
the
identification
to the
in p a r a g r a p h
on
credits
transferred;
respect
entry
custodian
appears
permits
security
with
that
in
an
Bank
appears
or
(3)
limited
the
of
or
of a l i m i t e d
in a c c o r d a n c e
is made
Reserve
of
a security
(a)(5)
of
this
on
the
books
books
the
interest
such
the
books
of
security
a
to
transferee
of
the
a
or
transferee
or
transfer
of
of
limited
of
a limited
interest
interest
as
section,
at
the
of
interest
the
book-entry
the
transferor
in favor
of
90
(5)
with
where
respect
the
secured
custodian
of the
to the
party
on wh o s e
security
transfer
of a s e c u r i t y
is
the b o o k - e n t r y
bo o k s
to be
the
interest
interest
appe a r s ,
s e c u r i t y has been
transferred
security
in a c c o r d a n c e
the
interest
transferor
agreement
interest
custodian
inte r e s t u nder
under
additional
interest
s uch
conditions
that d e l a y
time
as
the
custodian
transferor
custodian
security
is e f f e c t i v e
in w h i c h
of an a m o u n t
of
p lace
of such
transfer
conditions
conditions
under
transfer
been
the
until
fu l f i l l e d .
to as
book-entry
paragraph
as e f f e c t i v e
unless
(a)(4)
as
shall
to both
the b o o k - e n t r y
agreement.
paragraph
if
have
that may be a g r e e d
sentence,
transferee,
only
the
of
limited
to such
un d e r
s ection may
of such
the
the
the
or a s e c u r i t y
transfer
a transfer
is a p a r t y
A transfer
section
all
and
granting
and a t r a n s f e r e e
this
preceding
to treat
and
interest.
a transferor
the
the
effectiveness
the
effecting
entitled
on
of
security
custodian
of
the
section,
this
a written
security
transferor
transferor
with
(a)(5)
any such
in the
the
(a)(4)
specified
described
(c)
such
the
w h e n b oth
paragraph
paragraph
Notwithstanding
the
book-entry
By w r i t t e n agreement,
a limited
be
executed
the
with
book-entry
(b)
has
to
of
interest
(a)(3),
the
limited
securities
security
interest
of
(4),
the
or
(5)
transferred
is g r a n t e d
same
of
issue
this
or
is p a r t
that
(1)
the
or
91
are
maintained
at a F e d e r a l
the
book-entry
custodian
credited
account
and
For
is
the
the
(1)
writing
or
of
the
books
in w r i t i n g
or
reasonable
time
with
(3)
Section
Section
custodian
req u e s t
that
of
f o r m by
credits
maintained
identification
A
the
security
the
of
the
makes
or
transferee
if
in
contained
form w i t h i n
and
when
on
account
in a c c o r d a n c e
a security
the
the
f rom
book-entry
transaction
on
its
books
account
otherwise
the
a
expe n s e .
f r o m an
an e n t r y
that
permits
security
transferred.
Sec.
357.13
Enforceability,
security
perfection
interest.
a nd
in
in TREASURY DIRECT
to a s e c u r i t i e s
transferee
transfer
processing
DIRECT
designated
to an
is m a d e
transferred
of
is
displayable
(2)
data
is e f f e c t i v e
transferor
(2)
or u n r e a s o n a b l e
transfer
transferee
such
for
may be
to T R A D E S
the
entry
into e i t h e r
in T R E A S U R Y
357.22(a).
TREASURY DIRECT
an
from data
delay
the
of
Bank.
media,
or ot h e r
or
custodian
effecting
to be m a i n t a i n e d
357.1(a)(1)
to an a c c o u n t
book-entry
screen)
undue
in an a c c o u n t
transfer,
Reserve
tangible
eligible
the
section,
convertible
without
A security
in T R A D E S
on
this
by e l e c t r o n i c
equipment,
under
of
Bank
custodian
as on a v i d e o
retrievable
(e)
of a n o t h e r
at a F ederal
purposes
(such
effecting
book-entry
is m a i n t a i n e d
(d)
it
on
Reserve
termination
of
a
92
(a)
of
A
security
i n terest
is e n f o r c e a b l e
the
security
inte r e s t
a nd
the
(1)
secu rity in t e r e s t
a se cur i ty ag reement
inte rest and
(2)
gran tor of
the
secu rity,
the
(3)
(b)
A
the
h as
the
s e c u r ity
(c)
to S e ction
the
357.1 2
grantor
of
the
description
of
re fe r red
r educed
time
seven
(7)
enforceable
section.
