[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Proposed Rules]
[Pages 17966-17968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9616]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563
[No. 98-35]
RIN 1550-AB16
Transactions with Affiliates; Reverse Repurchase Agreements
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of Thrift Supervision (OTS) is proposing to revise
its regulations on transactions with affiliates. Specifically, the OTS
proposes to clarify that it will treat reverse repurchase agreements,
with one limited exception, as loans or other extensions of credit for
the purposes of section 11(a)(1)(A) of the Home Owners' Loan Act
(HOLA). Therefore, a savings association generally may not enter into a
reverse repurchase agreement with an affiliate that is engaged in non-
bank-holding company activities.
DATES: Comments must be received on or before June 12, 1998.
ADDRESSES: Send comments to Manager, Dissemination Branch, Records
Management and Information Policy, Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552, Attention Docket No. 98-35. These
submissions may be hand-delivered to 1700 G Street, NW., from 9:00 a.m.
to 5:00 p.m. on business days; they may be sent by facsimile
transmission to FAX Number (202) 906-7755 or by e-mail
public.info@ots.treas.gov. Those commenting by e-mail should include
their name and telephone number. Comments will be available for
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inspection at 1700 G Street, NW., from 9:00 a.m. until 4:00 p.m. on
business days.
FOR FURTHER INFORMATION CONTACT: Valerie J. Lithotomos, Counsel
(Banking and Finance), (202) 906-6439; or Karen A. Osterloh, Assistant
Chief Counsel, (202) 906-6639, Regulations and Legislation Division,
Chief Counsel's Office, or Donna Deale, Manager, (202) 906-7488,
Supervision Policy, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
Section 11(a)(1) of the Home Owners' Loan Act (HOLA) applies the
provisions of sections 23A and 23B of the Federal Reserve Act (FRA) to
every savings association to the same extent as if the thrift were a
member bank of the Federal Reserve System. Section 11(a)(1) also
imposes several additional restrictions on a savings association's
transactions with affiliates beyond those found in sections 23A and 23B
of the FRA. Specifically, section 11(a)(1)(A) states that ``no loan or
other extension of credit may be made to any affiliate unless that
affiliate is engaged only in activities described in section
10(c)(2)(F)(i) of the HOLA.'' As defined by 12 CFR 584.2-2, these
activities include activities approved for bank holding companies by
regulation, 12 CFR 225.25, or by case-by-case order of the Federal
Reserve Board, 12 CFR 225.23. Thus, under section 11(a)(1)(A) a thrift
may not make a loan or other extension of credit to an affiliate
engaged in non-bank holding company activities (non-banking affiliate).
Congress enacted this prohibition to ``reflect . . . the fact that
affiliates of savings associations can engage in a far greater range of
activities than affiliates of banks, and can thus expose the savings
association to greater risks.'' The OTS believes this statement
incorporates three distinct but overlapping policies.
The purpose of the prohibition in section (a)(1)(A),
together with other specific restrictions in section 11(a), is to
protect the thrift from all forms of risk, including credit risk,
presented by non-banking affiliates. These risks are not fully
addressed by sections 23A and 23B of the FRA.
Because the creditors that are ultimately exposed to the
greater risks in these transactions are the depositors and the deposit
insurance fund, section 11(a)(1)(A) operates to ensure that thrift
deposits do not serve, via an extension of credit, as a source of funds
for the activities of a non-banking affiliate.
As a corollary of the second policy, the deposit insurance
fund should not support the risks of default by a non-banking
affiliate.
The OTS is aware that there may be situations where savings
associations have entered into repurchase and reverse repurchase
agreements with their non-banking affiliates. For example, in one
instance, a thrift planned to sell United States Treasury securities to
its holding company, subject to the thrift's agreement to repurchase
the securities after a pre-determined period, several years later.
Using reverse repurchase agreements,1 the savings
association would also purchase United States Treasury securities from
the holding company, subject to the holding company's agreement to
repurchase on an overnight (or next-business-day) basis. The holding
company, in effect, would use the overnight purchases to manage its
available cash. At all times, the savings association's obligation to
repurchase securities under its agreement would exceed the holding
company's obligation to repurchase securities under its agreement.
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\1\ A sale of securities subject to an agreement to repurchase
is known as a ``reverse repurchase agreement'' when a bank or thrift
is the purchaser of the securities. See M. Stigum, The Repo and
Reverse Markets 4 (1989).
