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4000 - Advisory Opinions


Whether a State Nonmember Bank May Use FHLMC and FNMA Mortgage Pass-Through Securities as the Underlying Security for Repurchase Agreements the Bank Issues to Customers

March 7, 2000

FDIC--00--1

Jamey Basham, Counsel

I am responding to your letter dated February 25, 2000. You ask whether a state nonmember bank may use FHLMC and FNMA mortgage pass-through securities as the underlying security for repurchase agreements the bank issues to its customers.

Since you will be purchasing and selling securities to bank customers as part of the repurchase transactions, you must comply with the FDIC's securities confirmation and recordkeeping rules at 12 C.F.R. Part 344. If you retain custody of these securities during the term of the repurchase agreement, you must also comply with confirmation and custody requirements stated in regulations issued under the Government Securities Act, located at 17 C.F.R. Part 400. In either case, you should also make appropriate antifraud disclosures to your repo customers, since the transactions are covered by the antifraud provisions of section 17(b) of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934.

If you so desire, you may issue these repurchase agreements with maturities of less than seven days. This would include overnight repos used in connection with a demand deposit sweep arrangement, in which demand deposits are actually transferred into bank-issued repurchase agreements on an overnight basis. The FDIC would not consider this to be the payment of interest on a demand deposit for purposes of 12 C.F.R. Part 329 for a variety of reasons, the simplest of which is section 329.3. Section 329.3 makes the prohibitions of Part 329 inapplicable to payments to remuneration allowable for member banks under the regulations of the Board of Governors of the Federal Reserve System ("FRB") at Regulation D (12 C.F.R. Part 204) and Regulation Q (12 C.F.R. Part 217). Regulation D and Regulation Q are construed by the FRB as allowing member banks to issue repurchase agreements with maturities of less than seven days using FNMA and FHLMC pass-through securities as the underlying. FRRS 2--305.5. Finally, since Regulation D and Regulation Q would permit this for a member bank, which includes a national bank, you will not be required to submit an application under section 24 of the Federal Deposit Insurance Act (12 U.S.C. § 1831a).


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