[Federal Register Volume 61, Number 233 (Tuesday, December 3, 1996)]
[Rules and Regulations]
[Pages 64021-64027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30454]


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FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 910 and 912

[No. 96-79]


Regulations Governing Book-Entry Federal Home Loan Bank 
Securities

AGENCY: Federal Housing Finance Board.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Federal Housing Finance Board is adopting an interim final 
rule amending its regulations governing procedures for maintaining 
book-entry (uncertificated) Federal Home Loan Bank securities within 
the Federal Reserve Banks' system of accounts. This action is being 
taken in conjunction with similar amendments being made by the 
Department of Treasury to its regulations governing Federal Reserve 
Bank book-entry procedures for Treasury securities, and by the 
regulators of other government sponsored enterprises for which the 
Federal Reserve Banks maintain book-entry securities. These amendments 
are intended to update the regulations to eliminate the need to treat 
book-entry securities as if they were certificated securities and to 
conform more closely to the manner in which book-entry securities are 
treated under the laws of the majority of the states (as set forth in 
Article 8 of the Uniform Commercial Code, as revised in 1994).

DATES: The interim final rule will become effective on January 1, 1997. 
The Finance Board will accept comments on the interim final rule in 
writing on or before February 3, 1997.

ADDRESSES: Mail comments to Elaine A. Baker, Executive Secretary, 
Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 
20006.

FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Attorney-Advisor, 
Office of General Counsel, 202/408-2932, Federal Housing Finance Board, 
1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

    Subsections (b) and (c) of section 11 of the Federal Home Loan Bank 
Act (Bank Act) authorize the issuance of consolidated Federal Home Loan 
Bank (FHLBank) debentures or bonds (collectively, ``FHLBank 
securities''), which are the joint and several obligations of the 
FHLBanks, upon terms and conditions established by the Federal Housing 
Finance Board (Finance Board). See 12 U.S.C. 1431(b), (c). The Finance 
Board has set forth the terms and conditions regarding the issuance of 
FHLBank securities in part 910 of its regulations. 12 CFR part 910. 
Although, under the Bank Act, the Finance Board is designated as the 
``issuer'' of FHLBank securities, it has delegated the issuance of 
FHLBank securities, along with such other ministerial functions as the 
servicing of the FHLBank securities, to the Office of Finance (OF) (a 
joint office of the FHLBanks) pursuant to section 2B(b)(1) of the Bank 
Act, 12 U.S.C. 1422b(b)(1), part 941 of the Finance Board's 
regulations, 12 CFR part 941, and periodic resolutions of the Board of 
Directors of the Finance Board.
    Since 1977, the OF has issued domestic FHLBank securities

[[Page 64022]]