rights
in
security
(b)
to
the c o l l a t e r a l ,
against
to the
secu rity o r
secur ed pa r ty
t his
becomes
section,
in p a r a g r a p h
and
against
from
a security
pe r fec ted
i f the
(a)(1)
of
f o r m s igned b y
containing
a security
the g r a n t o r
Thereafter,
the
interest
of
interest
calendar days
and enfo rceabl e
at w h i c h
to w r i t t e n
p e r f e c t e d and e n f o r c e a b l e
of
the
party,
perfected
a s e c u r i ty
time
s ecu r i ty agre ement
been
to
(a).
in a c c o r d a n c e wi th pa ragr a p h
s e c t i o n has
if
g iven value.
becomes
part ies at
Pr io r to the
of
i n t e r e s t has
secu r i ty inte rest has bee n t r a n s f e r r e d
p u r s uant
only
g r a n t e d pu r suant
grantor
se c u r e d
secu red par ty has
t hird
been
grantor
and
se cur i ty in te rest
agai nst
the
the
s e c u r e d party,
between
secu r i ty
the
the
between
the d a t e
under
the
a
interest
third parties
i n t e r e s t will
is
for
on w h i c h
paragraph
thi s
a period
it b e c a m e
(a)
of
continue
this
to
93
be
perfected
only
period described
becomes
If the
in a c c o r d a n c e
the
security
security
than
the
seventh day
paragraph,
the
security
in a c c o r d a n c e
security
security
between
with para g r a p h
i n t e r e s t d oes
the
secured
until
the
time
of p a r a g r a p h
(b)
has
interest will
be d e e m e d
of
perfected
unperfected
a nd
continue
the
at w h i c h
grantor
the
to be
of
the
transfer
c o m p l i e d w ith,
to be
t his
seven-day
and
been
(b)
the
but w i l l
party
the
interest
become
become
t h i r d parties,
of
not
(b) w i t h i n
i n t e r e s t w ill
against
interest,
requirement
later
with paragraph
unenforceable
enforceable
no
in this
perfected
section.
period,
if,
perfected
and
only
the
as
of
such time.
(d)
A security
with
this
including
or
local
interest
that
section
shall
but
limited
law
not
concerning
is p e r f e c t e d
be p e r f e c t e d
to the
for
in a c c o r d a n c e
all
purposes,
applicability
priority
of p e r f e c t e d
of
any
state
security
i nte r e s t s .
(e)
A security
transfer
of
the
s e c u r e d party,
interest
security,
to the
designee
of
grantor,
(2)
security
interest was
security
interest
in a s e c u r i t y
by or w i t h
grantor
the g r a n t o r ,
fulfillment
of
security
successor
of
obligation
the
by
the
or
terminated
the a g r e e m e n t
or a ny
gran t e d ,
signed
the
is
in
of
by
the
interest,
interest
for w h i c h
(3) w r i t t e n
s e c u r e d party.
release
(1)
of
a
the
the
of
the
94
S e c . 357.14
(a)
Good
A good
faith
faith
transferee
transferee
s e c u r i t y or a l i m i t e d
interest
good
faith,
and w i t h o u t
(b)
Exc e p t
as o t h e r w i s e
357.19,
rights
a good
faith
its
claim which
such
An
in
prior
the
with
security
to the
transfer
3 5 7.15
of
of
and
to a c q u i r i n g
Section
free
in
claim.
in S e c t i o n s
in a d d i t i o n
a
357.11,
any adv e r s e
such
inte r e s t
to
transferee.
(c)
provided
acquired
for value,
of a n y a d v e r s e
in a c c o r d a n c e
interest
arose
notice
that
in a s e c u r i t y
transferee,
in a s e c u r i t y
acquires
is a t r a n s f e r e e
"adv e r s e
or w o u l d
the
(d)
be w r o n g f u l
owner
of or has
A transferee
section
(1)
cl a i m "
inc l u d e s
or
that a p a r t i c u l a r
an i n t e r e s t
in the
is a t r a n s f e r e e
for
a t r ansfer
adverse
person
was
is
security.
purposes
of
this
if;
the
interest
transferee
takes
solely
by o p e r a t i o n
such
to the
a security
or a l i mited
in a s e c u r i t y by a n y v o l u n t a r y
c r e a t i n g or g r a n t i n g
(2)
a c l a i m t hat
an
of
s e c u r i t y or
transferee
interest
law;
transaction
in a s e curity,
and not
a nd
limited
interest
in a c c o r d a n c e w i t h
is t r a n s f e r r e d
the
provisions
of
95
Section 357.12(a)(1),
(e)
(a)(3) or (a)(5).
