Regulations Governing Book-Entry Federal Home Loan Bank Securities

FEDERAL HOUSING FINANCE BOARD

12 CFR Parts 910 and 912

[No. 96-79]

Regulations Governing Book-Entry Federal Home Loan Bank

Securities

AGENCY: Federal Housing Finance Board.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Federal Housing Finance Board is adopting an interim final

rule amending its regulations governing procedures for maintaining

book-entry (uncertificated) Federal Home Loan Bank securities within

the Federal Reserve Banks' system of accounts. This action is being

taken in conjunction with similar amendments being made by the

Department of Treasury to its regulations governing Federal Reserve

Bank book-entry procedures for Treasury securities, and by the

regulators of other government sponsored enterprises for which the

Federal Reserve Banks maintain book-entry securities. These amendments

are intended to update the regulations to eliminate the need to treat

book-entry securities as if they were certificated securities and to

conform more closely to the manner in which book-entry securities are

treated under the laws of the majority of the states (as set forth in

Article 8 of the Uniform Commercial Code, as revised in 1994).

DATES: The interim final rule will become effective on January 1, 1997.

The Finance Board will accept comments on the interim final rule in

writing on or before February 3, 1997.

ADDRESSES: Mail comments to Elaine A. Baker, Executive Secretary,

Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C.

20006.

FOR FURTHER INFORMATION CONTACT: Eric M. Raudenbush, Attorney-Advisor,

Office of General Counsel, 202/408-2932, Federal Housing Finance Board,

1777 F Street, N.W., Washington, D.C. 20006.

SUPPLEMENTARY INFORMATION:

I. Background

Subsections (b) and (c) of section 11 of the Federal Home Loan Bank

Act (Bank Act) authorize the issuance of consolidated Federal Home Loan

Bank (FHLBank) debentures or bonds (collectively, ``FHLBank

securities''), which are the joint and several obligations of the

FHLBanks, upon terms and conditions established by the Federal Housing

Finance Board (Finance Board). See 12 U.S.C. 1431(b), (c). The Finance

Board has set forth the terms and conditions regarding the issuance of

FHLBank securities in part 910 of its regulations. 12 CFR part 910.

Although, under the Bank Act, the Finance Board is designated as the

``issuer'' of FHLBank securities, it has delegated the issuance of

FHLBank securities, along with such other ministerial functions as the

servicing of the FHLBank securities, to the Office of Finance (OF) (a

joint office of the FHLBanks) pursuant to section 2B(b)(1) of the Bank

Act, 12 U.S.C. 1422b(b)(1), part 941 of the Finance Board's

regulations, 12 CFR part 941, and periodic resolutions of the Board of

Directors of the Finance Board.

Since 1977, the OF has issued domestic FHLBank securities

[[Page 64022]]

exclusively in ``book-entry'' form; that is, as uncertificated

securities recorded as entries on the computerized system of accounts

maintained by the Federal Reserve Banks (Reserve Banks), acting as

fiscal agents of the FHLBanks. This arrangement between the FHLBanks

and the Reserve Banks exists pursuant to a 1973 agreement which, as

permitted under section 15 of the Bank Act, 12 U.S.C. 1435, authorizes

the Reserve Banks to issue book-entry FHLBank securities; to maintain

related book-entry accounts; to pay principal and interest due on book-

entry FHLBank securities; and otherwise to service such FHLBank

securities.

At the time this agreement was consummated, the former Federal Home

Loan Bank Board (FHLBB)--the Finance Board's predecessor as regulator

of the FHLBanks--promulgated regulations governing the rights and

obligations of the FHLBanks, the Reserve Banks, and other persons with

respect to the issuance and servicing of book-entry FHLBank securities

and the operation of the associated FHLBank book-entry system. See 12

CFR 506a (1974); 38 FR 10969 (1973) (proposed rule); 38 FR 26355 (1973)

(final rule). These regulations, and those of other government

sponsored enterprises (GSEs) having similar book-entry arrangements

with Reserve Banks, are patterned after part 306 of the regulations of

the Department of Treasury, 31 CFR part 306 (1996), which govern

Reserve Bank book-entry procedures for Treasury securities.

Responsibility for the FHLBB book-entry regulations was transferred to

the Finance Board by the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA), Pub. L. 101-73, section 401(h), 103

Stat. 356 (1989), and the regulations were redesignated as part 912 of

the Finance Board's regulations.

Like those underlying the analogous Department of Treasury

regulations, the legal concepts upon which part 912 is based have

become outdated. At the time that these regulations were developed, the

United States government securities market was in a state of transition

between one in which most securities existed in definitive form (that

is, the traditional certificate) to one in which securities are

maintained almost exclusively within computerized book-entry systems.

