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To the Chief Executive Officers of
State Member Banks, Branches and
Agencies of Foreign Banks and
Edge or Agreement Corporations
in the Second Federal Reserve District:
Subject:
Department of Treasury Interpretation Regarding
Allocation of Securities to Customer Accounts in
Hold-in-Custody Repurchase Transactions
The Bureau of Public Debt of the Department of the
Treasury (the "Bureau”) recently issued the attached interpretive
letter concerning the required timing of the allocation of
securities to customer accounts (repurchase agreement collateral)
in hold-in-custody repurchase transactions.
At the request of the Bureau, the Federal Reserve is
forwarding that agency's interpretive letter to you. In the
event you have any questions regarding this matter, please
contact the Bureau directly at (202) 219-3632.
Sincerely,
Attachment
,
DEPARTM ENT OF THE TREASURY
B U R E A U O F T H E PUBLIC D E B T
W A S H I N G T O N , D .C . 20239-0001
June 21, 1993
Dear Ms. Homer:
The Government Securities Regulations Staff has received
several inquiries concerning the required timing of the
allocation of securities to customer accounts (i.e., repurchase
agreement collateral) in hold-in-custody repurchase transactions
(hold-in-custody repos) pursuant to the requirements set out in
the regulations promulgated pursuant to the Government Securities
Act of 1986 (the "GSA," Pub. L. 99-571, 100 Stat. 3208, 15 U.S.C.
78o-5). ‘This interpretation is intended to clarify the
requirements of the GSA regulations in this area.
Specifically, in accordance with 17 CFR 403.5(d)(1)(vi), any
financial institution that retains custody of securities that are
the subject of a repurchase agreement between the financial
institution and a counterparty must maintain possession or
control of the securities that are the subject of the repurchase
agreement in accordance with section 450.4(a). Pursuant to 17
CFR 450.4(a)(1), a depository institution that holds government
securities as custodian for the account of a customer must
maintain possession or control of the government securities by
segregating such securities from the assets of the depository
institution and keeping them free of any lien, charge or claim of
a third party.
There are also requirements under the GSA regulations (17
CFR Ch. IV) that specific records be made and kept relating to
the custody of securities. Paragraph 404.4(a)(2) provides that
government securities brokers and dealers that are financial
institutions must comply with the recordkeeping requirements of
sections 450.4(c), (d) and (f). Pursuant to 17 CFR 450.4(c),
records of government securities held for customers shall be
maintained and kept separate and distinct from other records of
the depository institution. Such records shall provide a system
for identifying each customer, and each government security (or
the amount of each issue of a government security issued in bookentry form) held for the customer, and describe the customer's
interest in the government security. Further, paragraph
404.4(a)(3)(i)(A) of the GSA regulations requires that government
securities brokers and dealers that are financial institutions
make and keep current a securities record or ledger reflecting
separately for each government security as of the settlement
dates all long or short positions (including government
securities that are the subjects of repurchase or reverse
repurchase agreements) carried by such financial institutions for
its own account or for the account of its customers or others.
It is our understanding that the allocation (segregation) of
securities to customer accounts for hold-in-custody repos often
occurs as part of the end-of-the-day processing cycle.
(Over)
2
Recognizing the importance of ensuring customer protection, no
unnecessary delay of the allocation process should occur. We
also recognize that a certain amount of time is required, after
trading is completed, to finish the normal processing of the
day's transactions. However, to remain in compliance with
403.5(d)(1), 404.4 and 450.4 of the GSA regulations, a financial
institution must complete the securities allocation process for
hold-in-custody repos prior to opening the next business day.
Further, for an allocation to be in compliance, the records of a
financial institution must identify and list the specific
securities that are allocated to each customer in authorized,
transferrable denominations.
One of the fundamental objectives that gave rise to the
enactment of the GSA, and the subsequent issuance of regulations
thereunder, was to strengthen customer protection in hold-incustody repo transactions. The requirement that financial
institutions maintain and allocate specific securities to
specific customers is aimed at protecting customer securities in
the event of the failure of a financial institution. Without
timely and proper allocation, it may not be clear if an interest
in the securities has been conveyed to the counterparty. The
allocation requirement focuses on eliminating duplicative use of
securities as well as precluding pooling of securities (i.e.,
failing to identify and record specific securities on the books
and records of the institution).
We have consulted with staffs of the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, and
the Office of Thrift Supervision. This letter is being sent to
each of these agencies as guidance. I would appreciate your
assistance in advising your examiners and the institutions that
your organization supervises of this information.
Pursuant to 17 CFR 400.2(c)(7), this .letter will be made
immediately available to the public.
Sincerely
Richard L. Gregg
Commissioner
Ms. Laura Homer
Assistant Director
Division of Banking, Supervision
and Regulation
Board of Governors of the Federal Reserve
Washington, D.C. 20551
@FedFRASER