[Federal Register Volume 63, Number 156 (Thursday, August 13, 1998)]
[Rules and Regulations]
[Pages 43292-43294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21756]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 563

[No. 98-76]
RIN 1550-AB16


Transactions With Affiliates; Reverse Repurchase Agreements

AGENCY: Office of Thrift Supervision, Treasury.

ACTION: Final rule.

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SUMMARY: The Office of Thrift Supervision (OTS) is issuing a final rule 
to revise its regulations on transactions with affiliates. The final 
rule clarifies that OTS 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.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: Valerie J. Lithotomos, Counsel 
(Banking and Finance), (202) 906-6439; 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.'' These activities include activities 
approved for bank holding companies by regulation, 12 CFR 225.28, 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).
    OTS is aware that there may be situations where savings 
associations may wish to enter into reverse repurchase agreements with 
their non-banking affiliates.1 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.
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    \1\ A sale of assets subject to an agreement to repurchase is 
known as a ``reverse repurchase agreement'' when a bank or thrift is 
the purchaser of the assets. See M. Stigum, The Repo and Reverse 
Markets 4 (1989).
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    On April 13, 1998, OTS published a notice of proposed rulemaking 
that would treat most reverse repurchase agreements as loans or other 
extensions of credit.2 OTS noted that section 11(a)(1)(A) 
does not define ``loan or other extension of credit,'' and does not 
compel a legal conclusion that reverse repurchase agreements are, or 
are not, prohibited by statute.3 Section 11, however, 
focuses on prohibiting transactions with non-banking affiliates that 
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.4 On this basis, OTS concluded that it was 
appropriate to treat these transactions as loans or extensions of 
credit under section 11(a)(1)(4).
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    \2\ 63 FR 17966 (April 13, 1998).
    \3\ In making this determination, OTS recognized 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, does not 
control the interpretation of section 11 of the HOLA.
    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.
    \4\ 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 amount 
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. These types of agreements are generally 
considered the functional equivalent of a loan or extension of 
credit. See amendments to Federal Financial Institutions Examination 
Council Policy Statement on Repurchase Agreements of Depository 
Institutions with Securities Dealers and Others (``FFIEC Policy 
Statement''), 63 FR 6935 (February 11, 1998).
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    Credit and other risks may be ameliorated significantly under 
certain circumstances. For example, in one arrangement recently 
reviewed by OTS, 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, 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,

[[Page 43293]]

the savings association's obligation to repurchase securities under its 
agreement would exceed the holding company's obligation to repurchase 
securities under its agreement. In this example, risk is mitigated 
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 affiliate under which the thrift is, at all 
times a net debtor to the affiliate. Accordingly, OTS proposed to 
exclude such a connected set of transactions from the regulatory 
prohibition.

II. Summary of Comment and Description of the Final Rule

    The public comment period on the proposed rule closed on June 12, 
1998. OTS received one comment from a law firm, on behalf of a client.
    The commenter argued that section 11(a)(1)(A) of the HOLA does not 
provide OTS with legal authority to prohibit reverse repurchase 
agreements. As noted above, the preamble to the proposed rule 
recognized that section 11(a)(1)(A) of the HOLA, on its face, did not 
compel a legal conclusion that reverse repurchase agreements are, or 
are not, prohibited as loans or extensions of credit. It is, however, 
within OTS' purview to interpret and clarify the meaning of ``loan or 
other extension of credit'' in section 11 by regulation. Section 
3(b)(2) of the HOLA authorizes the Director to ``prescribe such 
regulations . . . as the Director may determine to be necessary for 
carrying out [the HOLA] and all other laws within the Director's 
jurisdiction.5 Thus, OTS has sufficient legal authority to 
issue this final rule interpreting the HOLA.
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    \5\ 12 U.S.C. 1462a. See also 12 U.S.C. 1463(a) and 1464.
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    The commenter also responded to a question posed in the preamble to 
the proposed rule. The proposed regulation outlined the circumstances 
under which OTS would not treat a reverse repurchase agreement as a 
loan or other extension of credit under section 11(a)(1)(A) of the 
HOLA. Specifically, the reverse repurchase agreement must be part of a 
transaction or series of transactions meeting the following 
requirements: (1) 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; and (2) 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. OTS specifically asked whether 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. 
The commenter opposed the imposition of any cap.
    OTS agrees with the commenter that a cap is unnecessary in light of 
the proposed requirement that the aggregate amount of the thrift's 
outstanding obligation to repurchase securities from the affiliate must 
at all times exceed the aggregate amount of the affiliate's outstanding 
obligation to repurchase securities from the thrift. See proposed 
Sec. 563.41(a)(3)(iii). Given this requirement, the savings association 
will always be able to set off all of its repurchase obligations to the 
affiliate, if the affiliate is unable to repurchase securities from the 
thrift under the agreement. Thus, the savings association will not have 
any net credit exposure to its affiliate. The proposal has not been 
revised to include a cap.6
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    \6\ The commenter opposed any additional restrictions. However, 
if additional restrictions are to be imposed, the commenter 
suggested that OTS require that the aggregate market value of the 
securities purchased by the savings association under the reverse 
repurchase agreement must exceed, by a specified margin (e.g., 102 
percent), the amount of the affiliate's repurchase obligation under 
the reverse repurchase agreement. OTS agrees that further regulatory 
restrictions are unnecessary to mitigate the risks associated with 
reverse repurchase agreements. Moreover, under the FFIEC Policy 
Statement, cited above, we note that savings associations should 
comply with specific margin guidelines for such repurchase 
agreements.
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    Today's final rule contains a technical clarification. Proposed 
Sec. 563.41(a)(3)(i) stated that the savings association (or its 
subsidiary) must ensure ``its right to dispose of the securities at any 
time during the term of the agreement and upon default.'' OTS has 
revised the final rule to clarify that the savings association (or its 
subsidiary) must obtain possession or control of the underlying 
securities to ensure that it has the right to dispose of the 
securities. Other than this clarifying change, today's final rule is 
substantially identical to the April proposal.

III. Executive Order 12866

    The Director of OTS has determined that this final 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, OTS 
certifies that the final rule does not have a significant impact on a 
substantial number of small entities. The final rule prohibits 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. 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. OTS has determined that the 
final 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 hereby amends 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

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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 its 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 its subsidiary) has possession or 
control of the securities and the 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 its 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 its subsidiary's) outstanding 
obligations to repurchase securities from the affiliate under paragraph 
(a)(3)(ii) of this section;
* * * * *
    Dated: August 7, 1998.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 98-21756 Filed 8-12-98; 8:45 am]
BILLING CODE 6720-01-P