exclusively in ``book-entry'' form; that is, as uncertificated 
securities recorded as entries on the computerized system of accounts 
maintained by the Federal Reserve Banks (Reserve Banks), acting as 
fiscal agents of the FHLBanks. This arrangement between the FHLBanks 
and the Reserve Banks exists pursuant to a 1973 agreement which, as 
permitted under section 15 of the Bank Act, 12 U.S.C. 1435, authorizes 
the Reserve Banks to issue book-entry FHLBank securities; to maintain 
related book-entry accounts; to pay principal and interest due on book-
entry FHLBank securities; and otherwise to service such FHLBank 
securities.
    At the time this agreement was consummated, the former Federal Home 
Loan Bank Board (FHLBB)--the Finance Board's predecessor as regulator 
of the FHLBanks--promulgated regulations governing the rights and 
obligations of the FHLBanks, the Reserve Banks, and other persons with 
respect to the issuance and servicing of book-entry FHLBank securities 
and the operation of the associated FHLBank book-entry system. See 12 
CFR 506a (1974); 38 FR 10969 (1973) (proposed rule); 38 FR 26355 (1973) 
(final rule). These regulations, and those of other government 
sponsored enterprises (GSEs) having similar book-entry arrangements 
with Reserve Banks, are patterned after part 306 of the regulations of 
the Department of Treasury, 31 CFR part 306 (1996), which govern 
Reserve Bank book-entry procedures for Treasury securities. 
Responsibility for the FHLBB book-entry regulations was transferred to 
the Finance Board by the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, section 401(h), 103 
Stat. 356 (1989), and the regulations were redesignated as part 912 of 
the Finance Board's regulations.
    Like those underlying the analogous Department of Treasury 
regulations, the legal concepts upon which part 912 is based have 
become outdated. At the time that these regulations were developed, the 
United States government securities market was in a state of transition 
between one in which most securities existed in definitive form (that 
is, the traditional certificate) to one in which securities are 
maintained almost exclusively within computerized book-entry systems. 
This is evidenced by the fact that current part 912 and the parallel 
regulations contained provisions regarding the conversion of definitive 
securities into book entry securities. Because, as mentioned, all 
definitive FHLBank securities have reached maturity, new part 912 
contains no such ``conversion'' provisions.
    Corresponding law (including state laws based on the Uniform 
Commercial Code (UCC)) at the time current part 912 was promulgated 
assumed that possession and delivery of physical certificates were the 
key elements in the securities holding system. This led the Department 
of Treasury, the FHLBB, and other GSE regulators to premise their 
regulations upon the ``bearer-definitive security fiction,'' which 
deems each book-entry security to be the equivalent of a bearer-
definitive security. Despite the usefulness of the bearer-definitive 
fiction, its shortcomings have become increasingly apparent over the 
past 25 years, as the rules based on this fiction have been found to 
leave many unanswered questions regarding transactions and rights in 
book-entry securities.
    In addition, the rules have proved inadequate to deal with the 
tiered system of accounts in which book-entry securities are held. Each 
interest in a book-entry security must be credited to the account of a 
Reserve Bank ``participant''--that is, an entity having an account with 
a Reserve Bank. Persons or entities, including securities broker-
dealers, who wish to acquire an interest in book-entry securities, but 
who do not have an account with a Reserve Bank, must do so through a 
Reserve Bank participant. Non-participant broker-dealers who deal in 
book-entry securities through a participant may, in turn, hold these 
securities for other persons or entities who otherwise lack access to 
the securities markets. Accordingly, a Reserve Bank most likely will 
have no information regarding the beneficial owners of interests in 
book-entry securities, but, instead, will consider the participants in 
whose Reserve Bank accounts the book-entry securities are held to be 
the ``owners'' of the interests therein.
    Since 1985, the Department of Treasury has been working to develop 
a new book-entry regulation that does not rely on the bearer-definitive 
fiction and that effectively addresses the tiered system of accounts in 
which book-entry securities are held. The Department of Treasury 
published proposed rules amending its regulations governing the book-
entry system for Treasury securities (called ``Treasury/Reserve 
Automated Debt Entry System'' or ``TRADES'') in March 1986 (51 FR 
8846), November 1986 (51 FR 43027) and April 1992 (57 FR 12244). After 
publication of the latter proposed rule, the Department of Treasury 
decided to defer publication of a final rule, or additional proposed 
rules, pending the completion of a planned revision of Article 8 of the 
UCC, governing investment securities, in order to coordinate the 
concepts contained in the new TRADES regulation with those set forth in 
the revised version of Article 8.
    The revised version of Article 8 of the UCC (Revised Article 8) was 
ratified by the American Law Institute and the National Conference of 
Commissioners on Uniform State Laws in 1994. Thereafter, the Department 
of Treasury, in March 1996, published a fourth proposed TRADES rule, 
see 61 FR 8420, that incorporates many of the concepts regarding 
transactions and rights in book-entry securities that are set forth in 
Revised Article 8 and that defers to state law modeled after Revised 
Article 8 in many circumstances. A largely similar final rule was 
published in August 1996, see 61 FR 43626, the substantive provisions 
of which will take effect on January 1, 1997.
    In order to ensure uniformity in the treatment of book-entry 
government securities, the regulators of GSEs that maintain book-entry 
securities at Reserve Banks also are promulgating new regulations to 
govern their respective book-entry systems. These regulations will 
parallel the new TRADES regulation, with modifications appropriate to 
the particular GSE and government securities to which such regulations 
will apply, and will most likely become effective simultaneously with 
the new TRADES regulation.
    As part of this effort, the Finance Board is now adopting an 
interim final rule amending part 912 of its regulations, governing 
book-entry FHLBank securities. Because new part 912 is based upon the 
new TRADES regulation and because the Department of Treasury has 
published extensive commentary in its proposed and final rules 
regarding the TRADES regulation, the Finance Board has not set forth 
here a comprehensive analysis of part 912. Instead, the Finance Board 
is including here concise summaries of each section of new part 912, 
which address the manner in which the new provisions will effect the 
FHLBank book-entry system specifically. Those wishing to review a more 
complete explanation of the nuances of the book-entry regulation and 
the principles underlying it are referred to the preambles of the 
proposed and final TRADES rules, as well as the official Department of 
Treasury Commentary on the TRADES regulation, which will be published 
as Appendix B to 31 CFR part 357 (and which was published as part of 
the final TRADES rule at 61 FR 43631).

[[Page 64023]]

    Although new part 912 is intended to provide a legal framework for 
all book-entry FHLBank securities, it is not a codification of all laws 
that could affect interests in book-entry FHLBank securities. In 
general, the regulation provides that (with some exceptions regarding 
security interests) Federal law will govern the rights and obligations 
of the FHLBanks and the Reserve Banks arising from book-entry FHLBank 
securities and the book-entry system, and that state law (to the extent 
that states have adopted Revised Article 8) will govern all other 
rights and obligations. The regulation also sets forth the substantive 
Federal law that applies to the rights and obligations of the FHLBanks 
and the Reserve Banks arising from book-entry FHLBank securities and 
the book-entry system. The most prominent aspect of the substantive law 
set forth therein is that neither the FHLBanks nor the Reserve Banks 
are liable to persons having or claiming interests in book-entry 
securities that are below the participant level in the tiered system of 
ownership; that is, the FHLBanks and Reserve Banks need only recognize 
Reserve Bank participants as holders of interests in book-entry FHLBank 
securities.

