[Federal Register Volume 62, Number 214 (Wednesday, November 5, 1997)]
[Rules and Regulations]
[Pages 59775-59779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29203]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / 
Rules and Regulations  

[[Page 59775]]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-0980]


Reserve Requirements of Depository Institutions

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is amending its Regulation D, Reserve Requirements 
of Depository Institutions, to allow U.S. branches and agencies of 
foreign banks and Edge and Agreement corporations to choose whether to 
aggregate reserve balances on a nationwide basis with a single pass-
through correspondent or to continue to maintain reserve balances on a 
same-state/same-District basis as they do today. The amendments will 
also update and clarify the pass-through rules in Regulation D for all 
institutions. These amendments will facilitate interstate banking and 
branching and eliminate certain restrictions applicable to pass-through 
arrangements.

EFFECTIVE DATE: January 1, 1998.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General 
Counsel, (202/452-3625) or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division. For the hearing impaired only, contact Diane 
Jenkins, Telecommunications Device for the Deaf (TDD) (202/452-3544), 
Board of Governors of the Federal Reserve System, 20th and C Streets, 
N.W., Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: To facilitate interstate banking and 
branching, the Federal Reserve Banks will begin to implement a new 
account structure in January 1998 that will provide a single Federal 
Reserve account for each domestic depository institution. This 
structure will enable the Federal Reserve Banks to establish a single 
debtor-creditor relationship with each chartered entity, thereby 
providing an effective means for Reserve Banks to carry out their risk 
management responsibilities, and will improve the efficiency of account 
management for depository institutions.1 In August 1997, the 
Board proposed amendments to its Regulation D (12 CFR Part 204) that 
would allow U.S. branches and agencies of the same foreign bank and 
Edge and Agreement corporations 2 to hold all of their 
required reserve balances in a single account held by a pass-through 
correspondent or to continue to have separate accounts on a same-state/
same-District basis as they do today (62 FR 42708, August 8, 1997). The 
proposal also would have allowed foreign bank offices and Edge 
corporations to choose whether to aggregate their deposit reports on a 
nationwide basis or to continue to report on a same-state/same-District 
basis.
---------------------------------------------------------------------------

    \1\ To determine the Federal Reserve Bank at which a bank with 
interstate branches will hold an account, the Board adopted rules 
earlier this year to define a domestic depository institution's 
location for purposes of Federal Reserve membership and reserve 
account maintenance (62 FR 34613, June 27, 1997).
    \2\ Edge corporations are organized under section 25A of the 
Federal Reserve Act (12 U.S.C. 611-631), and Agreement corporations 
have an agreement or undertaking with the Board under section 25 of 
the Federal Reserve Act (12 U.S.C. 601-604a). For purposes of this 
docket, the term ``Edge corporation'' includes Agreement 
corporations.
---------------------------------------------------------------------------

    To permit this choice for foreign bank offices and Edge 
corporations, the Board proposed changes to the pass-through rules in 
Regulation D, which would liberalize those rules for all domestic 
depository institutions as well as for foreign bank offices and Edge 
corporations. The Board also requested comment on issues relating to 
where all institutions should file their reports of deposit, as well as 
other reports.
    The Board is adopting a revised version of its proposal. Under the 
final rule, foreign bank offices and Edge corporations will have a 
choice whether to aggregate required reserve balances on a nationwide 
basis through a pass-through arrangement or to maintain separate same-
state/same-District accounts. All institutions, however, including 
foreign bank offices and Edge corporations, will continue to file 
reports of deposits and other reports with the Federal Reserve Bank in 
whose District they are located.

General Comments

    The Board received twelve comments on the proposed amendments to 
Regulation D, five from Federal Reserve Banks, three from U.S. offices 
of foreign banks, two from trade associations, one from a commercial 
bank parent of an Edge corporation, and one from a state banking 
supervisor. The commenters overwhelmingly supported allowing foreign 
bank offices and Edge corporations the option of aggregating their 
required reserve balances nationally or locally. The foreign bank 
commenters, the Edge corporation parent, and a foreign bank trade 
association noted that retaining the option is important to foreign 
banks because some offices operate independently and are not equipped 
to consolidate reserve balances, while other foreign bank families 
could operate more efficiently if reserve balances were maintained at a 
central location.
    A state banking supervisor expressed concern that the aggregation 
of a foreign bank's reserve balances may appear to conflict with the 
separate legal status of each branch of the foreign bank and should not 
be allowed to affect the responsibilities of each branch to comply with 
any requirements under state law. The Board believes that the treatment 
of the reserve balances of a foreign bank family under Regulation D 
does not change in any way the responsibility of any individual foreign 
bank branch or agency to continue to meet any relevant state law 
requirements imposed by a state regulator, such as asset pledge, 
maintenance, or reserve requirements.

