[Federal Register Volume 63, Number 156 (Thursday, August 13, 1998)]
[Rules and Regulations]
[Pages 43292-43294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21756]
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DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 563
[No. 98-76]
RIN 1550-AB16
Transactions With Affiliates; Reverse Repurchase Agreements
AGENCY: Office of Thrift Supervision, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of Thrift Supervision (OTS) is issuing a final rule
to revise its regulations on transactions with affiliates. The final
rule clarifies that OTS 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.
EFFECTIVE DATE: October 1, 1998.
FOR FURTHER INFORMATION CONTACT: Valerie J. Lithotomos, Counsel
(Banking and Finance), (202) 906-6439; 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.'' These activities include activities
approved for bank holding companies by regulation, 12 CFR 225.28, 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).
OTS is aware that there may be situations where savings
associations may wish to enter into reverse repurchase agreements with
their non-banking affiliates.1 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.
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\1\ A sale of assets subject to an agreement to repurchase is
known as a ``reverse repurchase agreement'' when a bank or thrift is
the purchaser of the assets. See M. Stigum, The Repo and Reverse
Markets 4 (1989).
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On April 13, 1998, OTS published a notice of proposed rulemaking
that would treat most reverse repurchase agreements as loans or other
extensions of credit.2 OTS noted that section 11(a)(1)(A)
does not define ``loan or other extension of credit,'' and does not
compel a legal conclusion that reverse repurchase agreements are, or
are not, prohibited by statute.3 Section 11, however,
focuses on prohibiting transactions with non-banking affiliates that
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.4 On this basis, OTS concluded that it was
appropriate to treat these transactions as loans or extensions of
credit under section 11(a)(1)(4).
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\2\ 63 FR 17966 (April 13, 1998).
\3\ In making this determination, OTS recognized 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, does not
control the interpretation of section 11 of the HOLA.
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.
\4\ 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 amount
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. These types of agreements are generally
considered the functional equivalent of a loan or extension of
credit. See amendments to Federal Financial Institutions Examination
Council Policy Statement on Repurchase Agreements of Depository
Institutions with Securities Dealers and Others (``FFIEC Policy
Statement''), 63 FR 6935 (February 11, 1998).
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Credit and other risks may be ameliorated significantly under
certain circumstances. For example, in one arrangement recently
reviewed by OTS, 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, 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,
[[Page 43293]]
the savings association's obligation to repurchase securities under its
agreement would exceed the holding company's obligation to repurchase
securities under its agreement. In this example, risk is mitigated
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 affiliate under which the thrift is, at all
times a net debtor to the affiliate. Accordingly, OTS proposed to
exclude such a connected set of transactions from the regulatory
prohibition.
II. Summary of Comment and Description of the Final Rule
The public comment period on the proposed rule closed on June 12,
1998. OTS received one comment from a law firm, on behalf of a client.
The commenter argued that section 11(a)(1)(A) of the HOLA does not
provide OTS with legal authority to prohibit reverse repurchase
agreements. As noted above, the preamble to the proposed rule
recognized that section 11(a)(1)(A) of the HOLA, on its face, did not
compel a legal conclusion that reverse repurchase agreements are, or
are not, prohibited as loans or extensions of credit. It is, however,
within OTS' purview to interpret and clarify the meaning of ``loan or
other extension of credit'' in section 11 by regulation. Section
3(b)(2) of the HOLA authorizes the Director to ``prescribe such
regulations . . . as the Director may determine to be necessary for
carrying out [the HOLA] and all other laws within the Director's
jurisdiction.5 Thus, OTS has sufficient legal authority to
issue this final rule interpreting the HOLA.
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\5\ 12 U.S.C. 1462a. See also 12 U.S.C. 1463(a) and 1464.
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The commenter also responded to a question posed in the preamble to
the proposed rule. The proposed regulation outlined the circumstances
under which OTS would not treat a reverse repurchase agreement as a
loan or other extension of credit under section 11(a)(1)(A) of the
HOLA. Specifically, the reverse repurchase agreement must be part of a
transaction or series of transactions meeting the following
requirements: (1) 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; and (2) 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. OTS specifically asked whether 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.
The commenter opposed the imposition of any cap.
OTS agrees with the commenter that a cap is unnecessary in light of
the proposed requirement that the aggregate amount of the thrift's
outstanding obligation to repurchase securities from the affiliate must
at all times exceed the aggregate amount of the affiliate's outstanding
obligation to repurchase securities from the thrift. See proposed
Sec. 563.41(a)(3)(iii). Given this requirement, the savings association
will always be able to set off all of its repurchase obligations to the
affiliate, if the affiliate is unable to repurchase securities from the
thrift under the agreement. Thus, the savings association will not have
any net credit exposure to its affiliate. The proposal has not been
revised to include a cap.6
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\6\ The commenter opposed any additional restrictions. However,
if additional restrictions are to be imposed, the commenter
suggested that OTS require that the aggregate market value of the
securities purchased by the savings association under the reverse
repurchase agreement must exceed, by a specified margin (e.g., 102
percent), the amount of the affiliate's repurchase obligation under
the reverse repurchase agreement. OTS agrees that further regulatory
restrictions are unnecessary to mitigate the risks associated with
reverse repurchase agreements. Moreover, under the FFIEC Policy
Statement, cited above, we note that savings associations should
comply with specific margin guidelines for such repurchase
agreements.
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Today's final rule contains a technical clarification. Proposed
Sec. 563.41(a)(3)(i) stated that the savings association (or its
subsidiary) must ensure ``its right to dispose of the securities at any
time during the term of the agreement and upon default.'' OTS has
revised the final rule to clarify that the savings association (or its
subsidiary) must obtain possession or control of the underlying
securities to ensure that it has the right to dispose of the
securities. Other than this clarifying change, today's final rule is
substantially identical to the April proposal.
III. Executive Order 12866
The Director of OTS has determined that this final 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, OTS
certifies that the final rule does not have a significant impact on a
substantial number of small entities. The final rule prohibits 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. 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. OTS has determined that the
final 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 hereby amends 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
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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 its 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 its subsidiary) has possession or
control of the securities and the 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 its 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 its subsidiary's) outstanding
obligations to repurchase securities from the affiliate under paragraph
(a)(3)(ii) of this section;
* * * * *
Dated: August 7, 1998.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-21756 Filed 8-12-98; 8:45 am]
BILLING CODE 6720-01-P
