[Federal Register Volume 66, Number 240 (Thursday, December 13, 2001)]
[Notices]
[Pages 64419-64433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30811]


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FEDERAL RESERVE SYSTEM

[Docket Nos. R-1107, R-1108, R-1109, and R-1110]


Policy Statement on Payments System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: The Board has revised its Policy Statement on Payments System 
Risk (PSR policy) to modify the net debit cap calculation for U.S. 
branches and agencies of foreign banks, to modify the time electronic 
check presentments are posted to depository institutions' Federal 
Reserve accounts for purposes of measuring daylight overdrafts, and to 
incorporate, with minor modifications, its interim policy that allows 
certain depository institutions to pledge collateral to the Federal 
Reserve in order to access additional daylight overdraft capacity above 
their net debit caps. These changes to the policy should benefit the 
few financially healthy institutions that have been constrained by 
their net debit caps by increasing their daylight overdraft capacity 
and should remove a potential impediment to the use of electronic check 
presentment. The Board has also removed provisions from the PSR policy 
that are now addressed in the Reserve Banks' Automated Clearing House 
operating circular. Finally, the Board has decided to retain the $50 
million limit on the value of book-entry securities transfers.

DATES: The revised PSR policy is effective December 10, 2001 with the 
following exceptions: (1) revisions to the criteria used to determine 
the U.S. capital equivalency measure for foreign banking organizations 
will take effect on February 21, 2002 and (2) the modification to post 
electronic check presentments to depository institutions' Federal 
Reserve accounts at 1 p.m. local time will take effect on April 1, 
2002.

FOR FURTHER INFORMATION CONTACT: Paul Bettge, Associate Director (202/
452-3174), Stacy Coleman, Manager (202/452-2934), or Connie Horsley, 
Senior Financial Services Analyst (202/452-5239), Division of Reserve 
Bank Operations and Payment Systems.

SUPPLEMENTARY INFORMATION:

I. Background

    The Board recently conducted a review of its PSR policy to evaluate 
the effectiveness of its daylight credit policies, recognizing that 
significant changes have occurred in the banking, payments, and 
regulatory environment in the past few years. The Board's daylight 
credit policies addressed net debit caps, capital measures, the 
daylight overdraft fee, the book-entry securities transfer limit, 
interaffiliate transfers, third-party access to Fedwire, counseling, ex 
post and real-time monitoring, and the posting rules.\1\ In addition, 
the Board evaluated further changes to the rate charged on average 
daily daylight overdrafts in depository institutions' Federal Reserve 
accounts.\2\

[[Page 64420]]

The Board 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. Furthermore, the PSR policy appears to be well understood by 
the industry, and private-sector participants have generally benefited 
from the policy's risk controls. The Board also recognized, however, 
that the policy has imposed costs on the industry and is considered 
burdensome by some depository institutions.
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    \1\ As part of its review, the Board rescinded its policies on 
Fedwire third-party access effective April 9, 2001 (66 FR 19165, 
April 13, 2001) and interaffiliate transfers effective January 1, 
2002 (66 FR 30198, June 5, 2001).
    \2\ 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). In March 1995, however, the Board decided 
to raise the daylight overdraft fee to 36 basis points instead of 48 
basis points and stated it would evaluate further changes to the fee 
after two years (60 FR 12559, March 7, 1995). In June 2001, the 
Board requested comment on the benefits and drawbacks associated 
with the following potential longer-term changes to the PSR policy: 
(1) Lowering self-assessed net debit caps and eliminating the two-
week average caps, (2) implementing a two-tiered pricing regime for 
daylight overdrafts in which institutions that pledge collateral to 
the Reserve Banks would pay a lower fee on their collateralized 
daylight overdrafts than on their uncollateralized daylight 
overdrafts, and (3) rejecting payments with settlement-day finality 
that would cause an institution to exceed its daylight overdraft 
capacity level (66 FR 30208, June 5, 2001). The Board will continue 
to evaluate these policy options.
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    In conducting its review, the Board evaluated the effect of past 
policy actions on depository institutions' behavior and on the markets 
generally and also considered the effect of various payment system 
initiatives on payments activity and the demand for daylight credit. 
Through its analysis, the Board identified growing liquidity pressures 
among certain payments system participants. Specifically, the Board 
learned that a 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. To 
address these liquidity concerns, the Board adopted on an interim 
basis, and requested comment on, a policy that allows depository 
institutions with self-assessed net debit caps (average, above average, 
or high) to pledge collateral to the Federal Reserve in order to access 
additional daylight overdraft capacity above their net debit cap levels 
(66 FR 30199, June 5, 2001).
    The Board also learned through its policy review that some foreign 
banking organizations (FBOs) believe that their net debit caps 
constrain their business activity and place them at a competitive 
disadvantage in comparison with U.S. depository institutions. Some FBOs 
assert that certain U.S. depository institutions hold a significant 
portion of their assets in foreign markets but are able to use 100 
percent of their total risk-based capital in establishing their caps, 
while the PSR policy does not recognize the FBOs' worldwide financial 
strength. In considering the concerns raised by FBOs, the Board 
assessed the criteria used in determining their U.S. capital 
equivalency measure. In addition, the Board evaluated trends in FBOs' 
daylight credit use, considered supervisory and legal issues, assessed 
the potential impact of new or emerging payments system initiatives, 
and held discussions with FBOs. To address the liquidity concerns 
identified by FBOs, the Board requested comment on proposed 
modifications to the criteria used to determine an FBO's U.S. capital 
equivalency measure (66 FR 30205, June 5, 2001).
    The Board also evaluated the effectiveness of the current daylight 
overdraft posting rules and found these rules to be generally effective 
and well understood by the industry. In reviewing the posting rules, 
however, the Board found that the posting times for electronic check 
presentment (ECP) transactions often create a disincentive for 
depository institutions to use Federal Reserve electronic check 
services. As a result, the Board requested comment on changing the 
posting time associated with ECP transactions in an effort to remove 
any disincentive created by the posting rules (66 FR 30195, June 5, 
2001).
    Finally, the Board considered the effectiveness of the $50 million 
limit on the transaction size of book-entry securities transfers on 
Fedwire. The Board focused on whether the limit was imposing an undue 
regulatory burden on depository institutions and their securities-
dealer customers. Because the industry bears a significant portion of 
the limit's costs in terms of transaction fees and receives a benefit 
in terms of reduced daylight overdraft fees, the Board requested 
comment on the desirability of retaining the $50 million limit (66 FR 
30193, June 5, 2001).