Among transferees whose interests in securities are
reflected on the books of the same book-entry custodian,
the
interests of the good faith transferees shall have priority
over the interests of those who do not qualify as good faith
transferees.
In the event that the claims to securities of
the same issue of those who qualify as good faith
transferees exceed the aggregate amount of such securities
available to satisfy their claims, the good faith
transferees shall share ratably in the available securities
of that issue.
(f)
Notwithstanding Section 357.11,
the transferee of a
security or a limited interest that has been a party to any
fraud or illegality affecting the security, or that as a
prior transferee of the security had notice of an adverse
claim, cannot improve its position by taking from a good
faith transferee.
Sec. 357.15
(a)
Clearing lien priority
A clearing lien in a security shall have priority over
all other claims of third parties to that security including
claims of a transferee that qualifies as a good faith
transferee except that:
96
(1)
all
clearing
the U n i t e d
Section
(2)
357.19;
a clearing
subject
the
(b)
same
this
extended
lien
the
A clearing
b ank
against
securities
securities
belonging
to
the
of
in
Reserve
is
Bank
in
priority provided
of
credit
services
and
actually
only
in a c c o r d a n c e
if:
with
Section
bank
the
on
on
of
provides
have
its
belonging
of
bank
has
o wn b o o k s
a book-entry
clearing
agreed
Reserve
the b o o k s
by a c l e a r i n g
clearing
as c o l l a t e r a l .
n ot be a s s e r t e d by a F e d e r a l
faith.
asserted
identified
securities
securities
in g o o d
to c u s t o m e r s
clearing
segregated
be
which
u se
as
the
extent
acquired
such c u s t o m e r s
Bank
for
clearing
except where
w h i c h are
as p r o v i d e d
lien of a F e d e r a l
lien m a y not
or o t h e r w i s e
of their
security
interests
and
segregated
the
to a n y
a s s e r t e d by a c l e a r i n g bank
is p e r f e c t e d
lien was
(c)
for w h i c h
same
lien q u a l i f i e s
lien
3 5 7.13(b);
(2)
the
subject
security.
section only
the
are
and
in p e r f o r m i n g
(1)
in
to a c l e a r i n g
A clearing
under
S tates
liens
as
custodian
services,
in w r i t i n g
to p e r m i t
A
lien m ay
Bank
the
to c u s t o m e r s
clearing
against
Federal
of
securities
Reserve
the d e p o s i t o r y
97
institution
clearing
for w h i c h
services
exc e p t
writing
Sec.
the
to p e r m i t use
357.16
Duties
(a)
under
business
on
the
of
Section
357.12(a)(4)
of
such
limited
on
its next
its
(c)
has
address,
transferee
the
business
not
the
shall
as
send
to
no
the
l ater
day
than
a fter
shall
interest
send
an a c k n o w l e d g m e n t
in a c c o r d a n c e
later
the
close
the
the d a y on w h i c h
is made.
be
of
transferee
of b u s i n e s s
the
entry
If the
book-entry
required
custodian with
transferee
the
the
with
to the
than
of
is made.
acknowledgment
to
close
and
357.12(a)(4)
sent
such c u s t o m e r
transferor
day after
provided
in
customer
the d a y on w h i c h
357.12(a)(3)
no
agreed
collateral.
its
to
to the
inte r e s t
in S e c t i o n
transferee
s hall
custodian
a limited
c u s t o m e r s have
of a s e c u r i t y
in S e c t i o n
provides
custodians.
its next b u s i n e s s
transfer
Bank
securities
custodian
A book-entry
described
t heir
357.12(a)(3)
entry described
(b)
s uch
of a t r a n s f e r
Section
Reserve
where
of b o o k - e n t r y
A book-entry
confirmation
of
Federal
to be
at
sent
to
the
the a d d r e s s
of
tra n s f e r o r .
