77-5

77-5

October 4, 1977

Re: Financial Code Section 1224 Opinion

Dear Mr. ________:

This is in reply to your letter of April 4, 1977, and is meant to confirm our earlier oral opinion.

Your question concerns the acceptance of drafts by ________ drawn by its customers in connection with ownership and storage of wrapper leaf tobacco. In the proposed transaction, ________ would establish a line of credit availability with its customer under which the customer would draw a time draft which would be accepted by ________. The banker’s acceptances would be secured by warehouse receipts and the commodity being stored, wrapper leaf tobacco, would not constitute readily marketable staples. Therefore, the acceptance would not satisfy the requirements of Section 1224.

Such an acceptance would constitute an “ineligible acceptance” for purposes of discount with the Federal Reserve.

Our conclusion and opinion is that such acceptances, which would not conform to the requirements of 1224 and which would constitute “ineligible acceptances” can be made by a state-chartered commercial bank. However, such non-conforming acceptances must conform with the unsecured loan limits and general loan limits set forth in Financial Code Section 1221 unless they fall within an exception to Section 1221 as provided in Section 1226. Commercial banks are authorized to accept drafts and bills of exchange as an incidental part of the banking business and it is not the purpose of Section 1224 to grant such authority. The section’s purpose is to liberalize loan limits of Section 1221 under the circumstances specified.

Should you have further questions regarding this matter, please do not hesitate to contact us.

Very truly yours,

CARL J. SCHMITT Superintendent of Banks

DIANA H. NISHIURA Counsel

DHN:ma

cc: State Banking Department, SF

April 4, 1977

Mr. J. L. Taufer Deputy Superintendent of Banks 600 South Commonwealth Avenue Los Angeles California 900snon.s

Re: Banker’s Acceptance

Dear .Mr. Taufer:

In line with our telephone conversation regarding the acceptance of drafts by ________ drawn by its customers in connection with the ownership and storage of wrapper leaf tobacco, I am requesting the approval of the State Banking Department for the transaction as outlined.

________ would establish a line of credit availability with its customer under which the customer would draw time drafts which would be accepted by ________ and held by ________ in its portfolio or rediscounted through a broker to holders based on ________ acceptance. The Banker’s Acceptances could be secured by warehouse receipts of a field warehouseman or by the Uniform Commercial Code inventory security interest as appropriate.

If secured by warehouse receipts, it is possible that the Banker’s Acceptances would be eligible for purchase by the Federal Reserve Bank of New York under their open market committee activities, but in any event, the acceptances would not be eligible for discount under Regulation A of the Federal Reserve Board.

The Banker’s Acceptances could be considered Banker’s Acceptances such as described under Regulation D of the Federal Reserve Board Section 204.1(F) which would require the maintenance of reserves by ________ against the outstanding amount rediscounted.

As the commodity being stored, wrapper leaf tobacco, is in all likelihood not a readily marketable staple, the acceptances would not fall within the provisions of the exclusion from loan limits provided for under Section 1224 of the Financial Code. The amount of the commitment to the Bank customer, however, would not cause legal lending limit problems for ________ and therefore, the exclusion provided by Section 1224 would be unnecessary for the transaction. The draft would be an obligation of the customer as defined under Section 1220 of the California Financial Code, and the maximum outstanding would not exceed the limits provided for in Section 1221.

________ in the past has requested and received consent of the State Banking Department to the issuance of letters of credit to be attached to and be a part of commercial notes of customers and/or trusts as a means of creating or improving the marketability of the commercial paper as a means of financing

The State Banking Department has approved this activity based on the application of prudent banking standards to the extension of credit. The State Banking Department’s approval to the issuance of Bankers Acceptances which do not fall within Section 1224 would be similar to the prior approval for the letters of credit in what is known as documented discount note transactions as in each case, instruments would be sold in the market place based on ________ credit and in one case from a letter of credit and in the other from the acceptance of the draft and in each case, would be based on ________ credit judgment of the underlying transaction and borrower.

Your earliest consideration of this transaction would be appreciated, as the Bank’s customer has requested a commitment in order to enter into the credit arrangement.

Please contact the undersigned for any additional information or if I can be of further assistance.

Very truly yours,

Associate Counsel

:dh

cc:

#105 – Loan Evaluation Division