FEDERAL RESERVE BOARD WASHINGTON X-6145

a d d r e s s o f f i c i a l c o r r e s p o n d e n c e t o - , - . t h e f e d e r a l r e s e r v e b o a r d s e p t e m b e r CO, -LZPlOO .

SUBJECT: P r o p o s e d Amendment t o R e g u l a t i o n A -Topic f o r C o n f e r e n c e s of Governors a n d F e d e r a l Rese rve A g e n t s .

Dear S i r :

The F e d e r a l R e s e r v e Board h a s v o t e d t o r e f e r t o t h e f o r t h c o m i n g c o n f e r e n c e s of Governors and F e d e r a l r e s e r v e a g e n t s f o r t h e i r c o n s i d e r a t i o n a s u g g e s t i o n made by t h e F e d e r a l R e s e r v e Bank of D a l l a s t h a t S e c t i o n IX of t h e B o a r d ' s R e g u l a t i o n A, which t r e a t s of p a p e r a c q u i r e d f rom nonmember "banks, he so amended a s t o e x c e p t f r o m t h e p r o h i b i t i o n on t h e d i s c o u n t of p a p e r "bearing t h e s i g n a t u r e or endorsement of nonmember "banks " b i l l s of exchange p a y -a b l e a t s i g h t o r on demand of t h e k i n d d e s c r i b e d i n S e c t i o n VII of R e g u l a t i o n A. There i s e n c l o s e d h e r e w i t h a copy of t h e l e t t e r r e -c e i v e d by t h e Board f rom t h e F e d e r a l R e s e r v e Bank of D a l l a s i n t h i s c o n n e c t i o n .

The s t a t u t e w i t h r e g a r d t o t h e d i s c o u n t by a F e d e r a l r e -s e r v e bank of s i g h t o r demand d r a f t s was amended by a c t of Congress a p p r o v e d May 29, 1928, so as t o make e l i g i b l e f o r d i s c o u n t such b i l l p r o p e r l y s e c u r e d by s h i p p i n g documents , which a r i s e ou t of t h e expor t a t i o n , a s w e l l a s t he domes t i c sh ipment , of n o n p e r i s h a b l e , r e a d i l y m a r k e t a b l e s t a p l e s , w h e t h e r or no t such s t a p l e s a r e of a n a g r i c u l t u r a l c h a r a c t e r . S e c t i o n VII of t h e B o a r d ' s R e g u l a t i o n A h a s no t been amended t o meet t h e changes made by t h e new law on t h i s s u b j e c t . I f R e g u l a t i o n A i s t o be amended so a s t o p e r m i t s i g h t or demand b i l l s c o n f o r m i n g t o S e c t i o n V I I of t h e R e g u l a t i o n to be d i s c o u n t e d by a F e d e r a l r e s e r v e bank , even though b e a r i n g t h e s i g n a t u r e o r e n d o r s e -ment of a nonmember bank , i t would seem a p p r o p r i a t e a t t h e same t i m e to amend S e c t i o n VII t o conform to t h e t e r m s of t h e Act of May 29 , 1928 .

There a r e e n c l o s e d h e r e w i t h f o r y o u r c o n s i d e r a t i o n c o p i e s of s u g g e s t e d amendments t o S e c t i o n IX and S e c t i o n VII o f t h e B o a r d ' s R e g u l a t i o n A which would e f f e c t t he changes above d e s c r i b e d .

Very t r u l y y o u r s ,

J . C. N o e l l , A s s i s t a n t S e c r e t a r y .

E n c l o s u r e s .

TO ALL F . R . AGENTS AND GOVERNORS. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

COPY X-6145-

FEIERAL RES3RV1 BAM OF DALLAS.

September 11, 1928.

F e d e r a l Heserve Board, Washington, D. C.