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These arrangements raise the question whether a reverse repurchase
agreement is a loan or other extension of credit for the purposes of
the prohibition in section 11(a)(1)(A) of the HOLA. Section 11(a)(1)(A)
does not define ``loan or other extension of credit.'' Thus, the face
of the statute does not compel a legal conclusion that reverse
repurchase agreements are, or are not, prohibited.2
Accordingly, the OTS has decided to resolve this issue through today's
rulemaking. While the agency does not believe that such agreements are
common, it believes that setting clear regulatory standards will help
to avoid future uncertainty.
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\2\ We recognize that the definition of ``covered transaction''
under section 23A(b)(7) of the FRA lists ``a purchase of assets,
including assets subject to an agreement to repurchase'' separately
from ``a loan or extension of credit.'' See 12 U.S.C. 371c(b)(7)(A),
(C). The fact that a reverse repurchase is considered to be an asset
purchase, rather than an extension of credit under section 23A of
the FRA, however, is not controlling here.
Although section 23A and section 11(a)(1)(A) are both designed
to prevent abuses by affiliates, the two statutes pursue this goal
differently. Section 23A identifies a class of covered transactions
that threaten prudent business relationships and places various
restrictions on the transactions. Some restrictions apply to all
transactions. Others apply only to certain types of covered
transactions. (E.g., loans and extensions of credit are subject to
specific collateralization requirements. Purchases, including
purchases that are subject to a repurchase agreement, are subject to
a prohibition on the purchase of low quality assets.) Thus, to
impose the appropriate restrictions, section 23A must distinguish
between covered transactions that are reverse repurchase agreements
and loans and covered transactions that are other extensions of
credit.
Moreover, we note that section 11(a)(1)(A) of the HOLA does not
specifically incorporate the definition of covered transaction under
section 23A. In light of the numerous other cross-references to
section 23A of the FRA that are contained in section 11 of the HOLA,
it is reasonable to conclude that if Congress had intended to
restrict ``loans or other extensions of credit'' only to those
transactions that are loans and extensions of credit for the
purposes of section 23A, it would have included a specific cross-
reference to that statute.
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The OTS is proposing to treat most reverse repurchase agreements as
loans or other extensions of credit. Section 11(a)(1)(A) of the HOLA
provision focuses on prohibiting transactions with non-banking
affiliates that would transfer credit and other risks to the thrift. As
a general matter, a reverse repurchase agreement with a non-banking
affiliate bears many of the economic characteristics of a loan or
extension of credit to such an affiliate. The savings association
transfers funds to the affiliate, expecting to be repaid when the
company repurchases the assets. The purchased assets essentially amount
to collateral, since the savings association is required to return the
assets at the time of repurchase. The savings association earns a pre-
determined rate of interest under the agreement. The principal risk to
the savings association, its depositors and the deposit insurance fund
is credit risk--the possibility that the affiliate will default on its
obligation to make the repurchase.
Of course, in the example cited above, the risk is ameliorated
significantly because the thrift is able to dispose of United States
Treasury securities, a highly liquid, federally guaranteed form of
collateral. The risk is further ameliorated by the offsetting
repurchase agreements between the thrift and the holding company under
which the thrift is, at all times a net debtor to the holding company.
Accordingly, as discussed more fully below, the OTS is proposing to
exclude such a connected set of transactions from the regulatory
prohibitions.
II. General Description of Proposed Rule
To address this and similar arrangements, the OTS is proposing to
revise 12 CFR 563.41(a)(3) to clarify that it will generally treat
reverse repurchase agreements as loans or other extensions of credit
for the purposes of section 11(a)(1)(A) of the HOLA. Such agreements
between a thrift and a non-
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banking affiliate would, therefore, be prohibited.
The proposed regulation also would outline circumstances in which
the OTS would not treat reverse repurchase agreements as loans or other
extensions of credit under section 11(a)(1)(A) of the HOLA. These
circumstances would be ones in which the agreements are consistent with
the policies underlying section 11(a)(1)(A) of HOLA and section 563.41
of the OTS regulations--avoidance of the use of insured deposits as a
source of funds for a non-banking affiliate, substantial elimination of
credit risk posed by the non-banking affiliate, and protection of the
insurance fund. Specifically, the proposed rule would not treat a
reverse repurchase agreement as a loan or other extension of credit if
the agreement is part of a set of transactions that meet the following
requirements:
In order that the agreements not channel insured deposits
to the non-banking affiliate, there must be offsetting repurchase
agreements between the thrift and the affiliate under which the thrift
sells assets subject to an agreement to repurchase. At all times, when
the agreements are netted, the thrift must be a net debtor to the
affiliate.