Section-By-Section Analysis

Section 204.3(a) Computation and Maintenance of Required Reserves

    Maintenance of required reserves. Section 204.3(a) of Regulation D 
requires every depository institution, U.S. branch or agency of a 
foreign bank, and Edge or Agreement Corporation to maintain reserves 
against its deposits and Eurocurrency liabilities and file reports in 
accordance with the ratios and procedures described in the regulation. 
The Board proposed no amendments to this provision but, as discussed 
below, has removed the reference to filing reports and has consolidated 
all reporting provisions in a single paragraph.

[[Page 59776]]

    Reporting. Section 204.3(a) also requires foreign bank offices and 
Edge corporations located in the same state and same Federal Reserve 
District to file a single aggregated report of deposits with the 
Federal Reserve Bank in whose District the offices are located. The 
Board solicited comment on an amendment to this section to allow a 
foreign bank or Edge corporation family to submit an aggregated report 
of deposits for all U.S. offices, in the event that those foreign banks 
or Edge corporations chose to aggregate required reserve balances in a 
single account held by a pass-through correspondent.
    The Board also requested comment on whether reporting changes are 
necessary for all depository institutions that hold their reserve 
balances with pass-through correspondents. Regulation D (former 
Sec. 204.3(i)(2), now relocated to Sec. 204.3(a)(2)) requires a 
depository institution to file its report of deposits with the Reserve 
Bank in whose District the institution is located, regardless of 
whether the institution maintains reserve balances in its own account 
or with a pass-through correspondent. The Reserve Bank notifies the 
reporting institution of its reserve requirements and also notifies the 
pass-through correspondent, if one exists. Each respondent is 
responsible for reporting; the pass-through correspondent is not 
responsible for reporting errors made by the respondent, but it is 
responsible for maintaining the required reserve balances in accordance 
with the reports. Under the proposed pass-through rules, a depository 
institution located in one Federal Reserve District could hold reserve 
balances with a pass-through correspondent whose Federal Reserve 
account is located in another District. (The Board has adopted this 
proposal, as discussed below.) In this situation, the Board noted that 
it may be appropriate for that depository institution's deposit reports 
to ``follow the money,'' that is, for the depository institution to 
send its deposit report to the Reserve Bank that holds the account, 
rather than the Reserve Bank of the institution's District. In 
addition, the Board requested comment on whether it is appropriate for 
all reports of all institutions (depository institutions as well as 
foreign bank offices and Edge corporations), including both supervisory 
and monetary reports, to go to the Reserve Bank that holds the account 
where that institution's reserve balances are held.
    Nine of the eleven commenters discussed reporting issues. Five 
commenters pointed out practical problems associated with requiring 
reports to ``follow the money'' rather than be filed with the 
institution's local Reserve Bank. A trade association for foreign banks 
stated that, for foreign bank offices that maintained reserve balances 
with a single pass-through correspondent account, the effect of 
requiring all reports to go to the Reserve Bank that holds the account 
is not clear. The commenter was concerned, for example, about how the 
Reserve Bank receiving the reports would coordinate with the Reserve 
Bank that supervises the local office, as well as the effect the 
unified reporting system would have on coordinated supervision between 
federal and state regulators. A foreign bank commenter stated that 
consolidation of all reports could result in a lack of understanding of 
the foreign bank office's condition by its supervising Reserve Bank and 
de facto double reporting requirements for the office. A Reserve Bank 
noted that allowing aggregate reporting for these foreign bank offices 
would make it difficult to verify reports on a timely basis, would 
require close coordination between Reserve Banks, and could affect the 
accuracy of data on the various separately chartered offices. One bank 
trade association, one Edge corporation parent, and two Reserve Banks 
supported the proposal to allow foreign bank offices and Edge 
corporations to file a single aggregated report of deposits, although 
one of those Reserve Banks argued against requiring domestic pass-
through respondents to file deposit reports with their out-of-District 
correspondent's Reserve Bank.
    The commenters also identified problems with the ``follow the 
money'' approach for domestic institutions that hold reserve balances 
with a pass-through correspondent. For example, one commenter stated 
that, although requiring all reports to go to the Federal Reserve Bank 
that holds the correspondent's account could provide an efficient means 
of administering reserve requirements, it would also require Reserve 
Banks to dedicate resources to analyzing nonlocal banks' structure, 
operations, and financial statements. The commenter stated that the 
alternative of ``split reporting'' (sending deposit reports to the 
account-holding Reserve Bank and all other reports to the local Reserve 
Bank) could lead to confusion and inefficiencies and that another 
alternative, filing all reports with multiple Reserve Banks, would 
place additional burden on depository institutions. Two other 
commenters stated that another reason the reporting location should not 
be based on the location of a pass-through correspondent is because 
pass-through arrangements can change frequently.
    Although the Board believes that requiring reports to follow the 
money might provide an efficient means of administering reserve 
requirements, any potential efficiencies appear to be outweighed by the 
practical difficulties involved when deposit (or all) reports are 
submitted to a Reserve Bank other than the reporting institution's 
local Reserve Bank. If the Reserve Bank in whose District the 
institution is located is responsible for supervising the institution, 
submitting supervisory reports to another Reserve Bank could affect the 
depth and timeliness of the supervising Reserve Bank's knowledge of the 
institution's condition. Split reporting would lead to inefficiencies 
in other areas for both the institution and the Federal Reserve Banks. 
The reporting institution would have to deal with more than one Reserve 
Bank on reporting and data editing issues. For the Federal Reserve, 
each Reserve Bank collecting data from a particular institution would 
have to become knowledgeable about that institution's structure, 
operations, and balance sheet in order to perform effective data 
editing and analysis.
    In light of these problems, the Board is retaining the current 
reporting requirements for domestic institutions as well as foreign 
bank offices and Edge corporations. The Board has consolidated the 
reporting provisions in new Sec. 204.3(a)(2). All reporting 
institutions will file deposit and other reports with the Federal 
Reserve Bank in whose District the institution is located. Foreign bank 
and Edge corporation offices operating in the same state and same 
District will file an aggregated report as they do today. The reporting 
rule does not affect an institution's ability to pass its reserve 
balances through a correspondent, which may be located in the same or 
another District. For example, a foreign bank family will be able to 
consolidate required reserve balances with a single pass-through 
correspondent while still reporting deposits on a same-state same-
District basis.
    One commenter asked the Board to clarify that, in the case of Edge 
corporations, the reporting aggregation applies to the offices of a 
single Edge corporation and not the offices of all Edge corporations 
owned by a single parent that operate in the same state and same 
District. The provisions of Sec. 204.3(a)(2) on aggregated reporting 
apply to all offices of a single Edge corporation operating in the same 
state and same District, not to all offices owned by a common parent.