Gentlemen:

Accord ing t o our i n t e r p r e t a t i o n of t he Act and t h e Board1 s R e g u l a t i o n s a F e d e r a l r e s e r v e bank may n o t , w i t h o u t t he p e r m i s s i o n of t he F e d e r a l Rese rve Board, e i t h e r d i s coun t or p u r c h a s e s i g h t d r a f t s s e c u r e d "by b i l l s of l a d i n g b e a r i n g t h e s i g n a t u r e o r indorsement of a nonmember bank, a l t h o u g h they may be o t h e r w i s e e l i g i b l e f o r d i s c o u n t or p u r c h a s e unde r S e c t i o n 13 of t he Act and R e g u l a t i o n s A and B.

We h a d o f f e r e d to u s on September 7 by t h e F i r s t N a t i o n a l Bank of Duran t , Oklahoma, a s i g h t d r a f t f o r $2,415.95* s e c u r e d by s h i p p e r s o r d e r b i l l of l a d i n g c o v e r i n g 25 b a l e s of co t ton* This d r a f t was made p a y a b l e to and i n d o r s e d by a nonmember bank and t h e F i r s t N a t i o n a l Bank of Durant h a d a p p a r e n t l y a c q u i r e d i t d i r e c t l y f rom t h e nonmember b a n k . . We d e c l i n e d to d i s coun t t h i s d r a f t and e n t e r e d i t f o r c o l l e c t i o n f o r c r e d i t t o the account of t he o f f e r i n g bank when p a i d , and i n w r i t i n g t o t h e member bank g i v i n g our r e a s o n s f o r d e c l i n i n g to d i s c o u n t t h e i t em wb quoted p a r a g r a p h ( a ) , S e c t i o n 9 of R e g u l a t i o n A. Wo d i d n o t , however, d i s c u s s w i t h the o f f e r i n g member bank the d e s i r -a b i l i t y o r t he p r o c e d u r e f o r o b t a i n i n g t h e B o a r d ' s p e r m i s s i o n to d i s -count o r p u r c h a s e such i t e m s .

• Obvious ly , t h e r e a s o n f o r e x c l u d i n g p a p e r b e a r i n g the s i g n a -t u r e o r indorsement of nonmember banks , e x c e p t w i t h t h e B o a r d ' s p e r -m i s s i o n o r e x c e p t a s s e t ou t i n p a r a g r a p h ( a ) , S e c t i o n 9 of R e g u l a t i o n A, i s t o p r e v e n t the i n d i r e c t u se of r e s e r v e c r e d i t by banks which g ive no s u p p o r t t o t h e Reserve System. I t i s no t l i k e l y , however, t h a t a member bank d e s i r i n g to u s e the r e d i s c o u n t f a c i l i t i e s of a r e s e r v e bank f o r t h e b e n e f i t of a nonmember bank would o f f e r p a p e r of t he c h a r a c t e r ment ioned , and we s u g g e s t , f o r the B o a r d ' s c o n s i d e r a t i o n , an amendment t o R e g u l a t i o n A, making such p a p e r e l i g i b l e w i t h o u t r e q u i r i n g a member bank to o b t a i n s p e c i a l p e r m i s s i o n . Such p a p e r i s of a s e l f - l i q u i d a t i n g c h a r a c t e r , a r i s e s out of t r a n s a c t i o n s i n v o l v i n g t h e movement of commodi-t i e s , and i s a c q u i r e d by our member banks i n the due c o u r s e of b u s i n e s s . I n a l l r e s p e c t s t h e p a p e r i s of a ve ry h i g h t y p e - i t s c r e a t i o n doe's not con templa te t he e x t e n d e d u s e of r e s e r v e bank c r e d i t , and w h i l e t h e Act p r o v i d e s t h a t e l i g i b l e p a p e r of t h i s c h a r a c t e r d i s c o u n t e d may be h e l d f o r a p e r i o d n o t exceed ing n i n e t y days, our e x p e r i e n c e i s t h a t i t i s l i q u i d a t e d w i t h i n f rom t h r e e t o t e n d a y s .