A book-entry
custodian,
r equest by a cust o m e r ,
s hall
customer
of
in such
or a d e s i g n e e
security
of such
upon
rec e i p t
provide
such
a statement
cust o m e r ,
customer
of an a d e q u a t e
of
(1)
and a ny ot h e r
to s u c h
the
interest
customer
in
98
t hat
the
same
secur i t y ,
book-entry
recei v e d ,
and
as
custodian
(2)
any
book-entry
to a t hird
party,
request
of
in w r i t i n g ,
response
is
department
to be
of
the
for m a i n t a i n i n g
purposes
of
interest
granted
paragraph,
that
by
in favor
r e quest
a limited
is
to
such o t h e r
reduced
(e)
is a
is
a
the
responsible
securities.
For
of a b o o k - e n t r y
in a secur i t y ,
rec o r d e d
on
the
books
of
custo d i a n .
confirmation,
pursuant
received.
request
that
a customer
including
Any
custodian
at
interest
(d)
is
received
is any p e r s o n w h o s e
book-entry
the
is
custodian
the
of
of
is
to w h i c h
custodian
interest,
books
the a d d r e s s
of b o o k - e n t r y
paragraph,
the
request
an a d e q u a t e
and w h i c h
records
the
on
the b o o k - e n t r y
the
provides
book-entry
a ppear
the date
the date
sent,
the
this
as of
or
as of
this
interests
limited
custodian,
For p u r p o s e s
such
this
f orm
acknowledgment,
section
that
at
m ust
the
or
statement
be d e l i v e r e d
option
of
the
i s sued
in w r i t i n g
recipient
or
in
m a y be
to writ i n g .
For
purposes
of
custodian
is s u b j e c t
Governors
of
Comptroller
the
of
this
Federal
Reserve
the C u r r e n c y ,
or ot h e r
a book-entry
custodian
is
if any
to a r e g u l a t i o n
Corporation,
for a c u s t o m e r
section,
Fed e r a l
to
System,
Fed e r a l
the
Board
Office
Deposit
of
of
the
Insurance
r e g u l a t o r y a g e n c y u nder w h i c h
effecting
required
of
book-entry
a securities
fur n i s h
to
its
transaction
customer
a
- 99 confirmation
then
or w r i t t e n
such book-entry
requirements
with
such
(f)
A
u n d er
of
notification
custodian
this
section
shall
so long
of
the
transaction,
not be
as
it
subject
is
to
the
in c o m p l i a n c e
regula t i o n .
con fi r m a t i o n , a c k n o w l e d g m e n t , or
this
sec t i o n m a y not
to
receive
it u n l e s s
by
Federal
regulation
be w a i v e d
such w a i v e r
referred
by
required
statement
the
person
entitled
is spec: i f i c a l l y a u t h o r i zed
to
in pa i
ragraph
(e)
of
this
a security
or
an
sec t i o n .
Sec.
357.17
(a)
Warranties
In c o n n e c t i o n
interest
in a s e c u r i t y
book-entry
not
be
described
of g o o d
limited
in any
encumbrance,
ownership,
any
transfer
in a c c o r d a n c e
custodian warrants
Such w a r r a n t y
shall
with
or
faith
to,
claim,
and
(1)
required
its
of
with
good
confirmation
including
any
by
the
book-entry
s p e c i f i c a l l y noted
on
the
confirmation;
the
knowledge
of
the b o o k - e n t r y
described
in the
except
specifically noted
as
warranty
that
the
security maintained
same
the
confirmation
security
is
on
and
shall
that
is
free
include,
is p a r t
of a n y
except
a warranty
custodian,
the
confirmation;
or all
in an a c c o u n t
but
security
free of a n y ot h e r
the
a
lien,
c l a i m of
custodian
(2)
3 5 7.12,
authority.
the
adverse
granted
to
faith
authority
a warranty
Section
of
of
that,
security
claims,
and
an a m o u n t
the
as
(3)
a
of
book-entry
100
c u s t o d i a n on
the b o o k s
(b)
the
b ooks
of a Federal
A book-entry
the
s e c u r i t y or
transferee
addition
of a n o t h e r
that
Reserve
custodian
an
the
this
Any
or
on
the
transferor
is
rightful
described
to
of
the
and e f f e c t i v e ,
in p a r a g r a p h
(a)
in
of
section.
