Covered Transactions in Transfer Pricing
Covered transactions entered into by Bank Chains include loans or extensions of credit (including overdrafts and leases or finance agreements) to 23A Affiliates, including placements with 23A Affiliates and securities borrowing/lending activities with 23A Affiliates. It also includes purchase of, or investments in, securities, notes or other debt instruments representing obligations of 23A Affiliates.
Purchase of assets from 23A Affiliates generally includes most purchases of loans, securities, premises, equipment and other assets; Purchases of municipal securities from a securities affiliate; Purchases of assets subject to repurchase by (or With Recourse to) the 23A Affiliate.
Transfers of Legal Vehicles or investments from 23A Affiliates to Bank Chain Entities in legal vehicle re-organizations are part of covered transactions, as are security transactions-related receivables. Bank borrows securities from Corp and pledges other securities as collateral.
- Acceptance of securities issued by a 23A Affiliate as collateral for a loan to an unaffiliated party
– Issuance of guarantees, letters of credit on behalf of 23A Affiliates
– “Attribution Rule”: Transactions by Bank Chain Vehicles with any
third party to the extent that the proceeds are used for the benefit
or support of 23A Affiliates, such as a bank extending credit to a third party to pay a corp.
Reg W modified the “sister bank” exemption in that a bank subsidiary that engages in activities that are not permissible for its parent bank are “affiliates” of the bank for 23A purposes now. Futhermore, extensions of credit to 23A Affiliates must be secured by qualifying collateral. Also, controllers may detect potential covered transactions by reviewing condicables of Bank Chain Vehicles.
Exceptions to Covered Transactions Include:
– Extensions of credit that are fully collateralized by obligations issued or guaranteed by the US Government
– Extensions of credit that are fully collateralized by COD in the bank affected
- Internal corporate reorganizations
– FX, Derivatives and Interest Rate Contracts and Overdrafts
These transactions must be on market terms, at least as strict as 3rd party transactions and effective January 2003, banks were required to adopt policies to monitor and control such credit exposures to affiliates. Also, exemptions from the attribution rule for: general purpose credit cards;
agency transactions; commissions on riskless principal transactions;
pre-existing lines of credit
The purchase of assets having an available “Market Quotation” when done
at the market price excludes purchase of securities issued by 23A Affiliates. Market quotation must appear regularly in a widely disseminated investment news source. Reg W codified a narrow expexpansion to the market quotation exception relating to purchases, from affiliated US registered broker-dealers, of securities having ready market prices.