[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30199-30205]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13978]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1107]


Policy Statement on Payments System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim policy statement with request for comment.

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SUMMARY: The Board is issuing and requesting comment on an interim 
policy statement that allows a depository institution that has a self-
assessed net debit cap (average, above average, or high) to pledge 
collateral to its Federal Reserve Bank in order to access additional 
daylight overdraft capacity above its net debit cap level. The Board 
may modify the final policy statement after considering the comments 
received.

DATES: The interim policy statement is effective on May 30, 2001. 
Comments on the interim policy must be received by August 6, 2001.

ADDRESSES: Comments, which should refer to Docket No. R-1107, may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551 
or mailed electronically to [email protected]. Comments 
addressed to Ms. Johnson also may be delivered to the Board's mailroom 
between 8:45 a.m. and 5:15 p.m. and to the security control room 
outside of those hours. Both the mailroom and the security control room 
are accessible from the courtyard entrance on 20th Street between 
Constitution Avenue and C Street, NW. Comments may be inspected in Room 
MP-500 between 9 a.m. and 5 p.m. weekdays, pursuant to Sec. 261.12, 
except as provided in Sec. 261.14, of the Board's Rules Regarding 
Availability of Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Paul Bettge, Associate Director (202/
452-3174) or Stacy Coleman, Manager (202/452-2934), Division of Reserve 
Bank Operations and Payment Systems.

SUPPLEMENTARY INFORMATION: This is one of five notices regarding 
payments system risk that the Board is issuing for public comment 
today. Three near-term proposals concern the net debit cap calculation 
for U.S. branches and agencies of foreign banks (Docket No. R-1108), 
modifications to the procedures for posting electronic check 
presentments to depository institutions' Federal Reserve accounts for 
purposes of measuring daylight overdrafts (Docket No. R-1109), and the 
book-entry securities transfer limit (Docket No. R-1110). In addition, 
the Board is requesting comment on the benefits and drawbacks to 
several potential longer-term changes to the Board's payments system 
risk (PSR) policy, including lowering self-assessed net debit caps, 
eliminating the two-week average caps, implementing a two-tiered 
pricing system for collateralized and uncollateralized daylight 
overdrafts, and rejecting payments with settlement-day finality that 
would cause an institution to exceed its daylight overdraft capacity 
level (Docket No. R-1111). Furthermore, to reduce burden associated 
with the PSR policy, the Board recently rescinded the interaffiliate 
transfer (Docket No. R-1106) and third-party access policies (Docket 
No. R-1100).
    The Board requests that in filing comments on these proposals, 
commenters prepare separate letters for each proposal, identifying the 
appropriate docket number on each. This will facilitate the Board's 
analysis of all comments received.

I. Background

    Beginning in 1985, the Board adopted and has subsequently modified 
a policy to reduce the risks that payments systems present to the 
Federal Reserve Banks, to the banking system, and to other sectors of 
the economy. An integral component of the current PSR policy is a 
program to control depository institutions' use of intraday Federal 
Reserve credit, commonly referred to as ``daylight credit'' or 
``daylight overdrafts.'' The Board's

[[Page 30200]]

