General Character Of Eligible Instruments

The Federal Reserve Board has determined that instruments themselves to be eligible for rediscount at a Federal Reserve Bank must meet the following requirements: -

1. They must be instruments, the proceeds of which have been used, or are to be used, in producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of production.

2. They must not have been used nor contemplated being used for permanent or fixed investments of any kind, such as lands, buildings or machinery.

3. Their proceeds must not have been used nor contemplated being used for investments of a purely speculative character.

4. They must be secured by the pledge of goods or collateral, if they are otherwise eligible.

Applications For Rediscount Required From Member Banks By Federal Reserve Bank

Member banks are required to make application for rediscount to the Federal Reserve Bank, which will satisfy itself as to the eligibility of the instrument. Member banks must furnish with all applications for the rediscount of notes, drafts or bills of exchange, a certificate, in form prescribed by the Federal Reserve Bank, that to the best of their knowledge and belief, the instruments have not been issued for prohibitive purposes.

(For commercial banking practice under the Federal Reserve and acceptances, see Part III.)

The Discount Of Bankers' Acceptances

By the provisions of the Federal Reserve Act, Federal Reserve Banks may discount for member banks bankers' acceptances having a maturity at the time of discount of not more than three months' sight, exclusive of days of grace, which are indorsed by at least one member bank and which grow out of transactions involving the importation or exportation of goods, or which grow out of transactions involving the domestic shipment of goods where shipping documents are attached at the time of acceptance, or which are secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title, covering readily marketable staples. Federal Reserve Banks may likewise acquire drafts or bills of exchange drawn on member banks by banks or bankers in foreign countries, or dependencies, or insular possessions of the United States for the purpose of furnishing dollar exchange.

Eligibility Of Bankers' Acceptances

In order to be eligible for rediscount, bankers' acceptances must have been drawn under a credit open for the purpose of collecting or settling accounts, resulting from transactions involving, (1) the shipment of goods between the United States and a foreign country, or between the United States and any of its dependencies or insular possessions, or between foreign countries, or (2), the domestic shipment of goods where shipping documents are attached at the time of acceptance, or (3), they must be secured at the time of acceptance by warehouse receipts or other such documents conveying or securing title covering readily marketable staples, or (4), Federal Reserve Banks may acquire bills drawn to furnish dollar exchange which have been accepted by a member bank in accordance with the regulations relating to acceptances by member banks, and these bills must be acquired prior to the acceptance where indorsed by a member bank.

Evidence Of Eligibility Of Bankers' Acceptances

Federal Reserve Banks must be satisfied from the acceptance itself or otherwise, that it is eligible for rediscount, which evidence of eligibility may consist of a stamp or certificate affixed by the acceptor in a form satisfactory to the Federal Reserve Bank, but no evidence is required where a bill is accepted by a national bank.