The Board of Governors has
a wide range of responsibility for monetary developments in this country
in addition to its duty to exercise special supervision over foreign
relationships of Federal Reserve Banks. To meet its responsibilities
it must of necessity, among other things, have complete and current
information as early as available with respect to all foreign relationships
of Federal Reserve Banks which may eventuate in some action. Such
action may take the form of establishing an account at a Reserve Bank
or the appointment of a correspondent or the establishment of an agency
in a foreign country by a Federal Reserve Bank; of handling a fund
for a foreign correspondent; of a loan on gold, or of an agreement
to purchase bills in foreign countries; or of other transactions that
need not be enumerated.
Thus, the Board’s duties involve broader questions than
mere technical compliance with particular provisions of law. Supervision
by the Board of the foreign relationships of the Federal Reserve Banks
involves close cooperation by the banks with the Board with constant
recognition of the responsibilities of the Board. The question in
each case should not be decided upon narrow grounds such as, for example,
whether a certain act does or does not amount to a negotiation and
consequently requires prior permission of the Board, but rather whether
knowledge of all the facts and circumstances with respect to the particular
act or correspondence would be helpful to the Board in the discharge
of its responsibilites. Full understanding and cooperation between
the Board and the banks upon the basis of this broad principle is
essential in the public interest.
Specific Situations With the broad
principle stated in the introduction to this memorandum as a guide,
careful consideration has been given to the question of working out
a proper and satisfactory procedure in connection with the establishment
and maintenance of foreign relationships by Federal Reserve Banks
with a view to enabling the Board to meet its responsibilities fully
and at the same time interfere as little as possible with the normal
operations of Federal Reserve Banks. Accordingly, the following course
of procedure has been adopted.
1. Foreign visitors. The difficulty in attempting
always to anticipate the nature of a forthcoming discussion or conference
with a visitor from a foreign country is understood. It is recognized
that a discussion or conference which had been expected to be wholly
general in its nature may turn into one contemplating eventual action
of some sort, and that awkwardness may result if officers of Federal
Reserve Banks in the midst of a discussion find that they must obtain
permission of the Board before proceeding further. This difficulty
should be avoided if foreign banks and bankers have a clear understanding
of the relationships between, and the responsibilities of, the Federal
Reserve Banks and the Board of Governors.
Before arranging a conference which may involve an agreement,
understanding, or negotiations with a person who may represent a foreign
bank, banker or government, permission should be obtained from the
Board; and as soon as a Federal Reserve Bank learns that such a person
is planning to visit the bank it should notify the Board and give
it as much information as it can obtain as to the occasion and purposes
of the visit. Unless it is known that the visitor has been informed
as to the relations of the Federal Reserve Banks and the Board, the
Federal Reserve Bank should advise him as soon as practicable after
learning of his proposed visit.
If a visit from such a person may involve discussions
leading to an agreement or commitment with respect to a particular
transaction on the part of a Federal Reserve Bank, or if in its progress
it so develops, permission of the Board should be obtained before
proceeding further to conduct such negotiations, unless such negotiations
are covered by permission previously granted.
As soon as possible such Federal Reserve Bank should file
a full report in writing, in accordance with the general principle
outlined above.
2.
Specific
permission from Board required in connection with agreements with
foreign banks, bankers, or states. No Federal Reserve Bank shall
enter into any agreement, contract or understanding with any foreign
bank or banker or with any group of foreign banks or bankers or with
any foreign state without first obtaining the permission of the Board
of Governors.
* Any agreement,
contract, or understanding which the operating bank has the right
to terminate, in whole or in part, shall likewise be so terminable
at the request of the Board of Governors.
3. Participations of Federal Reserve Banks in foreign
accounts, operations, and transactions. When any Federal Reserve
Bank, in accordance with Regulation N, as amended, and this letter,
has opened on its books an account (hereinafter referred to as “foreign
account”) for a foreign bank or banker (hereinafter referred to as
“foreign bank”), or a foreign state as defined in section 25(b) of
the Federal Reserve Act (hereinafter referred to as “foreign government”),
or has entered into an agreement, contract, or understanding with
reference to opening or maintaining a foreign account, other Federal
Reserve Banks may participate in such foreign account, and in operations
and transactions therein, on the understanding and agreement described
below, which understanding and agreement is hereby approved by the
Board of Governors of the Federal Reserve System.
