frsbog_mim_v33_0139.pdf

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T O

T H E FEDERAL RESERVE BO ARD

FEDERAL RESERVE BOARD

WASHINGTON

X-6697

September

6 ,

1930&

SUBJECT: Eligibility

f o r

rediscount

of

acceptances

f o r

Grain

Stabi l izat ion Corporat ion.

Dear

S i r ;

There

i s

enclosed

f o r

your information

a

copy

of a

l e t t e r add ressed

b y t h e

Federal Reserve Board

to Hon .

Alex-

ander Legge, Chairman of the Federa l Farm Board wit h r es pe ct

t o t h e

e l i g i b i l i t y

f o r

rediscount

by

Federal reserve banks

of

certain bankers' acceptances proposed

to be

issued under

acceptance credi ts to be granted t o t h e Grain Stabi l izat ion

Corporation

b y a

number

of

accepting banks

i n

accordance with

t h e

terms

of an

agreement between

t h e

Grain Stabi l izat ion

Corporation, th e Continental Il l inois Bank an d Trust Company

of

Chicagoi

a s

corporate th i s tee ,

M r.

William

P .

fcopf,

o f

Chicago, I l l inois ,

a s

individual trustee* various accepting

banks, an d ' t h e Fe de ra l Farih Board, which agreement i s aunmar-

ized

i n t h e

l e t t e r .

By

Order

of the

Federal

Be

serve Boai*d.

Very truly yours,

E. M. McClelland,

Assistant Secretary.

Enclosures.

TO GOVERNORS AHD CHAIRMEH OF ALL FEDERAL RESERVE BANKS.

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COPY

X-6697-a

September 5, 1930.

Hon. Alexander Legge, Chairman,

Federal Farm Board,

Washington, D. C.

S i r :

I

have

t h e

honor

to

advise

you

that bankers' accept-

ances drawn by The Grain Stabilization Corporation with maturi-

t i e s n o t i n excess of ninety days, secured by warehouse receipts,

shipping documents a n d other similar documents of t i t l e f o r

readi ly marketable staples, and accepted by responsible banks or

bankers

i n

accordance with

th e

Federal Reserve Board's under-

standing of the terms of the tentative agreement enclosed i n your

l e t t e r of August 29, 1930, a re e l i g i b l e f o r rediscount by Federal

re se rv e banks when pr es en te d

f o r

rediscount

in the

usual manner

with th e endorsement of a member bank of the Federal Reserve

System other than t h e accepting bank.

The

Board's understanding

of the

agreement under which

these acceptances a re to be issued and the other relevant facts

per t a in ing the re to

a r e

s ta t ed

i n a

more detailed memorandum

enclosed herewith.

By

Order

of the

Federal Reserve Board.

Very truly yours,

E. M. McClelland,

Assistant Secretary.

Enclosure.

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X 6 6 9

7 15

141

September 4 , 1930

Hon. Alexander Legge, Chairman,

Fe de ra l Farm Board,

Washington, D. C.

Th e


h a s

received your let ter

of

August 29th

inquiring whether certain bankers' acceptances proposed to h e issued under

acceptance credi ts

to he

granted

to The

Grain Stabilization Corporation

b y

a

number

of

accepting hanks

i n

accordance with

t h e

terms

of a

ten ta t ive

d r a f t

of an

agreement between

The

Grain Stabi l izat ion Corporat ion,

th e

Continental Il l inois Bank

and

Trust Company

o f

Chicago, I l l inois ,

a s c o r - :

porate t rus tee , M r. William P . Kopf of Chicago, I l l inois , a s individual

trustee, various accepting banks,

and the

Fede ral Farm Board, w i l l

be

e l i g i b l e f o r rediscount b y Federal reserve banks.

From th e t e n t a t i v e d r a f t of this proposed agreement enclosed i n

your l e t t e r ,

i t

appears that:

1. The

Grain Stabilization Corporation will request

a

number

of

different accept ing banks

t o

e s t a b l i s h

i n i t s

favor acceptance cre di ts

which shall

n o t

exceed

i n t h e

aggregate

th e sum of

$30,000,000

at any one

t ime outstanding, such credits

t o b e

avai led

of by

drafts payable

n o t

more

than ninety days after sight drawn from time

t o

time

by The

Grain Stabi l -

ization Corporation upon

t h e

respective accepting banks

and

accepted

b y

such accepting banks, no d r a f t t o mature later than July 31 , 1931 .

