Alert September 16, 2008

FRB Adopts Interim Final Rule Providing a Temporary Exemption to Banks from Limits of Section 23A of the FRA for Certain Loans to Affiliates

To address the impact of the recent economic downturn on the functioning of the U.S. tri-party repurchase agreement market (the “TPRA Market”), the FRB adopted an interim final rule (the “Rule”) to provide a temporary exemption (the “Exemption”), for certain types of transactions, to the limits in Section 23A of the Federal Reserve Act (“Section 23A”).  The Exemption facilitates the ability of an affiliate of a bank (such as a broker-dealer) (the “Affiliate”) to obtain financing, if needed, for securities or other assets that the Affiliate ordinarily would have financed through the TPRA Market.

The Exemption is subject to five conditions designed to protect the safety and soundness of the lending bank (the “Bank”):

  1. the Bank may only finance asset types that the Affiliate currently finances in the TPRA Market;
  2. the transaction must be marked-to-market daily and subject to daily margin requirements, and the Bank must be at least as over-collateralized as the Affiliate’s clearing bank was in its U.S. tri-party repurchase agreement transactions (“TPRA Transactions”) on September 12, 2008;
  3. the aggregate risk profile of the exempt transactions must be no greater than the aggregate risk profile of the Affiliate’s TPRA Transactions on September 12, 2008;
  4. the Bank’s top-tier holding company must guarantee the Affiliate’s obligation to the Bank (or provide other security to the Bank that is acceptable to the FRB); and
  5. the Bank may not use the Exemption if it has been advised by the FRB (after consulting with the Bank’s principal federal regulator) that the Bank may not use the Exemption.
The Rule is temporary and the Exemption expires on January 30, 2009.  Transactions using the Exemption remain subject to the market terms requirement of Section 23B of the Federal Reserve Act.  The Exemption became effective on September 14, 2008.  Comments on the Rule are due by October 31, 2008.