It will be understood and agreed between the
participating Federal Reserve Banks
† with respect to
each such participated foreign account, and the operations and transactions
therein, as follows:
(A) The operating bank
† is principal as to its own participation. The other participating
banks
† are also principals, and the operating bank is agent for
them, as to their respective participations. The other participating
banks are “undisclosed” principals, and, in accordance with the law
of “undisclosed” agency, each of the participating banks is responsible
as principal with respect to its participation, and the operating
bank as an agent acting for such undisclosed principals also has responsibility,
corresponding to that of such “undisclosed” principals.
(B) The standard form of letter
approved in 1937 by the Board of Governors of the Federal Reserve
System and all Federal Reserve Banks (a copy of which is attached
hereto) with inapplicable provisions deleted in order to conform to
the particular account shall be used wherever possible and the letter
so used will set forth the terms and conditions governing the foreign
account.
(C) The form
of letter so used from the operating bank to the foreign bank or foreign
government shall constitute the contract of the operating bank and
of the other participating banks with the foreign bank or foreign
government; and the character of the obligations of the participating
banks to the foreign bank or foreign government shall be determined
with reference to such letter.
(D) Such standard form of letter indicates
the scope of the participations of the participating banks other than
the operating bank in such foreign account (that is to say, such other
participating banks shall participate in all operations and transactions
in such foreign account which come within the scope of such standard
form of letter, including the making and execution of any arrangements
which are incidental to the operation of such an account, but shall
not participate in operations and transactions which the operating
bank may execute with or for the foreign bank or foreign government,
with the approval of the Board of Governors of the Federal Reserve
System, outside the scope of such standard form of letter, unless
participations in such operations and transactions are specifically
offered to and accepted by such other participating banks).
(E) In connection with subdivisions
(B), (C), and (D) of this section, it is understood that such standard
form of letter will not normally be used in connection with accounts
for foreign governments but that when such standard form of letter
is not used the terms and conditions which expressly or impliedly
govern the foreign account will be substantially the same as the corresponding
terms and conditions set forth in such standard form of letter.
(F) The rights and obligations
as between the participating banks with respect to expenses, losses,
and income incident to such foreign account, are as follows:
(1) The net
expenses of operating such foreign account (after deducting any amounts
received in reimbursement of out-of-pocket expenses, including labor
costs in connection with the handling of gold) shall be shared by all participating
banks, the other participating banks reimbursing the operating bank
for their respective pro rata shares calculated on the basis of their
participation percentages determined as hereinafter described in (G)(1).
(2) When income is
received from the operation of such foreign account (for example,
from the guarantee of payment of banker’s acceptances purchased for
account of the foreign bank or foreign government), such income shall
be distributed on the same pro rata basis among all participating
banks.
(3) Any losses
shall also be shared on the same pro rata basis by all participating
banks, except that the operating bank shall bear the entire amount
of any such loss which is due to its negligence.
(G) The following operating
and accounting procedures shall be followed with respect to such foreign
account and all other participated foreign accounts:
(1) Basis for determining participation percentages. The practice heretofore followed with respect to participated foreign
accounts shall be continued; that is, it shall be determined, as of
the first of each year, what percentage the capital and surplus of
each participating bank bears to the total capital and surplus of
all participating banks, and the participation percentage thus determined
for each participating bank shall represent its pro rata share of
all participated foreign accounts throughout the year; except to the
extent that such participation percentage may be varied by reason
of withdrawal from participation or refusal to participate in new
accounts, and except that each participating bank’s share of each
participated foreign account shall at all times be the amount actually
shown on its books, which shall be adjusted from time to time as nearly
as may be practicable to the participation percentage determined as
above.
(2) Withdrawal from participation. Withdrawal
from participation by a participating bank shall be conditional upon
the withdrawing bank’s giving written notice to the Board of Governors
of the Federal Reserve System, the operating bank, and each of the
other participating banks, that it intends to withdraw from participation
in all participated accounts effective on a date specified in such
notice. Such notice must be received by the operating bank at least
30 days prior to such effective date of withdrawal, and such withdrawal
shall constitute withdrawal by the withdrawing bank from participation
in all participated foreign accounts conducted by such operating bank,
but shall not terminate the withdrawing bank’s responsibility for
expenses and losses incurred in connection with, or resulting from,
transactions completed or in process of completion in the participated
accounts prior to withdrawal. When such withdrawal is effective the
withdrawing bank’s participation in all participated foreign accounts
at such operating bank shall be automatically assumed by the other
participating banks and a new computation made of the participation
percentages of the participating banks.