II. Summary of Comments and Analysis

    The Board has updated its PSR policy to incorporate most aspects of 
its near-term proposals. The following section describes the proposed 
changes to the PSR policy, provides a summary and analysis of the 
comments received on the proposals, and highlights the provisions of 
the revised PSR policy.

A. Increased Daylight Overdraft Capacity Through Collateralization 
(Docket No. R-1107)

    In its review of the PSR policy, the Board identified growing 
liquidity pressures among certain payments system participants. The 
Board also recognized that certain 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. To address these liquidity concerns, the Board adopted 
on an interim basis and requested comment on a policy that allows a 
depository institution with a self-assessed net debit cap to pledge 
collateral to its administrative Reserve Bank to secure daylight 
overdraft capacity in excess of its net debit cap (interim policy).\3\
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    \3\ The administrative Reserve Bank is responsible for the 
administration of Federal Reserve credit, reserves, and risk 
management policies for a given depository institution or other 
legal entity.
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    In the interim policy, the Board eliminated the separate treatment 
of book-entry securities overdrafts for self-assessed institutions; 
however, the Board proposed eliminating the separate treatment of book-
entry securities overdrafts for all depository institutions with the 
adoption of a final policy. By eliminating the separate treatment of 
book-entry securities overdrafts for self-assessed institutions, the 
Board abolished its collateralization requirement for self-assessed 
institutions that incurred ``frequent and material'' book-entry 
securities overdrafts.\4\ The previous policy required institutions 
that met the frequent and material criteria to collateralize fully 
their peak book-entry securities overdrafts, not just the portion that 
exceeded the net debit cap. Under the interim policy, Reserve Banks 
could require self-assessed depository institutions that frequently 
exceeded their caps as a result of transactions with settlement-day 
finality to collateralize the difference between their peak daylight 
overdrafts and their net debit cap levels, rather than the entire 
amount of their peak book-entry securities overdrafts.\5\
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    \4\ Under the previous policy, an account holder met the 
``frequent and material'' criteria when it exceeded 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.
    \5\ These transactions include Fedwire funds transfers, book-
entry securities transfers, net settlement service entries, and ACH 
credit originations.
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    The Board received twenty-five comment letters on its interim 
policy statement. The commenters included eleven commercial banking 
organizations and six of their trade

[[Page 64421]]

associations, two clearing organizations, and six Federal Reserve 
Banks.
    Commenters generally supported the Board's interim policy 
statement. Ten of the commenters explicitly noted that the potential 
benefits of allowing depository institutions with self-assessed net 
debit caps to pledge collateral for additional daylight overdraft 
capacity outweighed any potential drawbacks. Several commenters stated 
that the interim policy's primary benefits were additional flexibility 
in managing intraday liquidity and the potential for improved 
efficiency in payments activity. One commenter believed the policy's 
elimination of the frequent and material collateralization requirement 
for book-entry securities overdrafts would reduce regulatory burden. 
Only one commenter recommended that the Board not adopt the interim 
policy because it believed the policy would increase its organization's 
regulatory burden.
    Three commenters stated that allowing collateral to support 
daylight overdraft capacity above net debit cap levels would reduce 
Federal Reserve credit risk and could more closely align the Federal 
Reserve's policies with those of other central banks. One commenter who 
generally supported the policy stated that the costs of pledging 
additional collateral to the Federal Reserve might negate the benefits 
of acquiring additional daylight overdraft capacity. Six commenters, 
however, noted that under the interim policy, depository institutions 
would primarily use collateral already pledged to a Reserve Bank. Two 
commenters indicated that institutions might pledge additional 
collateral once they gain experience with the policy. Three commenters 
stated that some depository institutions might pledge additional 
collateral if certain longer-term policy proposals were adopted, such 
as lowering the single-day net debit cap level and implementing two-
tiered pricing for collateralized versus uncollateralized credit.
    The Board has adopted the interim policy's provision enabling self-
assessed depository institutions to obtain additional daylight credit 
by pledging collateral, which was intended to provide flexibility in 
addressing the liquidity needs of the few financially healthy 
institutions that are or may be constrained by their current net debit 
caps. In addition, the revised PSR policy continues to allow depository 
institutions to pledge collateral accepted today for discount window or 
PSR purposes. In conducting its review of the policy, the Board found 
that more than 25 percent of account holders already have collateral 
pledged to the Reserve Banks. The Board believes it would be reasonable 
for depository institutions to use collateral already pledged to a 
Reserve Bank for discount window purposes to obtain additional daylight 
overdraft capacity when that collateral is not supporting an 
outstanding discount window loan. In addition, 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.
    Two commenters expressed concern about the policy placing limits on 
the amount of book-entry securities overdrafts that institutions could 
incur and the potential implications for government securities market 
participants. The interim policy's elimination of the separate 
treatment of book-entry securities overdrafts for self-assessed 
institutions may require certain depository institutions to establish a 
maximum daylight overdraft capacity limit to accommodate their book-
entry securities transactions. The commenters believed that any 
limitation on book-entry securities overdrafts might cause market 
disruptions and further noted that as long as these overdrafts were 
collateralized, a rigid limit would not be necessary. One commenter 
suggested that if a limit were to be imposed, that the limit be allowed 
to vary on a daily basis depending on the amount of collateral that the 
institution had pledged to its Reserve Bank. Another commenter 
recommended limiting the amount of additional daylight overdraft 
capacity to 50 percent of current net debit cap levels.
    Two commenters supported allowing all book-entry securities 
overdrafts that are secured pursuant to the Reserve Banks' Operating 
Circular 10 (Lending) to be excluded from overdrafts measured against 
the cap.\6\ Alternatively, two commenters recommended that the policy 
allow only those book-entry securities overdrafts in excess of the net 
debit cap to be secured pursuant to the Operating Circular 10 and 
exclude them from overdrafts measured against the cap.
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    \6\ Depository institutions that pledge collateral to a Reserve 
Bank must sign an agreement in Operating Circular 10, which provides 
the Reserve Bank with a security interest in all the borrower's 
right, title, and interest in property (wherever located, now owned 
or hereafter acquired), including, but not limited to, accounts, 
chattel paper, inventory, equipment, instruments, investment 
property, general intangibles, payment intangibles, documents, 
deposit accounts, commercial tort claims, real property, and 
intellectual property, and which is (a) identified on a collateral 
schedule, (b) identified on the books or records of a Reserve Bank 
as pledged to the Bank, or (c) for which a financing statement has 
been filed.
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    Seven commenters expressed concern over the types of collateral 
accepted under the interim policy, particularly with regard to 
government securities market participants. Two of these commenters 
asked that the revised PSR policy reflect the continued acceptance of 
securities ``in transit'' to collateralize book-entry securities 
overdrafts.\7\ One commenter recommended exploring alternatives to 
stable pool collateral to secure daylight overdrafts arising from 
particular transactions whose dollar amounts have the potential to make 
stable pool collateral requirements impracticable. Two commenters 
recommended allowing a depository institution to pledge collateral held 
for its benefit at another depository institution to secure funds 
overdrafts, provided the collateral is held in an account maintained by 
a Reserve Bank or is otherwise acceptable to the Reserve Bank.
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    \7\ Securities in transit refer to book-entry securities 
transferred over Fedwire's National Book-Entry System that have been 
purchased by a depository institution, but not yet paid for and 
owned by the institution's customers.
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    The Board has decided to include book-entry securities overdrafts 
for purposes of determining an institution's compliance with its cap. 
Under the revised PSR policy, the Board requires that those depository 
institutions with self-assessed net debit caps that wish to expand 
their daylight overdraft capacity by pledging collateral consult with 
their Reserve Banks to establish a maximum daylight overdraft capacity 
limit.\8\ The Reserve Banks will consider the institution's reasons for 
requesting additional daylight overdraft capacity as well as the 
institution's financial and supervisory information in determining the 
appropriate level of collateralized credit, if any, to grant above the 
net debit cap. Depository institutions will continue to have some 
flexibility as to the specific types of collateral they may pledge to 
the Reserve Banks; however, all collateral must be acceptable to the 
Reserve Banks.
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    \8\ A depository institution's ``maximum daylight overdraft 
capacity limit'' is the total amount of Reserve Bank-approved 
daylight overdraft capacity, both uncollateralized and 
collateralized.
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    The Board recognizes that with the policy's elimination of the 
separate treatment of book-entry securities overdrafts, some depository 
institutions may find their net debit cap levels insufficient in 
accommodating their book-entry securities overdrafts and may request a 
maximum daylight