intention was to address the Federal Reserve's risk as well as risks on 
private-sector networks, primarily large-dollar payments systems. Risk 
can arise from transactions on the Federal Reserve's wire transfer 
system (Fedwire); from other types of payments, including checks and 
automated clearing house (ACH) transactions; and from transactions on 
private large-dollar networks.
    The Federal Reserve Banks face direct risk of loss should 
depository institutions be unable to settle their daylight overdrafts 
in their Federal Reserve accounts before the end of the day. Moreover, 
systemic risk may occur if an institution participating on a private 
large-dollar payments network were unable or unwilling to settle its 
net debit position. If such a settlement failure occurred, the 
institution's creditors on that network might also be unable to settle 
their commitments. Serious repercussions could, as a result, spread to 
other participants in the private network, to other depository 
institutions not participating in the network, and to the nonfinancial 
economy generally. A Reserve Bank could be exposed to indirect risk if 
Federal Reserve policies did not address this systemic risk.
    The 1985 policy required all depository institutions incurring 
daylight overdrafts in their Federal Reserve accounts as a result of 
Fedwire funds transfers to establish a maximum limit, or net debit cap, 
on those overdrafts (50 FR 21120, May 22, 1985).\1\ Initially, the 
Board exempted book-entry securities overdrafts from quantitative 
overdraft controls because of concerns about the effect that overdraft 
restrictions could have on the U.S. government securities market and on 
the Federal Reserve's ability to conduct monetary policy through open 
market operations. In 1990, however, the Board announced that a 
depository institution's funds and book-entry securities overdrafts 
would be combined for purposes of determining the institution's 
compliance with its cap (55 FR 22087, May 31, 1990).
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    \1\ Net debit caps are calculated by applying a cap multiple 
from one of six cap classes (zero, exempt, de minimis, average, 
above average, and high) to a capital measure. Cap multiples are 
determined through either a self-assessment process (for average, 
above average, and high cap classes) or a board-of-directors 
resolution or assigned by the Reserve Bank. Requests for a 
particular cap multiple are granted at the discretion of the Reserve 
Bank.
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    The Board recognized that receivers of book-entry securities 
generally cannot control the timing of their book-entry securities 
overdrafts, but that intraday book-entry securities overdrafts, like 
funds overdrafts, have the potential to become overnight overdrafts. 
Given the seller-driven nature of the book-entry system and the Board's 
sensitivity to the markets it supports, the Board determined that only 
collateralized book-entry securities overdrafts would be exempt from 
cap limits.\2\ This aspect of the policy was designed to protect the 
Reserve Banks from the very large exposures that can result from book-
entry transfers without creating serious disruptions in the market.
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    \2\ The policy requires that depository institutions with 
``frequent and material'' book-entry securities overdrafts fully 
collateralize these overdrafts. Book-entry daylight overdrafts 
become frequent and material when an account holder exceeds its net 
debit cap, because of book-entry securities transactions, on more 
than three days in any two consecutive reserve maintenance periods 
and by more than 10 percent of its capacity.
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    In 1989, the Board requested comment on a proposed change to its 
payments system risk reduction program that would assess a fee of 60 
basis points, phased in over three years, for average daily overdrafts 
in excess of a deductible of 10 percent of risk-based capital (54 FR 
26094, June 21, 1989). In October 1992, the Board approved charging a 
fee for daylight overdrafts, which was to be phased in as 24 basis 
points in 1994, 48 basis points in 1995, and 60 basis points in 1996 
(57 FR 47084, October 14, 1992).\3\ The purpose of the fee was to 
induce behavior that would reduce risk and increase efficiency in the 
payments system.
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    \3\ To facilitate the pricing of daylight overdrafts, the 
Federal Reserve also adopted a modified method of measuring daylight 
overdrafts that more closely reflects the timing of actual 
transactions affecting an institution's intraday Federal Reserve 
account balance. This measurement method incorporates specific 
account posting times for different types of transactions.
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    Some depository institutions and securities dealers commented that 
they opposed a fee on book-entry securities overdrafts that were 
collateralized. These depository institutions and securities dealers 
argued that pricing book-entry securities overdrafts was inequitable 
because collateral protected the Federal Reserve against losses and 
there are already costs associated with pledging collateral. For that 
reason, these institutions and securities dealers argued that pricing 
and requiring collateral for book-entry securities overdrafts was 
unduly burdensome. The Board stated, however, that allowing collateral 
to substitute for daylight overdraft fees would not provide a 
meaningful incentive for depository institutions or their dealer 
customers to change their procedures and reduce daylight overdrafts.\4\
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    \4\ The Board also stated that collateral is required for large 
book-entry overdrafters as an exception that permits clearing banks 
and similarly situated institutions to exceed their caps because of 
the difficulty of controlling book-entry securities overdrafts.
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    In March 1995, the Board decided to raise the daylight overdraft 
fee to 36 basis points instead of 48 basis points (60 FR 12559, March 
7, 1995). Because aggregate daylight overdrafts fell approximately 40 
percent after the introduction of fees, the Board was concerned that 
raising the fee to 48 basis points could produce undesirable market 
effects contrary to the objectives of the risk-control program. The 
Board believed, however, that an increase in the overdraft fee was 
needed to provide additional incentives for institutions to reduce 
overdrafts related to funds transfers. The Board stated it would 
evaluate further fee increases two years after the 1995 fee 
increase.\5\
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    \5\ On an average annual basis since 1995, overdrafts caused by 
book-entry securities transfers have decreased almost 10 percent per 
year and the value of book-entry securities transfers has grown more 
than 5 percent per year; whereas funds overdrafts and the value of 
Fedwire funds transfers have grown between 15 and 18 percent per 
year. The growth in funds overdrafts appears to be directly related 
to the growth in large-value funds transfers.
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    In considering its obligation to evaluate further fee increases, 
the Board recognized that significant changes have occurred in the 
banking, payments, and regulatory environment in the past few years 
and, as a result, decided to conduct a broad review of the Federal 
Reserve's daylight credit policies. During the course of its review, 
the Board evaluated the effectiveness of the current daylight credit 
policies and determined that these policies appear to be generally 
effective in controlling risk to the Federal Reserve and creating 
incentives for depository institutions to manage their intraday credit 
exposures. In addition, the Board determined that the current policy is 
well understood by the industry and that private-sector participants 
generally have benefited from the policy's risk controls. The Board 
also recognizes, however, that the policy has imposed costs on the 
industry and is considered burdensome by some depository institutions.
    In conducting its review, the Board evaluated the impact of past 
policy actions on depository institutions' behavior and on the markets 
generally. The Board also took into consideration the effect of various 
payment system initiatives on payments activity and the demand for 
daylight credit. While the Board believes that the current policy is 
generally effective, it did identify growing liquidity pressures among 
certain payment system participants. Specifically, the Board learned 
that a

