Current through Vol. 42, No. 1, September 16, 2024
(a) Banks and other
financial institutions involved with the purchase of United States Government
and Agency Obligations under agreements to resell (reverse repurchase
agreements) have sometimes incurred significant losses. The most important
factors causing these heavy losses have been inadequate credit risk management
and the failure to exercise effective control over securities collateralizing
the transactions.
(b) Standards of
prudent banking with respect to repurchase agreements (the term as used herein
also refers to Reverse Repurchase Agreements) with securities dealers and
others are set forth in (c) of this Section.
(c) The following minimum guidelines address
the need for managing credit risk exposure under securities repurchase
agreements and for controlling the securities in those transactions.
(1) Definitions:
(A) "Repurchase agreement" means an
arrangement in which a party that owns securities acquires funds by
transferring the securities to another party under an agreement to repurchase
the securities at an agreed upon future date.
(B) "Reverse repurchase agreement" means an
arrangement in which a party provides funds by acquiring securities pursuant to
an agreement to resell them at an agreed upon future date.
(2) All banks or trust companies that engage
in securities repurchase agreement transactions should establish written credit
policies and procedures governing those activities.
(3) A bank or trust company doing business
with an unregulated securities dealer should be certain that the dealer
voluntarily complies with the Federal Reserve Bank of New York's minimum
capital guidelines. To be certain, the following three forms of certification
are required:
(A) A letter of certification
from the dealer that the dealer will adhere on a continuous basis to the
capital adequacy standard;
(B)
Audited financial statements which demonstrate that as of the audit date the
dealer was in compliance with the standard and the amount of liquid capital;
and
(C) A copy of a letter from the
firm's certified public accountant stating that it found no material weakness
in the dealer's internal systems and controls incident to adherence to the
standard.
(4) Periodic
evaluations of counterparty creditworthiness should be conducted by individuals
who routinely make credit decisions and who are not involved in the execution
of repurchase agreement transactions.
(5) Maximum position and temporary exposure
limits for each approved counterparty should be established based upon credit
analysis performed. Periodic review and updates of those limits are
necessary.
(6) Except with respect
to a bank or trust companies secured interest and control of securities held as
collateral, a repurchase agreement transaction will be subject to lending
limits.
(7) A bank must have a
written agreement specific to each repurchase agreement transaction specifying
all the terms of the transaction.
(8) Possession or control of the underlying
securities must be obtained.
(9)
The amount paid by a bank or trust company under the repurchase agreement
should be less than the market value of the securities, including the amount of
any accrued interest, with the difference representing a predetermined margin.
Margin requirements should allow for the anticipated price volatility of the
security until the maturity of the repurchase agreement.
(10) Counterparties should not be provided
with excessive margin of collateralization. The excess market value of
securities sold by a bank or trust company are viewed as an unsecured loan to
the counterparty and should be treated accordingly for credit policy and
control purposes.