[[Page 64422]]

overdraft capacity limit to expand their capacity. To address 
commenters' concerns related to placing a limit on the amount of an 
institution's book-entry securities overdrafts, the revised PSR policy 
will allow the Reserve Banks to continue to accept securities in 
transit on the Fedwire book-entry securities system as collateral to 
support an institution's maximum daylight overdraft capacity limit. The 
Reserve Banks recognize that by accepting securities in transit as 
collateral to support an institution's additional daylight overdraft 
capacity, the institution's daylight overdraft capacity will vary on a 
daily basis.\9\
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    \9\ Depository institutions with self-assessed net debit caps 
that receive Reserve Bank approval to support a maximum daylight 
overdraft capacity limit with securities in transit must submit a 
board-of-directors resolution at least once in each twelve-month 
period. The resolution requires the depository institution's board 
of directors to acknowledge that (1) securities in transit will be 
used to collateralize daylight overdraft capacity in a manner 
consistent with the reasons and purposes submitted to the 
institution's administrative Reserve Bank and (2) the value of the 
securities in transit pledged to the Reserve Bank will fluctuate 
intraday and over time.
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    Two commenters expressed concern about the interim policy's 
provision that a Reserve Bank could require a depository institution 
with a self-assessed net debit cap that frequently exceeded its 
daylight overdraft capacity level to collateralize the difference 
between its peak daylight overdraft and its net debit cap level. These 
commenters noted that this requirement could marginally increase 
Federal Reserve credit risk because, unlike the previous policy that 
stipulated a depository institution with book-entry securities 
overdrafts that met the frequency and materiality thresholds had to 
collateralize fully those overdrafts, a depository institution would 
need to collateralize only the portion of its peak book-entry 
securities overdraft in excess of its net debit cap.
    The Board agrees that this change could increase the Federal 
Reserve's credit exposure; however, the Board believes the increase in 
Federal Reserve credit risk would be minimal given that the majority of 
institutions that participate in the government-securities market do 
not meet the frequent and material criteria. In addition, for the past 
several years, the policy has allowed the Reserve Banks to protect 
themselves from risk when they believe it is appropriate by requiring 
institutions to pledge collateral. The interim policy allowed Reserve 
Banks to require collateral for the portion of an institution's 
daylight overdraft above its net debit cap level if the institution 
frequently exceeded its cap as a result of transactions with 
settlement-day finality. In considering the frequency threshold, the 
Board determined that its longstanding policy of allowing Reserve Banks 
to exercise discretion in applying risk controls to their account 
holders is more practicable and precludes the need for the frequency 
threshold.
    Regarding the Board's proposal to eliminate the separate treatment 
of book-entry securities overdrafts for all depository institutions, 
commenters were generally supportive. The proposed policy change would 
require 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. Commenters did not 
believe such a policy change would create any undue burden. Two 
commenters noted that depository institutions frequently exceeding 
their net debit caps might be an indication that the institutions' 
payment activities have expanded or become more complex. They believed 
the requirement for such an institution to apply for a higher net debit 
cap was useful and appropriate.
    As mentioned previously, the Board has determined that its existing 
policies preclude the need for a frequency threshold. Under the Board's 
policy, Reserve Banks review the status of institutions that exceed 
their net debit caps during any two-week reserve-maintenance period. In 
addressing situations where an institution exceeds its net debit cap 
level, Reserve Banks may recommend that the institution apply for a 
higher net debit cap. In addition, if the institution does not qualify 
for a higher net debit cap, Reserve Banks have the discretion to apply 
risk controls, including requiring collateral, imposing clearing 
balance requirements, and delaying or rejecting transactions that would 
exceed the institution's account balance.
    Under the revised PSR policy, Reserve Banks will review the status 
of an institution that exceeds its de minimis cap during a reserve-
maintenance period and decide if the institution's cap level should be 
maintained or if the institution should be required to perform a self-
assessment for a higher cap. Similarly, Reserve Banks will decide if an 
institution with an exempt-from-filing cap that incurs overdrafts in 
its Federal Reserve account in excess of the lesser of $10 million or 
20 percent of capital on more than two days in any two consecutive 
reserve-maintenance periods should maintain its exemption or be 
required to file for a higher cap. Finally, Reserve Banks will also 
review the status of any zero cap institution that incurs a daylight 
overdraft and may decide to monitor the institution's activity in real 
time and reject or delay certain transactions. If the institution 
qualifies for a positive cap, the Reserve Bank may suggest that the 
institution accept an exempt-from-filing cap or file for a higher cap 
if the institution believes that it will continue to incur daylight 
overdrafts.
    One commenter stated that the policy should allow Reserve Banks to 
have flexibility in dealing with bankers' banks because they typically 
have limited ability to pledge collateral to their Reserve Banks but 
experience large intraday account fluctuations. While the Board's 
policy allows bankers' banks to access Federal Reserve payment 
services, bankers' banks that are exempt from reserve requirements do 
not have regular access to the discount window and, therefore, may not 
incur daylight overdrafts. Bankers' banks that waive their reserve 
requirement exemption would be free to establish net debit caps and 
would be subject to the same PSR policies as other depository 
institutions.
    Another commenter requested clarification on the method used to 
determine the maximum limit on an institution's daylight overdraft 
capacity and advocated consistent administration of the revised PSR 
policy throughout the Federal Reserve System. The Board believes that 
the revised PSR policy clarifies the conditions under which a 
depository institution may receive additional daylight overdraft 
capacity and notes that, pursuant to the Federal Reserve Act, the Board 
exercises general supervision over the Reserve Banks (section 11j). The 
Board expects to exercise this authority in a manner that should ensure 
equitable administration of the revised PSR policy.
    Based upon its analysis of the comments received, the Board is 
adopting all of the provisions of the interim policy except the 
frequency threshold that determined when a Reserve Bank would require a 
depository institution with a self-assessed net debit cap to 
collateralize the difference between its peak daylight overdraft and 
its net debit cap level. As mentioned previously, the Board believes 
its longstanding policy of allowing Reserve Banks to exercise 
discretion in applying risk controls to their account holders is more 
practicable and precludes the need for a frequency threshold.
    In adopting all of the other provisions of the interim policy, the 
Board recognizes the importance of providing an environment in which 
payment systems may function effectively and

