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Customer Securities at a Fed Bank

December 18, 1987

Mr. Stanley A. Nakamae
Investment Officer
First Hawaiian Bank
P.O. Box 3200
Honolulu, Hawaii 96847

Dear Mr. Nakamae:

This is in response to your letter of September 15, 1987, concerning the Department of the Treasury regulations applicable to custodial holdings of government securities by depository institutions, 17 CFR Part 450 (52 FR 27957, July 24, 1987), which implement Title II of the Government Securities Act of 1986.

You note that Section 450.4(a)(2)(i)(A) of the regulations requires a depository institution maintaining customer securities at a custodian institution to notify the custodian institution that such securities are customer securities. You have asked whether similar notice is required in the case of securities maintained at a Federal Reserve Bank.

Section 450.4(a)(1) of the regulations states that, except as otherwise provided in that section, a depository institution shall maintain possession or control of all government securities held for the account of customers by segregating such securities from the assets of the depository institution and keeping them free of any lien, charge or claim of any third party granted or created by such depository institution. In cases where customer securities are maintained by a depository institution at another depository institution (“custodian institution”), Section 450.4(a) (2) also requires certain actions of the depository institution and its custodian institution to meet the requirements of Section 450.4(a)(1). To ensure in such cases that liens, charges or claims of the custodian institution or any party claiming through it do not extend to securities held for customers of the depository institution, the custodian institution is required, based on notification and instructions from the depository institution, to maintain such customer securities in an account designated exclusively for customers of the depository institution.

Where a depository institution maintains customer securities at a Federal Reserve Bank, there is no requirement in the current regulations that the depository institution notify the Federal Reserve Bank which securities are customer securities or request segregation of such securities. (See the discussion in the temporary regulations at 52 FR 19666, May 26, 1987.) Section 450.4(a)(3) provides that the depository institution shall be in compliance with paragraph (a)(1) of that section if any lien, charge or other claim of such Federal Reserve Bank or other person claiming through it against securities of the depository institution expressly excludes customer securities. Thus, a depository institution should ensure that any agreements that it enters into with a Federal Reserve Bank that would grant a lien, charge or claim against securities held in an account at the Federal Reserve would exclude its customers' securities. Section 450.4(a) (3) does provide that a depository institution shall be deemed in compliance with the section if, as a result of extraordinary circumstances, a Federal Reserve Bank retains a lien on securities received during the day that are subsequently determined to be customer securities under certain specified conditions set out in that section. As discussed in the preamble to the final regulations (52 FR 27925), such exception was provided to deal only with extraordinary circumstances and is not meant to allow a depository institution to enter into a standing agreement with a Federal Reserve Bank that collateralizes daylight overdrafts or extensions of discount window credit with securities that are customer securities.

Your incoming letter and this response will become available to the public thirty days from the date of this letter.

Sincerely,
Charles O. Sethness
Assistant Secretary
(Domestic Finance)