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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10560
August 4, 1992
~|
SECURITIES UNDERWRITING ACTIVITIES OF BANK
HOLDING COMPANY SUBSIDIARIES
Proposal to Change the Current
10 Percent Revenue Test on Ineligible Securities
Comments Invited by August 27
To All Bank Holding Companies, and Others
Concerned, in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has requested public comment on alternative methods to adjust the 10
percent revenue test limiting ineligible securities activities of Section 20 subsidiaries of bank holding
companies.
Comment is requested by August 27, 1992.
Section 20 of the Glass-Steagall Act prohibits a member bank from being affiliated with a company
that is “engaged principally” in underwriting and dealing in bank ineligible securities.
The current test is based on the revenue earned from ineligible and total securities activities.
The Board is proposing alternatives because it believes that changes in the level and structure of
interest rates since the revenue test was last examined in September 1989 can alter the measure of whether
an underwriting and dealing subsidiary is “engaged principally” in ineligible securities activities in ways
that were not foreseen by the Board.
In addition, because the Board is concerned that these changes may have severe immediate effects
on the operations of some of these subsidiaries, it is allowing the subsidiaries to temporarily elect to
comply with the current “engaged principally” test on a quarter-by-quarter basis as opposed to the
8-quarter rolling average presently mandated.
Printed on the following pages is the text of the Board’s notice, which has been reprinted from
the Federal Register of July 29. Also, one of the alternative tests proposed by the Board of Governors
is a revenue test that is indexed to interest rate changes. A sample table of adjustment factors that
can be used under the proposed indexing revenue test to adjust interest and dividend revenue,
together with other supplemental information, is also printed on the following pages. Comments
on the proposal should be submitted by August 27, 1992, and may be sent to the Board of Governors,
as specified in the Board’s notice, or to our Banking Applications Department.
E. G e r a l d C o r r ig a n ,
President.
FEDERAL RESERVE SYSTEM
Regarding Availability of Information,
12 CFR 261.8.
activity on a measure of the gross
revenue of the company because the
[Docket No. R-0770]
Board believed that a test based on
FOR FURTHER INFORMATION CONTACT:
gross revenue was “an objective and
Richard M. Ashton, Associate General
10 Percent Revenue Limit on Bankmeaningful measure of the importance
Counsel (202/452-3750), Scott G.
Eligible Securities Activities of
of the activity to the enterprise as a
Alvarez, Associate General Counsel
Subsidiaries of Bank Holding
(202/452-3583), Thomas M. Corsi, Senior whole.”3 The Board also found that a
Companies Engaged in Underwriting
Attorney (202/452-3275), Legal Division; test based on gross revenue “reflects the
and Dealing In Securities
Michael}. Schoenfeld, Senior Securities level of risk involved in the activity.”
which was an important consideration
Regulation Analyst (202/452-2781),
a g e n c y ; Board of Governors of the
behind enactment of the Glass-Steagall
Division of Banking Supervision and
Federal Reserve System.
Act. Finally, the Board indicated that a
Regulation,
Board
of
Governors
of
the
a c t io n : Request for comment.
gross
revenue test would pose the
Federal Reserve System. For the hearing
fewest operational difficulties and
s u m m a r y : In 1987 and 1989 the Board
impaired only, Telecommunication
would “avoid the potential for
Device for the Deaf (TDD), Dorthea
authorized bank holding companies to
manipulation present in a test based
Thompson (202/452-4544), Board of
engage, through separate subsidiaries
solely on sales volume," which was the
(“section 20 subsidiaries”), in
Governors of the Federal Reserve
test advocated most strongly by the
underwriting and dealing in securities
System, 20th and C Streets, NW.,
applicants.4
Washington, D.C.