[[Page 30201]]

small number of financially healthy institutions regularly find their 
net debit caps to be constraining, causing them to delay sending 
payments and, in some cases, to turn away business.\6\ Payment system 
initiatives, such as the Clearing House Interbank Payments System with 
intraday finality (new CHIPS), the Continuous Linked Settlement (CLS) 
system, and the Federal Reserve's settlement-day finality for ACH 
credit transactions, may exacerbate these institutions' liquidity needs 
at specific times during the day.\7\
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    \6\ Current net debit cap levels provide sufficient liquidity 
for the majority of depository institutions. Approximately 97 
percent of depository institutions with positive net debit caps use 
less than 50 percent of their daylight overdraft capacity for their 
average daily peak overdrafts.
    \7\ New CHIPS was implemented on January 22, 2001, CLS is 
scheduled for implementation in the fourth quarter of 2001, and ACH 
credit transactions will be final on the settlement date beginning 
in mid-2001. Settlement-day finality for ACH credit transactions may 
exacerbate liquidity pressures for credit originators on the real-
time monitor that must prefund.
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II. Interim Policy Statement

    The Board is adopting an interim policy statement that allows 
depository institutions with net debit caps derived through a self-
assessment to pledge collateral voluntarily to the Federal Reserve 
Banks in order to access additional daylight overdraft capacity above 
their net debit cap levels.\8\ The Board's analysis of overdraft 
levels, liquidity patterns, and payment system developments revealed 
that while net debit caps provide sufficient liquidity to most 
institutions, some depository institutions are experiencing liquidity 
pressures. The Board recognizes that the interim policy could increase 
the public sector's credit exposure but believes that requiring 
collateral will allow the Federal Reserve to protect the public sector 
from additional credit exposure while providing extra liquidity to the 
few institutions that might otherwise be constrained. Providing extra 
liquidity to constrained institutions should help prevent liquidity-
related market disruptions. The option to pledge collateral for 
additional daylight overdraft capacity would provide the private sector 
with the flexibility that it has requested to relieve liquidity 
pressures that have arisen or may arise from payment system innovations 
such as new CHIPS, CLS, and ACH finality as well as other payment 
system initiatives.
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    \8\ Depository institutions that wish to have access to larger 
amounts of intraday credit than that provided by the exempt-from-
filing and de minimis net debit caps must perform a self-assessment 
of their creditworthiness, intraday funds management and control, 
customer credit policies and controls, and operating controls and 
contingency procedures to support a higher daylight overdraft cap.
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    The Board believes it is important to provide an environment in 
which payment systems may function effectively and efficiently and 
remove barriers, as appropriate, to foster risk-reducing payment system 
initiatives. The Board recognizes that large-dollar networks are an 
integral part of clearing and settlement systems, that it is of 
considerable importance to keep the payments system operating without 
significant disruption, and that some intraday credit may be necessary 
to keep the payments system running smoothly and efficiently. Given 
these principles, the Board believes that allowing depository 
institutions with self-assessed net debit caps to pledge collateral for 
additional daylight overdraft capacity will continue to promote the PSR 
policy's risk-reduction efforts while minimizing disruptions to the 
payments system. In addition, daylight overdraft fees will continue to 
apply to all overdrafts, collateralized or uncollateralized, as the fee 
provides a meaningful incentive for depository institutions to manage 
efficiently their use of Federal Reserve daylight credit.

