Okla. Admin. Code § 85:10-11-14

Current through Vol. 42, No. 4, November 1, 2024

Section 85:10-11-14 - Repurchase agreements of banks with security dealers and others

(a) Banks and other financial institutions involved with the purchase of United States Government and Agency Obligations under agreements to resell (reverse repurchase agreements) have sometimes incurred significant losses. The most important factors causing these heavy losses have been inadequate credit risk management and the failure to exercise effective control over securities collateralizing the transactions.

(b) Standards of prudent banking with respect to repurchase agreements (the term as used herein also refers to Reverse Repurchase Agreements) with securities dealers and others are set forth in (c) of this Section.

(c) The following minimum guidelines address the need for managing credit risk exposure under securities repurchase agreements and for controlling the securities in those transactions.

(1) Definitions:

(A) "Repurchase agreement" means an arrangement in which a party that owns securities acquires funds by transferring the securities to another party under an agreement to repurchase the securities at an agreed upon future date.

(B) "Reverse repurchase agreement" means an arrangement in which a party provides funds by acquiring securities pursuant to an agreement to resell them at an agreed upon future date.

(2) All banks or trust companies that engage in securities repurchase agreement transactions should establish written credit policies and procedures governing those activities.

(3) A bank or trust company doing business with an unregulated securities dealer should be certain that the dealer voluntarily complies with the Federal Reserve Bank of New York's minimum capital guidelines. To be certain, the following three forms of certification are required:

(A) A letter of certification from the dealer that the dealer will adhere on a continuous basis to the capital adequacy standard;

(B) Audited financial statements which demonstrate that as of the audit date the dealer was in compliance with the standard and the amount of liquid capital; and

(C) A copy of a letter from the firm's certified public accountant stating that it found no material weakness in the dealer's internal systems and controls incident to adherence to the standard.

(4) Periodic evaluations of counterparty creditworthiness should be conducted by individuals who routinely make credit decisions and who are not involved in the execution of repurchase agreement transactions.

(5) Maximum position and temporary exposure limits for each approved counterparty should be established based upon credit analysis performed. Periodic review and updates of those limits are necessary.

(6) Except with respect to a bank or trust companies secured interest and control of securities held as collateral, a repurchase agreement transaction will be subject to lending limits.

(7) A bank must have a written agreement specific to each repurchase agreement transaction specifying all the terms of the transaction.

(8) Possession or control of the underlying securities must be obtained.

(9) The amount paid by a bank or trust company under the repurchase agreement should be less than the market value of the securities, including the amount of any accrued interest, with the difference representing a predetermined margin. Margin requirements should allow for the anticipated price volatility of the security until the maturity of the repurchase agreement.

(10) Counterparties should not be provided with excessive margin of collateralization. The excess market value of securities sold by a bank or trust company are viewed as an unsecured loan to the counterparty and should be treated accordingly for credit policy and control purposes.

Okla. Admin. Code § 85:10-11-14

Amended at 25 Ok Reg 1064, eff 5-25-08