that a bank may not underwrite and
The Board determined to adopt the
deal in directly ("ineligible securities”). SUPPLEMENTARY INFORMATION:
more conservative 5 percent threshold
In order to ensure compliance with
when the first section 20 applications
section 20 of the Glass-Steagall Act, the Section 20 of the Glass-Steagall Act
were initially approved in April 1987,
Board provided that the amount of
Section 20 of the Glass-Steagall Act
but committed to review that level
revenue a section 20 subsidiary may
prohibits a member bank from becoming within a year. In September 1989,
derive from ineligible securities
an affiliate of any company that is
following that review, the Board
activities may not exceed 10 percent of
“engaged principally in the issue,
permitted securities affiliates to engage
the total revenue of the subsidiary.
flotation, underwriting, public sale, or
in ineligible securities activities up to 10
Section 20 prohibits a member bank
distribution” of securities. 12 U.S.C. 377. percent of gross revenues.5
from being affiliated with a company
The Board and the courts have
In authorizing and regulating the
that is “engaged principally" in
recognized that section 20 permits a
section 20 subsidiaries, the Board has
underwriting and dealing in securities.
member bank to be affiliated with a
sought to achieve two objectives: to
The Board believes that recent changes company whose largest activity is
approve only those activities that most
in the level and structure of interest
underwriting and dealing in the kind of
clearly comply with applicable statutory
rates involving unusually low levels of
securities that banks may underwrite
limits, and to assure that, as shown by
short-term rates and an historically
and deal in directly (“eligible
the section 20 subsidiaries’ actual
steep yield curve have the potential for
securities”, so long as the company does experience with newly-authorized
distorting the revenue test as an
not conduct sufficient underwriting and
functions, expanded securities functions
accurate measure of whether a section
dealing activities with regard to
do not impair bank safety and
20 subsidiary is engaged principally in
ineligible securities to be deemed to be
soundness or result in conflicts of
ineligible securities activities. The
“engaged principally” in those ineligible interest
Board, therefore, proposes to provide an securities activities.1
Effect of Recent Changes in Interest
alternative to the current revenue test to
Calculation of “Engaged Principally”
Rate Structure
take into account such changes, and
requests comment on possible
After careful review of the terms,
In monitoring the operations of the
alternative tests.
legislative history, and purpose of
existing section 20 subsidiaries, the
section 20 and related provisions of the
Board has noted that historically
DATES: Comments must be received by
Glass-Steagall Act, the Board in 1987
unusual changes in interest rate
August 27,1992.
concluded that a company would not be configurations recently have affected
ADDRESSES: Comments, which should
“engaged principally" in ineligible
the revenue test as a measure of the
refer to Docket No. R-0770, may be
securities
activities
for
purposes
of
the
relative
importance of eligible and
mailed to the Board of Governors of the
ineligible securities activities in ways
Federal Reserve System, 20th Street and Glass-Steagall Act if those activities
that were not anticipated by the Board
Constitution Avenue, NW., Washington, were not "substantial” relative to the
other activities of the company.2 The
when that test was established. Short
DC 20551, to the attention of Mr.
term interest rates have declined to their
Board also concluded that an activity
William Wiles, Secretary. Comments
lowest levels since the early 1960’s and,
was
not
substantial
if
the
gross
revenue
addressed to the attention of Mr. Wiles
derived from the activity did not exceed although long-term rates have also
may be delivered to the Board’s mail
the range of between 5 and 10 percent of declined, these rates have declined
room between 8:45 a.m. and 5:15 p.m.,
and to the security control room outside the total gross revenues of the company. much less than short-term rates, leaving
an unusually sharply upward sloping
The Board determined to base its
of those horn's. Both the mail room and
consideration of the substantiality of an yield curve. These unforeseen
security control room are accessible
developments in turn have biased the
from the courtyard entrance on 20th
relative revenue derived by some
Street between Constitution Avenue and
1 Citicorp, 73 Federal Reserve Bulletin 473, 484
C Street, NW. Commenls may be
(1987) ["Citicorp")-, Securities Industry of America
inspected in room B-1122 between 9 a.m. v. Board of Governors. 839 F.2d 47, 67-8 (2d Cir.