A. Payment System Initiatives

CHIPS Real-Time Final Settlement
    On January 22, 2001, the Clearing House Interbank Payments Company 
L.L.C. (CHIPCo) converted CHIPS from an end-of-day multilateral net 
settlement system to one that provides real-time final settlement for 
all payment orders as they are released.\9\ Under an end-of-day system, 
the delay between the release of a payment order and its settlement 
results in the risk that the failure of one or more participants could 
trigger a failure of the system to settle. In response to demands of 
CHIPS participants to eliminate any possibility of an unwind, CHIPCo 
developed a method to achieve real-time final settlement of CHIPS 
payment orders. Under real-time final settlement, all CHIPS payment 
instructions are settled against a positive current position in the 
CHIPS prefunded balance account held at the Federal Reserve Bank of New 
York (FRBNY) or simultaneously offset by incoming payments or both. As 
a result, real-time final settlement eliminates the complexity and 
potential systemic risks of an end-of-day settlement failure that could 
lead to a general unwinding of CHIPS payments. In addition, the real-
time final settlement of new CHIPS reduces credit and liquidity risks.
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    \9\ CHIPCo is the affiliate of The New York Clearing House 
Association L.L.C. that owns and operates CHIPS.
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    To accomplish real-time final settlement, each CHIPS participant 
must transfer (directly or through another participant) a predetermined 
amount into the CHIPS ``prefunded balance account'' on the books of 
FRBNY. While new CHIPS settles all of the payment orders when they are 
released, some payment orders remain unreleased at the end of the day. 
These payment orders are netted and set off against one another on a 
multilateral basis, with each participant in a net debit closing 
position transferring the amount of its closing position requirement 
into the prefunded balance account. Many CHIPS participants use Federal 
Reserve daylight credit to pay their end-of-day closing position 
requirements on CHIPS. Some of these participants have stated that 
making these Fedwire payments has, on occasion, increased their demand 
for intraday credit.
CLS Bank
    CLS Bank is being designed as a multi-currency facility for 
settling foreign exchange transactions. Under the proposed procedures, 
participating institutions will be required to make daily U.S. dollar 
payments to CLS Bank over Fedwire during the early hours of the Fedwire 
funds transfer operating day. Because U.S. financial money markets are 
not currently active during those hours, a number of CLS members assert 
that they will use Federal Reserve daylight credit to fund their CLS-
related payment obligations and have requested that the Federal Reserve 
grant them additional intraday credit.\10\
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    \10\ For additional information on payment system initiatives, 
refer to the Payments Risk Committee's report entitled ``Intraday 
Liquidity Management in the Evolving Payment System: A Study of the 
Impact of the Euro, CLS Bank, and CHIPS Finality,'' New York, April 
2000. http://www.ny.frb.org/prc/intraday.html.

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ACH Settlement-Day Finality In November 1999, the Board announced a 
decision to make the settlement of ACH credit transactions processed by 
the Federal Reserve final when posted to the accounts of the receivers, 
which is currently 8:30 a.m. ET on the day of settlement (64 FR 62673, 
November 17, 1999). The Board noted that, in order to protect the 
Federal Reserve from the credit risk of granting finality to receiving 
depository institutions, the Reserve Banks would require settling 
depository institutions that are monitored in real time to prefund the 
total of their ACH credit originations before the transactions are 
processed. Settlement-day finality for ACH credit transactions reduces 
risk to receiving depository institutions and receivers while the 
prefunding requirement permits the Reserve Banks to manage their 
settlement risk for ACH credit transactions as they do for other 
services with similar finality features.
    When the Board requested comment on the ACH finality proposal, a 
number of depository institutions asked that the Federal Reserve allow 
the flexibility of posting collateral as an alternative to the 
prefunding requirement (63 FR 70132, December 18, 1998). The Board 
noted that allowing collateral to cover non-securities related 
overdrafts was not in accordance with the PSR policy. The Board, 
however, also indicated that it would consider the commenters' request 
in future reviews of its PSR policies. Under the conditions described 
in this interim policy, some depository institutions submitting ACH 
credit transactions on the day of settlement will be able to secure 
additional daylight overdraft capacity.\11\
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    \11\ Federal Reserve systems in place today would not be 
effective for monitoring the collateralization of ACH credit 
transactions over several days.
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B. Collateralized Daylight Overdraft Capacity