To make credit risk de minimis, and to avoid a risk to the
insurance fund, the assets purchased under the agreements must be
United States Treasury securities and the remaining term of securities
purchased by the savings association must exceed the term of the
reverse repurchase agreement. The OTS specifically solicits comment on
whether, to reduce interest rate risk further, a cap should be placed
on the length of time by which the remaining term of the securities may
exceed the term of the reverse repurchase agreement.
There may be other common types of reverse repurchase transactions
that avoid the use of insured deposits as a source of funds for an
affiliate, substantially eliminate credit risk, and protect the
insurance fund from risk of loss. Accordingly, the OTS specifically
requests comments on such other agreements. Commenters addressing this
issue should describe the nature of the agreements, and should explain
how the agreements are consistent with the purposes of section
11(a)(1)(A).
III. Executive Order 12866
The Director of the OTS has determined that this proposed rule does
not constitute a ``significant regulatory action'' for the purposes of
Executive Order 12866.
IV. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
OTS certifies that this proposed rule will not have a significant
impact on a substantial number of small entities. The proposed rule
would prohibit all savings associations from entering into reverse
repurchase agreements with non-banking affiliates, except under very
limited circumstances. Thrifts currently engage in few reverse
repurchase agreements with affiliates. The OTS is not aware of any
small savings association that is currently engaging in transactions
that would be prohibited by this rule. Accordingly, a regulatory
flexibility analysis is not required.
V. Unfunded Mandates Act of 1995
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (unfunded Mandates Act), requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
federal mandate that may result in expenditure by state, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. The OTS has determined that
the proposed rule will not result in expenditures by state, local, or
tribal governments or by the private sector of $100 million or more.
Accordingly, this rulemaking is not subject to section 202 of the
Unfunded Mandates Act.
List of Subjects in 12 CFR Part 563
Accounting, Advertising, Crime, Currency, Investments, Reporting
and recordkeeping requirements, Savings associations, Securities,
Surety bonds.
Accordingly, the Office of Thrift Supervision proposes to amend
Part 563, chapter V, title 12, Code of Federal Regulations as set forth
below:
PART 563--OPERATIONS
1. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468,
1817, 1820, 1828, 3806; 42 U.S.C. 4106.
2. Section 563.41 is amended by revising paragraph (a)(3) to read
as follows:
Sec. 563.41 Loans and other transactions with affiliates and
subsidiaries.
(a) * * *
(3) A savings association (or its subsidiary) may not make a loan
or other extension of credit to an affiliate, unless the affiliate is
engaged solely in activities described in 12 U.S.C. 1467a(c)(2)(F)(i),
as defined in Sec. 584.2-2 of this chapter. For the purposes of this
paragraph (a)(3), a loan or other extension of credit includes a
purchase of assets from an affiliate that is subject to the affiliate's
agreement to repurchase the assets. Such a purchase of assets, however,
will not be considered a loan or other extension of credit if the
savings association (or subsidiary) has entered into a transaction or
series of transactions that meets all of the following requirements:
(i) The savings association (or its subsidiary) purchases United
States Treasury securities from the affiliate, the affiliate agrees to
repurchase the securities at the end of a stated term, the remaining
term of the securities purchased by the savings association (or its
subsidiary) exceeds the term of the affiliate's repurchase agreement,
and the savings association (or subsidiary) has ensured its right to
dispose of the securities at any time during the term of the agreement
and upon default.
(ii) The affiliate purchases United States Treasury securities from
the savings association (or its subsidiary) and the savings association
(or subsidiary) agrees to repurchase the securities at the end of a
stated term.
(iii) The aggregate amount of the affiliate's outstanding
obligations to repurchase securities from the savings association (or
its subsidiary) under the repurchase obligation described at paragraph
(a)(3)(i) of this section, at all times, is less than the aggregate
amount of the savings association's (or subsidiary's) outstanding
obligations to repurchase securities from the affiliate under paragraph
(a)(3)(ii) of this section;
* * * * *
Dated: April 2, 1998.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-9616 Filed 4-10-98; 8:45 am]
BILLING CODE 9720-01-P