* Citicorp at 484.
and 5 p.m. weekdays, except as
* Id.
1988).
6 75 Federal Reserve Bulletin 751.
* Citicorp at 484.
provided in § 261.8 of the Board’s Rules
PRINTED IN NEW YORK. FROM FEDERAL REGISTER, VOL. 57, NO. 146, pp. 33507-10
2
!OS(j D
o
section 20 companies from their
securities operations.
The sharp decline in short-term rates
has an especially marked effect on
revenues obtained by section 20
subsidiaries from their eligible securities
operations. First, eligible securities
activity at many subsidiaries tends to
involve a high proportion of short-term
instruments and, second, eligible
activity on average derives a greater
percentage of revenue from interest
earnings than does ineligible activity.
Recent revenue data from a number of
section 20 subsidiaries do show
significant declines in revenue derived
from eligible securities activities. Since
there has been very little corresponding
decline in long-term rates, revenue
earned by these subsidiaries from
holding ineligible securities, many of
which tend to be of medium- to long
term maturity, has not declined to the
same extent. Thus, the revenue currently
derived by some section 20 subsidiaries
from eligible and ineligible activities
suggests that the relative importance of
eligible activities in the subsidiary’s
business has declined, in some cases
substantially.
However, according to recent data on
the section 20 subsidiaries, other
indicators of the relative importance of
eligible activities, in particular, the
proportion of eligible and ineligible
assets held by these subsidiaries, have
not decreased, suggesting that the
relative level of eligible activity has not
declined as much as the revenue data
suggest. The decline in the ratio of
eligible to total revenue at these
subsidiaries apparently can be
attributed more to the extraordinary
level and shape of the yield curve rather
than to changes in the subsidiary’s mix
of eligible and ineligible activities. The
results produced by the revenue test
may not be indicative of any shift in
underlying activity, and the revenue
test, due to its dependence on interest
rates, may not be as reliable a measure
of “engaged principally” as the Board
had anticipated in September 1989 and
in earlier orders.
While the degree of the decline in
eligible revenues will necessarily vary
from section 20 subsidiary to section 20
subsidiary, depending on the kinds and
maturity of assets each subsidiary holds
and the nature of the business it
conducts, a comparison of rates
prevailing when the 10 percent limit was
established and rates prevailing at
present suggests that the effect of the
sharp drop in short-term rates in the
past few months will very likely have a
large impact on at least some of the
section 20 subsidiaries. For example,
rates since 1989. In effect, this
adjustment would be an attempt to
calculate the revenue that would have
been earned from eligible and ineligible
activities in the current period if the
Treasury yield curve were as it was in
September 1989.
Several steps would be required under
this method of adjusting revenue. These
steps could be incorporated in the
memoranda section of the FR Y-20,
Schedule SUD-I, which section 20
subsidiaries use to report current
financial information.
a. The subsidiary would need to
calculate the average duration of its
eligible and ineligible assets for the
quarter in question. Ideally, such a
calculation would be made at the close
of business each day, since interest and
dividends are earned on securities held
as of that time. The Board requests
comment on whether less frequent
calculations, such as weekly or monthly,
might be adequate.
b. Having made this calculation, the
subsidiary would consult a table,
published by the Board, that provides an
adjustment factor corresponding to
various portfolio durations. Each
adjustment factor represents the ratio of
interest rates in September 1989 on
Treasury securities to average interest
rates on Treasury securities in the most
recent quarter for obligations having
that particular duration.
c. Current interest and dividend
revenue for the eligible and ineligible
categories would then be scaled by the
appropriate adjustment factors.
d. Adjusted interest and dividend
revenue would be added to the other
types of revenue earned by the
subsidiary to calculate an adjusted ratio
of ineligible to total revenue for the
subsidiary.
The Board recognizes that
computation of daily duration estimates
might prove burdensome for some
section 20 subsidiaries. Section 20
subsidiaries would not be required to
use the indexed revenue limit and could
continue to use the current revenue test.
