Effective April 1, 2013, the Federal Reserve Banks are amending Operating Circular 7, Book-Entry Securities Account Maintenance and Transfer Services.
Key changes made by this amendment include the following
- The addition of the defined term Amortizing Book-Entry Security.
- The reorganization and revision of certain provisions relating to the payment of principal and interest on book-entry securities.
- Former paragraph 9.3 has been moved, without change, to new paragraph 9.2.2. This paragraph deals with the finality of credits of principal and interest payments.
- Former paragraph 4.3.3 has been moved to new paragraph 9.3.1 and revised. Former paragraph 4.3.3 permitted the Reserve Banks to hold in a non–interest-bearing account certain proceeds of book-entry securities maintained in restricted securities accounts, a procedure that is intended to protect the secured party in question by ensuring the value of maturing or fully called securities is retained for that party’s benefit until additional collateral is deposited or other arrangements are made. New paragraph 9.3.1 clarifies that only the principal of maturing or fully called book-entry securities maintained in restricted securities accounts are held in that way. All interest payments and all other principal payments on book-entry securities maintained in restricted securities accounts are credited to the master account of the participant (or its correspondent), except as provided in paragraph 5 of Appendix C, which governs principal and interest payments on book-entry securities held under the Reserve Banks’ joint-custody program, as discussed further below.
- Paragraph 14.1.1 has been revised to clarify whether and how various Fedwire® Securities Service fees are assessed and to update references to certain U.S. Treasury regulations. The revisions do not change the Reserve Banks’ current practices with respect to the imposition of fees, however.
Appendix C (Joint Custody)
- Paragraph 5.2 has been revised to be consistent with the new paragraph 9.3.1 of the body of the operating circular.
- New paragraph 5.3 deals with amortizing book-entry securities that are going to be paid off while pledged as collateral under the Reserve Banks’ joint-custody program. On the day an amortizing book-entry security that is pledged as collateral is to be paid off, the Reserve Banks will debit the master account of the institution that had pledged that security for the amount of principal to be paid to the pledgor before the opening of the Fedwire Securities Service. The Reserve Banks will hold those funds in a non–interest-bearing account for the benefit of the pledgee until the earliest of the three events set forth in new paragraph 5.3 (i.e., until the pledgor deposits substitute collateral in accordance with paragraph 4.3, the pledgee authorizes the release of the funds, or the pledgee collects the funds in accordance with paragraph 6). This measure helps ensure the value of the pledged amortizing book-entry security is retained for the benefit of the state or local government pledgee in question until additional collateral is deposited or other arrangements are made. If and when the Reserve Banks distribute the final principal payment on the amortizing security, the pledgor’s master account will be credited. If that distribution does not occur by 4:30 p.m. ET for whatever reason (e.g., the issuer has not provided the Reserve Banks with funds to make the distribution), the Reserve Banks will return the funds being held in the non–interest-bearing account to the pledgor’s master account.
In managing their master accounts, pledgors will have to take into account debits permitted under paragraph 5.3. Pledgors may be able to facilitate the release of funds being held in a non–interest-bearing account by promptly depositing adequate substitute collateral (if the pledgee permits substitution) or by ensuring the pledgee otherwise authorizes the Reserve Banks to release the funds to the pledgor.
Pledgees are reminded they are responsible under Appendix C for, among other things, monitoring the value of securities pledged for their benefit. Pledgees are further reminded that, in the absence of a notice of default as provided in paragraph 6, periodic payments on amortizing securities and proceeds of partially called securities, as well as all interest payments and all other principal payments (other than those specified in paragraphs 5.2 and 5.3) are paid directly to an account designated by the pledgor; the Reserve Banks do not set aside those funds for the benefit of the pledgee.
Appendix D (Automated Claim Adjustment for Mortgage-Backed Securities)
- Bilateral and unilateral claim adjustments are being eliminated. Consequently, paragraphs 3.6 and 3.7 have been deleted in their entirety, and paragraph 3.3.3 was revised to omit references to those types of adjustment requests. Participants will need to make other arrangements to settle such adjustments. The Reserve Banks understand that the securities industry has developed uniform market practices to handle similar adjustments for Treasury securities repurchase agreements, which could be adapted to handle adjustments for mortgage-backed securities maintained by the Fedwire Securities Service.
- Former paragraph 3.5.4 has been moved to new paragraph 3.1.3. The rest of former paragraph 3.5 has been deleted because it was duplicative of other existing and revised provisions.
- The deadlines in paragraphs 5.2.1 and 5.3.1 have been revised to reflect current practice.
Appendix E (FedPayments® Manager for the Fedwire Securities Service)
- References to trademarks and service marks owned by the Reserve Banks have been corrected or updated to reflect the Reserve Banks’ current policy regarding mark attribution.
- Erroneous references to “Appendix D” have been corrected.
This amendment incorporates a number of other, less significant changes. The definitive text of the revised operating circular is posted on FRBservices.org.
Your continued use of Reserve Bank services on or after April 1, 2013, constitutes agreement to the new terms of the operating circular.
See the link below on the Federal Reserve Financial Services website for the official version of the amended operating circular. To request a paper copy of any operating circular, contact your Customer Contact Center.
“Fedwire” and “FedPayments” are registered service marks of the Federal Reserve Banks. A complete list of marks owned by the Federal Reserve Banks is available at FRBservices.org.