This is evidenced by the fact that current part 912 and the parallel

regulations contained provisions regarding the conversion of definitive

securities into book entry securities. Because, as mentioned, all

definitive FHLBank securities have reached maturity, new part 912

contains no such ``conversion'' provisions.

Corresponding law (including state laws based on the Uniform

Commercial Code (UCC)) at the time current part 912 was promulgated

assumed that possession and delivery of physical certificates were the

key elements in the securities holding system. This led the Department

of Treasury, the FHLBB, and other GSE regulators to premise their

regulations upon the ``bearer-definitive security fiction,'' which

deems each book-entry security to be the equivalent of a bearer-

definitive security. Despite the usefulness of the bearer-definitive

fiction, its shortcomings have become increasingly apparent over the

past 25 years, as the rules based on this fiction have been found to

leave many unanswered questions regarding transactions and rights in

book-entry securities.

In addition, the rules have proved inadequate to deal with the

tiered system of accounts in which book-entry securities are held. Each

interest in a book-entry security must be credited to the account of a

Reserve Bank ``participant''--that is, an entity having an account with

a Reserve Bank. Persons or entities, including securities broker-

dealers, who wish to acquire an interest in book-entry securities, but

who do not have an account with a Reserve Bank, must do so through a

Reserve Bank participant. Non-participant broker-dealers who deal in

book-entry securities through a participant may, in turn, hold these

securities for other persons or entities who otherwise lack access to

the securities markets. Accordingly, a Reserve Bank most likely will

have no information regarding the beneficial owners of interests in

book-entry securities, but, instead, will consider the participants in

whose Reserve Bank accounts the book-entry securities are held to be

the ``owners'' of the interests therein.

Since 1985, the Department of Treasury has been working to develop

a new book-entry regulation that does not rely on the bearer-definitive

fiction and that effectively addresses the tiered system of accounts in

which book-entry securities are held. The Department of Treasury

published proposed rules amending its regulations governing the book-

entry system for Treasury securities (called ``Treasury/Reserve

Automated Debt Entry System'' or ``TRADES'') in March 1986 (51 FR

8846), November 1986 (51 FR 43027) and April 1992 (57 FR 12244). After

publication of the latter proposed rule, the Department of Treasury

decided to defer publication of a final rule, or additional proposed

rules, pending the completion of a planned revision of Article 8 of the

UCC, governing investment securities, in order to coordinate the

concepts contained in the new TRADES regulation with those set forth in

the revised version of Article 8.

The revised version of Article 8 of the UCC (Revised Article 8) was

ratified by the American Law Institute and the National Conference of

Commissioners on Uniform State Laws in 1994. Thereafter, the Department

of Treasury, in March 1996, published a fourth proposed TRADES rule,

see 61 FR 8420, that incorporates many of the concepts regarding

transactions and rights in book-entry securities that are set forth in

Revised Article 8 and that defers to state law modeled after Revised

Article 8 in many circumstances. A largely similar final rule was

published in August 1996, see 61 FR 43626, the substantive provisions

of which will take effect on January 1, 1997.

In order to ensure uniformity in the treatment of book-entry

government securities, the regulators of GSEs that maintain book-entry

securities at Reserve Banks also are promulgating new regulations to

govern their respective book-entry systems. These regulations will

parallel the new TRADES regulation, with modifications appropriate to

the particular GSE and government securities to which such regulations

will apply, and will most likely become effective simultaneously with

the new TRADES regulation.

As part of this effort, the Finance Board is now adopting an

interim final rule amending part 912 of its regulations, governing

book-entry FHLBank securities. Because new part 912 is based upon the

new TRADES regulation and because the Department of Treasury has

published extensive commentary in its proposed and final rules

regarding the TRADES regulation, the Finance Board has not set forth

here a comprehensive analysis of part 912. Instead, the Finance Board

is including here concise summaries of each section of new part 912,

which address the manner in which the new provisions will effect the

FHLBank book-entry system specifically. Those wishing to review a more

complete explanation of the nuances of the book-entry regulation and

the principles underlying it are referred to the preambles of the

proposed and final TRADES rules, as well as the official Department of

Treasury Commentary on the TRADES regulation, which will be published

as Appendix B to 31 CFR part 357 (and which was published as part of

the final TRADES rule at 61 FR 43631).

[[Page 64023]]

Although new part 912 is intended to provide a legal framework for

all book-entry FHLBank securities, it is not a codification of all laws

that could affect interests in book-entry FHLBank securities. In

general, the regulation provides that (with some exceptions regarding

security interests) Federal law will govern the rights and obligations

of the FHLBanks and the Reserve Banks arising from book-entry FHLBank

securities and the book-entry system, and that state law (to the extent

that states have adopted Revised Article 8) will govern all other

rights and obligations. The regulation also sets forth the substantive

Federal law that applies to the rights and obligations of the FHLBanks

and the Reserve Banks arising from book-entry FHLBank securities and

the book-entry system. The most prominent aspect of the substantive law

set forth therein is that neither the FHLBanks nor the Reserve Banks

are liable to persons having or claiming interests in book-entry

securities that are below the participant level in the tiered system of

ownership; that is, the FHLBanks and Reserve Banks need only recognize

Reserve Bank participants as holders of interests in book-entry FHLBank

securities.