2 . I n order to secure t h e accepting banks against loss, the

St ab i l iz at ion Corporat ion wil l del ive r

to t h e

trustees only

t h e

following

documents o f t i t l e f o r wheat:

( a )

Negotiable domest ic rai l ro ad b i l l s

of

lading;

( b )

nego tia ble domestic

o r

foreign steamship bi l ls

of

lading;

( c )

Negotiabl e warehouse re ce ip ts iss ue d

b y

ware-

houses i n terminal markets which a r e bonded and

under Federal

o r

State l icense;

( d )

Custodian ce rt i f ic at es issued

b y t h e

Board

o f

Trade

of the

City

of

Chicago.

3. The

Stabi l izat ion Corporat ion wil l

a t a l l

times have

i n

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2

1 4 2

X-6697-b

t h e

possession

of the

t rus tees

a s

security documents

of

t i t l e

f o r

wheat

having

a

market value equal

to 125$ of the

total face amount

of

acceptances

outstanding (including those forwarded

f o r

acceptance) , less

t h e

amount

of

a ny

cash deposited

by th e

St ab il iz at io n Corporation with

t h e

t rus t ee s .

4 . A l l

drafts drawn

by t he

Stabi l izat ion Corporat ion

f o r a c -

ceptance

by any of the

accepting banks will

b e

payable

i n

do l l a r s

a

certain

number of days after date t o t he order of the Stabi l izat ion Corporat ion a t

th e

Continental I l l inois Bank

a n d

Trust Company

a n d

wi l l

b e

duly endorsed

i n

blank

by t he

Stabi l izat ion Corporat ion.

5 . A l l such draf ts wi l l b e del ivered by t he Stab i l i za t i on

Corporation with written forwarding directions to the trustees, which*.

af ter regis ter ing them and placing an identifying number on them, will

forward them t o t h e respective accepting banks f o r acceptance; a n d a l l

banks accepting drafts so i d e n t i f i e d and reg i s t e r ed b y t h e trustees wi l l

b e e n t i t l e d t o t he secur i ty a f forded by t he agreement and by the pledge

from time

t o

time

of

documents

of

t i t l e

f o r

wheat, money,

o r

other things

pursuant

t o t he

agreement.

6. The

holders

o f t he

d ra ft s accepted under th is agreement

(other than

th e

bank which

h a s

accepted

th e

same) must look solely

to the

general credi t

o f t he

particular bank which accepted such drafts

a n d

will

have

no

rights whatsoever

i n o r t o t he

co l la te ra l deposited pursuant

t o

this agreement, such collateral being deposited solely f o r t h e b e n e f i t and

pro t ec t i on o f t he accepting banks.

7. The Stabil ization Corporation agrees t o deposit with t he

corporate t rustee

f o r t h e

account

o f t h e

respective accepting banks Chicago

funds

i n

cash equal

t o t h e

face amount

of

draf ts accepted

b y t h e

respect ive

accepting banks

on the

date

o f t he

respec t ive matur i t i es

o f

such draf ts ,

together with

a n y

charges

and

expenses which shall have accrued thereon;

a n d t h e

corporate t rustee wi l l not i fy

t h e

respective accepting banks

o f

t h e

r e c e i p t

o f

such deposit

an d

request forwarding instructions*

8 . Each acce pting bank, reg ard les s of p r i o r i t y an d time o f

acceptance, wil l b e secured equally a n d ra t ab ly i n proport ion t o i t s a c -

ceptances execut ed unde r th is agreement, except

as to

acceptances

f o r

which

cash

h a s

been deposited

a s

provided

i n t he

agreement.

9» The

Federal Farm Board

h a s

loaned and/or will loan further

sums

t o t h e


to bo

secured

b y a

l i e n

on

said secur-

i t y

subordinate

i n a l l

respects

t o t h e

l ion

o f t he

accepting banks.

