[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Proposed Rules]
[Pages 17966-17968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9616]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 98-35]
RIN 1550-AB16


Transactions with Affiliates; Reverse Repurchase Agreements

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Office of Thrift Supervision (OTS) is proposing to revise 
its regulations on transactions with affiliates. Specifically, the OTS 
proposes to clarify that it will treat reverse repurchase agreements, 
with one limited exception, as loans or other extensions of credit for 
the purposes of section 11(a)(1)(A) of the Home Owners' Loan Act 
(HOLA). Therefore, a savings association generally may not enter into a 
reverse repurchase agreement with an affiliate that is engaged in non-
bank-holding company activities.

DATES: Comments must be received on or before June 12, 1998.

ADDRESSES: Send comments to Manager, Dissemination Branch, Records 
Management and Information Policy, Office of Thrift Supervision, 1700 G 
Street, NW., Washington, DC 20552, Attention Docket No. 98-35. These 
submissions may be hand-delivered to 1700 G Street, NW., from 9:00 a.m. 
to 5:00 p.m. on business days; they may be sent by facsimile 
transmission to FAX Number (202) 906-7755 or by e-mail 
[email protected]. Those commenting by e-mail should include 
their name and telephone number. Comments will be available for

[[Page 17967]]

inspection at 1700 G Street, NW., from 9:00 a.m. until 4:00 p.m. on 
business days.

FOR FURTHER INFORMATION CONTACT: Valerie J. Lithotomos, Counsel 
(Banking and Finance), (202) 906-6439; or Karen A. Osterloh, Assistant 
Chief Counsel, (202) 906-6639, Regulations and Legislation Division, 
Chief Counsel's Office, or Donna Deale, Manager, (202) 906-7488, 
Supervision Policy, Office of Thrift Supervision, 1700 G Street, NW., 
Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 11(a)(1) of the Home Owners' Loan Act (HOLA) applies the 
provisions of sections 23A and 23B of the Federal Reserve Act (FRA) to 
every savings association to the same extent as if the thrift were a 
member bank of the Federal Reserve System. Section 11(a)(1) also 
imposes several additional restrictions on a savings association's 
transactions with affiliates beyond those found in sections 23A and 23B 
of the FRA. Specifically, section 11(a)(1)(A) states that ``no loan or 
other extension of credit may be made to any affiliate unless that 
affiliate is engaged only in activities described in section 
10(c)(2)(F)(i) of the HOLA.'' As defined by 12 CFR 584.2-2, these 
activities include activities approved for bank holding companies by 
regulation, 12 CFR 225.25, or by case-by-case order of the Federal 
Reserve Board, 12 CFR 225.23. Thus, under section 11(a)(1)(A) a thrift 
may not make a loan or other extension of credit to an affiliate 
engaged in non-bank holding company activities (non-banking affiliate).
    Congress enacted this prohibition to ``reflect . . . the fact that 
affiliates of savings associations can engage in a far greater range of 
activities than affiliates of banks, and can thus expose the savings 
association to greater risks.'' The OTS believes this statement 
incorporates three distinct but overlapping policies.
     The purpose of the prohibition in section (a)(1)(A), 
together with other specific restrictions in section 11(a), is to 
protect the thrift from all forms of risk, including credit risk, 
presented by non-banking affiliates. These risks are not fully 
addressed by sections 23A and 23B of the FRA.
     Because the creditors that are ultimately exposed to the 
greater risks in these transactions are the depositors and the deposit 
insurance fund, section 11(a)(1)(A) operates to ensure that thrift 
deposits do not serve, via an extension of credit, as a source of funds 
for the activities of a non-banking affiliate.
     As a corollary of the second policy, the deposit insurance 
fund should not support the risks of default by a non-banking 
affiliate.
    The OTS is aware that there may be situations where savings 
associations have entered into repurchase and reverse repurchase 
agreements with their non-banking affiliates. For example, in one 
instance, a thrift planned to sell United States Treasury securities to 
its holding company, subject to the thrift's agreement to repurchase 
the securities after a pre-determined period, several years later. 
Using reverse repurchase agreements,1 the savings 
association would also purchase United States Treasury securities from 
the holding company, subject to the holding company's agreement to 
repurchase on an overnight (or next-business-day) basis. The holding 
company, in effect, would use the overnight purchases to manage its 
available cash. At all times, the savings association's obligation to 
repurchase securities under its agreement would exceed the holding 
company's obligation to repurchase securities under its agreement.
---------------------------------------------------------------------------

    \1\ A sale of securities subject to an agreement to repurchase 
is known as a ``reverse repurchase agreement'' when a bank or thrift 
is the purchaser of the securities. See M. Stigum, The Repo and 
Reverse Markets 4 (1989).
---------------------------------------------------------------------------