II. Section-by-Section Analysis

    Section 912.1 contains definitions for use in part 912. Section 
912.2(a) provides that, with the exception of certain security 
interests addressed in Sec. 912.2(b) (discussed below), the rights and 
obligations of the FHLBanks and the Reserve Banks with respect to the 
FHLBank book-entry system and the FHLBank securities maintained therein 
are governed solely and exclusively by Federal law, which is defined to 
include: part 912, book-entry FHLBank securities offering notices, and 
Reserve Bank Operating Circulars. The governing Federal law set forth 
in Sec. 912.2 relates only to the matters set forth therein; other 
laws, such as tax, banking, and securities laws remain applicable and 
could affect the holders of book-entry FHLBank securities.
    Section 912.2(b) provides an exception to the rule of Federal 
preemption set forth in Sec. 912.2(a), stating that security interests 
in book-entry FHLBank securities in favor of a Reserve Bank that have 
not been recorded on the books of the Reserve Bank, as described in 
Sec. 912.4(c)(1), shall be governed by: (i) the law of the state in 
which the head office of the Reserve Bank maintaining the participant's 
account is located, if the security interest is from a participant; or 
(ii) the law of the state to be determined as specified in Sec. 912.3 
(discussed below), if the security interest is from a person other than 
a participant. By implication, security interests in favor of a Reserve 
Bank that have been recorded on the books of the Reserve Bank in 
accordance with Sec. 912.4(c)(1) are governed by Federal law, as set 
forth in Sec. 912.2(a). Thus, claims against the FHLBanks and Reserve 
Banks made by participants, or any other person claiming an interest in 
a book-entry FHLBank security, other than claims involving Reserve Bank 
security interests that have not been recorded on the books of the 
Reserve Bank, are governed solely and exclusively by Federal law.
    Section 912.2(c) provides that, if the application of the 
jurisdictional rule set forth in the first sentence of Sec. 912.2(b) 
would result in the application of the law of a state that has not 
adopted Revised Article 8, that state's law will be read as if it had 
adopted Revised Article 8. This limited rule of Federal preemption is 
included in order to ensure that matters involving book-entry FHLBank 
securities will be treated similarly regardless of the state having 
jurisdiction over the matter. As of November 1, 1996, 29 states have 
adopted Revised Article 8 and others are expected to follow. If and 
when all states adopt Revised Article 8, the Finance Board expects that 
this provision, and the similar provision contained in Sec. 912.3(d), 
will be repealed. In the meantime, as provided in Sec. 912.9(b), the 
Finance Board will defer to determinations of the Department of 
Treasury regarding whether particular states may be deemed to have 
adopted Revised Article 8 for purposes of part 912. With regard to the 
TRADES regulation, the Department of Treasury intends to publish such 
determinations in the Federal Register, as necessary. See 61 FR 43633-
34.
    Section 912.3 is a choice of law rule governing the substantive 
matters set forth in Sec. 912.3(a)--which are meant to be coextensive 
with those matters covered by Revised Article 8 with respect to a 
person's interest in a book-entry FHLBank security, other than 
interests connected with a person's relationship with the Reserve Banks 
or the FHLBanks, which are governed by Federal law, as provided in 
Sec. 912.2. Section 912.3(b) adopts Revised Article 8's general choice 
of law rule, providing that the law applicable to the securities 
intermediary will govern matters involving an interest in a book-entry 
FHLBank security held through that intermediary. Section 912.3(c) also 
parallels Revised Article 8 by excepting from the general rule the 
determination of whether security interests are perfected automatically 
or by filing a financing statement and providing that this issue is to 
be resolved by reference to the law of the state in which the debtor is 
located.
    Section 912.3(d) is analogous to Sec. 912.2(c), providing that if 
the application of the jurisdictional rule set forth in Sec. 912.3(b) 
would result in the application of the law of a state that has not 
adopted Revised Article 8, that state's law will be read as if it had 
adopted Revised Article 8.
    Section 912.4(a) provides that a participant's securities 
entitlement is created when a Reserve Bank indicates by book-entry that 
a book-entry FHLBank security has been credited to the participant's 
securities account. The nature of the participant's ``securities 
entitlement''--that is, the nature of its interest in a book-entry 
FHLBank security--once it is created, must be determined by reference 
to Federal law with respect to the participant's rights against and 
obligations to its Reserve Bank and the FHLBanks, as provided in 
Sec. 912.2, or to applicable state law with respect to the 
participant's rights against and obligations to all other persons, as 
provided in Sec. 912.3. Section 912.4(b) provides that a security 
interest in favor of the United States government to secure deposits of 
public money has priority over the interests of any other person in a 
book-entry FHLBank security.
    Section 912.4(c)(1) provides that, where required by Federal law or 
regulation or pursuant to a specific agreement with a Reserve Bank, a 
security interest in book-entry FHLBank securities in favor of a 
Reserve Bank or other person may be created and perfected by a Reserve 
Bank marking its books to record the security interest. However, 
neither the FHLBanks nor the Reserve Banks have any obligation to agree 
to record a security interest in book-entry FHLBank securities on the 
books of a Reserve Bank, except as required by Federal law or 
regulation. A security interest created and perfected as specified in 
Sec. 912.4(c)(1) has priority over all other interests in the book-
entry FHLBank security, except an interest of the United States 
government, as described in Sec. 912.4(b).
    Section 912.4(c)(2) provides that a security interest in a book-
entry FHLBank security may be perfected by any method available under 
applicable state law, as determined under Secs. 912.2(b) or 912.3, and 
that the priority of such security interests shall be governed by such 
applicable law. If a person perfects a security interest pursuant to 
Sec. 912.4(c)(2), obligations of the FHLBanks and the Reserve Banks