10. The

Stabil ization Corporation warrants

and

agrees t hat

a l l

wheat pledged under this agreement

a nd a l l

documents

of

t i t l e therefor sha l l

be

f r e e

o f a l l

liens, claims

and

encumbrances whatsoever,

and

that, except

f o r t h e

l ien created

by t he

agreement,

i t

wi l l

a t a l l

times have full

and

abso lu t e t i t l e

t o

such wheat

a nd t he

documents

of

t i t l e t h e r e f o r

a n d

wil l

maintain full insurance covering

a l l

wheat

s o

pledged against

a l l

customary

r i sks , inc luding f i re , l igh tn ing

a nd

tornado.

11. The

Sta bi l i za ti on Corporation wi ll have

t h e

r i g h t

(a ) to

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« » %3 **

X-6697M)

obtain th e re l ease of any documents of t i t l e pledged under th is agreement by

depositing with

th e

trustees cash equal

t o 80$ of the

then market value there-

o f , ( b ) t o

regain possession

of any

cash

so

deposited rrith

th e

t rus tees

(except cash deposited to p ay maturing acceptances) b y depositing with the

trustees documents of t i t le hav ing a market value equal to 125$ of th e

amount

o f

cash

to be

withdrawn,

an d ( c ) t o

s u b s t i t u t e

f o r

documents

of

t i t l e h e l d

b y t h e

trustees other documents

of

ti t le represent ing wheat

of

a value equal t o that represented b y t h e documents of tit le withdrawn.

1 2 .

Whenever

th e

value

o f t h e

wheat pledged falls below

125$

o f t h e to ta l face value of outstanding acceptances (loss t h e amount of

cash deposited),

th e

t ru s t ees

may

demand ad dit ion al c ol l at er al ;

a n d

when-

ever

t h e

current market value

of the

wheat pledged exceeds such amount,

the

St ab i l iz at io n Corporat ion with t h e concurrence o f t h e Federa l Farm Board,

may

obtain

th e

r e l e a s e

o f

such excess.

1 3 . Upon t h e f a i l u r e of the Stabi l izat ion Corporat ion t o deposit

with

the

corporate t rustee

f o r t h e

account

of any

accepting bank cash equal

t o t h e face amount of any drafts accepted o n t h e maturi ty date thereof, or

upon other default

on the

p a r t

o f t h e

Stabi l izat ion Corporat ion,

th e

trustees

i n

the i r d i sc re t ion

may, and

upon

th e

request

of

accepting banks which have

accepted 2 5 $ o r more of the total face amount of outstanding acceptances

shal l . , accelerate

a n d

mature immediately

t h e

obl igat ions

of the

Stab i l i za t ion

Corporation

to p ay t o t h e

accepting banks

th e

f u l l face value

of a l l o u t -

s tanding draf t s ,

and

thereupon

t h e

t ru s t ees

a r e

authorized

t o

s e l l

any or

a l l of t h e

pledged property

a t

publ ic

o r

pr ivate sa le

and to

apply

t h e n e t

proceeds of such sale p r o rata toward t h e payment of the ob l iga t ions of the

Stab i l iza t ion Corporat ion

to t h e

accepting banks, whether

t h e

acceptances

a r e d u e o r n o t , an d t o p ay an y

surplus thereover f i r s t

to the

Federal Farm

Board

an d

then

t o t h e


a s

thei r respect ive

i n -

t e r e s t s

may

appear.

14. The

accepting banks will have

th e

r i g h t

t o

proceed direct ly

agains t

t h e


b y

s u i t

o r

otherwise

f o r an y

fa i lu re

t o

place them

i n

funds

to

meet

th e

payment

of

acceptances,

b u t

shall have

no

r i g h t

to

enforce their r ights against

th e

collateral except through

th e

t ru s t ees

a s

provided

in t h e

agreement.