II. Section-by-Section Analysis

Section 912.1 contains definitions for use in part 912. Section

912.2(a) provides that, with the exception of certain security

interests addressed in Sec. 912.2(b) (discussed below), the rights and

obligations of the FHLBanks and the Reserve Banks with respect to the

FHLBank book-entry system and the FHLBank securities maintained therein

are governed solely and exclusively by Federal law, which is defined to

include: part 912, book-entry FHLBank securities offering notices, and

Reserve Bank Operating Circulars. The governing Federal law set forth

in Sec. 912.2 relates only to the matters set forth therein; other

laws, such as tax, banking, and securities laws remain applicable and

could affect the holders of book-entry FHLBank securities.

Section 912.2(b) provides an exception to the rule of Federal

preemption set forth in Sec. 912.2(a), stating that security interests

in book-entry FHLBank securities in favor of a Reserve Bank that have

not been recorded on the books of the Reserve Bank, as described in

Sec. 912.4(c)(1), shall be governed by: (i) the law of the state in

which the head office of the Reserve Bank maintaining the participant's

account is located, if the security interest is from a participant; or

(ii) the law of the state to be determined as specified in Sec. 912.3

(discussed below), if the security interest is from a person other than

a participant. By implication, security interests in favor of a Reserve

Bank that have been recorded on the books of the Reserve Bank in

accordance with Sec. 912.4(c)(1) are governed by Federal law, as set

forth in Sec. 912.2(a). Thus, claims against the FHLBanks and Reserve

Banks made by participants, or any other person claiming an interest in

a book-entry FHLBank security, other than claims involving Reserve Bank

security interests that have not been recorded on the books of the

Reserve Bank, are governed solely and exclusively by Federal law.

Section 912.2(c) provides that, if the application of the

jurisdictional rule set forth in the first sentence of Sec. 912.2(b)

would result in the application of the law of a state that has not

adopted Revised Article 8, that state's law will be read as if it had

adopted Revised Article 8. This limited rule of Federal preemption is

included in order to ensure that matters involving book-entry FHLBank

securities will be treated similarly regardless of the state having

jurisdiction over the matter. As of November 1, 1996, 29 states have

adopted Revised Article 8 and others are expected to follow. If and

when all states adopt Revised Article 8, the Finance Board expects that

this provision, and the similar provision contained in Sec. 912.3(d),

will be repealed. In the meantime, as provided in Sec. 912.9(b), the

Finance Board will defer to determinations of the Department of

Treasury regarding whether particular states may be deemed to have

adopted Revised Article 8 for purposes of part 912. With regard to the

TRADES regulation, the Department of Treasury intends to publish such

determinations in the Federal Register, as necessary. See 61 FR 43633-

34.

Section 912.3 is a choice of law rule governing the substantive

matters set forth in Sec. 912.3(a)--which are meant to be coextensive

with those matters covered by Revised Article 8 with respect to a

person's interest in a book-entry FHLBank security, other than

interests connected with a person's relationship with the Reserve Banks

or the FHLBanks, which are governed by Federal law, as provided in

Sec. 912.2. Section 912.3(b) adopts Revised Article 8's general choice

of law rule, providing that the law applicable to the securities

intermediary will govern matters involving an interest in a book-entry

FHLBank security held through that intermediary. Section 912.3(c) also

parallels Revised Article 8 by excepting from the general rule the

determination of whether security interests are perfected automatically

or by filing a financing statement and providing that this issue is to

be resolved by reference to the law of the state in which the debtor is

located.

Section 912.3(d) is analogous to Sec. 912.2(c), providing that if

the application of the jurisdictional rule set forth in Sec. 912.3(b)

would result in the application of the law of a state that has not

adopted Revised Article 8, that state's law will be read as if it had

adopted Revised Article 8.

Section 912.4(a) provides that a participant's securities

entitlement is created when a Reserve Bank indicates by book-entry that

a book-entry FHLBank security has been credited to the participant's

securities account. The nature of the participant's ``securities

entitlement''--that is, the nature of its interest in a book-entry

FHLBank security--once it is created, must be determined by reference

to Federal law with respect to the participant's rights against and

obligations to its Reserve Bank and the FHLBanks, as provided in

Sec. 912.2, or to applicable state law with respect to the

participant's rights against and obligations to all other persons, as

provided in Sec. 912.3. Section 912.4(b) provides that a security

interest in favor of the United States government to secure deposits of

public money has priority over the interests of any other person in a

book-entry FHLBank security.