1% t h e p a r t i c u l a r c a s e r e f e r r e d to we f e e l q u i t e c e r t a i n t h a t t he nonmember bank i s w i t h o u t any knowledge t h a t t h e d r a f t was o f f e r e d f o r d i s c o u n t to t he F e d e r a l r e s e r v e bank by t h e member bank .

We shou ld be g l a d to have the b e n e f i t of t h e B o a r d ' s v iews on t h i s m a t t e r .

Yours very t r u l y , ( S g d . ) R.R. GILBERT

Deputy Governor . Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

COPY X-6145~"b

(PARAGRAPH ( a ) OF SECTION IX OF REGULATION A, IF AMENDED AS SUGGESTED.)

SECTION IX. PAPER ACQUIRED FROM NONMEMBER BAMS

( a ) Except w i t h t h e p e r m i s s i o n of t he F e d e r a l Reserve Board, no

F e d e r a l r e s e r v e hank s h a l l d i s c o u n t any p a p e r a c q u i r e d "by a member hank

from a nonmember hank o r b e a r i n g t h e s i g n a t u r e or indorsement of a non-

member bank; e x c e p t t h a t F e d e r a l r e s e r v e banks may d i s c o u n t ( l ) b a n k e r s '

a c c e p t a n c e s and o t h e r e l i g i b l e p a p e r b e a r i n g t h e s i g n a t u r e or indorsement

of a nonmember bank, i f such p a p e r was bought by the o f f e r i n g bank i n

good f a i t h on t h e open market f rom some p a r t y o t h e r t h a n t h e nonmember

bank, a n d ( 2 ) b i l l s of exchange b e a r i n g the s i g n a t u r e o r indorsement of a

nonmember bank which a r e p a y a b l e a t s i g h t or on demand and which conform

to t h e r e q u i r e m e n t s of S e c t i o n VII of t h i s r e g u l a t i o n #

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

COPY X-6145-C

( S e c t i o n VI I of R e g u l a t i o n A, i f amended a s s u g g e s t e d . )

SECTtOIT V I I . SIGHT DRAFTS SECURED BY BILLS OF LADING.

A F e d e r a l r e s e r v e bank may d i s c o u n t f o r any of i t s member "banks b i l l s of exchange payab l e a t s i g h t o r on demand which-

( a ) Grow ou t of t he domest ic shipment o r t h e e x p o r t a t i o n of n o n p e r i s h a b l e , r e a d i l y m a r k e t a b l e s t a p l e s ; and

( b ) Are s e c u r e d by b i l l s of l a d i n g or o t h e r s h i p p i n g documents conveying o r s e c u r i n g t i t l e to such s t a p l e s .

A l l such b i l l s of exchange s h a l l be fo rwarded p rompt ly f o r c o l l e c t i o n , and demand f o r payment s h a l l be made p rompt ly , u n l e s s t h e drawer i n s t r u c t s t h a t t hey be h e l d u n t i l a r r i v a l of c a r , i n which even t t h e y must be p r e s e n t e d f o r payment w i t h i n a r e a s o n -a b l e t ime a f t e r n o t i c e of a r r i v a l of such s t a p l e s a t t h e i r d e s -t i n a t i o n h a s b e e n r e c e i v e d . In no even t s h a l l any such b i l l be h e l d by or f o r t h e accoun t of a F e d e r a l r e s e r v e bank f o r a p e r i o d i n e x c e s s of 90 days . >

In d i s c o u n t i n g such b i l l s F e d e r a l r e s e r v e banks may compute the i n t e r e s t t o be deduc ted on the b a s i s of the e s t i m a t e d l i f e of each b i l l and a d j u s t t he amount thus deduc ted a f t e r payment of such b i l l s t o conform to the a c t u a l l i f e t h e r e o f .

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis