Fed Eases Bank Units' Participation in 'Riskless Principal' Deals

The Federal Reserve Board on Tuesday made it easier for a bank subsidiary to act as a "riskless principal" in securities transactions.

The Fed repealed nine restrictions that had prevented banks from having a loan on its books involving either party involved in a "riskless principal" deal. The order applies to all 51 holding companies with permission to serve as riskless principals.

Riskless-principal transactions occur when the buyer of a security doesn't want the seller to know his or her identity. The bank purchases the security and resells it to the buyer. At no point does the bank disclose the buyer's name. Buyers cannot remain anonymous if they use a securities broker, because brokers must release the names of their clients.

The Fed said the loan restrictions are unnecessary. It noted that riskless-principal transactions closely resemble traditional brokerage activities, which are not subject to loan restrictions. Also, the deals already are covered by securities laws, it said.

The Fed left intact a separate series of rules that limit when a bank can serve as a riskless principal.