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Release Date: December 15, 2005

For immediate release

The Federal Reserve Board on Thursday released the report of the private-sector Working Group on NewBank Implementation and endorsed its recommendations for the creation of a dormant bank (NewBank) that would be available for activation to clear and settle U.S. government securities. Such activation would occur if a credit or legal problem caused the market to lose confidence in an existing clearing bank, and no well-qualified bank stepped forward to purchase the exiting bank's clearing business.

The Working Group was established by the Board in January 2004 to further develop the concept of NewBank that a previous panel (the Working Group on Government Securities Clearance and Settlement) had identified as a promising private-sector contingency plan for the sudden involuntary exit of one of the two clearing banks for non-operational reasons.

The Working Group determined that the NewBank concept is feasible and recommended that NewBank should be formed and that it should apply for a limited purpose trust company charter from the New York State Banking Department and apply to the Federal Reserve Bank of New York to become a member bank in the Federal Reserve System. The Working Group expects that all of the critical clearing-bank functions NewBank would need to perform can and should be performed for it under a service agreement with the exiting clearing bank. Efforts to sell the clearing business to a well-qualified bank would be left in the hands of the exiting bank.

Before NewBank can submit applications to the New York State Banking Department and the Federal Reserve Bank of New York, additional detailed work would need to be undertaken, including drafting service agreements with the existing clearing banks, identifying twenty-five or more shareholders for NewBank from among significant market participants, developing risk-management policies, making and testing system changes at the existing clearing banks necessary for rapid activation of NewBank, and obtaining credit ratings for NewBank.

At the request of the Working Group, The Bond Market Association has agreed to lead the next and final phase of the work. The Working Group recommended that a core group of its members be constituted as a steering committee to advise and assist The Bond Market Association and help ensure continuity with the previous work. The Board welcomes The Bond Market Association's agreement to provide leadership to this important initiative.

The Working Group was chaired by Michael Urkowitz, senior adviser to Deloitte Consulting. Its members included senior representatives of the two clearing banks for government securities (J.P. Morgan Chase and The Bank of New York), the Fixed Income Clearing Corporation, The Bond Market Association, the Investment Company Institute, Cantor Fitzgerald Securities, Deutsche Bank Securities Inc., Federated Investors, Fidelity Investments, Goldman Sachs & Co., Lehman Brothers, Merrill Lynch, Morgan Stanley & Co., Salomon Smith Barney (Citigroup), State Street Bank & Trust Co., and UBS Investment Bank.

Staff of the Federal Reserve, the Securities and Exchange Commission, the Department of the Treasury, the Federal Deposit Insurance Corp. and the New York State Banking Department participated as observers and technical advisers.

The Working Group's report to the Board, which was delivered in December 2005, is attached.

Attachment (1.5 MB PDF)

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Last update: December 15, 2005