AL 96-2
Subject:  Overnight Hold-In-Custody
          Repurchase Transactions

TO:  Chief Executive Officers of all National Banks, Department
     and Division Heads, and all Examining Personnel


PURPOSE

This advisory informs national banks that the Government
Securities Act (GSA) regulations issued by the Department of
Treasury (Treasury) require daily confirmations for overnight
hold-in-custody (HIC) repurchase agreement transactions.  This
applies to banks that are offering HIC repurchase agreement
programs, commonly termed "sweep repos."  Based on advice we
received from the Treasury, we want to make it clear that the GSA
regulations and interpretations currently do not permit other
than daily confirmations for such transactions.
 
BACKGROUND

The Chief National Bank Examiner's Office has received numerous
questions recently about whether daily confirmation disclosures
for sweep repo accounts are necessary.  Several banks have
commented that daily confirmations for sweep repos are
unnecessary, burdensome, and costly.  They have requested
permission to issue confirmations less frequently than daily;
some have suggested that monthly account statements could be
issued at the customer's option.

ISSUES

The Bureau of the Public Debt, a Treasury bureau, is responsible
for administering the regulations implementing the GSA.  Its
regulations at 17 CFR 403.5(d) require financial institutions and
government securities broker-dealers engaging in HIC repurchase
transactions to issue confirmations for such repurchase
transactions by the end of the day in which a transaction is
initiated.  The regulations also require confirmations to be
issued at the end of any other day in which substitution of
securities occurs.  These confirmation requirements apply to all
repurchase transactions in which the selling institution keeps
control of the underlying securities.  In addition, the
operational requirements for a daily sweep repo program currently
require institutional control of the underlying securities.


In December 1992, the Federal Financial Institutions Examination
Council's Regulatory Burden Study Group, in consultation with the
Treasury, reviewed the issue of whether daily confirmations are
burdensome.  The study affirmed Treasury's longstanding position
that daily confirmations provide fundamental customer protection
because they have significant value to investors in identifying
the specific securities transactions that are the subject of the 
repurchase transactions.  Confirmations also permit customers to
verify that securities of an appropriate type and value are
allocated to the transactions.  In addition, the GSA regulations
do not permit any other exclusions from the confirmation
requirements except for situations involving foreign
corporations, partnerships, trusts, or non-U.S. citizens residing
outside of the United States.  In such situations these entities
must provide written notification that they are waiving the right
to receive confirmations.

The Treasury has advised us that the provisions of Section
403.5(d) require daily confirmations of sweep repos because they
are recurring transactions, generally giving rise to a new
repurchase transaction daily.  The Treasury has also advised us
that the requirement that the confirmation take place by the end
of the business day means that the confirmation be sent prior to
opening for the next day of business.  Thus, for overnight sweep
repurchase agreements, the confirmation must be available for
delivery to the customer before or at the start of the bank's
next business day. As an alternative to mailing confirmations,
the Treasury has issued an interpretation stating that a
facsimile (fax) is an acceptable means of complying with the
written confirmation requirements of Section 403.5(d)(1)(ii),
provided the counterparty has agreed to accept confirmations by
this method.  An unsuccessful fax transmission, however, does not
relieve the bank of its obligation under this section.  If fax
transmissions are unavailable to any customer at any time or for
any reason, the bank must provide written confirmation by mail or
other appropriate means. 

REFERENCES

Background information and interpretations regarding the
importance of customer confirmations and the specific regulatory
requirements pertaining to repurchase agreement transactions are
contained in the preambles to the following four rulemaking
initiatives: 52 FR 19642, May 26, 1987; 52 FR 27910, July 24,
1987; 53 FR 8598, March 15, 1988; and, 53 FR 28978, August 1,
1988.  For rulemaking proposals that address the requirements for
overnight HIC repurchase transactions, including sweep repos, you
should reference 52 FR 19658-59, May 26, 1987; 52 FR 27919, July
24, 1987; 53 FR 8600, March 15, 1988; and 53 FR 28981-82, August
1, 1988.  

Section 403.5(d) contains rules applicable to financial
institutions that engage in hold-in-custody repurchase
transactions.  These rules parallel the GSA requirements that
apply to brokers and dealers that are not financial institutions. 


If your bank has questions or needs an interpretation of these
confirmation requirements or other GSA regulations, you may call
or write Bureau of the Public Debt, Government Securities
Regulations Staff, Washington, DC, 20239, (202) 219-3632.  For
further information contact the Office of the Chief National Bank
Examiner, Capital Markets, (202) 874-5070.  




                                     
Jimmy F. Barton
Chief National Bank Examiner
Date: March 22, 1996