October 26, 1994


Dear M ________:

This letter is in response to your letter of December 20, 1993 concerning the applicability of Financial Code Section 1226 to certain securities repurchase contracts. This letter will confirm our previous verbal advice on this issue. In your letter you request that the Superintendent grant an exemption, under the provisions of Financial Code Section 1226(b), for certain security repurchase and security lending transactions. Pursuant to the Financial code, the Superintendent of Banks hereby exempts from the provisions of Section 1221 such transactions which meet the following conditions:

1. The obligation of the bank’s counterparty will be secured by U.S. Treasury securities, or U.S. Agency securities supported by the full faith and credit of the United States Government.

2. At origination the fair market value of the collateral equal or exceed 102 percent of the obligation. At all times during the period that the obligation is outstanding the fair market value of the collateral equal or exceed the amount of the obligation. The value of the collateral shall be marked to market on a daily basis.

3. That the bank shall take possession of the collateral either in person, or through a third party custodian.

4. That the duration of any security repurchase agreement shall not exceed 10 days, and the duration of any security lending transaction shall not exceed 90 days.

5. At least annually, the bank shall make a written analysis of the creditworthiness of each proposed counterparty. At each periodic review the bank’s risk management group will establish in writing an appropriate limit for each proposed counterparty.

By this letter transactions which meet the above conditions are exempted from the limitations of Section 1221 of the Financial Code. However, the bank’s activities will continue to be monitored for safety and soundness. The bank’s compliance with the above conditions will be evaluated at the next regular examination of the bank.

If you have any questions regarding the foregoing please contact either David Scott, or Mas Yamaguchi in our Los Angeles office.

Yours truly,

Acting Superintendent of Banks


Deputy Superintendent of Banks

cc: FRB, S.F.

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