Conditions Governing Eligibility

The Federal Reserve Board, exercising its statutory right to regulate the purchase of bills of exchange and acceptances, has determined that a bill of exchange or acceptance to be eligible for purchase by Federal Reserve banks,

(a) Must not have been issued for carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States;

(b) Must not be a bill the proceeds of which have been used or are to he used for permanent or fixed investments of any kind, such as land, buildings, or machinery, or for investments of a merely speculative character;

(c) Must have been accepted by the drawee prior to purchase by a Federal Reserve bank unless it is accompanied and secured by shipping documents or by a warehouse, terminal or other similar receipt conveying or security title;

(d) May be secured by the pledge of goods, wares, merchandise, or agricultural products, including live stock, provided it is otherwise eligible.

In addition to the above general requirements, each bill of exchange and trade acceptance purchased under the terms of this regulation must also conform to the following:

To be eligible for purchase, the bill must have arisen out of an actual commercial transaction, domestic or foreign; that is, it must be a bill which has been issued or drawn for agricultural, industrial or commercial purposes, or the proceeds of which have been used or are to be used for the purpose of producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of production, manufacture, or distribution. It must have a maturity at time of purchase of not more than ninety days, exclusive of days of grace.

Opinions Of Counsel And Rulings Relating to Open Market Transactions

Promissory Notes Not Included

Regarding the eligibility of promissory notes, the Federal Reserve Board has reached the conclusion, in which it is sustained by opinion of counsel, that promissory notes, even though bearing an additional indorsement, must be regarded as excluded from open market purchases.

Eligible Paper

There remain, therefore, as eligible for purchase, "cable transfers" and "bills of exchange," the latter being of two kinds, first, so-called foreign bills of exchange, and second, domestic acceptances drawn by one party on another, as for instance, by a seller of goods upon the purchaser, giving rise to a trade acceptance, either accepted or not accepted at the time of purchase. Whether the Federal Reserve banks should engage in such open market transactions rests entirely with them and not with the Federal Reserve Board.

Banks are cautioned that no bill be bought in the open market, which, if indorsed by a member bank, would otherwise be ineligible for rediscount under Section 13 of the Federal Reserve Act. (See General Regulations and Rulings, preceding).

Promissory Notes Not Eligible

Promissory notes, as distinguished from bills of exchange, whether of one or more names, are not eligible for such purchase.

Eligibility Of Commodity Paper

The purchase of commodity loans from member banks without their indorsement would not come within the provisions of the law unless there is two name commodity paper or such paper can be created in connection with commodity loans.