Section 912.4(c)(1) provides that, where required by Federal law or

regulation or pursuant to a specific agreement with a Reserve Bank, a

security interest in book-entry FHLBank securities in favor of a

Reserve Bank or other person may be created and perfected by a Reserve

Bank marking its books to record the security interest. However,

neither the FHLBanks nor the Reserve Banks have any obligation to agree

to record a security interest in book-entry FHLBank securities on the

books of a Reserve Bank, except as required by Federal law or

regulation. A security interest created and perfected as specified in

Sec. 912.4(c)(1) has priority over all other interests in the book-

entry FHLBank security, except an interest of the United States

government, as described in Sec. 912.4(b).

Section 912.4(c)(2) provides that a security interest in a book-

entry FHLBank security may be perfected by any method available under

applicable state law, as determined under Secs. 912.2(b) or 912.3, and

that the priority of such security interests shall be governed by such

applicable law. If a person perfects a security interest pursuant to

Sec. 912.4(c)(2), obligations of the FHLBanks and the Reserve Banks

[[Page 64024]]

with respect to that security interest are limited, absent a specific

agreement made by the FHLBanks or Reserve Banks pursuant to

Sec. 912.4(c)(1). In other words, although security interests in a

book-entry FHLBank security perfected under applicable state law may be

valid, neither the FHLBanks nor a Reserve Bank have any obligation to

recognize any such interests, other than those of the participant in

whose securities account the interest is maintained; a creditor's

recourse will be solely against the debtor participant or other third

party.

Section 912.5(a) sets forth the general rule that, with limited

exceptions, the FHLBanks and the Reserve Banks will recognize the

interest in a book-entry FHLBank security only of a participant in

whose securities account such interest is maintained. As noted above,

book-entry FHLBank securities are held via a tiered system of

ownership. The records of a Reserve Bank reflect only the ownership

interests of participants. Participants frequently will hold interests

in book-entry FHLBank securities for the benefit of their customers

(which may include broker-dealers and other securities intermediaries)

who, in certain cases, in turn will hold interests in FHLBank

securities for the benefit of their customers. Accordingly, neither the

FHLBanks nor a Reserve Bank would know the identity or recognize a

claim of a participant's customer if that customer were to present it

to the FHLBanks or a Reserve Bank. Under the regulation, persons at

levels below the participant level must present their claims to their

securities intermediary; neither the FHLBanks not the Reserve Banks are

liable for any such claims.

Section 912.5(b)(1) sets forth a corollary to the rule set forth in

Sec. 912.5(a), providing that the FHLBanks discharge their payment

responsibilities with respect to a book-entry FHLBank security when a

Reserve Bank credits the funds account of a participant with amounts

due on that security, or makes payment in some other manner specified

by the participant. Section 912.5(b) establishes the mechanism for

payment of book-entry FHLBank securities at maturity or upon

redemption. Contrary to the practice with definitive securities, no act

of presentment is required by the participant.

Section 912.6 authorizes the Reserve Banks, as fiscal agents of the

FHLBanks, to operate the book-entry system for the FHLBanks. Section

912.7 provides that the FHLBanks and the Reserve Banks are not liable

for actions taken in reliance on a tender, transaction request form,

Transfer Message, or other written instrument, or evidence submitted in

support thereof. Section 912.8 makes clear where certain legal process

should be directed, although it makes clear that the regulations do not

establish whether a Reserve Bank is required to honor any such order or

notice.

Section 912.9(a) references, for interpretive purposes, the

Commentary that the Department of Treasury has appended to its TRADES

regulation, so as to provide a comprehensive background to the matters

contained in part 912 and to ensure that it is applied in similar

fashion to the TRADES regulation. Section 912.9(b) defers to the

Department of Treasury determinations regarding whether particular

states may be deemed to have adopted Revised Article 8 for purposes of

part 912.

Section 912.10 merely restates the substance of section 15 of the

Bank Act, 12 U.S.C. 1435, which provides that FHLBank securities are

not obligations of the United States and are not guaranteed by the

United States.

III. Procedural Requirements

This interim final rule does not meet the criteria for a

``significant regulatory action'' under Executive Order 12866.

The Finance Board finds that the notice and comment procedure

required by the Administrative Procedures Act is unnecessary,

impracticable, and contrary to the public interest in this instance.