(c)
is a lso
in a s e c u r i t y w a r r a n t s
transfer
to the w a r r a n t i e s
custodian
Bank.
that
interest
book-entry
transferor
security,
Bank,
that
other
the
transfer
the U n i t e d
Federal
is
or p u r s u a n t
that
the
By s e n d i n g
357.16(a)
to a s i m i l a r
information
that
to a s i m i l a r
a book-entry
the b o o k - e n t r y
with
therein
requirement
the
Section
be m ade
to
in a c c o r d a n c e
(4),
before
the
its
Section
under
c u s t o d i a n has m ade
or
ot h e r
is a c c u r a t e .
custodian warrants
357.12(a)(3)
such an e n t r y w i l l
that
in a c c o r d a n c e w i t h
357.1 6 ( b ) ,
or
transferee
custodian warrants
provided
a confirmation
in S e c t i o n
and
Reserve
requirement under
Section
as d e s c r i b e d
to its
in a c c o r d a n c e
r e g u l a t i o n or an a c k n o w l e d g m e n t
that
a Fed e r a l
warrants
F e deral
transferee
in a
faith.
a book-entry
or p u r s u a n t
interest
and e f f e c t i v e
a statement
r e gulation,
customer
in g o o d
or an
States,
custodian,
rightful
is ac t i n g
By p r o v i d i n g
357.16(c)
(e)
than
or a b o o k - e n t r y
transferor
(d)
of a s e c u r i t y
to
other
with
its
an e n t r y
as a p p r o p r i a t e ,
book-entry
101
custodian
(f)
next
The w a r r a n t i e s
disclaimed
Sec.
opens
357.18
(a)
or
Duty
Unless
fulfills
makes
busin e s s .
described
limited
agreed,
to t r a n s f e r
its bo o k s
to m a k e
such
it
(2)
make
an e n t r y
(3)
it
Bank
to t r a n s f e r
(b)
Unless
instructs
the
agreed,
a Federal
fulfills
instructs
its b o o k - e n t r y
such b o o k-entry
an
or
entry
instruct
instruct
a Federal
another
Reserve
(1)
Section
Bank
other
at
the
or
than
time
manner
to
or
Reserve
the
on
to m a k e
an e n t r y
(3)
it
required
an e n t r y
357.12(a)(3);
357.12(a)(1);
Bank
Federal
custodian
to m a k e
Section
a book-entry
in the
book-entry
to T R E A S U R Y DIR E C T .
or
to m a k e
or
it
D I RECT.
a transferor
custodian,
custodian,
Section
custodian
transfer
(1)
357.12(a)(1);
to T R E A S U R Y
to
in a c c o r d a n c e w i t h
accordance with
security
be
book-entry
with
Reserve
Section
Bank,
time
another
a Federal
Reserve
its d u t y
the
in a c c o r d a n c e
with
security
custodian
books
m a y not
custodian
at
instructs
its b o o k - e n t r y
otherwise
States,
a security
or
in a c c o r d a n c e
instructs
a book-entry
an e n t r y
357.12(a)(3);
by
section
by a g r e e m e n t .
otherwise
an e n t r y on
United
in this
to t r a n s f e r .
its d u t y
custodian
for
(2)
its
such
to
in
to t r a n s f e r
the
102
Sec.
35 7 . 1 9
A
limited
States
or
deposits
limited
by
Priority
or
the
or
was
acting
capacity.
For
purposes
entry
is made
either
the
in a s e c u r i t y
3 57.20
Each
agent
of
the
with
the
of
is
this
rather
s ection,
with
or
unless
the U n i t e d
transferred
any
A
is
other
required
to the U n i t e d
other
interest
security
Department
c r eated,
in w h i c h
to any
m o n e y or
any
that
c r eated.
in a p r o p r i e t a r y
St a t e s
Authority
Federal
terms
of
such
States
to w h i c h
shall
the
free
s e c u r i t y was
Sta t e s
than
be
or
the
governmental
a security
or a l i m i t e d
the U n i t e d
to
Section
States
357.12
executive
Federal
Bank
if an
identifying
department
to
by
the
i ssue
t his
thereof
as
Banks.
authorized
securities
Subpart
Bureau
securities
Reserve
is h e r e b y
the a p p l i c a b l e
established
maintain
of
Reserve
the U n i t e d
Department
the
cedures
and
or
or
transferred
superior
the U n i t e d
t r ansferee.