[[Page 64024]]

with respect to that security interest are limited, absent a specific 
agreement made by the FHLBanks or Reserve Banks pursuant to 
Sec. 912.4(c)(1). In other words, although security interests in a 
book-entry FHLBank security perfected under applicable state law may be 
valid, neither the FHLBanks nor a Reserve Bank have any obligation to 
recognize any such interests, other than those of the participant in 
whose securities account the interest is maintained; a creditor's 
recourse will be solely against the debtor participant or other third 
party.
    Section 912.5(a) sets forth the general rule that, with limited 
exceptions, the FHLBanks and the Reserve Banks will recognize the 
interest in a book-entry FHLBank security only of a participant in 
whose securities account such interest is maintained. As noted above, 
book-entry FHLBank securities are held via a tiered system of 
ownership. The records of a Reserve Bank reflect only the ownership 
interests of participants. Participants frequently will hold interests 
in book-entry FHLBank securities for the benefit of their customers 
(which may include broker-dealers and other securities intermediaries) 
who, in certain cases, in turn will hold interests in FHLBank 
securities for the benefit of their customers. Accordingly, neither the 
FHLBanks nor a Reserve Bank would know the identity or recognize a 
claim of a participant's customer if that customer were to present it 
to the FHLBanks or a Reserve Bank. Under the regulation, persons at 
levels below the participant level must present their claims to their 
securities intermediary; neither the FHLBanks not the Reserve Banks are 
liable for any such claims.
    Section 912.5(b)(1) sets forth a corollary to the rule set forth in 
Sec. 912.5(a), providing that the FHLBanks discharge their payment 
responsibilities with respect to a book-entry FHLBank security when a 
Reserve Bank credits the funds account of a participant with amounts 
due on that security, or makes payment in some other manner specified 
by the participant. Section 912.5(b) establishes the mechanism for 
payment of book-entry FHLBank securities at maturity or upon 
redemption. Contrary to the practice with definitive securities, no act 
of presentment is required by the participant.
    Section 912.6 authorizes the Reserve Banks, as fiscal agents of the 
FHLBanks, to operate the book-entry system for the FHLBanks. Section 
912.7 provides that the FHLBanks and the Reserve Banks are not liable 
for actions taken in reliance on a tender, transaction request form, 
Transfer Message, or other written instrument, or evidence submitted in 
support thereof. Section 912.8 makes clear where certain legal process 
should be directed, although it makes clear that the regulations do not 
establish whether a Reserve Bank is required to honor any such order or 
notice.
    Section 912.9(a) references, for interpretive purposes, the 
Commentary that the Department of Treasury has appended to its TRADES 
regulation, so as to provide a comprehensive background to the matters 
contained in part 912 and to ensure that it is applied in similar 
fashion to the TRADES regulation. Section 912.9(b) defers to the 
Department of Treasury determinations regarding whether particular 
states may be deemed to have adopted Revised Article 8 for purposes of 
part 912.
    Section 912.10 merely restates the substance of section 15 of the 
Bank Act, 12 U.S.C. 1435, which provides that FHLBank securities are 
not obligations of the United States and are not guaranteed by the 
United States.