    Depository institutions with self-assessed net debit caps that wish 
to expand their daylight overdraft capacity levels by pledging 
collateral should consult with their Reserve Banks. In developing 
guidelines for approving maximum limits on collateralized daylight 
overdraft capacity beyond net debit cap levels, the Board and Reserve 
Bank staff will consider financial and supervisory information. The 
financial and supervisory information may include, but is not limited 
to, potential daylight credit usage, capital and liquidity ratios, the 
composition of balance sheet assets, CAMELS or other supervisory 
ratings and assessments, and the Strength of Support Assessment 
rankings for U.S. branches and agencies of foreign banks.
    Depository institutions may pledge the same types of collateral 
they do today for discount window or PSR purposes. In addition, the 
Board believes that it would be reasonable for depository institutions 
to use collateral pledged to the discount window for additional 
daylight overdraft capacity and notes that more than 25 percent of 
account holders already have collateral pledged to the Reserve 
Banks.\12\ While several hundred depository institutions have 
collateral pledged to the Federal Reserve, the Board expects that very 
few depository institutions will seek to expand their daylight 
overdraft capacity levels by pledging collateral because approximately 
97 percent of all account holders use less than 50 percent of their net 
debit caps for their average peak overdrafts. This modification of the 
PSR policy, allowing depository institutions with self-assessed net 
debit caps to pledge collateral for extra daylight overdraft capacity, 
affects other areas of the policy, including the policy's treatment of 
U.S. branches and agencies of foreign banks, book-entry securities 
transfers, and account monitoring procedures.
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    \12\ The Board notes that the majority of Federal Reserve 
daylight credit extensions are currently implicitly collateralized 
because depository institutions that have pledged collateral must 
sign Operating Circular 10, which provides the Reserve Banks with a 
secured interest in any collateral recorded on the Reserve Banks' 
books.
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U.S. Branches and Agencies of Foreign Banks
    For U.S. branches and agencies of foreign banks, net debit caps on 
daylight overdrafts in Federal Reserve accounts are calculated by 
applying the cap multiples for each cap category to a foreign banking 
organization's (FBO's) consolidated ``U.S. capital equivalency.''\13\ 
U.S. capital equivalency is calculated in one of several ways. In the 
case of FBOs whose home-country supervisors adhere to the Basle Capital 
Accord, U.S. capital equivalency is equal to the greater of 10 percent 
of worldwide capital or 5 percent of the liabilities to nonrelated 
parties of each agency or branch.\14\ For FBOs whose home-country 
supervisors do not adhere to the Basle Capital Accord, U.S. capital 
equivalency is measured as the greater of (1) the sum of the amount of 
capital (but not surplus) that would be required of a national bank 
being organized at each agency or branch location, or (2) the sum of 5 
percent of the liabilities to nonrelated parties of each agency or 
branch.
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    \13\ The term ``U.S. capital equivalency'' is used in this 
context to refer to the particular capital measure used to calculate 
daylight overdraft net debit caps and does not necessarily represent 
an appropriate capital measure for supervisory or other purposes.
    \14\ Liabilities to nonrelated parties include acceptances but 
excludes accrued expenses and amounts due and other liabilities to 
offices, branches, and subsidiaries of the foreign bank.
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    The current policy allows U.S. branches and agencies of FBOs whose 
home-country supervisors do not adhere to the Basle Capital Accord to 
incur daylight overdrafts above their net debit caps up to a maximum 
amount equal to their cap multiples times 10 percent of their FBOs' 
capital, provided that any overdrafts above the net debit caps are 
collateralized. The interim policy offers all foreign banks, under 
terms that reasonably limit Reserve Bank risk, a level of overdrafts 
based on the same proportion of worldwide capital. Under the interim 
policy statement, the above distinction is no longer pertinent because 
any U.S. branch or agency of a foreign bank that has a self-assessed 
net debit cap and that would like to access daylight credit above its 
net debit cap level may consult with its Administrative Reserve Bank to 
discuss an appropriate daylight overdraft capacity level.\15\ In 
addition, a notice published elsewhere in today's Federal Register 
requests comment on the net debit cap calculation for U.S. branches and 
agencies of foreign banks (Docket No. R-1108).
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    \15\ The Administrative Reserve Bank is responsible for managing 
an institution's account relationship with the Federal Reserve.
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Book-Entry Securities Transactions
    The current policy stipulates that depository institutions with 
book-entry securities overdrafts that meet the frequency and 
materiality thresholds must fully collateralize these overdrafts, not 
only the overdraft amount that exceeds the net debit cap level.\16\ 
Under the interim policy statement, the Board is eliminating the 
frequent and material collateralization requirement for self-assessed 
depository institutions' book-entry securities overdrafts. Instead, the 
policy statement will allow Reserve Banks to require collateral from 
self-assessed depository institutions that frequently exceed their caps 
as a result of transactions with settlement-day