See 5 U.S.C. 553(b)(3)(B). The Treasury TRADES regulation on which this

rule is based has been published, in various forms, as a proposed rule

four times and as a final rule once. In each instance, the TRADES

regulation was accompanied by extensive commentary addressing the

background and provisions of the TRADES regulation. Accordingly, the

Finance Board has concluded that publication of new part 912 for notice

and comment is unnecessary given its similarity to the TRADES

regulation and is impracticable given the compelling reasons for

setting the effective date of the regulation at January 1, 1997, when

the TRADES regulation and those of the other GSEs will most likely

become effective. Nevertheless, because the Finance Board believes

public comments aid in effective rulemaking, it will accept written

comments on the interim final rule on or before February 3, 1997.

Because no notice of proposed rulemaking is required, the

provisions of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., do

not apply.

There are no collections of information contained in this interim

final rule. Therefore, the Paperwork Reduction Act does not apply.

List of Subjects

12 CFR Part 910

Federal home loan banks, Government securities.

12 CFR Part 912

Federal home loan banks, Federal Reserve System, Government

securities, electronic funds transfer.

Accordingly, the Federal Housing Finance Board hereby amends title

12, chapter IX of the Code of Federal Regulations, to read as follows:

PART 910--CONSOLIDATED BONDS AND DEBENTURES

1. The authority citation for part 910 is revised to read as

follows:

Authority: 12 U.S.C. 1422b, 1431.

2. Section 910.3 is revised to read as follows:

Sec. 910.3 Transactions in consolidated bonds.

The general regulations of the Department of Treasury now or

hereafter in force governing transactions in United States securities,

except 31 CFR part 357, regarding book-entry procedure, are hereby

incorporated into this part, so far as applicable and as necessarily

modified to relate to consolidated Federal Home Loan Bank bonds, as the

regulations of the Board for similar transactions in consolidated

Federal Home Loan Bank bonds. The book-entry procedure for consolidated

Federal Home Loan Bank bonds is contained in part 912 of this

subchapter.

3. Part 912 is revised to read as follows:

PART 912--BOOK-ENTRY PROCEDURE FOR FEDERAL HOME LOAN BANK

SECURITIES

Sec.

912.1 Definitions.

912.2 Law governing rights and obligations of Federal Home Loan

Banks and Federal Reserve Banks; rights of any Person against

Federal Home Loan Banks and Federal Reserve Banks.

912.3 Law governing other interests.

912.4 Creation of Participant's Security Entitlement; security

interests.

912.5 Obligations of the Federal Home Loan Banks; no Adverse

Claims.

912.6 Authority of Federal Reserve Banks.

912.7 Liability of Federal Home Loan Banks and Federal Reserve

Banks

912.8 Notice of attachment for Book-entry Federal Home Loan Bank

Securities.

912.9 Reference to certain Department of Treasury commentary and

determinations.

912.10 Obligations of United States with respect to Federal Home

Loan Bank Securities.

[[Page 64025]]

Authority: 12 U.S.C. 1422a, 1422b, 1431, 1435.

Sec. 912.1 Definitions.

For purposes of this part, unless the context otherwise requires or

indicates:

(a) Adverse Claim means a claim that a claimant has a property

interest in a Book-entry Federal Home Loan Bank Security and that it is

a violation of the rights of the claimant for another Person to hold,

transfer, or deal with the Security.

(b) Book-entry Federal Home Loan Bank Security means a Federal Home

Loan Bank Security maintained in the book-entry system of the Federal

Reserve Banks.

(c) Entitlement Holder means a Person to whose account an interest

in a Book-entry Federal Home Loan Bank Security is credited on the

records of a Securities Intermediary.

(d) Federal Home Loan Bank Security means a consolidated bond,

debenture, note, or other obligation of the Federal Home Loan Banks

issued under authority of section 11 of the Federal Home Loan Bank Act

(12 U.S.C. 1431).

(e) Federal Reserve Bank means the a Federal Reserve Bank or

branch, acting as fiscal agent of the Federal Home Loan Banks, unless

otherwise indicated.

(f) Federal Reserve Bank Operating Circular means the publication

issued by each Federal Reserve Bank that sets forth the terms and

conditions under which the Federal Reserve Bank maintains Book-entry

Securities accounts and transfers Book-entry Securities.

(g) Funds account means a reserve and/or clearing account at a

Federal Reserve Bank to which debits or credits are posted for

transfers against payment, Book-entry Securities transaction fees, or

principal and interest payments.

(h) Participant means a Person that maintains a Participant's

Securities Account with a Federal Reserve Bank.

(i) Participant's Securities Account means an account in the name

of a Participant at a Federal Reserve Bank to which Book-entry Federal

Home Loan Bank Securities held for a Participant are or may be

credited.

(j) Person means and includes an individual, corporation, company,

governmental entity, association, firm, partnership, trust, estate,

representative, and any other similar organization, but does not mean

or include the United States, a Federal Home Loan Bank, or a Federal

Reserve Bank.