III. Procedural Requirements

    This interim final rule does not meet the criteria for a 
``significant regulatory action'' under Executive Order 12866.
    The Finance Board finds that the notice and comment procedure 
required by the Administrative Procedures Act is unnecessary, 
impracticable, and contrary to the public interest in this instance. 
See 5 U.S.C. 553(b)(3)(B). The Treasury TRADES regulation on which this 
rule is based has been published, in various forms, as a proposed rule 
four times and as a final rule once. In each instance, the TRADES 
regulation was accompanied by extensive commentary addressing the 
background and provisions of the TRADES regulation. Accordingly, the 
Finance Board has concluded that publication of new part 912 for notice 
and comment is unnecessary given its similarity to the TRADES 
regulation and is impracticable given the compelling reasons for 
setting the effective date of the regulation at January 1, 1997, when 
the TRADES regulation and those of the other GSEs will most likely 
become effective. Nevertheless, because the Finance Board believes 
public comments aid in effective rulemaking, it will accept written 
comments on the interim final rule on or before February 3, 1997.
    Because no notice of proposed rulemaking is required, the 
provisions of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., do 
not apply.
    There are no collections of information contained in this interim 
final rule. Therefore, the Paperwork Reduction Act does not apply.

List of Subjects

12 CFR Part 910

    Federal home loan banks, Government securities.

12 CFR Part 912

    Federal home loan banks, Federal Reserve System, Government 
securities, electronic funds transfer.
    Accordingly, the Federal Housing Finance Board hereby amends title 
12, chapter IX of the Code of Federal Regulations, to read as follows:

PART 910--CONSOLIDATED BONDS AND DEBENTURES

    1. The authority citation for part 910 is revised to read as 
follows:

    Authority: 12 U.S.C. 1422b, 1431.

    2. Section 910.3 is revised to read as follows:


Sec. 910.3  Transactions in consolidated bonds.

    The general regulations of the Department of Treasury now or 
hereafter in force governing transactions in United States securities, 
except 31 CFR part 357, regarding book-entry procedure, are hereby 
incorporated into this part, so far as applicable and as necessarily 
modified to relate to consolidated Federal Home Loan Bank bonds, as the 
regulations of the Board for similar transactions in consolidated 
Federal Home Loan Bank bonds. The book-entry procedure for consolidated 
Federal Home Loan Bank bonds is contained in part 912 of this 
subchapter.
    3. Part 912 is revised to read as follows:

PART 912--BOOK-ENTRY PROCEDURE FOR FEDERAL HOME LOAN BANK 
SECURITIES

Sec.
912.1  Definitions.
912.2  Law governing rights and obligations of Federal Home Loan 
Banks and Federal Reserve Banks; rights of any Person against 
Federal Home Loan Banks and Federal Reserve Banks.
912.3  Law governing other interests.
912.4  Creation of Participant's Security Entitlement; security 
interests.
912.5  Obligations of the Federal Home Loan Banks; no Adverse 
Claims.
912.6  Authority of Federal Reserve Banks.
912.7  Liability of Federal Home Loan Banks and Federal Reserve 
Banks
912.8  Notice of attachment for Book-entry Federal Home Loan Bank 
Securities.
912.9  Reference to certain Department of Treasury commentary and 
determinations.
912.10  Obligations of United States with respect to Federal Home 
Loan Bank Securities.

[[Page 64025]]

    Authority: 12 U.S.C. 1422a, 1422b, 1431, 1435.


Sec. 912.1  Definitions.

    For purposes of this part, unless the context otherwise requires or 
indicates:
    (a) Adverse Claim means a claim that a claimant has a property 
interest in a Book-entry Federal Home Loan Bank Security and that it is 
a violation of the rights of the claimant for another Person to hold, 
transfer, or deal with the Security.
    (b) Book-entry Federal Home Loan Bank Security means a Federal Home 
Loan Bank Security maintained in the book-entry system of the Federal 
Reserve Banks.
    (c) Entitlement Holder means a Person to whose account an interest 
in a Book-entry Federal Home Loan Bank Security is credited on the 
records of a Securities Intermediary.
    (d) Federal Home Loan Bank Security means a consolidated bond, 
debenture, note, or other obligation of the Federal Home Loan Banks 
issued under authority of section 11 of the Federal Home Loan Bank Act 
(12 U.S.C. 1431).
    (e) Federal Reserve Bank means the a Federal Reserve Bank or 
branch, acting as fiscal agent of the Federal Home Loan Banks, unless 
otherwise indicated.
    (f) Federal Reserve Bank Operating Circular means the publication 
issued by each Federal Reserve Bank that sets forth the terms and 
conditions under which the Federal Reserve Bank maintains Book-entry 
Securities accounts and transfers Book-entry Securities.
    (g) Funds account means a reserve and/or clearing account at a 
Federal Reserve Bank to which debits or credits are posted for 
transfers against payment, Book-entry Securities transaction fees, or 
principal and interest payments.
    (h) Participant means a Person that maintains a Participant's 
Securities Account with a Federal Reserve Bank.
    (i) Participant's Securities Account means an account in the name 
of a Participant at a Federal Reserve Bank to which Book-entry Federal 
Home Loan Bank Securities held for a Participant are or may be 
credited.
    (j) Person means and includes an individual, corporation, company, 
governmental entity, association, firm, partnership, trust, estate, 
representative, and any other similar organization, but does not mean 
or include the United States, a Federal Home Loan Bank, or a Federal 
Reserve Bank.
    (k) Revised Article 8 means Uniform Commercial Code, Revised 
Article 8, Investment Securities (with Conforming and Miscellaneous 
Amendments to Articles 1, 3, 4, 5, 9, and 10) 1994 Official Text. 
Copies of this publication are available from the Executive Office of 
the American Law Institute, 4025 Chestnut Street, Philadelphia, PA 
19104, and the National Conference of Commissioners on Uniform State 
Laws, 676 North St. Clair Street, Suite 1700, Chicago, IL 60611.
    (l) Securities Intermediary means:
    (1) A Person that is registered as a ``clearing agency'' under the 
federal securities laws; a Federal Reserve Bank; any other person that 
provides clearance or settlement services with respect to a Book-entry 
Federal Home Loan Bank Security that would require it to register as a 
clearing agency under the federal securities laws but for an exclusion 
or exemption from the registration requirement, if its activities as a 
clearing corporation, including promulgation of rules, are subject to 
regulation by a federal or state governmental authority; or
    (2) A Person (other than an individual, unless such individual is 
registered as a broker or dealer under the federal securities laws) 
including a bank or broker, that in the ordinary course of its business 
maintains securities accounts for others and is acting in that 
capacity.
    (m) Security Entitlement means the rights and property interest of 
an Entitlement Holder with respect to a Book-entry Federal Home Loan 
Bank Security.
    (n) State means any State of the United States, the District of 
Columbia, Puerto Rico, the Virgin Islands, or any other territory or 
possession of the United States.
    (o) Transfer Message means an instruction of a Participant to a 
Federal Reserve Bank to effect a transfer of a Book-entry Federal Home 
Loan Bank Security, as set forth in Federal Reserve Bank Operating 
Circulars.


