Full text of Federal Reserve Bank of New York Circulars : Purchase and Sale of U.S. Government Securities in the Secondary Market

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AT CIRCULAR NO. j
FEDERAL RESERVE BANK
OF NEW YORK
July 19, 1993

PU R C H A SE A N D SALE OF U .S. G O V E R N M E N T
SE C U R IT IE S IN T H E SECONDARY M A R K E T

To All Depository Institutions in the Second
Federal Reserve District, and Others Concerned:

The Board of Governors of the Federal Reserve System has requested
comment on a proposal to consolidate at the Federal Reserve Bank of
Chicago the purchase and sale of securities in the secondary market. This
Bank does not currently offer the service to depository institutions in this
District. Consequently, this proposal will be a new service for those
institutions who wish to obtain that type of service from the Chicago Fed.
The new service will be included as part of the Federal Reserve’s priced
book-entry securities services, beginning January 1, 1994.
Printed on the following pages is the text of the Board of Governors’
notice, as published in the F e d e ra l R e g is te r of July 7. Comments on the
proposal should be submitted by August 6, 1993, and may be sent to the
Board, at the address indicated in the notice.
Questions regarding this matter may be directed to Whitney R. Irwin,
Vice President (Tel. No. 212-720-5810).




E. G erald C orrigan ,
P resid en t.

D Q * l/7 o (-

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Federal Register / Vol. 58, No. 128 / Wednesday, July 7, 1993 / Notices
Board of G overnors of th e Federal
Reserve System . For th e hearing
im paired only, T elecom m unications
D evice for th e Deaf (TDD), D orothea
T hom pson (202/452-3544), Board of
G overnors of th e Federal Reserve
System , 20th and C Streets, NW.,
W ashington, DC 20551.
SUPPLEMENTARY INFORMATION:

Background
T he purchases and sales service
consists of th e secondary m arket
p u rch ase or sale of U.S. G overnm ent
[Docket No. R-0304J
securities, w h ich are eligible to be h eld
in F ederal Reserve book-entry.
Consolidation of Purchases and Sales
P urch ases an d sales are con d u cted for
Service at Federal Reserve Bank of
in stitu tio n s’ ow n securities as w ell as
Chicago
for those of custom ers. Prior to the
AGENCY: Board of Governors of the
passage of th e M onetary Control Act of
Federal Reserve System.
1980, eleven Reserve Banks1*offered th e
ACTION: Notice.
service to m em ber banks. G enerally,
sm aller depository in stitu tio n s w ith no
SUMMARY: T he Board requests com m ent
direct relatio n sh ip w ith a securities
on a proposal by th e F ederal Reserve
b roker or dealer have relied u p o n
Banks to consolidate th e priced
Reserve Banks. W ith th e increased
secondary m arket purch ases an d sales of accep tan ce of book entry an d th e
securities service, w h ich is cu rren tly
declin in g availability of Federal agency
provided by eight Reserve Banks, at the
securities in definitive form, the
Federal Reserve Bank of Chicago. T he
requests for p urchases and sales evolved
Reserve Banks propose consolidation at
from th e p u rch ase and sale of definitive
the Chicago Reserve Bank to im prove
secu rities to prim arily book-entry
efficiency an d contain th e costs of
securities. D em and for p urchases and
pro v id in g th is service to depository
sales has declin ed steadily over th e past
in stitu tio n s n ationw ide. T he service
few years, from 74,000 transactions in
w ill be in c lu d ed as a p art of th e Federal
1980 to 18,400 tran sactio n s in 1992. The
R eserve’s priced book-entry securities
service is cu rren tly offered by eight
service, beginning January 1 ,1994.
Reserve Banks; th ese are Boston,
DATES: C om m ents m u st be subm itted on
P h ilad elp h ia, C leveland, R ichm ond,
or before A ugust 6 ,1 9 9 3 .
Chicago, M inneapolis, Kansas City, and
D allas w ith the Chicago Reserve Bank
ADDRESSES: C om m ents, w hich sho u ld
processing m ore than h a lf of the
refer to Docket No. R -0804, m ay be
S ystem ’s an n u al volum e.
m ailed to Mr. W illiam W. W iles,
C onsolidation of th e purchases and
Secretary, Board of G overnors of the
Federal Reserve System , 20th Street and sales service provides an o p p o rtu n ity to
C onstitution A venue, NW., W ashington, red u ce cost w ith little, if any, im pact on
th e level of service offered to depository
DC 20551. C om m ents ad dressed to Mr.
in stitu tio n s. All seven Reserve Banks
W iles m ay also be delivered to th e
now offering the service are expected to
B oard’s m ail room betw een 8:45 a.m .
co n so lid ate by th e end of 1994. Tw o
an d 5:15 p.m ., an d to th e security
Banks (Cleveland and K ansas City) have
control room o utside of those hours.
asked to consolidate as early as possible.
Both th e m ail room and th e security
T he Chicago Reserve Bank is prepared
control room are accessible from th e
to su p p o rt a consolidated purchases and
courtyard entran ce on 20th Street
sales operation at Chicago. A toll-free
betw een C onstitution A venue and C
telep h o n e n u m b er w o u ld be available
Street, NW. C om m ents m ay be
n atio n w id e for depository in stitu tio n s to
inspected on room B -1122 b etw een 9:00
in itiate transactions w ith th e Chicago
a.m. an d 5:00 p.m ., except as provided
Reserve Bank. A depository in stitu tio n ’s
in § 261.8 of th e B oard’s Rules
representative, w ith p ro p er
Regarding the A vailability of
au th o rizatio n on file w ith th e Chicago
Inform ation, 12 CFR 261.8.
Reserve Bank, w o u ld initiate orders to
FED ERAL RESERVE SYSTEM

