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  3. Background and Summary of Regulation N

Background and Summary of Regulation N

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Regulation N was promulgated in 1933 pursuant to sections 12A, 14(e) and 14(g) of the Federal Reserve Act. The regulation addresses the Board of Governors’ special supervisory responsibility regarding transactions and relationships among the Federal Reserve Banks and foreign banks, bankers, and governments. In addition, the regulation recognizes the Reserve Banks’ authority to engage in foreign open market operations under the direction of the Federal Open Market Committee. Essentially, the purpose of Regulation N is to give the Board of Governors the responsibility for approving in advance any negotiations or agreements by Reserve Banks with foreign banks, bankers, and states, and to ensure that the Board is fully informed about all such relationships.
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CONFERENCES AND NEGOTIATIONS (§ 214.3)

The Reserve Banks must obtain the permission of the Board of Governors in order to conduct any negotiations with foreign banks or bankers or with any foreign state, unless the communications are in the ordinary course of business in conjunction with transactions previously approved by the Board. The Board of Governors has also reserved the right to be represented at any meetings concerning such negotiations or agreements. After the negotiations, a full report must be made to the Board.
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AGREEMENTS (§ 214.4)

Section 214.4 of the regulation pertains to agreements with foreign banks, bankers, and states and to participation in foreign accounts. With Board approval, a Federal Reserve Bank may enter into any such agreement, contract, or understanding. Furthermore, once, a Reserve Bank has received Board approval and entered into an agreement, any other Reserve Bank may participate in the agreement with Board approval. In addition, with Board approval, any Reserve Bank may open and maintain accounts for foreign banks or governments or participate in any such foreign account maintained by another Reserve Bank.
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ACCOUNTS (§ 214.5)

Foreign account agreements and negotiations incident to the opening of foreign accounts are under the supervision of the Federal Open Market Committee (FOMC). The FOMC establishes the rules, regulations, and limitations governing these transactions. Any Federal Reserve Bank maintaining accounts with a foreign bank may, upon authorization of or direction by the FOMC, undertake negotiations, agreements, or contracts to facilitate open market transactions. Under the FOMC’s direction, any Reserve Bank may carry on, through a Reserve Bank that maintains an account with a foreign bank, any open market transactions that are permissible under section 14 of the Federal Reserve Act. At least quarterly, Reserve Banks must report to the Board on accounts they maintain with foreign banks.
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