However, once a subsidiary chooses the
alternate indexed method of applying
the 10 percent limit, the subsidiary
would be expected to continue to use
1. Revenue Test Indexed to Interest Rate that method for some fixed period of
Changes
time, such as five years.
The adjustment technique outlined
Under this proposed technique, the 10
may not be the best one available. For
percent revenue test would be modified
one thing, because it is applied to all
to account for changes in the level and
slope of the yield curve since September interest and dividend revenue, in effect
this technique adjusts risk premiums
1989. Section 20 subsidiaries would be
embodied in interest rates as well as the
allowed to adjust their current interest
base risk-free rate. More complex
and dividend revenue on a quarterly
methods taking account of additional
basis to compensate for the unintended
factors seem to entail even more
consequences of the shift in risk-free
using the most simplistic assumptions—
that the duration of the ineligible
securities held by a section 20
subsidiary can be represented by a
corporate bond, that the duration of its
eligible securities can be represented by
a 3-month Treasury bill rate, and that all
of the subsidiary’s revenue is derived
from interest on securities held—at
interest rates prevalent in September
1989. when the Board increased the
revenue limit to 10 percent, the amount
of ineligible securities that the
subsidiary could hold under the 10
percent revenue limit was
approximately 7-1/4 percent of total
assets, given the difference at that time
between Treasury bill and corporate
bond rates. With the interest rate
structure prevalent today, the same
subsidiary could hold only about 3-3/4
percent of its total assets in ineligible
securities, because of the current very
wide disparity between short- and long
term rates.
This effective change in the revenue
test was not intended by the Board
when it established the 10 percent limit.
In the Board’s view, the reduction in a
section 20 subsidiary’s eligible revenues
due solely to the highly unusual and
unforeseen alteration in the historic
relationship between short- and long
term interest rates should not artificially
force the subsidiary to restrict its
ineligible activities to levels below what
would be permitted by the 10 percent
test under the interest rate patterns that
prevailed when the Board established
that limit. Accordingly, the Board has
decided to allow section 20 subsidiaries,
at their election, to use an alternative
test for determining compliance with the
statutory “engaged principally”
restriction, instead of the current
revenue test.
The Board notes, however, that the
existing revenue test can be adjusted by
a variety of methods to account for
unusual changes in the yield curve. The
Board requests public comment on
appropriate methods that may be
employed to achieve this objective. The
Board is specifically requesting
comment on two different methods of
creating an alternative test:
3
burdensome data and reporting
requirements. The Board solicits
comments on other methods that might
be used to accomplish the same
adjustment, as well as comments on the
feasibility and burden of the technique
suggested.
2. Alternate Asset-Based Test
A section 20 subsidiary, at its election,
would be allowed to compute
compliance with the "engaged
principally" language of section 20 on
the basis of assets, rather than on the
basis of the existing revenue test.
Specifically, such a subsidiary would be
viewed as in compliance with section 20
for any quarter if the average daily
assets held in connection with
underwriting and dealing in ineligible
securities for that quarter, when added
to the average daily assets held in
connection with ineligible securities
activities for the previous seven
quarters, does not exceed 10 percent of
the average daily total assets of the
subsidiary for that quarter and the
previous seven quarters.
A test based on the value of securities
assets held by a section 20 subsidiary is
less sensitive to alterations in interest
rate relationships than a test based
solely on revenue. Thus, an asset-based
test might represent a more accurate
measure of the relative importance of
eligible and ineligible securities
activities.
When the Board initially selected
revenue as the best indicator of whether
specific securities activities are a
substantial activity of a section 20
subsidiary, the Board noted two basic
problems with a test based on average
assets. The Board expressed concern
that, compared to a revenue test, an
asset-based test can be more easily
manipulated by inflating the asset base
solely to support ineligible activity.