    These arrangements raise the question whether a reverse repurchase 
agreement is a loan or other extension of credit for the purposes of 
the prohibition in section 11(a)(1)(A) of the HOLA. Section 11(a)(1)(A) 
does not define ``loan or other extension of credit.'' Thus, the face 
of the statute does not compel a legal conclusion that reverse 
repurchase agreements are, or are not, prohibited.2 
Accordingly, the OTS has decided to resolve this issue through today's 
rulemaking. While the agency does not believe that such agreements are 
common, it believes that setting clear regulatory standards will help 
to avoid future uncertainty.
---------------------------------------------------------------------------

    \2\ We recognize that the definition of ``covered transaction'' 
under section 23A(b)(7) of the FRA lists ``a purchase of assets, 
including assets subject to an agreement to repurchase'' separately 
from ``a loan or extension of credit.'' See 12 U.S.C. 371c(b)(7)(A), 
(C). The fact that a reverse repurchase is considered to be an asset 
purchase, rather than an extension of credit under section 23A of 
the FRA, however, is not controlling here.
    Although section 23A and section 11(a)(1)(A) are both designed 
to prevent abuses by affiliates, the two statutes pursue this goal 
differently. Section 23A identifies a class of covered transactions 
that threaten prudent business relationships and places various 
restrictions on the transactions. Some restrictions apply to all 
transactions. Others apply only to certain types of covered 
transactions. (E.g., loans and extensions of credit are subject to 
specific collateralization requirements. Purchases, including 
purchases that are subject to a repurchase agreement, are subject to 
a prohibition on the purchase of low quality assets.) Thus, to 
impose the appropriate restrictions, section 23A must distinguish 
between covered transactions that are reverse repurchase agreements 
and loans and covered transactions that are other extensions of 
credit.
    Moreover, we note that section 11(a)(1)(A) of the HOLA does not 
specifically incorporate the definition of covered transaction under 
section 23A. In light of the numerous other cross-references to 
section 23A of the FRA that are contained in section 11 of the HOLA, 
it is reasonable to conclude that if Congress had intended to 
restrict ``loans or other extensions of credit'' only to those 
transactions that are loans and extensions of credit for the 
purposes of section 23A, it would have included a specific cross-
reference to that statute.
---------------------------------------------------------------------------

    The OTS is proposing to treat most reverse repurchase agreements as 
loans or other extensions of credit. Section 11(a)(1)(A) of the HOLA 
provision focuses on prohibiting transactions with non-banking 
affiliates that would transfer credit and other risks to the thrift. As 
a general matter, a reverse repurchase agreement with a non-banking 
affiliate bears many of the economic characteristics of a loan or 
extension of credit to such an affiliate. The savings association 
transfers funds to the affiliate, expecting to be repaid when the 
company repurchases the assets. The purchased assets essentially amount 
to collateral, since the savings association is required to return the 
assets at the time of repurchase. The savings association earns a pre-
determined rate of interest under the agreement. The principal risk to 
the savings association, its depositors and the deposit insurance fund 
is credit risk--the possibility that the affiliate will default on its 
obligation to make the repurchase.
    Of course, in the example cited above, the risk is ameliorated 
significantly because the thrift is able to dispose of United States 
Treasury securities, a highly liquid, federally guaranteed form of 
collateral. The risk is further ameliorated by the offsetting 
repurchase agreements between the thrift and the holding company under 
which the thrift is, at all times a net debtor to the holding company. 
Accordingly, as discussed more fully below, the OTS is proposing to 
exclude such a connected set of transactions from the regulatory 
prohibitions.

II. General Description of Proposed Rule

    To address this and similar arrangements, the OTS is proposing to 
revise 12 CFR 563.41(a)(3) to clarify that it will generally treat 
reverse repurchase agreements as loans or other extensions of credit 
for the purposes of section 11(a)(1)(A) of the HOLA. Such agreements 
between a thrift and a non-

[[Page 17968]]