(k) Revised Article 8 means Uniform Commercial Code, Revised

Article 8, Investment Securities (with Conforming and Miscellaneous

Amendments to Articles 1, 3, 4, 5, 9, and 10) 1994 Official Text.

Copies of this publication are available from the Executive Office of

the American Law Institute, 4025 Chestnut Street, Philadelphia, PA

19104, and the National Conference of Commissioners on Uniform State

Laws, 676 North St. Clair Street, Suite 1700, Chicago, IL 60611.

(l) Securities Intermediary means:

(1) A Person that is registered as a ``clearing agency'' under the

federal securities laws; a Federal Reserve Bank; any other person that

provides clearance or settlement services with respect to a Book-entry

Federal Home Loan Bank Security that would require it to register as a

clearing agency under the federal securities laws but for an exclusion

or exemption from the registration requirement, if its activities as a

clearing corporation, including promulgation of rules, are subject to

regulation by a federal or state governmental authority; or

(2) A Person (other than an individual, unless such individual is

registered as a broker or dealer under the federal securities laws)

including a bank or broker, that in the ordinary course of its business

maintains securities accounts for others and is acting in that

capacity.

(m) Security Entitlement means the rights and property interest of

an Entitlement Holder with respect to a Book-entry Federal Home Loan

Bank Security.

(n) State means any State of the United States, the District of

Columbia, Puerto Rico, the Virgin Islands, or any other territory or

possession of the United States.

(o) Transfer Message means an instruction of a Participant to a

Federal Reserve Bank to effect a transfer of a Book-entry Federal Home

Loan Bank Security, as set forth in Federal Reserve Bank Operating

Circulars.

Sec. 912.2 Law governing rights and obligations of Federal Home Loan

Banks and Federal Reserve Banks; rights of any Person against Federal

Home Loan Banks and Federal Reserve Banks.

(a) Except as provided in paragraph (b) of this section, the rights

and obligations of the Federal Home Loan Banks and the Federal Reserve

Banks with respect to: A Book-entry Federal Home Loan Bank Security or

Security Entitlement and the operation of the Book-entry system, as it

applies to Federal Home Loan Bank securities; and the rights of any

Person, including a Participant, against the Federal Home Loan Banks

and the Federal Reserve Banks with respect to: A Book-entry Federal

Home Loan Bank Security or Security Entitlement and the operation of

the Book-entry system, as it applies to Federal Home Loan Bank

Securities; are governed solely by regulations of the Federal Housing

Finance Board, including the regulations of this part 912, the

applicable offering notice, applicable procedures established by the

Federal Home Loan Banks, and Federal Reserve Bank Operating Circulars.

(b) A security interest in a Security Entitlement that is in favor

of a Federal Reserve Bank from a Participant and that is not recorded

on the books of a Federal Reserve Bank pursuant to Sec. 912.4(c)(1), is

governed by the law (not including the conflict-of-law rules) of the

jurisdiction where the head office of the Federal Reserve Bank

maintaining the Participant's Securities Account is located. A security

interest in a Security Entitlement that is in favor of a Federal

Reserve Bank from a Person that is not a Participant, and that is not

recorded on the books of a Federal Reserve Bank pursuant to

Sec. 912.4(c)(1), is governed by the law determined in the manner

specified in Sec. 912.3.

(c) If the jurisdiction specified in the first sentence of

paragraph (b) of this section is a State that has not adopted Revised

Article 8, then the law specified in the first sentence of paragraph

(b) of this section shall be the law of that State as though Revised

Article 8 had been adopted by that State.

Sec. 912.3 Law governing other interests.

(a) To the extent not inconsistent with this part 912, the law (not

including the conflict-of-law rules) of a Securities Intermediary's

jurisdiction governs:

(1) The acquisition of a Security Entitlement from the Securities

Intermediary;

(2) The rights and duties of the Securities Intermediary and

Entitlement Holder arising out of a Security Entitlement;

(3) Whether the Securities Intermediary owes any duties to an

adverse claimant to a Security Entitlement;

(4) Whether an Adverse Claim can be asserted against a Person who

acquires a Security Entitlement from the Securities Intermediary or a

Person who purchases a Security Entitlement or interest therein from an

Entitlement Holder; and

(5) Except as otherwise provided in paragraph (c) of this section,

the perfection, effect of perfection or non-perfection, and priority of

a security interest in a Security Entitlement.

(b) The following rules determine a ``Securities Intermediary's

jurisdiction'' for purposes of this section:

[[Page 64026]]

(1) If an agreement between the Securities Intermediary and its

Entitlement Holder specifies that it is governed by the law of a

particular jurisdiction, that jurisdiction is the Securities

Intermediary's jurisdiction.