[[Page 59777]]

    Low Reserve Tranche and Exemption Amounts. Regulation D provides 
that foreign bank and Edge corporation families share one low reserve 
tranche and exemption amount among all related offices.3 The 
pre-amendment Regulation D set out separate provisions 
(Sec. 204.3(a)(1) and (a)(2)) for foreign banks and Edge corporations 
covering allocation of the low reserve tranche and contained a separate 
provision (Sec. 204.3(a)(3)) on allocation of the reserve exemption, 
which applied to depository institutions as well as foreign bank 
offices and Edge corporations. The Board proposed a new 
Sec. 204.3(a)(2) to combine the existing provisions on allocation of 
the low reserve tranche and the reserve exemption among branches of 
depository institutions, foreign bank offices, and Edge corporations.
---------------------------------------------------------------------------

    \3\ The amount of an institution's net transaction accounts in 
the low reserve tranche ($0 to $49.3 million) carries a lower 
reserve requirement (3 percent) than the amount above the tranche 
(which carries a 10 percent requirement). The first $4.4 million of 
any institution's reservable liabilities are exempt from reserve 
requirements.
---------------------------------------------------------------------------

    The Board received one comment on this proposed amendment, in favor 
of the revision. The Board has adopted the amendment as proposed. Under 
the amendment, a depository institution and its branches, foreign bank 
families, and offices of an Edge corporation will continue to share one 
low reserve tranche and one reserve exemption and can allocate the 
tranche and exemption among offices or groups of offices that file 
separate deposit reports.4
---------------------------------------------------------------------------

    \4\ Ordinarily, branches of a domestic depository institution 
would not file separate deposit reports unless they are in 
transition (for example, after a merger or other consolidation) from 
a multiple to a single reporting and account structure.
---------------------------------------------------------------------------

Section 204.3(b) Form and Location of Reserves

    In June 1997, the Board amended Sec. 204.3(b) to set forth where a 
domestic depository institution is located for purposes of determining 
the Federal Reserve Bank where the institution will maintain its 
reserve balances (see footnote 1). Specifically, an institution is 
considered to be located in the Federal Reserve District specified in 
its charter or organizing certificate, or, if no such location is 
specified, the location of its head office. The Board can make 
exceptions to the general rule for a particular institution after 
considering certain criteria. The Board proposed to apply the same rule 
to foreign bank offices and Edge corporations. For foreign banks and 
Edge corporations that pass all reserve balances through a single 
correspondent, the location of the pass-through correspondent would 
determine which Reserve Bank holds the account. The Board also proposed 
to remove the sentence in Sec. 204.3(b)(1) that stated that reserves 
that were held on a pass-through basis were considered to be a balance 
maintained with a Reserve Bank. This sentence could be read to conflict 
with the Board's proposed revisions to the pass-through rules 
clarifying that the balances held in the account of the pass-through 
correspondent were the property of the correspondent.
    The Board received one comment on these provisions, supporting the 
proposal. The Board has adopted the proposed amendments and has also 
revised the language in Sec. 204.3(b)(1) to clarify that only non-
member institutions may hold reserves with a pass-through 
correspondent.5
---------------------------------------------------------------------------

    \5\ This limitation is set forth in section 19(c)(1) of the 
Federal Reserve Act, 12 U.S.C. 461(c).
---------------------------------------------------------------------------

Section 204.3(i) Pass-Through Rules

    Eligible Pass-Through Correspondents. Former Sec. 204.3(i)(1) 
stated that foreign bank offices and Edge corporations could pass their 
reserve balances through an account of another office of the same 
institution, subject to the pass-through rules applicable to all 
depository institutions. This provision could have been interpreted to 
preclude these institutions from using an unaffiliated pass-through 
correspondent. The Board proposed to clarify that a foreign bank or 
Edge corporation family may choose any eligible institution as a pass-
through correspondent, such as a domestic depository institution or a 
office of another foreign bank, in addition to an office of its own 
family. Although the Board believes that these entities will generally 
choose one of their own offices as the pass-through correspondent, 
allowing the choice is comparable to the treatment of domestic 
depository institutions under Regulation D. The Board received two 
comments on this amendment, both in support, and has adopted it as 
proposed. The Board has also revised Sec. 204.3(i)(1) to provide that a 
Reserve Bank may make exceptions to the requirement that an institution 
can choose only one pass-through correspondent. Such an exception may 
be necessary, for example, during a transition period after the merger 
of two respondents with two different pass-through correspondents.
    Account Maintenance. Former Sec. 204.3(i) required a pass-through 
correspondent to maintain accounts at each Federal Reserve Bank in 
whose District the respondent institutions were located. The Board 
proposed to remove the requirement that pass-though reserve balances 
must be held in the District where the respondent is located. This 
proposal was necessary to enable foreign bank families and Edge 
corporations to aggregate their required reserve balances in a single 
account held by a pass-through correspondent. The proposed amendment 
applied to pass-through arrangements for all domestic depository 
institutions as well. The Board received two comments that specifically 
discussed this amendment; both supported the change, citing improved 
efficiency and removal of impediments to interstate banking. The Board 
has adopted the amendment as proposed.
    Former Regulation D also provided that, when respondents are 
located in the same District as the pass-through correspondent, the 
correspondent may choose to maintain its own reserve balances and the 
pass-through reserve balances in a single commingled account or in two 
separate accounts. Under the Board's proposal, correspondents would 
hold pass-through balances in a single commingled account, along with 
the pass-through correspondent's own reserve balances (if any) at the 
Reserve Bank in whose District the pass-through correspondent is 
located. The Board requested comment on whether correspondents should 
continue to have the option of separate accounts for their own reserve 
balances and the reserve balances they hold on a pass-through basis. 
The Board received two comments on this issue, both from Federal 
Reserve Banks. One commenter suggested that the Board allow 
correspondents to retain the option to have a separate account for 
pass-through reserve balances because the Federal Reserve Banks' 
subaccount structure does not provide account-holders with a daily 
ending balance for each subaccount. The other commenter stated that 
there is no need for a correspondent to maintain pass-through reserve 
balances in separate account from its own reserve balances and that the 
subaccount structure will provide the correspondent with sufficient 
information to segregate its own reserve balances from pass-through 
balances. The Board continues to believe the subaccount will suffice 
for tracking respondent activity and that correspondents will be able 
to calculate the ending balance for subaccounts based on the 
information they receive. The Board, therefore, has adopted the 
proposed provision that a correspondent maintain a single account for 
its own reserve balances (if any) and the pass-