banking affiliate would, therefore, be prohibited.
    The proposed regulation also would outline circumstances in which 
the OTS would not treat reverse repurchase agreements as loans or other 
extensions of credit under section 11(a)(1)(A) of the HOLA. These 
circumstances would be ones in which the agreements are consistent with 
the policies underlying section 11(a)(1)(A) of HOLA and section 563.41 
of the OTS regulations--avoidance of the use of insured deposits as a 
source of funds for a non-banking affiliate, substantial elimination of 
credit risk posed by the non-banking affiliate, and protection of the 
insurance fund. Specifically, the proposed rule would not treat a 
reverse repurchase agreement as a loan or other extension of credit if 
the agreement is part of a set of transactions that meet the following 
requirements:
     In order that the agreements not channel insured deposits 
to the non-banking affiliate, there must be offsetting repurchase 
agreements between the thrift and the affiliate under which the thrift 
sells assets subject to an agreement to repurchase. At all times, when 
the agreements are netted, the thrift must be a net debtor to the 
affiliate.
     To make credit risk de minimis, and to avoid a risk to the 
insurance fund, the assets purchased under the agreements must be 
United States Treasury securities and the remaining term of securities 
purchased by the savings association must exceed the term of the 
reverse repurchase agreement. The OTS specifically solicits comment on 
whether, to reduce interest rate risk further, a cap should be placed 
on the length of time by which the remaining term of the securities may 
exceed the term of the reverse repurchase agreement.
    There may be other common types of reverse repurchase transactions 
that avoid the use of insured deposits as a source of funds for an 
affiliate, substantially eliminate credit risk, and protect the 
insurance fund from risk of loss. Accordingly, the OTS specifically 
requests comments on such other agreements. Commenters addressing this 
issue should describe the nature of the agreements, and should explain 
how the agreements are consistent with the purposes of section 
11(a)(1)(A).

III. Executive Order 12866

    The Director of the OTS has determined that this proposed rule does 
not constitute a ``significant regulatory action'' for the purposes of 
Executive Order 12866.

IV. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act, the 
OTS certifies that this proposed rule will not have a significant 
impact on a substantial number of small entities. The proposed rule 
would prohibit all savings associations from entering into reverse 
repurchase agreements with non-banking affiliates, except under very 
limited circumstances. Thrifts currently engage in few reverse 
repurchase agreements with affiliates. The OTS is not aware of any 
small savings association that is currently engaging in transactions 
that would be prohibited by this rule. Accordingly, a regulatory 
flexibility analysis is not required.

V. Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L. 
104-4 (unfunded Mandates Act), requires that an agency prepare a 
budgetary impact statement before promulgating a rule that includes a 
federal mandate that may result in expenditure by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year. If a budgetary impact statement is 
required, section 205 of the Unfunded Mandates Act also requires an 
agency to identify and consider a reasonable number of regulatory 
alternatives before promulgating a rule. The OTS has determined that 
the proposed rule will not result in expenditures by state, local, or 
tribal governments or by the private sector of $100 million or more. 
Accordingly, this rulemaking is not subject to section 202 of the 
Unfunded Mandates Act.

List of Subjects in 12 CFR Part 563

    Accounting, Advertising, Crime, Currency, Investments, Reporting 
and recordkeeping requirements, Savings associations, Securities, 
Surety bonds.
    Accordingly, the Office of Thrift Supervision proposes to amend 
Part 563, chapter V, title 12, Code of Federal Regulations as set forth 
below:

PART 563--OPERATIONS

    1. The authority citation for part 563 continues to read as 
follows:

    Authority: 12 U.S.C. 375b, 1462, 1462a, 1463, 1464, 1467a, 1468, 
1817, 1820, 1828, 3806; 42 U.S.C. 4106.

    2. Section 563.41 is amended by revising paragraph (a)(3) to read 
as follows:


Sec. 563.41  Loans and other transactions with affiliates and 
subsidiaries.

    (a) * * *
    (3) A savings association (or its subsidiary) may not make a loan 
or other extension of credit to an affiliate, unless the affiliate is 
engaged solely in activities described in 12 U.S.C. 1467a(c)(2)(F)(i), 
as defined in Sec. 584.2-2 of this chapter. For the purposes of this 
paragraph (a)(3), a loan or other extension of credit includes a 
purchase of assets from an affiliate that is subject to the affiliate's 
agreement to repurchase the assets. Such a purchase of assets, however, 
will not be considered a loan or other extension of credit if the 
savings association (or subsidiary) has entered into a transaction or 
series of transactions that meets all of the following requirements:
    (i) The savings association (or its subsidiary) purchases United 
States Treasury securities from the affiliate, the affiliate agrees to 
repurchase the securities at the end of a stated term, the remaining 
term of the securities purchased by the savings association (or its 
subsidiary) exceeds the term of the affiliate's repurchase agreement, 
and the savings association (or subsidiary) has ensured its right to 
dispose of the securities at any time during the term of the agreement 
and upon default.
    (ii) The affiliate purchases United States Treasury securities from 
the savings association (or its subsidiary) and the savings association 
(or subsidiary) agrees to repurchase the securities at the end of a 
stated term.
    (iii) The aggregate amount of the affiliate's outstanding 
obligations to repurchase securities from the savings association (or 
its subsidiary) under the repurchase obligation described at paragraph 
(a)(3)(i) of this section, at all times, is less than the aggregate 
amount of the savings association's (or subsidiary's) outstanding 
obligations to repurchase securities from the affiliate under paragraph 
(a)(3)(ii) of this section;
* * * * *
    Dated: April 2, 1998.
    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-9616 Filed 4-10-98; 8:45 am]
BILLING CODE 9720-01-P