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FED ER AL RESERVE BANK OF NEW YORK r Circular No. 7 3 0 0 1 L D ecem ber 20, 1973 -I IN T E R P R E T A T IO N O F R E G U L A T IO N Q T reatm en t o f “ In te rb a n k Loan P articipations” (IB L P s ) To All Member Banks, and Others Concerned, in the Second Federal Reserve District: The Board of Governors of the Federal Reserve System has issued an interpreta tion o f its Regulation Q, “ Interest on Deposits,” indicating that the use of “ inter bank loan participations” (IB L P s), involving participation by nonbank third parties in Federal funds transactions, does not come within the exemption from “ deposit” classification for certain obligations between banks that is provided in § 217.1(f) of Regulation Q and § 204.1(f) of Regulation D. The interpretation supplements an earlier interpretation of Regulation Q (§ 217.137) originally issued in 1970 by the Board o f Governors, on member bank participation in the Federal funds market. Enclosed is a copy of the interpretation, which has been printed in a form that will allow it to be maintained with your copies of Regulation Q and its amendments and Supplement. Future interpretations printed by this Bank will also be sent to you in that form. Additional copies of the enclosure will be furnished upon request. A lfred H ayes, President. Board of Governors of the Federal Reserve System IN T E R E S T O N D E P O S IT S IN T E R P R E T A T IO N O F R E G U L A T IO N Q Federal Funds Transactions §217.138 — Nonbank participation in “Federal funds” market The Board has recently considered whether the use of “interbank loan participations” (“IBLPs”), which involves participation by nonbank third parties in Federal funds trans actions, comes within the exemption from “deposit” classification for certain obligations between banks contained in §204.1(f) of Regulation D and §217.1(f) of Regulation Q. An IBLP transaction is one through which a bank that has sold Federal funds to another bank, subsequently “sells” or participates out its loan contract to a nonbank third party with out notifying the bank that has “purchased” its funds. The Board’s 1970 interpretation regarding Federal funds transactions (§217.137) clari fies the meaning of “bank” as that term is used in the exemption for liabilities to banks. Para graph (b ) of that interpretation states that the purpose of requiring that interbank transac tions be issued to another bank for its own account, in order to come within the non-de posit exemption, is “to assure that the exemp tion for liabilities to banks is not used as a means by which nonbanks may arrange through a bank to ‘sell’ Federal funds to a member bank that are not subject to Regula tions D and Q”. The Board regards trans actions which result in third parties gaining access to the Federal funds interbank loan market as contrary to the interbank exemption contained in §217.1(f) of Regulation Q, and §204.1(f) of Regulation D regardless of whether the nonbank third party is a party to the initial interbank transaction or there after becomes a participant in the transaction through purchase of all or part of the obliga tion held by “selling” bank. The Board regards the notice requirements set out in §217.137 as applicable to IBLPtype transactions as described herein so that a bank “selling” Federal funds must provide to the purchasing bank ( 1 ) notice of its inten tion, at the time of the initial transaction, to sell or participate out its loan contract to a nonbank third party, and ( 2 ) full and prompt notice whenever it (the “selling” bank) sub sequently sells or participates out its loan contract to a nonbank third party. P R IN T E D IN N E W Y O R K
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