[[Page 59778]]

 through reserve balances of respondents. The Board has, however, added 
a provision to allow a Reserve Bank to make an exception to this rule. 
The Board anticipates that a Reserve Bank might permit an exception in 
cases where, for example, the correspondent is involved in a merger and 
holds a separate transition account at the same or another Reserve 
Bank.
    Former Regulation D was unclear as to whose money is in the account 
that contains the pass-through reserve balances, that is, whether the 
account is a Reserve Bank liability to the pass-through correspondent 
or to the respondent. 6 The Board proposed amendments to 
Sec. 204.3(i) to clarify that the balances held by the pass-through 
correspondent are the property of the correspondent and represent a 
liability of the Reserve Bank solely to the correspondent, regardless 
of whether the funds represent the reserve balances of another office 
or institution that have been passed through the correspondent. The 
Board received two comments on this proposal, both in favor, and has 
adopted the amendment as proposed.
---------------------------------------------------------------------------

    \6\ The call report instructions are more clear, stating that, 
from the perspective of the Federal Reserve Bank, pass-through 
balances are treated as balances due to the correspondent, not to 
the respondent.
---------------------------------------------------------------------------

    Services. Former Sec. 204.3(i)(5) contained provisions regarding 
the services available to pass-through correspondents and respondents. 
The Board proposed to remove these provisions from Regulation D. The 
terms of services offered by the Reserve Banks are covered in 
Regulation J (12 CFR part 210) and the Reserve Banks' operating 
circulars. The Board received one comment on this proposal, in support 
of the change. The Board has eliminated this provision, as proposed.

Technical Changes

    The Board also proposed editorial and conforming amendments to 
Secs. 204.3(i) and 204.9(b) of Regulation D. The Board received no 
comments on these changes. Because of the addition of the consolidated 
reporting provision in Sec. 204.3(a), the technical amendment to a 
cross-reference in Sec. 204.9(b) is no longer necessary. The Board has 
adopted the editorial changes to Sec. 204.3(i) as proposed.

Final Regulatory Flexibility Analysis

    Two of the three requirements of a final regulatory flexibility 
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and 
the objectives of the rule and (2) a summary of the issues raised by 
the public comments, the agency's assessment of the issues, and a 
statement of the changes made in the final rule in response to the 
comments, are discussed above. The third requirement of a final 
regulatory flexibility analysis is a description of significant 
alternatives to the rule that would minimize the rule's economic impact 
on small entities and reasons why the alternatives were rejected.
    The final amendments will apply to all depository institutions, 
U.S. branches and agencies of foreign banks, and Edge and Agreement 
corporations, regardless of size, and represent changes to the existing 
rules that should reduce burden for those institutions that are part of 
a pass-through arrangement for the purpose of maintaining required 
reserve balances. The amendments would increase flexibility for those 
institutions by eliminating restrictions on where pass-through 
correspondents must maintain accounts. The amendments should not have a 
negative economic impact on small institutions, and, therefore, there 
were no significant alternatives that would have minimized the economic 
impact on those institutions.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule under 
the authority delegated to the Board by the Office of Management and 
Budget. The proposed rule contained no new collections of information 
and proposed no substantive changes to existing collections of 
information pursuant to the Paperwork Reduction Act. However, one of 
the changes in the proposed rule had the potential to reduce reporting 
burden for a subset of respondents on existing information collections 
by allowing fewer reports. The change would have granted Edge 
corporations and U.S. branches and agencies of foreign banks the option 
to file single reports of deposits and Eurocurrency data aggregated 
nationwide. Currently these respondents file deposits and Eurocurrency 
reports aggregated by each state and Federal Reserve District in which 
their offices are located.
    None of the comments received specifically addressed reporting 
burden. However, as discussed earlier in this notice, several 
commenters raised problems associated with not filing the reports with 
each individual respondent's Federal Reserve District. The Board 
believes that these problems outweigh any potential efficiencies 
afforded by such changes. The final rule does not contain any of the 
proposed elective changes in reporting. Therefore, no collections of 
information pursuant to the Paperwork Reduction Act are revised by the 
final rule.

