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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
Federal Reserve Board
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
Stabi l izat ion Corporat ion
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
Stabi l izat ion Corporat ion
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
Stabi l izat ion Corporat ion
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
Federal Reserve Board
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,
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