[[Page 64423]]

efficiently and remove barriers, as appropriate, to foster risk-
reducing payment system initiatives. Under the revised PSR policy, 
certain 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 
Board believes that requiring collateral allows the Federal Reserve to 
protect the public sector from additional credit risk 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. In addition, 
the Board's decision to eliminate the separate treatment of book-entry 
securities overdrafts for all depository institutions should simplify 
administration of and compliance with the policy.

B. Daylight Overdraft Capacity for Foreign Banking Organizations 
(Docket No. R-1108)

    During the Board's policy review, a few FBOs indicated that their 
net debit caps constrain their business activity and place them at a 
competitive disadvantage to U.S. depository institutions. These FBOs 
assert that certain U.S. depository institutions hold a significant 
portion of their assets in foreign markets but are able to use 100 
percent of their total risk-based capital in establishing their caps, 
while the PSR policy does not recognize the FBOs' worldwide financial 
strength. The Board found that during 2000, approximately 35 percent of 
U.S. branches and agencies of foreign banks with positive net debit 
caps had cap utilization levels of 75 percent or more.\10\ In contrast, 
during the same time period, less than 5 percent of domestically 
chartered institutions used more than 50 percent of their net debit 
caps for their average daily peak daylight overdrafts.
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    \10\ Cap utilization is equal to an institution's average daily 
peak daylight overdraft divided by the institution's net debit cap.
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    To address the liquidity concerns identified by FBOs during its 
review of the policy, the Board requested comment on proposed 
modifications to the criteria used to determine the U.S. capital 
equivalency measure for FBOs. The Board proposed (1) eliminating the 
Basle Capital Accord (BCA) criteria used in the policy to determine 
U.S. capital equivalency measure for FBOs, (2) replacing the BCA 
criteria with the strength of support assessment (SOSA) rankings and 
financial holding company (FHC) status in determining U.S. capital 
equivalency measure for FBOs, and (3) raising the percentage of capital 
used in calculating U.S. capital equivalency measure for certain FBOs. 
The Board also proposed replacing ``liabilities to nonrelated parties'' 
with ``net due to related depository institutions'' as a proxy for 
calculating the U.S. capital equivalency measure for SOSA 3-ranked 
FBOs.\11\ Specifically, an FBO's U.S. capital equivalency measure would 
be equal to one of the following:
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    \11\ Reporting Form FFIEC 002/002S. Report of Assets and 
Liabilities of U.S. Branches and Agencies of Foreign Banks. Schedule 
RAL--Assets and Liabilities: Liabilities: item 4--``Liabilities to 
nonrelated parties'' and item 5--``Net due to related depository 
institutions.''
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     35 percent of capital for FBOs that are FHCs
     25 percent of capital for FBOs that are not FHCs and are 
ranked a SOSA 1
     10 percent of capital for FBOs that are not FHCs and are 
ranked a SOSA 2
     5 percent of ``net due to related depository 
institutions'' for FBOs that are not FHCs and are ranked a SOSA 3.
    The Board received ten comment letters on its proposal regarding 
daylight overdraft capacity for FBOs. The commenters included three 
commercial banking organizations and three of their trade associations, 
one clearing organization, and three Federal Reserve Banks.
    All of the commenters supported the proposed changes to the 
calculation of FBOs' net debit caps. Commenters generally believed that 
the proposed net debit cap structure, combined with the interim policy 
that allows depository institutions with self-assessed net debit caps 
to obtain additional daylight overdraft capacity, reasonably addresses 
the liquidity needs of FBOs. One commenter noted that the proposal 
would improve FBOs' capacity to clear and settle U.S. dollar payments.
    Four commenters supported further increases in the percentage of 
capital used in the calculation of FBOs' net debit caps, particularly 
for institutions that hold an FHC classification. One commenter 
recommended allowing Reserve Banks to use discretion on a case-by-case 
basis when providing daylight credit to FBOs. In particular, the 
commenter stated that the percentage applied to determine the U.S. 
capital equivalency measure for institutions that are ranked SOSA 1 
should be allowed to exceed 25 percent if the Reserve Bank agrees, 
presuming the institution has demonstrated adequate need for additional 
liquidity.
    With respect to FBOs' access to the U.S. payments system, two 
commenters stated that the proposed policy changes provided FBOs with 
appropriate access. Four commenters, although in support of the 
proposed policy, requested to be treated more similarly to 
domestically-chartered institutions in the calculation of their net 
debit caps. Two of these commenters expressed concern that the proposal 
leaves FBOs at a competitive disadvantage in comparison with 
domestically-chartered depository institutions. These commenters 
recommended that the Board consider further actions to address 
differences in the net debit cap calculation between FBOs and domestic 
institutions. They maintain that, in many instances, the supervision of 
FBOs, particularly for large and complex banking organizations, is 
comparable to, if not more stringent than, the supervision of 
domestically-chartered depository institutions and that this should 
offset concerns outlined in the Board's proposal about the risks these 
institutions pose. One commenter also recommended that foreign banks 
and domestically-chartered banks be treated comparably with respect to 
the real-time monitor. None of the commenters, however, addressed the 
extent to which the Board should consider the legal risks, such as 
differing international solvency laws, involved in the evaluation of 
the net debit cap calculation for FBOs.
    While the Board recognizes commenters' concerns regarding the 
criteria used to determine the U.S. capital equivalency measure for 
FBOs, it believes that the criteria outlined in the Board's proposal 
are appropriate given the added supervisory and legal risks that FBOs 
present in comparison with domestically-chartered depository 
institutions. Although commenters contend that the level of supervision 
parallels and sometimes surpasses that of domestically-chartered 
depository institutions, the Board believes that the availability of 
this information to U.S. regulators may not be timely or comparable to 
similar information used in the supervision of U.S. depository 
institutions. The Board also believes that FBOs present additional 
legal risks, particularly in relation to insolvency laws. The Board 
believes that it is not practicable for the Federal Reserve to 
undertake and keep current extensive analyses of the legal risks 
presented by the insolvency law(s) applicable to each FBO with a 
Federal Reserve account in order to quantify precisely the legal risk 
that the Federal Reserve incurs by providing intraday credit to that 
institution. The Board believes that these additional risks warrant 
differential treatment of FBOs in relation to the provision of intraday 
liquidity.