List of Subjects in 12 CFR Part 204

    Banks, Banking, Federal Reserve System, Reporting and recordkeeping 
requirements.

    For the reasons set out in the preamble, 12 CFR part 204 is amended 
as set forth below.

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 
(REGULATION D)

    1. The authority citation for part 204 continues to read as 
follows:

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
3105.

    2. In Sec. 204.3, paragraphs (a), (b)(1), (b)(2)(i), and (i) are 
revised to read as follows:


Sec. 204.3  Computation and maintenance.

    (a) Maintenance and reporting of required reserves. (1) 
Maintenance. A depository institution, a U.S. branch or agency of a 
foreign bank, and an Edge or Agreement corporation shall maintain 
reserves against its deposits and Eurocurrency liabilities in 
accordance with the procedures prescribed in this section and 
Sec. 204.4 and the ratios prescribed in Sec. 204.9. Reserve-deficiency 
charges shall be assessed for deficiencies in required reserves in 
accordance with the provisions of Sec. 204.7. For purposes of this 
part, the obligations of a majority-owned (50 percent or more) U.S. 
subsidiary (except an Edge or Agreement corporation) of a depository 
institution shall be regarded as obligations of the parent depository 
institution.
    (2) Reporting. (i) Every depository institution, U.S. branch or 
agency of a foreign bank, and Edge or Agreement corporation shall file 
a report of deposits (or any other required form or statement) directly 
with the Federal Reserve Bank of its District, regardless of the manner 
in which it chooses to maintain required reserve balances. A foreign 
bank's U.S. branches and agencies and an Edge or Agreement 
corporation's offices operating within the same state and the same 
Federal Reserve District shall prepare and file a report of deposits on 
an aggregated basis.
    (ii) A Federal Reserve Bank shall notify the reporting institution 
of its reserve requirements. Where a pass-through arrangement exists, 
the Reserve Bank will also notify the pass-through correspondent of its 
respondent's required reserve balances.

[[Page 59779]]