Sec. 912.2  Law governing rights and obligations of Federal Home Loan 
Banks and Federal Reserve Banks; rights of any Person against Federal 
Home Loan Banks and Federal Reserve Banks.

    (a) Except as provided in paragraph (b) of this section, the rights 
and obligations of the Federal Home Loan Banks and the Federal Reserve 
Banks with respect to: A Book-entry Federal Home Loan Bank Security or 
Security Entitlement and the operation of the Book-entry system, as it 
applies to Federal Home Loan Bank securities; and the rights of any 
Person, including a Participant, against the Federal Home Loan Banks 
and the Federal Reserve Banks with respect to: A Book-entry Federal 
Home Loan Bank Security or Security Entitlement and the operation of 
the Book-entry system, as it applies to Federal Home Loan Bank 
Securities; are governed solely by regulations of the Federal Housing 
Finance Board, including the regulations of this part 912, the 
applicable offering notice, applicable procedures established by the 
Federal Home Loan Banks, and Federal Reserve Bank Operating Circulars.
    (b) A security interest in a Security Entitlement that is in favor 
of a Federal Reserve Bank from a Participant and that is not recorded 
on the books of a Federal Reserve Bank pursuant to Sec. 912.4(c)(1), is 
governed by the law (not including the conflict-of-law rules) of the 
jurisdiction where the head office of the Federal Reserve Bank 
maintaining the Participant's Securities Account is located. A security 
interest in a Security Entitlement that is in favor of a Federal 
Reserve Bank from a Person that is not a Participant, and that is not 
recorded on the books of a Federal Reserve Bank pursuant to 
Sec. 912.4(c)(1), is governed by the law determined in the manner 
specified in Sec. 912.3.
    (c) If the jurisdiction specified in the first sentence of 
paragraph (b) of this section is a State that has not adopted Revised 
Article 8, then the law specified in the first sentence of paragraph 
(b) of this section shall be the law of that State as though Revised 
Article 8 had been adopted by that State.


Sec. 912.3  Law governing other interests.

    (a) To the extent not inconsistent with this part 912, the law (not 
including the conflict-of-law rules) of a Securities Intermediary's 
jurisdiction governs:
    (1) The acquisition of a Security Entitlement from the Securities 
Intermediary;
    (2) The rights and duties of the Securities Intermediary and 
Entitlement Holder arising out of a Security Entitlement;
    (3) Whether the Securities Intermediary owes any duties to an 
adverse claimant to a Security Entitlement;
    (4) Whether an Adverse Claim can be asserted against a Person who 
acquires a Security Entitlement from the Securities Intermediary or a 
Person who purchases a Security Entitlement or interest therein from an 
Entitlement Holder; and
    (5) Except as otherwise provided in paragraph (c) of this section, 
the perfection, effect of perfection or non-perfection, and priority of 
a security interest in a Security Entitlement.
    (b) The following rules determine a ``Securities Intermediary's 
jurisdiction'' for purposes of this section:

[[Page 64026]]

