This letter reduces the reporting requirements for examinations of government securities custodial activities of state member banks, branches, and agencies. Under AD 91-26, Reserve Banks are required to file with Board staff a separate report form FR 1468 for each government securities broker or government securities dealer examination, and each review of stand-alone government securities custodial activities.
Effective immediately, AD 91-26 is withdrawn and the form FR 1468 is eliminated. Examiners will no longer be required to complete a FR 1468 report form when they examine stand-alone government securities custodial activities. Rather, Reserve Banks will be required to report to Board staff only those findings from examinations of government securities broker or dealer operations of state member banks, branches, or agencies subject to Federal Reserve supervision.
This letter does not change the supervisory responsibility of Reserve Banks with regard to government securities custodial activities under the risk-focused supervision process, but merely alters internal Federal Reserve communication practices.
Government securities brokers and dealers have been regulated since 1987, when the U.S. Treasury adopted regulations implementing the Government Securities Act of 1986 (GSA). Reserve Banks are charged with the responsibility of examining the government securities activities of state member banks, uninsured state branches and agencies of foreign banks, and Edge Corporations (if applicable) located within their districts for compliance with Treasury rules. The Federal Reserve is responsible for supervising the government securities broker-dealer activities of roughly three dozen state member banks and foreign banking offices for which the Federal Reserve is designated as the "appropriate regulatory agency" under the Securities Exchange Act of 1934.1 Federal Reserve supervisory responsibilities under the GSA also encompass the government securities custodial operations at hundreds of supervised institutions that hold government securities for customers but do not engage in government securities broker-dealer activities. Under AD 91-26, Reserve Banks were required to report the results of all reviews of government securities activities to Board staff using FR 1468. This internal reporting process was adopted, in part, to enable Board staff to furnish feedback to Treasury on GSA rule compliance.
Because Treasury's custody rules have remained unchanged for over a decade and bank compliance with these rules has been generally satisfactory, it is no longer necessary for Reserve Banks to furnish separately to Board staff the results of reviews solely on custodial activities of depository institutions subject to Federal Reserve supervision. Rather, going forward, Reserve Banks will be required to report separately to Board staff only the results of reviews of government securities broker-dealer activities (and such broker-dealer's related custodial activities). Moreover, in making these reports Reserve Banks have the option of either using the attached separate Summary Report of Government Securities Broker-Dealer Activities (GSB-D report) or forwarding a copy of the relevant section of the examination report that contains the same information as required in the GSB-D report. Such reports should be transmitted to the Market and Liquidity Risk Section at Mail Stop 185, to the attention of Genevievette Walker.
Although this letter discontinues the separate reporting of the results of the reviews pertaining solely to government securities custodial activities, Reserve Banks need to ensure that they fully consider their supervisory responsibilities under the GSA in formulating their supervisory plans and conducting risk-focused examinations. In this regard, two key factors should be considered concerning government securities custodial activities. First, all depository institutions that hold government securities for customers, including securities under repurchase agreements, are subject to Treasury's GSA custody rules.2 Second, certain financial institutions that are exempt from the definition of a government securities broker or dealer are, nevertheless, subject to the Treasury government securities broker or dealer custody rules when they engage in hold-in-custody repurchase agreements. Under such agreements the financial institution retains custody of securities that are the subject of a repurchase agreement between the financial institution and a counterparty.3 These issues are fully described in the Board's specialty examination procedures pertaining to government securities activities referenced in SR 87-37 and SR 93-40.
Questions should be directed to Mike Schoenfeld, Senior Supervisory Financial Analyst, at (202) 452-2836, or Genevievette Walker, Supervisory Financial Analyst, at (202) 452-2261. Any information regarding significant issues or violations associated with government securities custodial activities at financial institutions that are not government securities brokers or dealers should also be directed to these individuals.