Loans to Foreign Obligors Pledged as Collateral

This notice applies to depository institutions that pledge as collateral, loans to foreign obligors for Discount Window, Payment System Risk or Treasury program purposes. This notice does not apply to foreign securities.

Out of concern for Reserve Banks’ ability to perfect and enforce a security interest in loans to foreign obligors pledged as collateral, Reserve Banks will no longer accept such loans as collateral unless those loans meet criteria as described below.

Foreign obligor loans (FOL) are commercial loans or commercial real estate loans to entities that are incorporated outside of the U.S. or whose principal place of business or main office is outside of the U.S. For loans that rely on the strength of guarantors, the domicile of the guarantor determines the classification (e.g., loans to U.S. shell companies that are guaranteed by foreign parents should be considered foreign). Because of the risk that a Reserve Bank may be unable to perfect or enforce its security interest in such collateral, the Federal Reserve is restricting the eligibility of pledges of FOL collateral to include only:

• loans pledged by U.S. depository institutions or
• loans pledged by foreign depository institutions chartered in the same jurisdiction as the obligor.

To pledge eligible FOL collateral, a depository institution should contact its local Reserve Bank to learn more about how to seek a legal opinion from the relevant foreign jurisdiction. Foreign counsel will need to interact closely with Reserve Bank counsel to ensure that the opinion addresses the Federal Reserve’s concerns. The cost of the foreign counsel will be borne by the depository institution.

We expect institutions to either have removed FOL collateral from their collateral schedules or to have begun taking steps to comply with this policy within the time frame established by their local Reserve Bank.

Depository institutions that participate in the Borrower-in Custody (BIC) Commercial Loan program will be required to report the amount and jurisdiction of all pledged FOL collateral on the annual BIC commercial loan certification. Any foreign obligor loan collateral discovered during a routine BIC inspection that is either not reported or has not received an acceptable legal opinion will be given zero value or will be removed from the BIC. Repeated violations of this policy could result in an institution being deemed ineligible for the BIC commercial loan program.

If you have any questions regarding the pledge of foreign obligor loan collateral or would like to discuss other suitable collateral, please contact your local Reserve Bank.