(3) Refusal
to participate in new account. A Federal Reserve Bank may refuse
to participate in a new account in which case it shall promptly communicate
such refusal to the Board, the operating bank, and each of the other
Federal Reserve Banks. Refusal to participate in a new foreign account
shall not require withdrawal from participations in other participated
foreign accounts. In the event of the refusal by a Federal Reserve
Bank to participate in a new foreign account, the participation refused
by such bank shall be automatically assumed by the other Federal Reserve
Banks participating or agreeing to participate in such account.
(4) Transfers through Interdistrict Settlement Fund
to adjust deposit liability of participating Federal Reserve Banks
in connection with participated accounts. Transactions in participated
dollar deposit accounts will be effected without any immediate change
in the foreign deposit liability of the participating banks other
than the operating bank; and, in order periodically to adjust the
foreign deposit liability of the respective participating banks as
nearly as may be practicable to their participation percentages computed
as provided in (G)(1) above, transfers shall be made through the Interdistrict
Settlement Fund between the operating bank and the other participating
banks on Wednesday of each week, and more frequently whenever there
is a net change (since the last adjustment) of $10,000,000 or more
in the aggregate of the dollar deposit liabilities of all participating
banks in all participated foreign accounts, unless it is anticipated
that such change will be offset by further transactions before the
next weekly adjustment.
(5) Weekly
mail reports from operating bank to other participating banks. The operating bank shall send to each of the other participating
banks by mail weekly, as of the close of business on each Wednesday,
a statement including the following information:
(a) The amount
due to each foreign depositor in a participated dollar deposit account,
and each participating bank’s share, adjusted as described in (G)(4)
above, in the total foreign deposit liability in all participated
accounts.
(b) The amount
of the contingent liability, if any, for the guarantee of banker’s
acceptances purchased for each participated foreign account, and each
participating bank’s pro rata share in the total thereof.
(c) The amounts of earmarked gold
and securities held by the operating bank in custody in the respective
participated foreign accounts.
(d) The amounts of the deposits “Due from”
foreign banks, gold abroad, investments abroad, and outstanding foreign
loans; and such participating bank’s pro rata share in the totals
thereof.
(6) Weekly
telegraphic reports from the operating bank to other participating
banks. The operating bank shall inform each participating bank
by telegraph each Wednesday, as of the close of business on that day,
of the following: Provided, however, that when there has been
no change during the week with respect to the amounts referred to
below, such fact may be reported, instead of stating the amounts,
in such telegraphic report.
(a) The amount
1 of
such participating banks share in the total deposit liability referred
to in
(G)(5)(a) above.
2(b) The amount
1 of such participating
bank’s share in the total contingent liability referred to in
(G)(5)(b)
above.
3(c)
The amount1 of such participating bank’s share in the totals
of the respective assets referred to in (G)(5)(d) above. * * *
Deposit accounts
“Due from” foreign banks, the holding of gold and investments abroad,
and outstanding foreign loans and any agreements with respect thereto,
which have been or may be entered into by a Federal Reserve Bank,
with the approval of the Board of Governors, may be participated in
by other Federal Reserve Banks in accordance with arrangements between
the Federal Reserve Banks, subject to the applicable provisions of
(A) relating to the obligations of participating and operating Federal
Reserve Banks,
(F)(1), (2), and (3) relating to the distribution of
net expenses, income, and losses,
(G)(1) relating to the computation
of participation percentages, and
(G)(5) and (6) relating to reports.
Withdrawals from such participations may be
made by agreement between the Federal
Reserve Banks concerned, subject to the approval of the Board of Governors.
The Federal Reserve Bank operating such an account shall from time
to time as new accounts or transactions are opened notify the Board
and the participating banks which of the Federal Reserve Banks are
participating in such accounts or transactions. S-718; Dec. 14, 1943.
An amendment to Regulation N effective February 13,
1962, authorizing negotiations, agreements, contracts, or understandings
with foreign banks subject to authorization, direction, and regulation
by the Federal Open Market Committee insofar as open market transactions
are involved superseded, to the extent inconsistent, the requirements
of the foregoing statement of procedure.