FOR FURTHER INFORMATION CONTACT:

C harles W. B ennett, A ssistant D irector
(202/452-3442), G erald D. M anypenny,
M anager (202/452-3954), or M ichael L.
B erm udez, F inancial Services A nalyst
(202/452-2216), D ivision o f Reserve
Bank O perations a n d P aym ent System s,




1 In 1980, the eleven Reserve Banks offering the
purchases and sales service were Boston, N ew York,
Philadelphia, Cleveland, Richmond, Atlanta,
Chicago, M inneapolis, Kansas City, Dallas, and San
Francisco. H owever in som e districts, such as San
Francisco, dem and for the service disappeared
follow ing the im plem entation of service pricing.

p u rch ase or sell secu rities by
te lep h o n in g th e Chicago Reserve Bank
on th e recorded toll-free line. A fter
d eterm in in g th at an order to sell
secu rities is au th en tic, the Chicago
Reserve Bank w o u ld confirm th a t th e
securities are h eld in book-entry form at
a F ederal Reserve B ank;2 a m in im u m of
tw o dealers w o u ld be contacted if th e
tran sactio n is an o d d lot; an d a
m in im u m o f five dealers w o u ld be
contacted for ro u n d -lo t transactions.
T he dealer subm itting th e best price
(bid) generally w ould be given th e
o rder.3 O rders for th e purchase of
secu rities for depository in stitu tio n s
also w o u ld be received via recorded
telep h o n e lin e an d verified for
au th en ticity .4 L ike-securities issues (by
CUSIP num ber) w o u ld be com bined by
Chicago, w h en ev er possible, to obtain
th e best price. For pu rch ases, th e dealer
su bm itting th e best price (offer)
generally w ould be given th e order.
T he M onetary Control Act of 1980
requires that th e F ederal Reserve price
its services to depository in stitu tio n s to
recover th e costs in cu rred in providing
th o se services. Based on th e analysis
w h ich follow s, conso lid atio n of the
h an d lin g of p u rch ases an d sales
tran sactio n s w ill p rovide scale
econom ies and o th er efficiencies not
available at eight separate locations.
T he Board, after soliciting p u b lic
com m ent, ap p ro v ed in O ctober 1992, a
set of factors to b e u sed in its analysis
of Reserve Bank requests to w ith d raw
from a p riced service line. T h e Board
ap p lied th ese factors in d eterm ining
w h eth er th e System sh o u ld w ith d raw
from th e d efin itiv e safekeeping service,
w h ich co n sists of th e definitive
securities safekeeping service an d the
purchases and sales service. Also, after
soliciting p u b lic com m ent, th e Board, in
O ctober 1992, approved th e request by
th e Reserve Banks to w ith d raw from the
defin itiv e safekeeping service line by
a When depository institutions located outside of
the Chicago Head Office region w ish to sell
securities, Chicago w ould request that the
institution sellin g the securities or the Reserve Bank
holding the book-entry account for the requesting
depository institution transfer the securities to
Chicago, thus reducing the book-entry holdings at
the sending Reserve Bank and increasing the bookentry holdings at Chicago. The offsetting payment
is settled through the Inter-District Settlem ent Fund
on settlem ent day.
3 Settlem ent of transactions in U nited Slates
Treasury or A gency securities of $100,000 or more
normally occurs on the bu sin ess day follow ing the
date of execution of the order. Upon request, if an
order is received before 11:00 a.m. (Central Time),
the Chicago Reserve Bank endeavors to execute the
orders for settlem ent on the same day as the orders
are placed.
4 Purchases for $500,000 or more are
authenticated by telephoning another authorized
person of the requesting depository institution other
than the original caller.

Federal Register / VoL 58, No. 128 / Wednesday, July 7, 1993 / Notices
the end of 1993. Secondary market
purchase and sale of securities would
continue to be offered, but would no
longer be included under the definitive
safekeeping service line after 1993.
With the declining volum e and
consequent prospects for cost recovery,
the Federal Reserve Banks have
requested approval to consolidate the
purchases and sales service at the
Chicago Reserve Bank. To ensure that
appropriate consideration is given to
any public policy issues arising from a
proposal to consolidate a priced service
across district lines, the Board adopted
the following factors to be considered
when evaluating proposals to
consolidate Reserve Bank priced
services across district lines. This
proposal has been evaluated against
those factors as follows:
A. Maintenance or improvement of cost

recovery in a service.
The total savings to the System once
consolidation is com pleted w ill be at
least $100,000 per year, primarily as a
result of staff reductions,
B. Improvement of the efficiency of

Federal Reserve Bank operations.
The Chicago Reserve Bank has the
most automated purchases and sales
operation and currently has excess
capacity. As a result, it w ill be able to
absorb the System ’s entire volum e
without increasing staff.
C. Maintenance or improvement of the

level or quality of service.
Through consolidation, the level and
quality of service are expected to
improve. The Chicago Reserve Bank’s
purchases and sales staff monitors the
secondary securities market
electronically throughout the day and
times its trades according to the
m ovement in that market in order to
obtain the best price for the depository
institution. A lso, because of its level of
volume, the Chicago Reserve Bank has
more opportunities to com bine sm all
trades in order to obtain a better price
and to reduce the amount of the broker’s
fee that must be passed on to the
depository institutions; with more
volume, the opportunities to com bine
trades is likely to increase.

D. Responsiveness to changes in the
financial-services industry.
The Chicago Reserve Bank’s level of
automation and market monitoring
make it more consistent with and more
flexible in responding to changes in. the
industry.




E. Effect on private-sector providers of
the serviceGiven the sm all volum e processed by
all the Federal Reserve Banks,
consolidation is expected to have no
measurable impact on private-sector
providers of this service.

F. Effect on users of the service.
As indicated in the comments under
Factors a. through d„ depository
institutions w ill receive an improved
level of service, usually at the sam e or
a lower fee. Also, consolidation w ill
enhance on-going cost containment
efforts, thereby delaying or reducing
possible future fee increases. The
depository institutions w ill be dealing
w ith em ployees of a different Federal
Reserve Bank, but transactions and
accounting entries from the depository
institutions side w ill be handled in
generally the same manner as before
consolidation.
The Board requests comment on the
Federal Reserve Banks’ proposal to
consolidate the purchases and sales
service at the Federal Reserve Bank of
Chicago. W hile comments in general are
w elcom e, it w ould be helpful to the
Board in considering this proposal to
receive com m ents that respond to each
of the factors.
Board o f Governors o f the Federal Reserve
System, June 30,1993.
W illiam W . Wiles,

Secretary of the Board.
(FR Doc. 93-15956 Filed 7 -6 -9 3 ; 6:45 am}
BILLING CODE S210-01-F

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