[[Page 64424]]

    The Board received no comments on its question regarding the 
appropriateness of replacing ``liabilities to nonrelated parties'' with 
``net due to related depository institutions'' as a proxy for 
calculating U.S. capital equivalency for SOSA 3-ranked FBOs.
    One commenter recommended clarifying the policy to refer to 
``worldwide capital'' in relation to the capital measure for FBOs as 
opposed to merely ``capital,'' to be consistent with language from the 
previous policy statement. The Board believes the capital of a foreign 
banking organization is, by definition, the organization's ``worldwide 
capital.''
    Four commenters believed that the Federal Reserve should play an 
active role in an initiative to establish a cross-border collateral 
pool as an intraday liquidity service for participating banks. These 
commenters mentioned that such a facility would enable an institution 
to receive funds in a foreign central bank account by earmarking 
intraday balances in central bank money with its home country central 
bank. The Board is amenable to discussing this initiative, but is not 
addressing it in this notice.
    Based upon its analysis and the comments received, the Board is 
adopting the proposed policy changes to FBOs' net debit caps. The Board 
is replacing the BCA criteria with SOSA rankings and FHC status in 
determining the U.S. capital equivalency measure and raising the 
percentage of capital used in the net debit cap calculation for certain 
FBOs. The Board believes that SOSA rankings provide broader information 
about the condition of the FBO, its supervision, and the home country, 
whereas the BCA distinction provides information only about the home 
country treatment of bank capital adequacy. Furthermore, the BCA 
designation reflects the one-time adoption of BCA standards by a 
country's supervisory authority, while U.S. bank supervisors update the 
SOSA rankings regularly. The Board believes that, like the SOSA 
ranking, FHC status is preferable to the BCA distinction in determining 
the risk posed by FBOs to the U.S. payments system because FHCs must 
continue to meet certain capital and management standards in order to 
maintain their status and are subject to enhanced reporting 
requirements.
    In addition, the Board is replacing ``liabilities to nonrelated 
parties'' with ``net due to related depository institutions'' as a 
proxy for calculating the U.S. capital equivalency measure for SOSA 3-
ranked FBOs. ``Liabilities to nonrelated parties'' may increase 
relative to assets when an institution becomes financially weaker and 
could unduly increase the institution's overdraft capacity. ``Net due 
to related depository institutions'' reflects the amounts owed to the 
parent by the branch and can be viewed as the capital investment by the 
FBO parent in its U.S. operations. The Board notes that this policy 
change would not affect any SOSA 3-ranked FBOs at this time.

C. Modifications to Daylight Overdraft Posting Rules for Electronic 
Check Presentments (Docket No. R-1109)

    In reviewing the PSR posting rules, the Board found that the 
posting times for electronic check presentment (ECP) transactions often 
create a disincentive for depository institutions to use Federal 
Reserve electronic check services. The Reserve Banks deliver the 
majority of electronic check presentments in the morning, and the 
delivery of the ECP files constitutes legal presentment of the checks 
under the terms of the Federal Reserve's uniform check Operating 
Circular 3. In accordance with the Board's objectives in designing the 
posting rules, the current posting rules stipulate that debits to 
depository institutions' Federal Reserve accounts for check 
presentments occur on the next clock hour that is at least one hour 
after presentment takes place, beginning at 11 a.m. Eastern Time (ET) 
and no later than 3 p.m. local time. Because the Reserve Banks 
generally deliver electronic check presentments in the morning, the 
corresponding debits occur at 11 a.m. ET. As a result, for many 
depository institutions, the posting times for electronic check 
presentments are earlier than the posting times associated with their 
paper check presentments.
    The often earlier debit posting times associated with electronic 
check presentments have caused some depository institutions to incur 
daylight overdrafts earlier in the day and, in many cases, for longer 
periods of time. Because the Reserve Banks charge depository 
institutions a fee for the amount and duration of their Federal Reserve 
daylight credit use, the daylight overdraft charges of a few 
institutions that have moved to electronic check services have grown 
substantially. As a result, some depository institutions have asserted 
that the increases in their daylight overdraft charges have reduced or 
eliminated the benefits of using Federal Reserve electronic check 
services.
    To remove barriers that may discourage depository institutions' use 
of Federal Reserve electronic check presentment services, the Board 
requested comment on proposed modifications to its daylight overdraft 
posting rules to allow debits associated with ECP transactions to post 
to depository institutions' Federal Reserve accounts no earlier than 1 
p.m. local time.
    The Board received nineteen comment letters on its proposal to 
modify daylight overdraft posting rules for ECP transactions. The 
commenters included eight commercial banking organizations and four of 
their trade associations, one clearing organization, and six Federal 
Reserve Banks.
    All of the commenters supported the proposed change in the posting 
time for ECP debits. Commenters generally believed that the benefits of 
the Board's proposed change in the posting time for ECP debits 
outweighed any disadvantages. In addition, commenters generally noted 
that posting ECP debits at 1 p.m. local time should facilitate 
participation in Federal Reserve ECP services by eliminating any 
disincentive created by the current posting rules.
    None of the commenters indicated that the proposed change in the 
posting time of ECP debits would provide the Federal Reserve Banks with 
an inappropriate competitive advantage. One commenter stated that the 
later posting time actually improves the ability of private-sector 
banks to compete with Federal Reserve Banks. Another commenter noted 
that private-sector banks providing ECP services have the additional 
advantage of negotiating settlement arrangements with their 
correspondents. Two commenters noted that the proposed posting time 
does not unduly benefit paying banks or collecting banks, because the 
vast majority of depository institutions function as both paying and 
collecting banks.
    One commenter recommended that the Board evaluate the potentially 
negative effect of posting debits and associated credits later in the 
day on bankers' banks, noting that the policy might impede their 
ability to manage their accounts within net debit cap levels. The Board 
believes that because the Federal Reserve Banks deliver the majority of 
electronic check presentments in the morning, account holders have 
adequate time before 1 p.m. local time to manage their accounts 
appropriately.
    One commenter recommended that the Board extend the ECP posting 
time of 1 p.m. local time to debits and credits related to paper check 
transactions, noting that such a provision would enable many depository 
institutions to more easily monitor and manage their account activity. 
The Board notes that Reserve Banks do not post check debits to 
institutions' accounts prior to