15. The

trustees shal l hold

a l l

c ol la t e r a l pledged with them

f i r s t f o r t h e s e c u r i t y an d pro tec t ion o f t h e accepting banks an d then f o r

th e

secu r i ty

an d

pro tec t ion

o f t h e

Fe de ra l Farm Board*

t

16

#

H ie agreement i s subject t o amendment by th e concurrence of

th e

t r u s t e e s ,

t h e

Stabi l izat ion Corporat ion,

t h e

Federa l Farm Board ,

and

t h e

accepting banks which

a t t h e

time

of

such amendment have accepted

a

majo r i ty o r more i n face value of the acceptances then outstanding f o r

which funds have

n o t

been furnished

t o

such accepting banks

by the

Stabilization Corporation*

above

i s n o t

intended

a s a

complete statement

o f t h e p r o -

vis ions of the ten ta t ive d ra f t o f t h e agreement enclosed i n your let ter ;

b u t i t

indicates

t h e

Federal Reserve Board's understanding

as to the

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i

144

4— X 6697 1

essen t i a l f ea tu res

of the

plan under which proposed acceptances

a re to be

i ssued .

While i t i s n o t so s t a t e d i n t h e agreement, i t i s assumed f o r

t h e

purpose

of

this rul ing that

( a ) a l l

warehouse receipts pledged with

th e trustees pursuant t o th is agreement w i l l be issued b y warehouses i n -

dependent

o f t h e

Grain Stabilization Corporation within

th e

meaning

and

i n t e n t

of the

Regulations

and

ru l ings

of the

Federal Reserve Board,

and

(b )

that

th e

custod ian cer t i f ica tes i ssued

b y t h e

Board

of

Trade

of the

City

of

Chicago which

a r e

pledged with

th e

t ru s t ees e i the r

a r e i n

legal

effect warehouse receipts issued

b y

independent warehousemen

o r a r e

otherwise suff ic ien t

t o

vest

in t h e

ho lder s va l id t i t l e

to t h e

gra in

f o r

which they

a r e

issued

o r a

valid lien thereon good

and

enforceable

a s

aga ins t a l l other pa r t ie s .

I n t h e

f i r s t c l a u s e

of the

preamble

o f t h e

agreement

i t i s

s ta ted that

th e

dra f t s wi l l

b e

payable

n o t

more than ninety days after

s igh t ;

b u t i n

A r t i c l e

1 i t i s

sta ted that

th e

d r a f t s

s o

accepted shall

have maturi t ies

n o t

exceeding

s i x

months after sight.

The

Federal Reserve

Board understands, however,

an d

assumes

f o r t h e

purpose

o f

this rul ing,

that no d r a f t s w i l l b e accepted with maturit ies i n excess of ninety days.

This

i s n o t

intended

a s a

ru l ing

t o t h e

effect that drafts with maturi t ies

i n excess of ninety days would b e i n e l i g i b l e f o r rediscount b y Federal

reserve banks,

b u t i s

intended only

t o

avoid

f o r t h e

present

t h e

neces-

s i t y of making any ru l ing on the apparently academic question whether

drafts having

a

matur i ty

i n

excess

of

ninety days would

b e

e l i g i b l e

f o r

rediscount .

One purpose of the requirement of the Federal Reserve A c t that ,

i n

order

to be

e l i g i b l e

f o r

acceptance

b y

member banks

o r f o r

rediscount

b y Federal reserve banks, drafts growing ou t o f the storage of read i ly

marketable staples must

b e

secured

a t t h e

time

o f

acceptance

b y

warehouse

r e c e i p t s

o r

other such documents conveying

o r

secu r ing t i t l e

i s t o

enable

t h e

accept ing banks effect ively

t o

require that they

b e

provided with funds

with which

to p ay t h e

acceptances

on or

before their maturi ty;

and the

Board 's regulat ions require that t h e acceptor remain secured throughout

th e

l i f e

of the

acceptance.

The

provision contained

i n

A r t i c l e

13 of the

t en t a t ive d ra f t of the agreement substantially to the ef fec t t ha t th e

trustees cannot

b e

requi red

t o

s e l l

any of the

c o l l a t e r a l

i n

order

t o

provide funds to p ay maturing acceptances except a t t h e request of banks

which have accepted

2 5 $ o r

more

o f t h e

total volume

of

acceptances issued

pursuant t o t h e agreement, i s inc onsi ste nt with these provisions of the

law and of the

Board ' s regu la t ions .

