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FED ER A L RESER VE BANK OF NEW YORK r Circular No. 8 2 3 9 1 L J December 19, 1977 PRO PO SED IN T E R P R E T A T IO N OF REG U LATIO N A Bankers’ Acceptances Eligible fo r Discount To A ll Member Banks, and Others Concerned, in the Second Federal Reserve District: F ollow in g is the text o f a statement by the B oard o f G overnors o f the Federal Reserve Sys tem relating to a proposed interpretation o f its Regulation A , “ E xtensions o f Credit by Federal Reserve Banks” : The Board of Governors of the Federal Reserve System today proposed for comment a regulatory inter pretation that would extend the kinds of bankers’ acceptances eligible for discount by Federal Reserve Banks. The Board requested comment by February 1, 1978. The proposal would make bankers’ acceptances secured by field warehouse receipts eligible for discount. Such acceptances could be used as collateral for Federal Reserve loans to member banks. A 1933 interpretation by the Board held that acceptances backed by field warehouse receipts were not eligible for discount and therefore could not be used as collateral for loans to member banks. In reviewing the matter, the Board concluded that changes in commercial law and in commercial practices since 1933 may make the proposed revision of the interpretation desirable. A bankers’ acceptance is usually a time draft used to finance the shipment or storage of goods. P rinted below is the text o f the proposal. Com m ents should be submitted by F ebruary 1, 1978, and may be sent to our D iscount D ivision (T el. N o. 2 1 2 -7 9 1 -5 3 9 5 ). P au l A. V olcker , President. FEDERAL RESERVE SYSTEM [Reg. A ; Docket No. R-0135] Eligible Bankers’ Acceptances A G E N C Y : Board of Governors of the Federal Reserve System. A C T IO N : Proposed interpretation. S U M M A R Y : This proposed interpretation provides that a bankers’ acceptance secured by a field warehouse receipt covering readily marketable staples is eligible for discount by a Federal Reserve Bank despite the fact that the warehouseman is an employee of the owner of the goods. This proposed interpretation, if adopted, would reverse a current interpretation adopted by the Board in 1933 ([[ 1445 Published Interpretations). D A T E : Comments must be received before February 1, 1978. A D D R E S S : Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. All material submitted should include the Docket Number R-0135. FO R F U R TH E R IN F O R M A T IO N C O N T A C T : Don C. Hammer, Attorney, Legal Division, Board of Governors of the Federal Reserve System, Washington, D.C. 20551 [(2 0 2 ) 452-3611]. S U P P L E M E N T A R Y IN F O R M A T IO N : (1 ) The Board has been asked to review its 1933 interpretation concerning the eligibility for discount of bankers’ ac ceptances secured by field warehouse receipts. Under that interpretation, such acceptances were determined to be not eligible for discount because the actual cus todian of the goods was so closely identified with the owner of the goods that, in the Board’s view, the lending bank’s security might be impaired. The Board has con cluded that a review of the interpretation is desirable in light of the changes in commercial practice and com mercial law in the 44 years since the publication of the current interpretation. Furthermore, this matter is of significance to member banks because, under the Board’s Regulation D, the sale of such acceptances by member banks could result in additional reserve liability for the member bank if the acceptance sold were ineligible for discount. (2 ) To aid in the consideration of this matter by the Board, interested persons are invited to submit relevant data, views, or comments. Any such material should be submitted in writing to the Secretary, Board of Gover nors of the Federal Reserve System, Washington, D.C. 20551, to be received not later than February 1, 1978. All material submitted should include the docket num ber R-0135. Such material will be made available for inspection and copying upon request except as provided in section 261 6 (a) of the Board’s Rules Regarding Availability of Information (12 CFR § 261.6(a)). (3 ) This action is proposed pursuant to the Board’s authority under section 13 of the Federal Reserve Act. PROPOSED INTERPRETATION OF REGULATION A The Board has been asked to review an interpretation it issued in 1933 concerning the eligibility for rediscount by a Federal Reserve Bank of bankers’ acceptances is sued against field warehouse receipts where the custo dian of the goods is a former employee of the borrower. Ir 1445 Published Interpretations, 1933 B U L LE T IN 188] The Board determined at that time that the accept ances were not eligible because: such receipts do not comply with the requirement of section 13 of the Federal Reserve Act that a bankers’ acceptance be “ secured at the time o f acceptance by a warehouse receipt or other such document convey ing or securing title covering readily marketable staples.’’ nor with the requirement of section X I of the Board’s Regulation A that it be “ secured at the time of acceptance by a warehouse, terminal, or other similar receipt, conveying security title to such staples, issued by a party independent of the customer.” The requirement that the receipt be “ issued by a party independent of the customer” was deleted from Regula tion A in 1973, and thus the primary issue for the Board’s consideration is whether a field warehouse receipt is a document "securing title” to readily mar ketable staples. While bankers’ acceptances secured by field ware house receipts are rarely offered for rediscount or as collateral for an advance, the issue of “ eligibility” is still significant. If an ineligible acceptance is sold by a member bank, the proceeds are deemed to be “ deposits” under section 204.1(f ) of Regulation D and are subject to reserve requirements. In reviewing this matter, the Board has taken into consideration the changes that have occurred in com mercial law and practice since 1933. Modern commer cial law, embodied in the Uniform Commercial Code, refers to perfecting “ security interests” rather than “ securing title” to goods. The Board believes that if, under State law, the field warehousing arrangement provides the lender with a perfected security interest in the goods, the “ securing title” requirement of the Fed eral Reserve Act is satisfied. Under the U.C.C. evidence of an agreement between the secured party and the debtor must exist before a security interest can attach. This agreement may be evidenced by: ( 1) a written security agreement signed by the debtor, or ( 2 ) the collateral being placed in the possession of the secured party or his agent [U.C.C. s? 9-203]. If the security interest is based on a written security agreement, it can only be perfected by the filing of a financing statement [U.C.C. § 9-302] If the secu rity interest is based on possession of the collateral by the secured party, then perfection can be achieved by: ( 1) having warehouse receipts issued in the name of the secured party; ( 2 ) notifying the bailee of the secured party’s interest; or (3 ) having a financing statement filed. [U.C.C. § 9 -3 0 4 (3 )] If the field warehousing operation is properly conduc ted, a security interest is created by the secured party’s agent taking possession o f the collateral and is per fected either by issuance of warehouse receipts in the name of the secured party (the lending bank) or by notification to the bailee (the field warehouseman) of the secured party’s interest. Therefore, warehouse re ceipts issued pursuant to a bona fide field warehousing operation satisfy the legal requirements of section 13 of the Federal Reserve Act. Moreover, in a properly con ducted field warehousing operation, the warehouse man ager will be trained, bonded, supervised and audited by the field warehousing company. This procedure insures that he will not be impermissibly controlled by his former (or sometimes present) employer, the borrower, even though he may look to the borrower for reemploy ment at some future time. If the warehousing operation is not conducted prop erly, however, and the manager remains under the control of the borrower, the security interest may be lost. In such instances, the security interest should be based upon a written security agreement between the borrower and the secured party, and perfection should be accomplished by the filing of a financing statement. It has been represented to the Board that a written security agreement is almost always entered into as an adjunct to establishment of a field warehousing opera tion and that a financing statement is, in fact, often filed. Therefore, if a bankers’ acceptance secured by a field warehouse receipt is actually offered for rediscount or as collateral for an advance, the Reserve Bank may in its discretion require proof of the existence of a written security agreement and it may require that a financing statement be filed. It has also been represented to the Board that most established field warehousing companies maintain large fidelity bonds and legal liability insurance. If the Re serve Bank desires additional protection, it may require proof of the existence of insurance coverage in an amount adequate to cover any loss. This interpretation is based on facts that have been presented in regard to field warehousing operations conducted by established, professional field warehouse companies, and it does not necessarily apply to ad hoc warehousing operations. Thus 1430 and 1440 of the Published Interpretations [1918 B U L L E T IN 31 and 1918 B U LLE T IN 862] maintain their validity with regard to corporations formed for the purpose of con ducting limited field warehousing operations. Further more, the prohibition contained in ][ 1435 Published Interpretations [1918 B U LLE T IN 634] that “ the bor rower shall not have access to the premises and shall exercise no control over the goods stored” retains its validity, except that access for inspection purposes is still permitted under ][ 1450 [1926 B U L L E T IN 666]. The reason for the acceptance transaction must be proper and cannot be for speculation [][ 1400, 1919 B U LLE TIN 858] or for the purpose of furnishing working capital [fl 1405, 1922 B U LLE T IN 52]. This interpretation represents a reversal only o f the previous ]! 1445 of the Published Interpretations [1933 B U LLE TIN 188], and is not intended to affect any other Board interpretation regarding field warehousing. By order of the Board of Governors, December 12, 1977.
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