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FE D ER AL R E SE R V E B AN K O F N E W YO RK Circular No. 9 1 7 4 T October 2 7 , 19 8 1 J INTERNATIONAL BANKING FACILITIES To A ll D epository Institutions in the Second Federal Reserve District, and Others Concerned: Printed below is a series of questions and answers regarding the amendments to Regulations D and Q that permit establishment of International Banking Facilities ( IBFs ). These questions and answers were prepared by the staff of the Federal Reserve Bank of New York, in consultation with the legal staff of the Board of Governors of the Federal Reserve System. Additional questions regarding this material or other matters relating to IBFs should be directed to the following: Interpretation of Regulations D and Q: Bradley K. Sabel, Assistant Counsel (Tel. No. 212-791-5222) Joyce E. Motylewski, Attorney, Legal Department (Tel. No. 212-791-5031) Reporting Requirements: Richard J. Gelson, Assistant Vice President (Tel. No. 212-791-7904) George R. Juncker, Manager, Consumer Affairs and Bank Regulations Department (Tel. No. 212-791-5910) Nancy Bercovici, Chief, Deposit Reports Division (Tel. No. 212-791-5794) Registration Statements: Barbara L. Walter, Manager, Foreign Banking Applications Department (Tel. No. 212-791-5881) Additional copies of this circular may be obtained from the Circulars Division of this Bank (Tel. No. 212-791-5216). A nthony M. Solomon , President. Questions and Answers 1 The list of permissible IBF extensions of credit does not include demand deposits at another bank’s office within the United States. Does this mean that an IBF that wishes to have a demand account in the United States for settlement pur poses is restricted to having an account on the domestic books of its own bank? Answer: Yes. The only entities in the United States on which an IBF may hold claims are another IBF or a United States office of its own bank Because an IBF may not own a demand deposit at another IBF, the IBF is restricted to using an account with its own institution. This means that an IBF will have an account on the domestic books of its bank, and that account will b e subject to Eurocurrency reserve requirements on a net basis. Settlement of IBF transactions in the United States will have to be performed through this account. In addition, there is no provision under the regulation for an IBF to hold cash; accordingly, in order to hold this type of asset in the United States, the IBF will also have to hold it in the form of a balance due from the domestic books of its own institution. 2. The regulation speaks in terms of “segregating” IBF accounts on an establishing entity’s books. Must IBF accounts be placed in asset and lia bility accounts that are separate from the domes tic business asset and liability accounts on the general ledger, or may the IBF accounts be intermingled with accounts on the domestic books? Answer: IBF accounts must be kept as a sepa rate set of accounts on a subsidiary ledger. Institutions may establish a separate general ledger for their IBF accounts if they so desire. This will facilitate IBFs’ completion of report ing requirements and assist Federal Reserve examiners. nite period. Assets that are transferred from the IBF to an offshore office within a few days of the transfer to the IBF will be looked upon with suspicion. 3. Many customers would like to have a cash man agement arrangement between the United States books of their bank and the bank’s IBF. Such an arrangement would allow the foreign customer to take funds from its demand account toward the end of the day and place the funds in a twoday time deposit at the IBF. May foreign cus tomers have the bank make such transfers auto matically? 7. IBF deposits are defined as deposits under Reg ulation Q. Does this mean that provisions of Regulation Q, such as the early withdrawal pen alty and various grace periods, apply to IBF time deposits? Answer: Yes. There is no prohibition against the transfer of customer funds in either direction between the United States and IBF books of the bank. Funds may be transferred automatically from an IBF time deposit at maturity to a de posit account at a U.S. office of the bank, and funds may be transferred from an account at the U.S. office to the IBF. However, the deposit must qualify for treatment as an IBF deposit. Answer: An institution may not permit early withdrawal of an IBF time deposit if that would mean that it is on deposit less than two days; however, early withdrawal may be permitted' with penalty, so long as funds will have been on deposit at least two days. Grace period provi sions applicable to domestic time deposits are irrelevant to IBF time deposits. 4. May funds placed by an IBF with another bank’s IBF be passed through by the second bank to a reserve account at a Federal Reserve Bank in order to count toward the first bank’s reserve re quirements? 8. Section 204.8(b) of the IBF regulation requires that nonbank customers of an IBF receive a writ ten statement concerning use of an IBF only for foreign purposes. In the case of a syndicated loan to a nonbank borrower, must all the banks in the syndicate that choose to record the loan on the books of their IBF send such a statement to the borrower, or may only the agent bank in the syndicate do so? Answer: 'No. There is no provision in the regu lation for use of such funds as a pass-through account. A bank would have to book funds due to its IBF on its domestic books and pass the funds to its pass-through bank in order to use IBF funds to satisfy reserve requirements on a pass-through basis; the bank would be subject to Eurocurrency reserve requirements on that borrowing. 