    (1) If an agreement between the Securities Intermediary and its 
Entitlement Holder specifies that it is governed by the law of a 
particular jurisdiction, that jurisdiction is the Securities 
Intermediary's jurisdiction.
    (2) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify the governing law as provided in 
paragraph (b)(1) of this section, but expressly specifies that the 
securities account is maintained at an office in a particular 
jurisdiction, that jurisdiction is the Securities Intermediary's 
jurisdiction.
    (3) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) of this section, the Securities 
Intermediary's jurisdiction is the jurisdiction in which is located the 
office identified in an account statement as the office serving the 
Entitlement Holder's account.
    (4) If an agreement between the Securities Intermediary and its 
Entitlement Holder does not specify a jurisdiction as provided in 
paragraph (b)(1) or (b)(2) of this section and an account statement 
does not identify an office serving the Entitlement Holder's account as 
provided in paragraph (b)(3) of this section, the Securities 
Intermediary's jurisdiction is the jurisdiction in which is located the 
chief executive office of the Securities Intermediary.
    (c) Notwithstanding the general rule in paragraph (a)(5) of this 
section, the law (but not the conflict-of-law rules) of the 
jurisdiction in which the Person creating a security interest is 
located governs whether and how the security interest may be perfected 
automatically or by filing a financing statement.
    (d) If the jurisdiction specified in paragraph (b) of this section 
is a State that has not adopted Revised Article 8, then the law for the 
matters specified in paragraph (a) of this section shall be the law of 
that State as though Revised Article 8 had been adopted by that State. 
For purposes of the application of the matters specified in paragraph 
(a) of this section, the Federal Reserve Bank maintaining the 
Securities Account is a clearing corporation, and the Participant's 
interest in a Federal Home Loan Bank Book-entry Security is a Security 
Entitlement.


Sec. 912.4  Creation of Participant's Security Entitlement; security 
interests.

    (a) A Participant's Security Entitlement is created when a Federal 
Reserve Bank indicates by book entry that a Book-entry Federal Home 
Loan Bank Security has been credited to a Participant's Securities 
Account.
    (b) A security interest in a Security Entitlement of a Participant 
in favor of the United States to secure deposits of public money, 
including, without limitation deposits to the Treasury tax and loan 
accounts, or other security interest in favor of the United States that 
is required by Federal statute, regulation, or agreement, and that is 
marked on the books of a Federal Reserve Bank is thereby effected and 
perfected, and has priority over any other interest in the Securities. 
Where a security interest in favor of the United States in a Security 
Entitlement of a Participant is marked on the books of a Federal 
Reserve Bank, such Reserve Bank may rely, and is protected in relying, 
exclusively on the order of an authorized representative of the United 
States directing the transfer of the Security. For purposes of this 
paragraph (b), an ``authorized representative of the United States'' is 
the official designated in the applicable regulations or agreement to 
which a Federal Reserve Bank is a party, governing the security 
interest.
    (c)(1) The Federal Home Loan Banks and the Federal Reserve Banks 
have no obligation to agree to act on behalf of any Person or to 
recognize the interest of any transferee of a security interest or 
other limited interest in a Security Entitlement in favor of any Person 
except to the extent of any specific requirement of Federal law or 
regulation or to the extent set forth in any specific agreement with 
the Federal Reserve Bank on whose books the interest of the Participant 
is recorded. To the extent required by such law or regulation or set 
forth in an agreement with a Federal Reserve Bank, or the Federal 
Reserve Bank Operating Circular, a security interest in a Security 
Entitlement that is in favor of a Federal Reserve Bank or a Person may 
be created and perfected by a Federal Reserve Bank marking its books to 
record the security interest. Except as provided in paragraph (b) of 
this section, a security interest in a Security Entitlement marked on 
the books of a Federal Reserve Bank shall have priority over any other 
interest in the Securities.
    (2) In addition to the method provided in paragraph (c)(1) of this 
section, a security interest in a Security Entitlement, including a 
security interest in favor of a Federal Reserve Bank, may be perfected 
by any method by which a security interest may be perfected under 
applicable law as described in Sec. 912.2(b) or Sec. 912.3. The 
perfection, effect of perfection or non-perfection, and priority of a 
security interest are governed by that applicable law. A security 
interest in favor of a Federal Reserve Bank shall be treated as a 
security interest in favor of a clearing corporation in all respects 
under that law, including with respect to the effect of perfection and 
priority of the security interest. A Federal Reserve Bank Operating 
Circular shall be treated as a rule adopted by a clearing corporation 
for such purposes.


Sec. 912.5  Obligations of the Federal Home Loan Banks; No Adverse 
Claims.