Also, the Board found that an average
asset test even if computed on a daily
basis, would not take into account
underwriting activities, since
underwriters typically hold the
securities being sold only for a few
hours.6 The Board seeks comment on
9 Citicorp, at 484.
whether it is appropriate to implement
subsidiaries may need time to adjust to
these unforeseen changes.
modifications to an asset-based test
For this reason, the Board amends its
designed to minimize these defects.
earlier section 20 orders to permit a
For example, in order to prevent
section 20 subsidiaries from engaging in section 20 subsidiary to elect to comply
"matched book” or similar transactions with the 10 percent test on a quarter-by
in eligible securities for the sole purpose quarter basis, instead of the 8-quarter
rolling average prescribed in those
of offsetting ineligible securities
orders, until an alternative test for
activities, specific limits could be
imposed on the use of such transactions complying with the 10 percent limit is
implemented by the Board, or until the
to artificially increase eligible assets
end of the fourth quarter of 1992,
totals in an asset-based test. One other
possible restriction is a separate cap on whichever is earlier.7 The alternative
quarter-by-quarter computation period
the total amount of revenues that may
as a measure of the substantiality of a
be derived from ineligible securities
section 20 company’s compliance with
activities during any calendar quarter
the “engaged principally" limit is fuliy
This cap would serve as a check to
consistent with the terms and purpose of
assure that manipulation of the eligible
the Act The availability of a quarter-byasset base does not allow a subsidiary
quarter basis for computation may
to substantially expand its ineligible
securities business. Such a revenue limit alleviate the need for drastic
would be set at a level somewhat higher adjustments in the level of ineligible
than 10 percent, such as 15 percent. If an activity caused by recent pronounced
declines in short-term rates and eligible
asset-based test is adopted, the Board
revenue that might otherwise be
would expect to scrutinize, through the
necessary under the 8-quarter average
examination process, transactions that
do not appear to have been entered into method where no adjustment is made
for interest rate distortion. A section 20
for any ostensible business purpose but
rather for manipulating the eligible asset subsidiary is not required to use the
quarter-by-quarter method and may
base. Comment is also solicited as to
continue to compute compliance with
any other objective standards that may
the revenue test using an 8-quarter
be adopted to ensure the integrity of an
rolling average.
asset-based test.
To prevent manipulation, a section 20
If an asset-based test is adopted, a
subsidiary that elects to comply with the
section 20 subsidiary could be given the
10 percent limit on a quarter-by-quarter
option of compliance with that test in
lieu of the current revenue limit. In order basis must continue to comply on that
basis until the Board adopts an
to prevent a subsidiary from repeatedly
shifting between revenue and asset tests alternative to the current revenue test,
or until the end of the fourth quarter of
in an effort to maximize its eligible
1992, whichever is earlier. A section 20
securities base, a section 20 subsidiary
subsidiary that chooses to use the
that chooses the asset-based test may
quarter-by-quarter computation, period
be precluded from changing back to the
for the current quarter, must advise the
revenue test for some fixed period of
appropriate Reserve Bank within 10
time, such as five years.
In addition to proposing basic changes days from the date of this order.
By order of the Board of Governors of
in the 10 percent revenue test, the Board
the Federal Reserve System. July 22,
is also concerned that the recent sharp
1992.
and unanticipated alterations in the
yield curve might have severe
immediate effects on the operations of
at least some section 20 companies. The
W illiam W . W iles,
Board is also concerned that these
Secretary o f Lite Board.
effects will occur before an alternative
(FR Doc. 92-17839 Filed 7-28-92; 6:45 amj
to the current revenue limit can be
BILLING COOE 62W-01-F
implemented and that section 20
lO^bO
Section 20 Supplemental Information
T h e c u r r e n t 10 p e r c e n t t e s t w a s d e s i g n e d t o p r e v e n t
S e c t i o n 20 s u b s i d i a r i e s from b e i n g " e n g a g e d p r i n c i p a l l y ” in
u n d e r w r i t i n g a n d d e a l i n g in b a n k - i n e l i g i b l e s e c u r i t i e s
in
v i o l a t i o n of S e c t i o n 20 of the G l a s s - S t e a g a l l Act.