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finality.\17\ \18\ While the interim policy statement requires 
collateralization of overdrafts only above net debit cap levels, which 
could increase the Federal Reserve's credit exposure, the Board 
believes an increase in Federal Reserve credit risk would be minimal 
given that very few institutions that participate in the government-
securities market meet the frequent and material criteria. The Board 
also believes that eliminating the frequent and material 
collateralization requirement for book-entry securities overdrafts 
specifically and developing guidelines that require collateralization 
of overdrafts above net debit cap levels regardless of the cause would 
simplify administration of and compliance with the policy.
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    \16\ Book-entry daylight overdrafts become ``frequent and 
material'' when an account holder exceeds its net debit cap, due to 
book-entry securities transactions, by more than 10 percent of its 
capacity and on more than three days in any two consecutive reserve 
maintenance periods.
    \17\ These transactions include Fedwire funds and book-entry 
securities transfers, enhanced net settlement service transactions, 
and ACH credit originations (beginning in mid-2001).
    \18\ Under the interim policy, ``frequently'' will continue to 
mean more than three days in any two consecutive reserve maintenance 
periods. In the vast majority of cases where depository 
institutions' overdrafts exceed their net debit cap levels, the 
materiality threshold is met. The Board, therefore, is eliminating 
the ``materiality'' criteria entirely from the policy because it has 
little practical purpose.
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    The changes described above do not apply to institutions with 
exempt-from-filing or de minimis net debit caps. Under the interim 
policy, the Board plans to continue to allow depository institutions 
with exempt-from-filing or de minimis caps to collateralize voluntarily 
all or part of their book-entry securities overdrafts. The Board also 
intends to continue:
     Requiring depository institutions with exempt-from-filing 
or de minimis caps that frequently exceed their caps, even if only 
partly because of book-entry securities transactions, to collateralize 
all of their book-entry securities overdrafts.
     Prohibiting depository institutions with exempt-from-
filing or de minimis caps to pledge collateral to increase their 
daylight overdraft capacity for funds overdrafts.
     Requiring depository institutions with zero caps that have 
access to the discount window to collateralize fully all book-entry 
securities overdrafts.
    With the adoption of a final policy statement, the Board intends to 
eliminate the current policy's separate treatment of book-entry 
securities overdrafts. The policy will require any depository 
institution with an exempt-from-filing or de minimis cap to apply for a 
higher net debit cap if the institution frequently exceeds its cap 
because of transactions with settlement-day finality. The Board 
believes that such a change would simplify administration and 
compliance with the policy. Furthermore, the Board notes that very few 
depository institutions (currently there are six) with exempt-from-
filing or de minimis caps voluntarily hold collateral to cover their 
book-entry securities overdrafts and would not be adversely affected by 
the proposed policy change.\19\
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    \19\ Currently there are no depository institutions with exempt-
from-filing or de minimis caps that are required to pledge 
collateral for book-entry securities overdrafts as a result of 
meeting the frequency and materiality criteria.
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Account Monitoring
    Currently, a depository institution's funds and book-entry 
securities overdrafts are combined for purposes of determining the 
institution's compliance with its cap. Under the ex post monitoring 
procedures, the Reserve Banks contact and counsel institutions with net 
debit positions in excess of their caps, discussing ways to reduce 
their excessive use of intraday credit. Each Reserve Bank retains the 
right to protect its risk exposure from individual institutions by 
unilaterally reducing net debit cap levels, imposing collateralization 
or clearing-balance requirements, holding or rejecting Fedwire 
transfers or enhanced net settlement service transactions during the 
day until the institution has collected balances in its Federal Reserve 
account, or, in extreme cases, prohibiting it from using Fedwire.
    The Board does not intend to modify significantly the Federal 
Reserve's ex post monitoring procedures. The Board notes, however, that 
three aspects of the ex post monitoring procedures warrant 
clarification with implementation of the interim policy. First, the 
Reserve Banks will monitor the net debit positions of depository 
institutions with self-assessed caps that choose to pledge collateral 
voluntarily for additional overdraft capacity against these 
institutions' daylight overdraft capacity levels and not their net 
debit cap levels.
    Second, Reserve Banks may require depository institutions with 
self-assessed net debit caps that frequently exceed their daylight 
overdraft capacity levels to collateralize the difference between their 
peak daylight overdrafts and their net debit cap levels. Depository 
institutions have some flexibility as to the specific types of 
collateral they may pledge to the Reserve Banks; all collateral, 
however, must be acceptable to the Reserve Banks.
    Finally, the policy will continue to allow administrative 
counseling flexibility for institutions that frequently exceed their 
net debit caps due to the posting of transactions that do not have 
settlement-day finality, such as checks and ACH debit originations.\20\ 
Escalated counseling or requiring collateral for daylight overdrafts 
caused by these transactions may be of limited use in reducing 
associated overdrafts.
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    \20\ In October 1994, the Board approved administrative 
counseling flexibility for institutions that continue to exceed 
their net debit caps due to the posting of non-Fedwire transactions 
(59 FR 27122, November 2, 1994).
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III. Request for Comment