    (a) Except in the case of a security interest in favor of the 
United States or a Federal Reserve Bank or otherwise as provided in 
Sec. 912.4(c)(1), for the purposes of this part 912, the Federal Home 
Loan Banks and the Federal Reserve Banks shall treat the Participant to 
whose Securities Account an interest in a Book-entry Federal Home Loan 
Bank Security has been credited as the person exclusively entitled to 
issue a Transfer Message, to receive interest and other payments with 
respect thereof and otherwise to exercise all the rights and powers 
with respect to the Security, notwithstanding any information or notice 
to the contrary. Neither the Federal Reserve Banks nor the Federal Home 
Loan Banks are liable to a Person asserting or having an Adverse Claim 
to a Security Entitlement or to a Book-entry Federal Home Loan Bank 
Security in a Participant's Securities Account, including any such 
claim arising as a result of the transfer or disposition of a Book-
entry Federal Home Loan Bank Security by a Federal Reserve Bank 
pursuant to a Transfer Message that the Federal Reserve Bank reasonably 
believes to be genuine.
    (b) The obligation of the Federal Home Loan Banks to make payments 
of interest and principal with respect to Book-entry Federal Home Loan 
Bank Securities is discharged at the time payment in the appropriate 
amount is made as follows:
    (1) Interest on Book-entry Federal Home Loan Bank Securities is 
either credited by a Federal Reserve Bank to a Funds Account maintained 
at the Federal Reserve Bank or otherwise paid as directed by the 
Participant.
    (2) Book-entry Federal Home Loan Bank Securities are paid, either 
at maturity or upon redemption, in accordance with their terms by a 
Federal Reserve Bank withdrawing the securities from the Participant's 
Securities Account in which they are maintained and by either crediting 
the amount of the proceeds, including both principal and interest, 
where applicable, to a Funds Account at the Federal Reserve Bank or 
otherwise paying such

[[Page 64027]]

principal and interest as directed by the Participant. No action by the 
Participant is required in connection with the payment of a Book-entry 
Federal Home Loan Bank Security, unless otherwise expressly required.


Sec. 912.6  Authority of Federal Reserve Banks.

    (a) Each Federal Reserve Bank is hereby authorized as fiscal agent 
of the Federal Home Loan Banks to perform functions with respect to the 
issuance of Book-entry Federal Home Loan Bank Securities, in accordance 
with the terms of the applicable offering notice and with procedures 
established by the Federal Home Loan Banks; to service and maintain 
Book-entry Federal Home Loan Bank Securities in accounts established 
for such purposes; to make payments of principal, interest and 
redemption premium (if any), as directed by the Federal Home Loan 
Banks; to effect transfer of Book-entry Federal Home Loan Bank 
Securities between Participants' Securities Accounts as directed by the 
Participants; and to perform such other duties as fiscal agent as may 
be requested by the Federal Home Loan Banks.
    (b) Each Federal Reserve Bank may issue Operating Circulars not 
inconsistent with this part 912, governing the details of its handling 
of Book-entry Federal Home Loan Bank Securities, Security Entitlements, 
and the operation of the book-entry system under this part 912.


Sec. 912.7  Liability of Federal Home Loan Banks and Federal Reserve 
Banks.

    The Federal Home Loan Banks and the Federal Reserve Banks may rely 
on the information provided in a tender, transaction request form, 
other transaction documentation, or Transfer Message, and are not 
required to verify the information. The Federal Home Loan Banks and the 
Federal Reserve Banks shall not be liable for any action taken in 
accordance with the information set out in a tender, transaction 
request form, other transaction documentation, or Transfer Message, or 
evidence submitted in support thereof.


Sec. 912.8  Notice of attachment for Book-entry Federal Home Loan Bank 
Securities.

    The interest of a debtor in a Security Entitlement may be reached 
by a creditor only by legal process upon the Securities Intermediary 
with whom the debtor's securities account is maintained, except where a 
Security Entitlement is maintained in the name of a secured party, in 
which case the debtor's interest may be reached by legal process upon 
the secured party. These regulations do not purport to establish 
whether a Federal Reserve Bank is required to honor an order or other 
notice of attachment in any particular case or class of cases.


Sec. 912.9  Reference to certain Department of Treasury commentary and 
determinations.

    (a) The Department of Treasury TRADES Commentary (Appendix B to 31 
CFR part 357) addressing the Department of Treasury regulations 
governing book-entry procedure for Treasury Securities is hereby 
referenced, so far as applicable and as necessarily modified to relate 
to Book-entry Federal Home Loan Bank Securities, as an interpretive aid 
to this part 912.
    (b) Determinations of the Department of Treasury regarding whether 
a State shall be considered to have adopted Revised Article 8 for 
purposes of 31 CFR part 357, as published in the Federal Register or 
otherwise, shall also apply to this part 912.


Sec. 912.10  Obligations of United States with respect to Federal Home 
Loan Bank Securities.

    Federal Home Loan Bank Securities are not obligations of the United 
States and are not guaranteed by the United States.

    By the Board of Directors of the Federal Housing Finance Board.

    Dated: November 7, 1996.
Bruce A. Morrison,
Chairman.
[FR Doc. 96-30454 Filed 12-2-96; 8:45 am]
BILLING CODE 6725-01-U