The Board proposed alternative tests because
it
b e l i e v e d t h a t ch a n g e s in the level a n d s t r u c t u r e of i n t e r e s t
r a tes s i nce t h e r e v e n u e tes t w as last c o n s i d e r e d in S e p t e m b e r
1989 can a l t e r th e m e a s u r e of w h e t h e r a S e c t i o n 20 s u b s i d i a r y is
"en g a g e d p r i n c i p a l l y "
in inel i g i b l e s e c u r i t i e s
n o t f o r e s e e n b y t he Board.
in w a y s t h a t wer e
O ne p o s s i b l e a l t e r n a t i v e t e s t
s u g g e s t e d w a s a r e v e n u e t e s t t h a t is i n d e x e d to i n t e r e s t r a t e
changes.
T h e m e t h o d of i n d exing p r o p o s e d is to a d j u s t c u r r e n t
i n t e r e s t a n d d i v i d e n d r e v e n u e in o r d e r to c a l c u l a t e t h e r e v e n u e
t hat w o u l d h a v e b een e a r n e d in the c u r r e n t p e r i o d if t h e T r e a s u r y
y i e l d curve w e r e as it was in S e p t e m b e r 1989.
U n d e r the p r o p o s e d i n d e x i n g method,
current revenue
w o u l d be a d j u s t e d by a series of f a ctors s u p p l i e d b y t h e B o a r d
t h a t v a r y a c c o r d i n g to the av e r a g e d u r a t i o n of th e s e c u r i t i e s
portfolio.
F or each d u r a t i o n t he f a ctor r e p r e s e n t s t h e r a t i o of
interest r a tes
in S e p t e m b e r 1989 on T r e a s u r y s e c u r i t i e s to the
a v e r a g e in t e r e s t rates in the m ost r e c e n t quarter.
These
a d j u s t m e n t f a c tors w o u l d the n be a p p l i e d to c u r r e n t i n t e r e s t and
d i v i d e n d revenue.
5
In o r d e r to a l l o w i n t e rested p a r t i e s to d e t e r m i n e h o w
suc h a p r o p o s e d index m i g h t o p e rate in practice,
a nd t h e r e b y to
be in a b e t t e r p o s i t i o n to c o m m e n t on t h e a p p r o p r i a t e n e s s of a
t e s t u s i n g s u c h an index,
t he B o a r d is p r o v i d i n g a s a m p l e t a b l e
of a d j u s t m e n t s t h a t c o uld be u s e d u n d e r t h e p r o p o s e d i n d e x i n g
r e v e n u e tes t to a d j u s t interest and d i v i d e n d r e v e n u e in t h e
s e c o n d quarter,
a s s u m i n g t h a t this t e s t w e r e in effect.
The
s a m p l e t a ble of a d j u s t m e n t factors b e i n g p r o v i d e d is c o n s t r u c t e d
fro m the r a tios of a v e rage interest rates in S e p t e m b e r 1989 to
a v e r a g e interest rates in the second q u a r t e r of 1992.
The risk
free r a tes u s e d in c a l c u l a t i n g t h ese f a c tors a r e s e c o n d a r y - m a r k e t
q u o t e s of the y i e l d s on T r e a s u r y b i lls for d u r a t i o n s of three,
six,
a n d t w e l v e m o n t h s a n d on STRIPS,
securities,
or z e r o - c o u p o n T r e a s u r y
for d u r a t i o n s of two y e a r s or more.
The adjustment
f a ctors in this sample t a b l e are c a l c u l a t e d u s i n g W e d n e s d a y
o b s e r v a t i o n s but t he B o ard w o u l d a n t i c i p a t e u s i n g d a i l y d a t a to
c a l c u l a t e a d j u s t m e n t factors.
A m o r e d e t a i l e d s e l e c t i o n of
d u r a t i o n s c o uld be m a d e a v a i l a b l e if necessary.
