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August 15, 1996

[Name deleted]

Dear [Name deleted] :

This responds to your letter of August 7, 1996, concerning a "cash-settled forward equity purchase agreement." Your company is a bank (the "issuer") considering entering into such a transaction with a foreign bank as counterparty (the "counterparty"). In your letter and telephone conversations with our office, you have indicated that the terms of the proposed transaction are similar to the forward transaction (the "1995 transaction") described in correspondence from the bank dated August 4, 1995 and from our office dated February 13, 1996 (digested in the Federal Reserve Regulatory Service at 5-963). The primary difference is that the terms of this transaction call for cash settlement, although the counterparty will have the option to deliver stock of the issuer in lieu of cash.

The 1995 transaction was originally collateralized with margin stock of the issuer, valued at its loan value (50 percent) under the Board's margin regulations. Later, you sought to withdraw the issuer's margin stock. Board staff did not object to the withdrawal of the issuer's stock pledged in connection with a purchase of the issuer's stock. Our opinion indicated that in this context, the counterparty's acceptance of the pledge by the issuer of the issuer's own stock as collateral was tantamount to accepting a guarantee of the issuer.

Your letter states that the issuer would be able to post some of its treasury shares to support its obligation under the forward agreement currently contemplated, but the issuer and the counterparty believe that collateralizing the transaction in such a manner would not serve any commercial purpose. While the Board and its staff have not addressed whether a forward purchase of margin stock can be effected on an uncollateralized basis, the pledge of margin stock (i.e., the treasury shares) valued at 50 percent of its market value would be in compliance with Regulations G and U. However, in the context of a repurchase of the issuer's shares, Board staff believes that it is not necessary to insist on collateralization that can be achieved in a manner that differs little in economic effect from the acceptance by the counterparty of a guarantee by the issuer and to do so would not further the purposes of the Board's securities credit regulations. Board staff therefore is of the opinion that the "forward equity purchase agreement" described in your letter need not be collateralized.

This is a staff opinion only, as the matter has not been presented to the Board, and is limited to the facts presented. Different facts could compel a different conclusion.

Yours truly,

(signed) Scott Holz

Scott Holz

Senior Attorney

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