[[Page 64425]]

presentment. Therefore, a single time for all check debits and credits 
would necessarily be later in the day than many depository institutions 
believed would be appropriate, according to earlier comments on this 
issue (57 FR 47084, October 14, 1992).
    Based upon its analysis of the comments received, the Board has 
revised the PSR policy to reflect a modified posting time of 1 p.m. 
local time for ECP transactions. Because the Reserve Banks post the 
vast majority of check transactions by 1 p.m. local time, the Board 
believes that applying this posting time to ECP transactions should 
minimize any disincentive posed by the posting rules to move to ECP 
services. The Board also believes that the revised posting time should 
reduce or eliminate any potential increase in daylight overdraft 
charges created by differences in posting times for ECP and paper check 
transactions.

D. Retention of the $50 Million Fedwire Securities Transfer Limit 
(Docket No. R-1110)

    During its review, the Board also considered the effectiveness of 
the $50 million limit on the transaction size of book-entry securities 
transfers on Fedwire to determine whether the limit was imposing an 
undue regulatory burden on securities market participants. To better 
understand the limit's effectiveness, Federal Reserve staff met with 
representatives of primary dealers, clearing banks, and industry 
utilities. These representatives supported retention of the limit, 
noting its positive net effect on the government securities settlement 
system. To ensure that it considered the perspectives of all parties 
before making a final determination, the Board requested comment on the 
desirability of retaining the $50 million limit on the transaction size 
of book-entry securities transfers on Fedwire.
    The Board received fifteen comment letters regarding the $50 
million limit. The commenters included seven commercial banking 
organizations and four of their trade associations, two clearing 
organizations, and two Federal Reserve Banks.
    All of the commenters supported the retention of some limit on the 
size of book-entry securities transfers on Fedwire. Twelve commenters 
supported retention of the $50 million limit, while three commenters 
favored increasing the transfer limit amount to $100 million or more. 
None of the commenters favored reducing the transfer limit amount.
    Ten commenters indicated that retaining a $50 million limit was 
reasonable and cited reduced overdrafts and enforcement of dealers 
accepting partial deliveries of large trades as the policy's primary 
benefits. Three commenters viewed the costs that institutions would 
incur to modify their systems as a reason not to change the limit, 
while two commenters specifically stated that changes to the limit 
would not require costly systems changes for their organizations. Three 
commenters stated that increasing the transfer limit would reduce 
administrative burden and would more appropriately reflect the current 
trading environment while not putting smaller market participants at a 
competitive disadvantage. Five commenters stated that lowering the 
transfer limit would increase systems and transactions costs and could 
potentially increase the number of delivery fails.
    Following the September 11 terrorist attacks, one commenter 
recommended further evaluation of the transfer limit's necessity and of 
the possibility of lifting or modifying the limit in times of crisis. 
Board staff recently contacted some commenters who supported the limit 
to determine whether their views had changed because of the financial 
market disruptions resulting from the September 11 attacks. These 
commenters indicated that their views did not change and that they 
continue to support the limit's retention.
    Two commenters stated that the limit's requirement of multiple 
deliveries per trade generally increases transaction costs and the 
potential for trade failures or transaction errors. Ten commenters 
viewed the policy's provision for multiple deliveries in order to 
reduce position building by dealers as beneficial. One commenter stated 
that the limit prevents securities delivery logjams that may otherwise 
occur if larger entities were to regularly accumulate securities in 
order to make larger par value deliveries first. Another commenter did 
not believe that the limit promotes any specific benefits in the 
government securities market.
    The Board believes the $50 million limit on book-entry securities 
transfers in combination with daylight overdraft fees has been 
effective in reducing total daylight overdrafts. In addition, the 
industry bears a significant portion of the costs and benefits of the 
limit and supports retention of the limit. As a result, the Board has 
retained the $50 million limit on book-entry securities transfers on 
Fedwire.

III. 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.\12\ 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. The Board believes 
the modifications to its PSR policy will have no adverse effect on the 
ability of other service providers to compete effectively with the 
Federal Reserve Banks in providing similar services.
---------------------------------------------------------------------------

    \12\ 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).
---------------------------------------------------------------------------

IV. 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 revised PSR 
policy under the authority delegated to the Board by the Office of 
Management and Budget. The collections of information associated with 
the PSR policy are found in the Guide to the Federal Reserve's Payments 
System Risk policy.
    The information on de minimis and self-assessed net debit caps 
requested in the Board's PSR policy is currently collected in the 
mandatory Report of Net Debit Cap (FR 2226; OMB No. 7100-0217). The 
information on daylight overdraft capacity for foreign banking 
organizations is currently collected in the Annual Daylight Overdraft 
Capital Report for U.S. Branches and Agencies of Foreign Banks (FR 
2225; OMB No. 7100-0216), a voluntary report.
    The Board expects to publish a separate notice issuing changes to 
the FR 2226 and FR 2225 reporting requirements to comply with the 
revised PSR policy. The burden associated with these information 
collections will be addressed at that time.
    The Board has a continuing interest in the public's opinions of our 
collections of information. At any time, comments regarding the burden 
estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, may be sent to: 
Secretary, Board of Governors of the Federal Reserve System, 20th and C 
Streets, NW., Washington, DC 20551, or mailed electronically to 
[email protected], or

[[Page 64426]]

mailed to the Office of Management and Budget, Paperwork Reduction 
Project (7100-0199), Washington, DC 20503.