    The Board requests comment on all aspects of the interim policy 
statement. The Board is also requesting specific comments on the 
following questions:
    1. What are the benefits and drawbacks of allowing depository 
institutions with self-assessed net debit caps to pledge collateral for 
additional daylight overdraft capacity?
    2. Would a policy change that requires depository institutions with 
exempt-from-filing and de minimis caps to apply for higher net debit 
caps if they frequently exceed their caps because of book-entry 
securities transfers simplify the policy or create an undue burden?
    3. Would the interim policy cause institutions to pledge additional 
collateral to the Federal Reserve or would they primarily use 
collateral already pledged to a Reserve Bank?

IV. Competitive Impact Analysis

    The Board has established procedures for assessing the competitive 
impact of rule or policy changes that have a substantial impact on 
payments system participants.\21\ Under these procedures, the Board 
assesses whether a change would have a direct and material adverse 
effect on the ability of other service providers to compete effectively 
with the Federal Reserve in providing similar services due to differing 
legal powers or constraints, or due to a dominant market position of 
the Federal Reserve deriving from such differences. If no reasonable 
modifications would mitigate the adverse competitive effects, the Board 
will determine whether the expected benefits are significant enough to 
proceed with the change despite the adverse effects.
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    \21\ These procedures are described in the Board's policy 
statement ``The Federal Reserve in the Payments System,'' as revised 
in March 1990. (55 FR 11648, March 29, 1990).
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    The Board does not believe that the broader use of collateral for 
daylight overdraft purposes will have a direct and material effect on 
the ability of other service providers to compete with the Reserve 
Banks' payments services. The Board notes that the interim policy

[[Page 30204]]

statement is intended to facilitate the smooth functioning of private-
sector payment systems.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
ch. 3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the policy 
statement under the authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the policy statement.

VI. Federal Reserve Policy Statement on Payments System Risk

    The ``Federal Reserve Policy Statement on Payments System Risk,'' 
section I is amended, effective DATE, as follows with changes 
identified by italics:

I. FEDERAL RESERVE POLICY
    A. Daylight overdraft definition
    B. Pricing
    C. Capital
    1. U.S.-chartered institutions
    2. U.S. agencies and branches of foreign banks
    D. Net debit caps
    1. Cap set through self-assessment
    2. De minimis cap
    3. Exemption from filing
    4. Special situations
    a. Edge and agreement corporations
    b. Bankers' banks
    c. Limited-purpose trust companies
    d. Zero-cap depository institutions
    E. Collateral
    F. Book-entry securities transactions
    1. Collateralization
    2. Transfer-size limit
    G. Monitoring
    1. Ex post
    2. Real time
    3. Multi-District institutions
    4. ACH controls