(2) If an agreement between the Securities Intermediary and its

Entitlement Holder does not specify the governing law as provided in

paragraph (b)(1) of this section, but expressly specifies that the

securities account is maintained at an office in a particular

jurisdiction, that jurisdiction is the Securities Intermediary's

jurisdiction.

(3) If an agreement between the Securities Intermediary and its

Entitlement Holder does not specify a jurisdiction as provided in

paragraph (b)(1) or (b)(2) of this section, the Securities

Intermediary's jurisdiction is the jurisdiction in which is located the

office identified in an account statement as the office serving the

Entitlement Holder's account.

(4) If an agreement between the Securities Intermediary and its

Entitlement Holder does not specify a jurisdiction as provided in

paragraph (b)(1) or (b)(2) of this section and an account statement

does not identify an office serving the Entitlement Holder's account as

provided in paragraph (b)(3) of this section, the Securities

Intermediary's jurisdiction is the jurisdiction in which is located the

chief executive office of the Securities Intermediary.

(c) Notwithstanding the general rule in paragraph (a)(5) of this

section, the law (but not the conflict-of-law rules) of the

jurisdiction in which the Person creating a security interest is

located governs whether and how the security interest may be perfected

automatically or by filing a financing statement.

(d) If the jurisdiction specified in paragraph (b) of this section

is a State that has not adopted Revised Article 8, then the law for the

matters specified in paragraph (a) of this section shall be the law of

that State as though Revised Article 8 had been adopted by that State.

For purposes of the application of the matters specified in paragraph

(a) of this section, the Federal Reserve Bank maintaining the

Securities Account is a clearing corporation, and the Participant's

interest in a Federal Home Loan Bank Book-entry Security is a Security

Entitlement.

Sec. 912.4 Creation of Participant's Security Entitlement; security

interests.

(a) A Participant's Security Entitlement is created when a Federal

Reserve Bank indicates by book entry that a Book-entry Federal Home

Loan Bank Security has been credited to a Participant's Securities

Account.

(b) A security interest in a Security Entitlement of a Participant

in favor of the United States to secure deposits of public money,

including, without limitation deposits to the Treasury tax and loan

accounts, or other security interest in favor of the United States that

is required by Federal statute, regulation, or agreement, and that is

marked on the books of a Federal Reserve Bank is thereby effected and

perfected, and has priority over any other interest in the Securities.

Where a security interest in favor of the United States in a Security

Entitlement of a Participant is marked on the books of a Federal

Reserve Bank, such Reserve Bank may rely, and is protected in relying,

exclusively on the order of an authorized representative of the United

States directing the transfer of the Security. For purposes of this

paragraph (b), an ``authorized representative of the United States'' is

the official designated in the applicable regulations or agreement to

which a Federal Reserve Bank is a party, governing the security

interest.

(c)(1) The Federal Home Loan Banks and the Federal Reserve Banks

have no obligation to agree to act on behalf of any Person or to

recognize the interest of any transferee of a security interest or

other limited interest in a Security Entitlement in favor of any Person

except to the extent of any specific requirement of Federal law or

regulation or to the extent set forth in any specific agreement with

the Federal Reserve Bank on whose books the interest of the Participant

is recorded. To the extent required by such law or regulation or set

forth in an agreement with a Federal Reserve Bank, or the Federal

Reserve Bank Operating Circular, a security interest in a Security

Entitlement that is in favor of a Federal Reserve Bank or a Person may

be created and perfected by a Federal Reserve Bank marking its books to

record the security interest. Except as provided in paragraph (b) of

this section, a security interest in a Security Entitlement marked on

the books of a Federal Reserve Bank shall have priority over any other

interest in the Securities.

(2) In addition to the method provided in paragraph (c)(1) of this

section, a security interest in a Security Entitlement, including a

security interest in favor of a Federal Reserve Bank, may be perfected

by any method by which a security interest may be perfected under

applicable law as described in Sec. 912.2(b) or Sec. 912.3. The

perfection, effect of perfection or non-perfection, and priority of a

security interest are governed by that applicable law. A security

interest in favor of a Federal Reserve Bank shall be treated as a

security interest in favor of a clearing corporation in all respects

under that law, including with respect to the effect of perfection and

priority of the security interest. A Federal Reserve Bank Operating

Circular shall be treated as a rule adopted by a clearing corporation

for such purposes.

Sec. 912.5 Obligations of the Federal Home Loan Banks; No Adverse

Claims.