V. Federal Reserve Policy Statement on Payments System Risk

    Section I. of the PSR policy is revised, effective December 10, 
2001, to read as follows:

Introduction

I. Federal Reserve Daylight Credit Policies
    A. Daylight overdraft definition and measurement
    B. Pricing
    C. Net debit caps
    1. Definition
    2. Cap categories
    a. Self-assessed
    b. De minimis
    c. Exempt-from-filing
    d. Zero
    3. Capital
    a. U.S.-chartered institutions
    b. U.S. branches and agencies of foreign banks
    D. Collateral
    E. Special situations
    1. Edge and agreement corporations
    2. Bankers' banks
    3. Limited-purpose trust companies
    4. Problem institutions
    F. Monitoring
    1. Ex post
    2. Real time
    3. Multi-District institutions
    G. Transfer-size limit on book-entry securities
II. Policies for private-sector systems
    A. Privately operated multilateral settlement systems
    B. Private delivery-against-payment securities systems
III. Other Policies
    A. Rollovers and continuing contracts

Introduction

    The Federal Reserve Board has developed this policy to address the 
risks that payment systems present to the Federal Reserve Banks 
(Reserve Banks), to the banking system, and to other sectors of the 
economy. This policy is directed primarily at risks on large-dollar 
payment systems, including Federal Reserve and private-sector systems. 
Risk can arise from transactions on the Federal Reserve's real-time 
gross settlement system (Fedwire), from transactions processed in other 
Federal Reserve payment systems (for example, the automated 
clearinghouse (ACH) system), and from transactions on private large-
dollar systems.
    The Reserve Banks face direct risk of loss should depository 
institutions be unable to settle their intraday or ``daylight'' 
overdrafts in their Federal Reserve accounts before the end of the 
day.\1\ Moreover, systemic risk may occur if an institution 
participating in a private large-dollar payment system were unable to 
settle its net debit position. If this were to occur, the institution's 
creditors in that system might then be unable to settle their 
obligations in that system or other systems. Serious repercussions 
could spread to other participants in the private system, to other 
depository institutions not participating in the system, and to the 
nonfinancial economy generally. A Reserve Bank could be exposed to an 
indirect risk if the Federal Reserve's policies did not address this 
systemic risk. Finally, depository institutions create risk by 
permitting their customers, including other depository institutions, to 
incur daylight overdrafts in the depository institutions' accounts in 
anticipation of receiving covering funds before the end of the day.
---------------------------------------------------------------------------

    \1\ In this policy statement, the terms ``depository 
institution'' or ``institution'' will be used to refer not only to 
institutions defined as ``depository institutions'' in 12 U.S.C. 
461(b)(1)(A), but also to U.S. branches and agencies of foreign 
banking organizations, Edge and agreement corporations, and bankers' 
banks, unless the context indicates a different reading.
---------------------------------------------------------------------------

    The Board is aware that large-dollar systems are an integral part 
of clearing and settlement systems and that it is vital to keep the 
payments mechanism operating without significant disruption. 
Recognizing the importance of avoiding such disruptions, the Board 
continues to seek to reduce the risks of settlement failures that could 
cause these disruptions. The Board is also aware that some intraday 
credit may be necessary to keep the payments mechanism running smoothly 
and efficiently. The reduction and control of intraday credit risks, 
although essential, must be accomplished in a manner that will minimize 
disruptions to the payments mechanism. The Board expects to reduce and 
control risks without unduly disrupting the smooth operation of the 
payments mechanism by establishing guidelines for use by institutions 
and relying largely on the efforts of individual institutions to 
identify, control, and reduce their own exposures.
    The Board expects depository institutions to manage their Federal 
Reserve accounts effectively and minimize their use of Federal Reserve 
daylight credit. Although some intraday credit may be necessary, the 
Board expects that, as a result of its policies, relatively few 
institutions will consistently rely on intraday credit supplied by the 
Federal Reserve to conduct their business. The Board also expects to 
continue observing, over time, a reduction in the volume of intraday 
credit at those institutions with a pattern of substantial reliance on 
such credit. The Board will continue to monitor the effect of its 
policies on the payments system.
    The general methods used to control intraday credit exposures are 
explained in the policies below. These methods include limits on 
daylight overdrafts in depository institutions' accounts at Reserve 
Banks; collateralization, in certain situations, of daylight overdrafts 
at the Federal Reserve; limits on the maximum level of credit exposure 
that can be produced by each participant on private large-dollar 
systems; availability of backup facilities capable of completing daily 
processing requirements for private large-dollar systems; and credit 
and liquidity safeguards for private delivery-against-payment systems. 
To assist depository institutions in implementing the Board's policies, 
the Federal Reserve has prepared two documents, the ``Overview of the 
Federal Reserve's Payments System Risk Policy'' and the ``Guide to the 
Federal Reserve's Payments System Risk Policy,'' which are available on 
line at http://www.federalreserve.gov/PaymentSystems/PSR or from any 
Reserve Bank. The ``Overview of the Federal Reserve's Payments System 
Risk Policy'' summarizes the Board's policy on payments system risk, 
including net debit caps and daylight overdraft fees. The overview is 
intended for use by institutions that incur only small and infrequent 
daylight overdrafts. The ``Guide to the Federal Reserve's Payments 
System Risk Policy'' explains in detail how these policies apply to 
different institutions and includes procedures for completing a self-
assessment and filing a cap resolution, as well as information on other 
aspects of the policy.

I. Federal Reserve Daylight Credit Policies

A. Daylight Overdraft Definition and Measurement

    A daylight overdraft occurs when a depository institution's Federal 
Reserve account is in a negative position during the business day. The 
Reserve Banks use an ex post system to measure daylight overdrafts in 
depository institutions' Federal Reserve accounts. Under this ex post 
measurement system, Fedwire funds transfers, book-entry securities 
transfers, and net settlement transactions are posted as they are 
processed during the business day. Other transactions, including 
automated

[[Page 64427]]

clearinghouse and check transactions, are posted to depository 
institutions' accounts according to a defined schedule. The following 
table presents the schedule used by the Federal Reserve for posting 
transactions to institutions' accounts for purposes of measuring 
daylight overdrafts.
Procedures for Measuring Daylight Overdrafts \2\
---------------------------------------------------------------------------

    \2\ This schedule of posting rules does not affect the overdraft 
restrictions and overdraft-measurement provisions for nonbank banks 
established by the Competitive Equality Banking Act of 1987 and the 
Board's Regulation Y (12 CFR 225.52).
---------------------------------------------------------------------------

Opening Balance (Previous Day's Closing Balance)
Post Throughout Business Day:
    +/- Fedwire funds transfers
    +/- Fedwire book-entry securities transfers
    +/- Net settlement entries.
Post at 8:30 a.m. Eastern Time:
    +/- Government and commercial ACH credit transactions \3\
---------------------------------------------------------------------------