    The last paragraph in section I.C.2., under the heading ``U.S. 
agencies and branches of foreign banks,'' has been deleted, effective 
DATE.
    A new heading ``Collateral'' and text have been added to read as 
follows in section I.E., effective DATE:
E. Collateral
    Depository institutions with self-assessed net debit caps may 
pledge collateral to their Administrative Reserve Banks to secure 
daylight overdraft capacity in excess of their net debit caps. The 
Reserve Banks will work with self-assessed depository institutions that 
request additional daylight overdraft capacity to decide on the 
appropriate maximum daylight overdraft capacity levels, that is, net 
debit cap levels plus allowable collateralized credit. Depository 
institutions have some flexibility as to the specific types of 
collateral they may pledge to the Reserve Banks; all collateral, 
however, must be acceptable to the Reserve Banks. Depository 
institutions with exempt-from-filing and de minimis net debit caps may 
not obtain additional capacity by pledging collateral. These depository 
institutions must perform a self-assessment of their creditworthiness, 
intraday funds management and control, customer credit policies and 
controls, and operating controls and contingency procedures to support 
a higher daylight overdraft cap.
    In addition, Reserve Banks may require depository institutions with 
self-assessed net debit caps that frequently exceed their caps due to 
transactions with settlement-day finality to collateralize the 
difference between their peak daylight overdrafts and their net debit 
cap levels. For the purposes of this policy, ``frequently'' means more 
than three occasions in two consecutive reserve-maintenance periods.
    The policy allows administrative counseling flexibility for most 
institutions that frequently exceed their net debit caps because of the 
posting of transactions that lack settlement-day finality, such as 
checks and ACH debit originations. The Board's policy on net debit caps 
is intended to address intraday risk to the Federal Reserve arising 
from daylight overdrafts. Most transactions that lack settlement-day 
finality, however, pose primarily interday, rather than intraday, risk. 
Escalated counseling or requiring collateral for daylight overdrafts 
caused by these transactions may be of limited use in reducing 
associated overdrafts. Under administrative counseling flexibility, the 
Reserve Banks work with affected institutions on means of avoiding 
daylight overdrafts, but generally do not subject these institutions to 
escalated levels of counseling, require collateral, or assign a zero 
cap.
    Section I.F.1., under the heading ``Collateralization'' is 
replaced, effective DATE, to read as follows:
F. Book-Entry Securities Transactions

1. Collateralization

    A depository institution's funds and book-entry securities 
overdrafts are combined for purposes of determining an institution's 
compliance with its cap.\18\ The policy requires depository 
institutions with exempt-from-filing or de minimis caps that frequently 
exceed their caps, even if only partly because of book-entry securities 
transactions, to collateralize all of their book-entry securities 
overdrafts. For the purposes of this policy, ``frequently'' means on 
more than three occasions in two consecutive reserve-maintenance 
periods. To determine whether an institution exceeds its net debit cap 
because of book-entry securities transactions, the Reserve Bank 
determines what activity in an institution's Federal Reserve account is 
attributable to funds transfers and other payment transactions and what 
activity is attributable to book-entry securities transactions. A book-
entry securities overdraft occurs when an institution's book-entry 
securities balance, less any credit in its funds balance, is a net 
debit.
---------------------------------------------------------------------------

    \18\ Funds overdrafts refer to overdrafts caused by funds 
transfers as well as NSS, TIP, cash, ACH, and check transactions.
---------------------------------------------------------------------------

    In addition, all depository institutions with exempt-from-filing or 
de minimis caps may collateralize all or part of their book-entry 
securities overdrafts. Such secured overdrafts shall not be included 
with those overdrafts measured against their caps. For example, a 
depository institution with a de minimis cap of $50 million and a $30 
million overdraft--$15 million due to funds transfers and $15 million 
due to book-entry securities transfers--would ordinarily have excess 
capacity of $20 million. Such an institution may increase its excess 
capacity by $15 million by collateralizing all of its book-entry 
securities overdrafts (or may increase its excess capacity by less than 
$15 million by collateralizing some portion of its book-entry 
securities overdrafts). Such an institution may not increase its cap of 
$50 million by over-collateralizing its book-entry securities 
overdrafts or by collateralizing any part of its funds overdrafts.
    Section I.G.1., under the heading ``Ex Post'' is amended, effective 
DATE, as follows with changes identified by italics:
G. Monitoring

1. Ex Post

    Under the ex post monitoring procedure, an institution with a net 
debit position in excess of its cap or daylight overdraft capacity 
level will be contacted by its Reserve Bank. The Reserve Bank will 
counsel the institution, discussing ways to reduce its excessive use of 
intraday credit. Each Reserve Bank retains the right to protect its 
risk exposure from individual institutions by unilaterally reducing 
Fedwire caps, imposing collateralization or clearing-balance 
requirements, holding or rejecting Fedwire transfers during the day 
until the institution has

[[Page 30205]]

collected balances in its Federal Reserve account, or, in extreme 
cases, taking the institution off-line or prohibiting it from using 
Fedwire.


    By order of the Board of Governors of the Federal Reserve 
System, May 30, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-13978 Filed 6-4-01; 8:45 am]
BILLING CODE 6210-01-P