    (iii) The Board and the Federal Reserve Banks will not hold a pass-
through correspondent responsible for guaranteeing the accuracy of the 
reports of deposits submitted by its respondents.
    (3) Allocation of low reserve tranche and exemption from reserve 
requirements. A depository institution, a foreign bank, or an Edge or 
Agreement corporation shall, if possible, assign the low reserve 
tranche and reserve requirement exemption prescribed in Sec. 204.9(a) 
to only one office or to a group of offices filing a single aggregated 
report of deposits. The amount of the reserve requirement exemption 
allocated to an office or group of offices may not exceed the amount of 
the low reserve tranche allocated to such office or offices. If the low 
reserve tranche or reserve requirement exemption cannot be fully 
utilized by a single office or by a group of offices filing a single 
report of deposits, the unused portion of the tranche or exemption may 
be assigned to other offices or groups of offices of the same 
institution until the amount of the tranche (or net transaction 
accounts) or exemption (or reservable liabilities) is exhausted. The 
tranche or exemption may be reallocated each year concurrent with 
implementation of the indexed tranche and exemption, or, if necessary 
during the course of the year to avoid underutilization of the tranche 
or exemption, at the beginning of a reserve computation period.
    (b) Form and location of reserves. (1) A depository institution, a 
U.S. branch or agency of a foreign bank, and an Edge or Agreement 
corporation shall hold reserves in the form of vault cash, a balance 
maintained directly with the Federal Reserve Bank in the Federal 
Reserve District in which it is located, or, in the case of nonmember 
institutions, with a pass-through correspondent in accordance with 
Sec. 204.3(i).
    (2) (i) For purposes of this section, a depository institution, a 
U.S. branch or agency of a foreign bank, or an Edge or Agreement 
corporation is located in the Federal Reserve District that contains 
the location specified in the institution's charter, organizing 
certificate, or license or, if no such location is specified, the 
location of its head office, unless otherwise determined by the Board 
under paragraph (b)(2)(ii) of this section.
* * * * *
    (i) Pass-through rules. (1) Procedure. (i) A nonmember depository 
institution, a U.S. branch or agency of a foreign bank, or an Edge or 
Agreement corporation required to maintain reserve balances 
(respondent) may select only one institution to pass through its 
required reserve balances, unless otherwise permitted by Federal 
Reserve Bank in whose district the respondent is located. Eligible 
institutions through which respondent required reserve balances may be 
passed (correspondents) are Federal Home Loan Banks, the National 
Credit Union Administration Central Liquidity Facility, and depository 
institutions, U.S. branches or agencies of foreign banks, and Edge and 
Agreement corporations that maintain required reserve balances at a 
Federal Reserve office. In addition, the Board reserves the right to 
permit other institutions, on a case-by-case basis, to serve as pass-
through correspondents. The correspondent chosen must subsequently pass 
through the required reserve balances of its respondents directly to a 
Federal Reserve Bank. The correspondent placing funds with a Federal 
Reserve Bank on behalf of respondents will be responsible for account 
maintenance as described in paragraphs (i)(2) and (i)(3) of this 
section.
    (ii) Respondents or correspondents may institute, terminate, or 
change pass-through arrangements for the maintenance of required 
reserve balances by providing all documentation required for the 
establishment of the new arrangement or termination of the existing 
arrangement to the Federal Reserve Banks involved within the time 
period provided for such a change by those Reserve Banks.
    (2) Account maintenance. A correspondent that passes through 
required reserve balances of respondents shall maintain such balances, 
along with the correspondent's own required reserve balances (if any), 
in a single commingled account at the Federal Reserve Bank in whose 
District the correspondent is located, unless otherwise permitted by 
the Reserve Bank. The balances held by the correspondent in an account 
at a Reserve Bank are the property of the correspondent and represent a 
liability of the Reserve Bank solely to the correspondent, regardless 
of whether the funds represent the reserve balances of another 
institution that have been passed through the correspondent.
    (3) Responsibilities of parties. (i) Each individual depository 
institution, U.S. branch or agency of a foreign bank, or Edge or 
Agreement corporation is responsible for maintaining its required 
reserve balance either directly with a Federal Reserve Bank or through 
a pass-through correspondent.
    (ii) A pass-through correspondent shall be responsible for assuring 
the maintenance of the appropriate aggregate level of its respondents' 
required reserve balances. A Federal Reserve Bank will compare the 
total reserve balance required to be maintained in each account with 
the total actual reserve balance held in such account for purposes of 
determining required reserve deficiencies, imposing or waiving charges 
for deficiencies in required reserves, and for other reserve 
maintenance purposes. A charge for a deficiency in the aggregate level 
of the required reserve balance will be imposed by the Reserve Bank on 
the correspondent maintaining the account.
    (iii) Each correspondent is required to maintain detailed records 
for each of its respondents in a manner that permits Federal Reserve 
Banks to determine whether the respondent has provided a sufficient 
required reserve balance to the correspondent. A correspondent passing 
through a respondent's reserve balance shall maintain records and make 
such reports as the Board or Reserve Bank requires in order to insure 
the correspondent's compliance with its responsibilities for the 
maintenance of a respondent's reserve balance. Such records shall be 
available to the Reserve Banks as required.
    (iv) The Federal Reserve Bank may terminate any pass-through 
relationship in which the correspondent is deficient in its 
recordkeeping or other responsibilities.
    (v) Interest paid on supplemental reserves (if such reserves are 
required under Sec. 204.6) held by a respondent will be credited to the 
account maintained by the correspondent.

    By order of the Board of Governors of the Federal Reserve 
System, October 30, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-29203 Filed 11-4-97; 8:45 am]
BILLING CODE 6210-01-P