The

Board

i s o f the

opinion, therefore,

that these acceptances should n o t b e considered el igible f o r rediscount

by

Federal reserve banks unless this provision

of the

agreement

i s

modified

so as to provide i n substance that, upon th e f a i l u r e o f t h e Stab i l i za t ion

Corporation

to

deposit with

th e

corporate t rus tee funds su ff ic ie nt

to pay

maturing acceptances

a t

maturi ty ,

t h e

accepting bank shall have

th e

r igh t ,

without

th e

concurrence

of any

other bank,

t o

requ i re tha t su f f i c i en t

c o l -

l a t e r a l

b e

sold

to

provide funds adequate

f o r

this purpose

an d

tha t

i t

shall

b o t h e

duty

of the

corporate trustee immediately

t o

s e l l s u f f i c i e n t

c o l -

l a t e r a l

and to pay

over

t o t h e

bank requesting

i t a

sufficient amount

of

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- 5 —

X-6697-b

t h e proceeds thereof t o enable i t t o meet a n y a n d a l l matured acceptances

Issued

by i t

pursuant

t o

this agreement.

The

Board understands that

i t

wi l l be poss ib le t o modify th e agreement t o this extent an d i s ruling upon

t h e

question presented with

t h e

understanding that

t h e

agreement will

be

so

modified.

I f t h e

agreement

i s

modified

in t h e

manner suggested

i n th o

preceding paragraph, a n d i f bankers' acceptances a r c issued, secured, and

drawn

i n

full compliance with

t h e

Federal Reserve Board's understanding

of the proposed plan an d t h e f acts per ta in ing there to a s s t a t e d i n th is

l e t t e r ,

t h e


i s o f t h e

opinion that such acceptances

w i l l

b e

e l i g i b l e

f o r

rediscount

b y

Federal reserve banks when they have

ma t u r i t i e s n o t i n excess of ninety days a n d when they a r e o f f e r e d f o r

rediscount

i n t h e

usual manner with

t h e

endorsement

of a

member bank

of

t h e

Federal Reserve System other than

t h e

accepting bank.

While such acceptances will

b e

deemed eligible

f o r

rediscount

b y Federal reserve banks, i t should b e c le ar ly understood tha t th e Fed -

eral reserve banks

a r e n o t

required

to

rediscount them

but may

decline

to do so in the exercise of their banking discret ion. I n view of the

large volume

of

acceptances proposed

to be

issued , therefor e ,

i t i s

suggested that

i t

would

b e

advisable

t o

consult with,

and

ascer t a in

the

a t t i t u d e o f , t h e Federal reserve banks t o which i t i s expected that these

acceptances will

b e

of fe red

f o r

rediscount , before

th e

proposed plan

i s

def in i te ly adopted .

I n

your l e t t e r

of

August 29th

i t i s

sta ted that

a n

iden t i ca l

arrangement, except

as t o

certain provisions

as to

hedging wheat, will

be

entered into

b y t h e

Farmers National Grain Corporation;

but you do

n o t spec i f i ca l ly r eques t a ru l ing a t th is time with ref ere nce t o accept -

ances growing

ou t o f

that arrangement.

The

Federal Reserve Board,

how-

ever, wil l b e glad t o rule upon th e e l i g i b i l i t y of such acceptances

upon being informed

as t o t h e

nature

of the

provisions regarding

th e

hedging

o f

wheat

and as to any

other respects

i n

which that agreement

a s

f i na l l y prepared

may

di ff er from

th o

agreement prepared

on

behalf

of the

Grain Stabi l izat ion Corporat ion.

By

Order

of tho

Federal Reserve Board.

Very truly yours,

E. M.

McClelland,

Assistant Secretary,

frsbog_mim_v33_0139.pdf

Documents

i g i b i

matur i t i e s

r documents of t i t

e t t e r

t e n t

i n i n g

i n o i s bank

corporate t h i s t