Sec.
by
States
to
of p u b l i c
States
is
whenever
in a c c o r d a n c e
the U n i t e d
be
whenever
Department
deposits
and
St a t e s
transferred
the U n i t e d
s hall
securities,
claims,
the U n i t e d
l oan a c c o u n t s ,
regulation
in a t r a n s a c t i o n
interest
and
of
to the U n i t e d
adv e r s e
acquired
tax
Department,
in such
transferred
a ny
to s e c u r e
in favor
sta t u t e
of
in s e c u r i t i e s
to the T r e a s u r y
interest
created
of
interest
interests
the D e p a r t m e n t
Federal
States
of
of
the
offered
a p plies,
offering
in s e c u r i t i e s
fiscal
and
s old
in a c c o r d a n c e
circular
Public
as
and w i t h
pro
Debt,” to s e r v i c e
accounts
established
103
for
such
such
purposes;
securities,
transfer
of
to m ake
as d i r e c t e d
securities
the
entities
Sec.
35 7 . 2 1
such
Rights
the U n i t e d
Reserve
transfer
A
Federal
Reserve
to a p e r s o n
the
United
co u r t
or
u nder
or e n t i t y
with
interest
Section
other
only
the
and
than
on
a Federal
Federal
Reserve
recorded.
In
is
transferred
the
the
books
of
Bank
shall
recognize
the
interest
of
extent
expressly
set
forth
the
regulations,
the
(b)
Except
the
and
357.12(a)(2),
that
in
Federal
letters,
books
or
l aw or
that
that
be m a d e
Bank
or
by
books
Reserve
Federal
transferee
Reserve
the
a limited
applicable
by
a
of a F e d e r a l
a Federal
the
of
may
on w h o s e
event
pursuant
section,
to S e c t i o n
on
Bank
Bank
with
Reserve
Reserve
of
Fed e r a l
circulars
maintained.
357.12(a)(2)
requirement
interest
operating
the
an o r d e r
to be
or
by
Federal
to
is
statute
as d i r e c t e d
Federal
on
on
to e f f e c t
are
pursuant
transfer
the
interest
records.
Bank
States
and
accounts
States
and
accounts
to t r a n s f e r s
of a l i m i t e d
a specific
agreement
securities
respect
Bank
principal
securities
for w h i c h
of
of
by the D e p a r t m e n t ;
between
Banks with
(a)
payments
Reserve
only
to
Federal
Bank's
specific
agreement
transferee.
as o t h e r w i s e
provided
and n o t w i t h s t a n d i n g
contrary,
the U n i t e d
any
States
in p a r a g r a p h
information
a nd
the
(a)
of
this
or n o t i c e
Federal
Reserve
to
104
Banks
shall
a security
effect
other
be e n t i t l e d
is c r e d i t e d
transfers
described
Reserve
to
interest
account
according
the
security
or
though
instructing
the
instruction.
discharged
account
Subpart
Sec.
The
D -- A d d i t i o n a l
3 57.40
Additional
In any case
regulations,
or any
the
such a d d i t i o n a l
without
surety,
necessary
States.
for
as may
the
and
only
to any
of a t r a n s f e r e e ,
as
a F e deral
of
shall
of
not be
of
duty
to issue
shall
the
in w h o s e
liable
fiduciary
right
Bank
order
the e n t i t y
be
entity
for
e ven
the
fully
in w h o s e
is m a i n t a i n e d .
Provisions
requirements.
cl a s s
S e c r e t a r y of
require
the
to
a s e c u r i t y or a l i m i t e d
in b r e a c h
Reserve
entitled
interest
Subject
section,
e n t i t y h ad no
Fed e r a l
security
this
instruction
participation
by c o m p l e t i n g
the
of
account
s e c u r i t y and o t h e r w i s e
is m a i n t a i n e d ,
conversion
r eceive
interest
transferred
to the
to
security.
the
(a)
in w h o s e
entity exclusively
to such
the
recognize
that has
the e n t i t y
s e curity,
over
in p a r a g r a p h
Bank
the
res p e c t
control
requirements
as
of such
payments with
to e x e r c i s e
to treat
of
the
evidence
in the
protection
ca s e s
Treasury
the
of
these
("Se c r e t a r y " )
and a b o n d
judgment
of
a r i s i n g u nder
of
the
interests
may
i n demnity,
Secretary
with
be
of the U n i t e d
or
105
Sec.