To u s e t h e i n d exing m e t h o d d e s c r i b e d in t h e B o a r d ' s
r e q u e s t for c o m m e n t s in c o n j u n c t i o n w i t h the s a m p l e t a b l e
p r o v i d e d to d e t e r m i n e c o m p l i a n c e w i t h the 10 p e r c e n t r e v e n u e
limit for t he c u r r e n t quarter,
a Se c t i o n 20 s u b s i d i a r y w o u l d
c a l c u l a t e t he a v e r a g e d u r a t i o n of its e l i g i b l e and its i n e l i g i b l e
s e c u r i t i e s p o r t f o l i o s over the quarter.
e l i g i b l e revenues,
To c a l c u l a t e i n d e x e d
the s u b s i d i a r y w o u l d c a l c u l a t e t h e a v e r a g e
d u r a t i o n of its e l i g i b l e securities p o r t f o l i o over t h e q u a r t e r
6
and s e l e c t f rom t he s a m p l e t a ble the a d j u s t m e n t f a c t o r
a p p r o p r i a t e for the duration.
Th e s u b s i d i a r y w o u l d t h e n m u l t i p l y
t h e a c t u a l e l i g i b l e i n t e r e s t and d i v i d e n d r e v e n u e for t h e q u a r t e r
by thi s a d j u s t m e n t factor to d e t e r m i n e th e i n d e x e d e l i g i b l e
i n t e r e s t a n d d i v i d e n d revenue.
T he s u b s i d i a r y w o u l d r e p e a t this
p r o c e d u r e b a s e d upo n the a v e r a g e d u r a t i o n of its i n e l i g i b l e
s e c u r i t i e s p o r t f o l i o and th e a p p r o p r i a t e a d j u s t m e n t f a c t o r for
the d u r a t i o n c a t e g o r y to d e t e r m i n e indexed i n e l i g i b l e in t e r e s t
and d i v i d e n d r e v e n u e for the quarter.
T he i n d e x e d e l i g i b l e and
ine l i g i b l e in t e r e s t and d i v i d e n d r e v e n u e s w o u l d t h e n be a d d e d to
t h e o t h e r t y p e s of r e v e n u e e a r n e d d u r i n g t he q u a r t e r to c a l c u l a t e
an a d j u s t e d r a t i o of i n e l i g i b l e r e v e n u e to t o t a l r e v e n u e su b j e c t
to th e 10 p e r c e n t test.
T h e t a b l e of factors b e i n g p r o v i d e d is o n l y one m e t h o d
by w h i c h c u r r e n t r e v e n u e c o u l d be a d j u s t e d to a c c o u n t for the
level a nd s t r u c t u r e of i n t erest rates
in S e p t e m b e r
1989.
T he
B o a r d r e q u e s t s com m e n t s on w h e t h e r other m e t h o d s of c a l c u l a t i n g
t h e s e a d j u s t m e n t s bay be m o r e appropriate.
T h e sample t a b l e is attached.
7
Factors to Adjust Interest and Dividend Revenue
(ratio of i n t erest r a tes in S e p t e m b e r 1989
to s e c o n d q u a r t e r 1992)
Adjustment
F a ctor
Duration
Months
2.10
2.10
1
3
6
2.06
1.93
12
Years
1.46
1.33
1.23
1.17
1.13
2
3
4
5
6
7
1.10
10
1.04
0.99
0.95
20
30
Note:
A d j u s t m e n t factors w e r e c a l c u l a t e d u s i n g s e c o n d a r y - m a r k e t
q u o t e s of t he y i e l d s on T r e a s u r y b i l l s for d u a r t i o n s of three,
six, and t w e l v e m o n t h s and on STRIPS, or z e r o - c o u p o n T r e a s u r y
securities, for dur a t i o n s two y e a r s and greater.
Dat a are
a v e rages of W e d n e s d a y observations.
8
@FedFRASER