Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 96-2 (SPE)
March 26, 1996


SUBJECT: Overnight Hold-In-Custody Repurchase Transactions

                        Under the Government Securities Act of 1986 (GSA), the U.S. Department of the Treasury is responsible for issuing regulations implementing the GSA. Section 403.5(d) of the Treasury's GSA-related regulations (17 CFR 403.5(d)) require government securities broker-dealers to issue a confirmation for repurchase transactions by the end of the day on which a transaction is initiated and on any day on which a substitution occurs.

                        Over the past few years, the Federal banking agencies have received numerous questions about whether daily confirmation disclosures for sweep repo accounts are necessary under the Treasury's regulations. The banking agencies staffs consulted with Treasury and were advised that daily confirmations provide fundamental customer protection and that Treasury will not permit any exclusions from the confirmation requirements, except for situations involving foreign corporations, partnerships, or trusts, or non-U.S. citizens residing outside the United States.

                        In order to communicate this Treasury position to all banking organizations who may be subject to the Treasury's GSA regulations, the Federal banking agencies' staffs, working in conjunction with Treasury representatives, prepared a suggested letter that should be disseminated to all the domestic and foreign banking organizations supervised by the agencies. A copy of the suggested letter is attached. We request that you send it to all banking organizations supervised by the Federal Reserve in your District, except for bank holding companies and nonbank subsidiaries. The other banking agencies have sent, or are in the process of sending, a similar letter to the banks they supervise.

                        If you have any questions concerning this matter, please contact Susan Meyers, Senior Securities Regulation Analyst, at (202) 452-2781.

Stephen C. Schemering
Deputy Director


To: Chief Executive Officers of State Member Banks, Uninsured State Branches and Agencies of Foreign Banks, Commercial Lending Companies Owned or Controlled by Foreign Banks, and Edge and Agreement Corporations
Subject: Overnight Hold-In-Custody Repurchase Transactions

Dear ____________________:


        Regulations issued under the Government Securities Act (GSA) by the U.S. Department of the Treasury require daily confirmations for overnight hold-in-custody (HIC) repurchase agreement transactions. This applies to banks that are offering HIC repurchase agreement programs, commonly termed "sweep repos."

        Board staff and the staffs of the other Federal banking agencies have received questions about whether daily confirmation disclosures for "sweep repo" accounts are necessary. Several banks have commented that daily confirmations for sweep repos are unnecessary, burdensome, and costly. They have requested permission to issue confirmations less frequently than daily; some have suggested that monthly account statements could be issued at the customer's option.

        This advisory notifies you that Treasury has informed the banking agencies that the GSA regulations currently do not permit other than daily confirmations for such transactions.


        The Bureau of the Public Debt, a Treasury bureau, is responsible for administering the regulations implementing the GSA. Its regulations at 17 CFR 403.5(d) require financial institutions and government securities broker-dealers engaging in HIC repurchase transactions to issue confirmations for such repurchase transactions by the end of the day in which a transaction is initiated. The regulations also require confirmations to be issued at the end of any other day in which substitution of securities occurs. These confirmation requirements apply to all repurchase transactions in which the selling institution keeps control of the underlying securities. It is our understanding that the operational requirements for a daily sweep repo program currently require institutional control of the underlying securities.

        In December 1992, the Federal Financial Institutions Examination Council's Regulatory Burden Study Group, in consultation with Treasury, reviewed the issue of whether daily confirmations are burdensome. The study affirmed Treasury's long-standing position that daily confirmations provide fundamental customer protection because they have significant value to investors in identifying the specific securities transactions that are the subject of the repurchase transactions. According to Treasury, confirmations also permit customers to verify that securities of an appropriate type and value are allocated to the transactions. In addition, the GSA regulations do not permit any other exclusions from the confirmation requirements except for situations involving foreign corporations, partnerships, trusts, or non-U.S. citizens residing outside of the United States. In such situations these entities must provide written notification that they are waiving the right to receive confirmations.

        Treasury also advised us that the provisions of Section 403.5(d) of its GSA regulations require daily confirmations of sweep repos because they are recurring transactions, generally giving rise to a new repurchase transaction daily. Treasury also advised that the requirement that the confirmation take place by the end of the business day means that the confirmation be sent prior to opening for the next day of business. Thus, for overnight sweep repurchase agreements, the confirmation must be available for delivery to the customer before or at the start of the bank's next business day. As an alternative to mailing confirmations, Treasury has issued an interpretation stating that a facsimile is an acceptable means of complying with the written confirmation requirements of Section 403.5(d)(1)(ii), provided the counterparty has agreed to accept confirmations by this method. An unsuccessful fax transmission, however, does not relieve the bank of its obligation under this section. If fax transmissions are unavailable to any customer at any time or for any reason, the bank must provide written confirmation by mail or other appropriate means.


        Letters similar to this are being sent to banking organizations supervised by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation.

        Background information and interpretations regarding the importance of customer confirmations and the specific regulatory requirements pertaining to repurchase agreement transactions are contained in the preambles to the following four rulemaking initiatives: 52 FR 19642, May 26, 1987; 52 FR 27910, July 24, 1987; 53 FR 8598, March 15, 1988; and, 53 FR 28978, August 1, 1988. For rulemaking proposals that address the requirements for overnight HIC repurchase transactions, including sweep repos, you should reference 52 FR 19658-59, May 26, 1987; 52 FR 27919, July 24, 1987; 53 FR 8600, March 15, 1988; and 53 FR 8981-82, August 1, 1988. Section 403.5(d) contains rules applicable to financial institutions that engage in hold-in-custody repurchase transactions. These rules parallel the GSA requirements that apply to brokers and dealers that are not financial institutions.

        If your banking organization has questions or needs an interpretation of these confirmation requirements or other GSA-related regulations, write the Bureau of the Public Debt, Government Securities Regulations Staff, Washington, DC, 20239, or call them at (202) 219-3632.


SR letters | 1996