5 Answer: Only the agent of a syndicate needs to send the written statement. If the borrower is an affiliate of a United States resident, the return statement need be sent by the borrower to the agent only; however, the members of the syn dicate should obtain a copy of the borrower’s letter for their records in order to insure that the IBF regulation is being complied with. Is there any requirement as to the time of day during which an overnight borrowing or two-day borrowing is booked or renewed by an IBF? No. The Federal Reserve does not have any general requirement concerning the time of day during which deposits or borrowings are booked or renewed so long as the procedure is consistent with the bank’s general bookkeeping procedures on banking days. 9. Footnote 2 of the Supplemental Information to the IBF regulation states that written notice need not be given to IBF customers associated with assets transferred to the IBF within the fourweek exemption period. Does this also apply to deposits that are so transferred? A sale of an asset by a domestic office of a bank to its IBF is not subject to Eurocurrency reserve requirements if the transfer takes place during the four weeks immediately following establish ment of an IBF. May such a transferred asset subsequently be transferred to an offshore office of the bank without being subject to Eurocur rency reserve requirements? Answer: No. Only assets are covered by the exemption. If a deposit is transferred, die bank is necessarily required to contact the customer in order to determine whether the funds in the account will be used for foreign purposes. It may be necessary for a bank to contact loan cus tomers in order to determine the purpose of the loan, but this is not required if the bank can determine the purpose from existing loan docu mentation. Answer: 6 Answer: The intent of the four-week exemption period is to allow banks to place assets with their IBFs that could have been placed there at the inception of the asset. It is not intended to serve as a “sterilization” method whereby assets may be passed through an IBF on their way to an offshore office of the bank in order to avoid the reserve requirement on sales of assets to offshore offices. Institutions will be expected to use this exemption in good faith. The Federal Reserve expects that assets transferred to IBFs in the four-week period will remain there for an indefi 10. Securities issued by foreigners, including com mercial paper and acceptances of other banks, may qualify as IBF assets if the proceeds are used for a foreign purpose. How may an IBF determine whether this is so, especially if it buys the security in the open market? Answer: A Board of Governors’ interpretation on the purchase of securities will be issued in the future. 2 11. Is a loan to a foreigner for purposes of importing items from the United States to be used outside the United States considered to be “foreign busi ness”? Also, can an IBF extend credit to a wholly owned offshore shell subsidiary of a U.S. exporter for the purpose of financing exports from the United States? 15. Must the total of IBF assets equal the total of IBF liabilities? Answer: IBF assets, including claims on the establishing entity, must equal IBF liabilities, including claims by the establishing entity. 16. Must the maturity of liabilities that are assumed by an IBF match the maturity of assets that are acquired? Answer: An S-letter will be issued by the Board of Governors in the near future. 12. Section 204.8 ( a ) (2 ) ( ii) ( C ) states that no deposit or withdrawal from an IBF time deposit issued to a nonbank customer of less than $100,000 is per mitted. (a) Can withdrawals of interest earned on an IBF time deposit be less than $100,000? (b ) Can withdrawals of less than $100,000 be made to make loan repayments to the issuing entity? (c) What action is required if the dollar value of foreign currency deposits drops below $ 100,000? Answer: Maturities of IBF assets need not match the maturities of IBF liabilities. 17. When is the written notice and acknowledgement provided for in Section 204.8(b) required to be given to a nonbank customer in connection with the opening of an IBF time deposit; in connec tion with establishing a nonbinding line of credit? Answer: Section 204.8(b) states that a written notice must be given to an IBF customer at the time a deposit relationship or credit relationship is first established. A deposit relationship is established when a debtor/creditor relationship arises, and that occurs when funds are deposited to an account. Accordingly, the notice must be provided prior to that time. A credit relationship arises, not when the funds are disbursed, but when the commitment is made. Accordingly, the notice must be provided prior to the time that the funds are disbursed. Answer: (a) Yes. Withdrawal of interest earned on an IBF account is not regarded as a withdrawal from the account and accordingly may be less than $100,000. This exception is made be cause otherwise IBF customers would likely be encouraged to limit deposits to the mini mum maturity in order to withdraw interest. (b ) No. (c) None. The amount of a deposit or with drawal of foreign currency funds must have an exchange value of at least $100,000 at the time of the transaction. A depository insti tution is still in compliance with Regulations D and Q if the value of the deposit drops below $100,000 due to a change in exchange rates because no deposit or withdrawal of less than $100,000 has occurred. 18. May a United States parent of a borrower from an IBF guarantee a loan made by an IBF to the borrowing foreign subsidiary? Answer: Yes. The guarantee by a United States parent would not destroy the qualification of an IBF asset which otherwise qualifies under Seotion 204.8(a) (2). 19. May an IBF extension of credit be secured by a United States asset such as the shares of a United States company or a mortgage on United States property; may an IBF purchase United States assets subject to the obligation to resell them at a later date? 13. In addition to the foreign purpose requirement, Section 2 0 4 .8 (a )(2 )(h ) states that nonbank IBF time deposits may be issued only to non-United States residents. Is an individual who has a resi dence outside the United States and a residence in the United States a non-United States resident? Answer: Yes, if the underlying transaction is a qualifying one. In determining compliance with the definition of permissible IBF assets, the type of collateral is not necessarily a relevant con sideration. The identity of the borrower and ap plication of the loan proceeds are the relevant criteria. Likewise, because a repurchase agree ment is essentially a secured borrowing in eco nomic terms, the nature of the assets subject to resale by the IBF is also not determinative. Answer: An individual who resides principally outside the United States at the time of the trans action is a non-United States resident. 