357.41
The
Secretary
discretion,
case
or
or
action
of
of
to
regulations.
reserves
to w a i v e
class
in o r d e r
s uch
Waiver
for
relieve
the
inconsistent
rights,
and
the
will
subject
the
United
in the
of
States
of
regulations
the U n i t e d
of u n n e c e s s a r y
with
Secretary
Secretary's
these
convenience
any person(s)
existing
not
right,
a ny p r o v i s i o n ( s )
cases
is n ot
the
law,
d oes
not
is s a t i s f i e d
to any
in a n y
States
hardship,
im p a i r
that
any
such
substantial
if
action
expense
or
liability.
Sec.
3 57.42
Liability
of D e p a r t m e n t
and
Federal
Reserve
Federal
Reserve
B anks
Banks.
(a)
on
The
the
request
The
Department
information
f orm a nd
Department
li a b l e
for
are
not
the
action
information
set
or
(b)
In the
is u n a b l e
out
event
to m a k e
l i a b i l i t y of
Federal
the U n i t e d
of
St a t e s
Department
the
*
the
payment.
information.
shall
with
transaction
States
or
not
be
the
req u e s t
the
on a s e c u r i t y w h e n
States
rely
form
thereof.
the U n i t e d
to the a m o u n t
or
or
may
transaction
Banks
in a c c o r d a n c e
in s u p p o r t
a payment
or
to v e r i f y
Reserve
in a te n d e r
t hat
the
in a tender
required
ta k e n
submitted
evidence
the
provided
and
a ny
and
and
due,
the D e p a r t m e n t
In the e v e n t
is u n a b l e
Department
to take
&
that
is
the
limited
the U n i t e d
any o t h e r
action
106
with
respect
neither
for
the U n i t e d
failure
action
of
civil
or
Sec.
the U n i t e d
commotion,
of
or
the
action
States
the
fai l u r e
Liability
s uch
the
shall
failure
the
includes
acts
appl i e s ,
of God,
interruption
of
liable
take
reasonable
but
w ar
or o t h e r
be
to
Department.
computer
or
Part
is b e y o n d
control
accident,
this
Department
if
or
disasters,
communications
357.43.
nor
reasonable
to n a t u r a l
f a ilure,
such
to w h i c h
to an e v e n t w h i c h
is b e y o n d
limited
States
to take
is d ue
control
which
to s e c u r i t i e s
An
event
is not
or
other
equipment
electrical
power
lines.
for
transfers
to and
from T REASURY
DIRECT.
A depository
or
receives,
acting
the
as
or
35 7 . 4 4
In
the
to a t t a c h
entity's
for
States
liability,
Sec.
a security
agent
United
institution
its
and
loss
event
of
customer
the
such
securities,
from
s uch
or
DIRECT
agrees
f r o m the
judicial
to o b t a i n
of
proceeding
entity
Reserve
of a t t a c h m e n t
any notice
judicial
and
Federal
for
thereby
to
from
securities
in w h i c h
to,
to be
indemnify
any
claim,
in T R A D E S .
a person
Reserve
concerning
attachment
s hall
transfers
is d e e m e d
Ba n k s
by a F e d e r a l
an o r d e r
that
transaction.
proceedings
a security maintained
account
other
f rom T R E A S U R Y
resulting
Notices
or
or o t h e r
be d i r e c t e d
to
B ank
s eeks
for
an
disposition
of
notice
the
arising
Federal
107
Reserve Bank on whose books such security is maintained.
In all
other cases in which a person seeks to attach a security
maintained in TRADES or to obtain an order concerning disposition
of such security, any notice of attachment or other notice
arising from such judicial proceeding shall be directed to the .
book-entry custodian on whose books appears the interest of the
person against whom the attachment or other disposition is
sought.
Sec.
357.45
The
Supplements, amendments or revisions.
Secretary may,
supplemental,
securities,
at any time,
amendatory or
revised
including charges
servicing of securities
and
prescribe
additional
regulations with
fees
in book-entry
respect
for the m a in te na nc e
form.
to
and
@FedFRASER