(a) Except in the case of a security interest in favor of the

United States or a Federal Reserve Bank or otherwise as provided in

Sec. 912.4(c)(1), for the purposes of this part 912, the Federal Home

Loan Banks and the Federal Reserve Banks shall treat the Participant to

whose Securities Account an interest in a Book-entry Federal Home Loan

Bank Security has been credited as the person exclusively entitled to

issue a Transfer Message, to receive interest and other payments with

respect thereof and otherwise to exercise all the rights and powers

with respect to the Security, notwithstanding any information or notice

to the contrary. Neither the Federal Reserve Banks nor the Federal Home

Loan Banks are liable to a Person asserting or having an Adverse Claim

to a Security Entitlement or to a Book-entry Federal Home Loan Bank

Security in a Participant's Securities Account, including any such

claim arising as a result of the transfer or disposition of a Book-

entry Federal Home Loan Bank Security by a Federal Reserve Bank

pursuant to a Transfer Message that the Federal Reserve Bank reasonably

believes to be genuine.

(b) The obligation of the Federal Home Loan Banks to make payments

of interest and principal with respect to Book-entry Federal Home Loan

Bank Securities is discharged at the time payment in the appropriate

amount is made as follows:

(1) Interest on Book-entry Federal Home Loan Bank Securities is

either credited by a Federal Reserve Bank to a Funds Account maintained

at the Federal Reserve Bank or otherwise paid as directed by the

Participant.

(2) Book-entry Federal Home Loan Bank Securities are paid, either

at maturity or upon redemption, in accordance with their terms by a

Federal Reserve Bank withdrawing the securities from the Participant's

Securities Account in which they are maintained and by either crediting

the amount of the proceeds, including both principal and interest,

where applicable, to a Funds Account at the Federal Reserve Bank or

otherwise paying such

[[Page 64027]]

principal and interest as directed by the Participant. No action by the

Participant is required in connection with the payment of a Book-entry

Federal Home Loan Bank Security, unless otherwise expressly required.

Sec. 912.6 Authority of Federal Reserve Banks.

(a) Each Federal Reserve Bank is hereby authorized as fiscal agent

of the Federal Home Loan Banks to perform functions with respect to the

issuance of Book-entry Federal Home Loan Bank Securities, in accordance

with the terms of the applicable offering notice and with procedures

established by the Federal Home Loan Banks; to service and maintain

Book-entry Federal Home Loan Bank Securities in accounts established

for such purposes; to make payments of principal, interest and

redemption premium (if any), as directed by the Federal Home Loan

Banks; to effect transfer of Book-entry Federal Home Loan Bank

Securities between Participants' Securities Accounts as directed by the

Participants; and to perform such other duties as fiscal agent as may

be requested by the Federal Home Loan Banks.

(b) Each Federal Reserve Bank may issue Operating Circulars not

inconsistent with this part 912, governing the details of its handling

of Book-entry Federal Home Loan Bank Securities, Security Entitlements,

and the operation of the book-entry system under this part 912.

Sec. 912.7 Liability of Federal Home Loan Banks and Federal Reserve

Banks.

The Federal Home Loan Banks and the Federal Reserve Banks may rely

on the information provided in a tender, transaction request form,

other transaction documentation, or Transfer Message, and are not

required to verify the information. The Federal Home Loan Banks and the

Federal Reserve Banks shall not be liable for any action taken in

accordance with the information set out in a tender, transaction

request form, other transaction documentation, or Transfer Message, or

evidence submitted in support thereof.

Sec. 912.8 Notice of attachment for Book-entry Federal Home Loan Bank

Securities.

The interest of a debtor in a Security Entitlement may be reached

by a creditor only by legal process upon the Securities Intermediary

with whom the debtor's securities account is maintained, except where a

Security Entitlement is maintained in the name of a secured party, in

which case the debtor's interest may be reached by legal process upon

the secured party. These regulations do not purport to establish

whether a Federal Reserve Bank is required to honor an order or other

notice of attachment in any particular case or class of cases.

Sec. 912.9 Reference to certain Department of Treasury commentary and

determinations.

(a) The Department of Treasury TRADES Commentary (Appendix B to 31

CFR part 357) addressing the Department of Treasury regulations

governing book-entry procedure for Treasury Securities is hereby

referenced, so far as applicable and as necessarily modified to relate

to Book-entry Federal Home Loan Bank Securities, as an interpretive aid

to this part 912.

(b) Determinations of the Department of Treasury regarding whether

a State shall be considered to have adopted Revised Article 8 for

purposes of 31 CFR part 357, as published in the Federal Register or

otherwise, shall also apply to this part 912.

Sec. 912.10 Obligations of United States with respect to Federal Home

Loan Bank Securities.

Federal Home Loan Bank Securities are not obligations of the United

States and are not guaranteed by the United States.

By the Board of Directors of the Federal Housing Finance Board.

Dated: November 7, 1996.

Bruce A. Morrison,

Chairman.

[FR Doc. 96-30454 Filed 12-2-96; 8:45 am]

BILLING CODE 6725-01-U