14. What is the duty of a depository institution if it discovers that an IBF time deposit or IBF loan is not in fact being used to support operations outside of the United States? Answer: A depository institution must keep re serves against IBF liabilities that do not meet the requirements of Regulations D and Q and, in addition, comply with interest-rate restrictions of Regulation Q. IBF assets which do not meet those requirements must be transferred from the IBF to the domestic books. An institution will be expected to communicate with its customers to determine that the requirements are understood and followed. “ T tt o 1 cieuir 1S secured by mortgage on U.S. property or shares of a U corporation, the obligor defaults on the loan a the creditor forecloses on the collateral mav’su property or shares be held by the IBF? Answer: Yes, consistent with prudent banki practice and other regulatory requirements. 3 tion to use of a different name, but banks should ensure that use of such a name is unobjectionable to its chartering and licensing authority. 21. May an IBF issue a letter of credit with a United States beneficiary? Answer: Yes, if the underlying transaction quali fies within the meaning of Section 204.8(a)(2) — that is, the account party must be seeking a letter of credit for a transaction that would be a per missible loan transaction for an IBF. The draw ing down of the letter of credit by means of a draft does not connect the arrangement to an impermissible transaction account. However, the IBF may not pay the draft by establishing a demand deposit account. 28. As to assets transferred to the IBF from a domes tic office, is the amount of the asset transferred considered permanently free from the Eurocur rency reserve requirement? Answer: No. There is no base amount of reservefree transfers of assets. Only those particular assets that are transferred during the initial fourweek period are exempt from Eurocurrency reserve requirements on sales of assets. 22. Does the requirement that an IBF time deposit “support operations outside the United States” require that the source of funds arise solely out of operations outside of the United States? 29. When an extension of credit is made, it qualifies as an IBF extension of credit, but a change in circumstances of the debtor that was not reason ably foreseeable at the time of the extension of credit causes the credit not to come within the criteria of an IBF extension of credit. For ex ample, a loan might be made to the foreign office of a U.S. company for an eligible purpose, but during the life of the loan the company closes the foreign office. May the credit still be con sidered an IBF extension of credit? Answer: Not necessarily. For example, capital supplied by a United States parent to a foreign office or subsidiary may be deposited in an IBF if the purpose of the transaction was to support the non-United States operations of the company. Funds may not be deposited by a United States office to obtain indirectly the favorable regula tory treatment on an IBF deposit. Answer: Yes. In this case, the credit may still be considered an IBF extension of credit. 23. May an IBF’s income and expense items be con sidered permissible asset or liability accounts? 30. Is a deposit in an IBF by a foreign office of a Answer: For Federal Reserve purposes these ac counts are not permissible IBF assets or liabilities. However, contra accounts that are required by accounting convention to accompany an entry for a permissible IBF asset or liability may be established. However, for state tax purposes these income and expense accounts may be permissible, or even required, on an IBF’s books. bank a “deposit” for the purposes of Regulation Answer: No. However, a request for revision of Regulation Q to define such funds as “de posits” is currently pending before the Board of Governors. This may have implications for Fed eral tax withholding requirements. 31. May an IBF engage in bankers’ acceptance fi nancing? 24. If an IBF’s establishing institution is a member of a bank holding company, may the other sub sidiaries of the holding company that do not have IBFs be customers of the IBF? Answer: Answer: Yes. An IBF may accept and discount a draft presented by its customers provided the draft is held to maturity. Such a transaction is booked as a loan for report of condition purposes. An institution’s acceptance held in its own port folio is treated as a loan, not an acceptance. Only if they otherwise qualify as IBF customers. 25 In order to determine whether a customer must acknowledge in writing the rules governing IBF deposits and extensions of credit under Sections 2 0 4 .8 (a )( 2 ) (ii)(B ) and 8 (a )(3 )(h ), what must IBFs do to determine whether a foreign company is controlled by a domestic corporation? 32. May an IBF hold nonvoting preferred stock as an IBF extension of credit? Answer: Yes, so long as the other requirements on IBF extensions of credit are complied with. Answer: Only those corporations in which the parent owns more than 50 percent of the voting shares are covered. 26 33. Is a loan to a U.S. borrower, fully guaranteed as to principal and interest by a foreign govern ment, an IBF extension of credit? Is a loan to a foreign corporation for the purpose of acquiring an existing United States corporation in a takeover bid considered to be for a foreign purpose? Answer: Answer: No. The transaction will be regarded as a domestic extension of credit. 34. May an IBF accept deposits from a foreign office of an Article XII investment company, a private bank, or a U.S. bank not subject to Federal Re serve reserve requirements? No. 27. Need a bank’s IBF have a name different from that of the bank? Answer: Yes. The IBF will have to determine whether the depositor should be treated as a bank or as a nonbank entity. Answer: No. An IBF is neither a separate entity nor a branch. The Federal Reserve has no objec 4
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