    \3\ Depository institutions that are monitored in real time must 
fund the total amount of their commercial ACH credit originations 
when the transactions are processed. If the Federal Reserve receives 
commercial ACH credit transactions from depository institutions 
monitored in real time after the scheduled close of the Fedwire 
funds transfer system, these transactions will be processed when the 
Federal Reserve's Account Balance Monitoring System (ABMS) reopens, 
or by the ACH deposit deadline, whichever is earlier. The ABMS 
provides intraday account information to the Reserve Banks and 
depository institutions and is used primarily to give authorized 
Reserve Bank personnel a mechanism to control and monitor account 
activity for selected institutions. For more information on ACH 
transaction processing, refer to the ACH Settlement Day Finality 
Guide available through the Federal Reserve Financial Services Web 
site at http://www.frbservices.org.
---------------------------------------------------------------------------

    + Treasury Electronic Federal Tax Payment System (EFTPS) 
investments from ACH credit transactions
    + Advance-notice Treasury investments
    + Treasury checks, postal money orders, local Federal Reserve Bank 
checks, and EZ-Clear savings bond redemptions in separately sorted 
deposits
    - Penalty assessments for tax payments from the Treasury Investment 
Program (TIP).\4\
---------------------------------------------------------------------------

    \4\ The Reserve Banks will identify and notify depository 
institutions with Treasury-authorized penalties on Thursdays. In the 
event that Thursday is a holiday, the Reserve Banks will identify 
and notify depository institutions with Treasury-authorized 
penalties on the following business day. Penalties will then be 
posted on the business day following notification.
---------------------------------------------------------------------------

Post at 8:30 a.m. Eastern Time and Hourly, on the Half-Hour, 
Thereafter:
    +/- Main Account Administrative Investment or Withdrawals from TIP
    +/- SDI (Special Direct Investment) Administrative Investment or 
Withdrawals from TIP
    + 31 CFR Part 202 Account Deposits from TIP
    - Uninvested PATAX Tax Deposits from TIP
    - Main Account Balance Limit Withdrawals from TIP
    - Collateral Deficiency Withdrawals from TIP
    - 31 CFR Part 202 Deficiency Withdrawals from TIP.
Post at 8:30 a.m., 11:30 a.m., and 6:30 p.m. Eastern Time:
    - Main Account Treasury Withdrawals from TIP.\5\
---------------------------------------------------------------------------

    \5\ On rare occasions, the Treasury may announce withdrawals in 
advance that are based on depository institutions' closing balances 
on the withdrawal date. The Federal Reserve will post these 
withdrawals after the close of Fedwire.
---------------------------------------------------------------------------

Post by 9:15 a.m. Eastern Time:
    + U.S. Treasury and government agency book-entry interest and 
redemption payments
    + U.S. Treasury and government agency matured coupons and 
definitive securities received before the maturity date.
Post Beginning at 9:15 a.m. Eastern Time:
    - Original issues of Treasury securities.\6\
---------------------------------------------------------------------------

    \6\ Original issues of government agency securities are 
delivered as book-entry securities transfers and will be posted when 
the securities are delivered to the purchasing institutions.
---------------------------------------------------------------------------

Post at 9:30 a.m. Eastern Time and Hourly, on the Half-Hour, 
Thereafter:
    + FR-ETA Value Fedwire Investments from TIP.
Post at 11:00 a.m. Eastern Time:
    +/-ACH debit transactions
    + EFTPS investments from ACH debit transactions.
Post at 11:00 a.m. Eastern Time and Hourly Thereafter:
    +/- Commercial check transactions, including returned checks \7\
---------------------------------------------------------------------------

    \7\ Electronic check presentments will post at 11:00 a.m. 
Eastern Time and hourly thereafter until April 1, 2002.
---------------------------------------------------------------------------

    +/- Check corrections amounting to $1 million or more
    + Currency and coin deposits
    + Credit adjustments amounting to $1 million or more.
Post at 12:30 p.m. Eastern Time and Hourly, on the Half-Hour, 
Thereafter:
    + Dynamic Investments from TIP.
Post by 1:00 p.m. Eastern Time:
    + Same-day Treasury investments.
Post at 1:00 p.m. Local Time and Hourly Thereafter (Beginning on April 
1, 2002):
    - Electronic check presentments.\8\
---------------------------------------------------------------------------

    \8\ The Federal Reserve Banks will post debits to depository 
institutions' accounts for electronic check presentments made before 
12:00 p.m. local time at 1:00 p.m. local time. The Reserve Banks 
will post presentments made after 12:00 p.m. local time on the next 
clock hour that is at least one hour after presentment takes place 
but no later than 3:00 p.m. local time.
---------------------------------------------------------------------------

Post at 5:00 p.m. Eastern Time:
    + Treasury checks, postal money orders, and EZ-Clear savings bond 
redemptions in separately sorted deposits. These items must be 
presented by 4:00 p.m. Eastern Time.
    + Local Federal Reserve Bank checks. These items must be presented 
before 3:00 p.m. Eastern Time.
    +/- Same-day ACH transactions. These transactions include ACH 
return items, check-truncation items, and flexible settlement items.
Post at 6:30 p.m. Eastern Time:\9\
---------------------------------------------------------------------------

    \9\ The Federal Reserve Banks will process and post Treasury-
authorized penalty abatements on Thursdays. In the event that 
Thursday is a holiday, the Federal Reserve Banks will process and 
post Treasury-authorized penalty abatements on the following 
business day.
---------------------------------------------------------------------------

    + Penalty Abatements from TIP.
Post After the Close of Fedwire Funds Transfer System:
    +/- All other transactions. These transactions include the 
following: local Federal Reserve Bank checks presented after 3:00 p.m. 
eastern time but before 3:00 p.m. local time; noncash collection; 
credits for U.S. Treasury and government agency definitive security 
interest and redemption payments if the coupons or securities are 
received on or after the maturity date; currency and coin shipments; 
small-dollar credit adjustments; and all debit adjustments. Discount-
window loans and repayments are normally posted after the close of 
Fedwire as well; however, in unusual circumstances a discount window 
loan may be posted earlier in the day with repayment 24 hours later, or 
a loan may be repaid before it would otherwise become due.
Equals:
Closing Balance

B. Pricing

    Reserve Banks charge a fee for average daily daylight overdrafts in 
Federal Reserve accounts. Daylight overdraft fees apply to all daylight 
overdrafts in depository institutions' Federal Reserve accounts above 
the level of a deductible; however, Reserve Banks will waive fees of 
$25 or less in any two-week reserve-maintenance period.
    For each two-week reserve-maintenance period, the Reserve Banks 
calculate and assess daylight overdraft fees, which are equal to the 
sum of any

[[Page 64428]]

daily daylight overdraft charges during the period. For each day, an 
institution's daylight overdraft charge is equal to the effective daily 
rate charged for daylight overdrafts multiplied by the average daylight 
overdraft for the day minus a deductible valued at the effective daily 
rate.
    Daylight overdraft fees are calculated using an annual rate of 36 
basis points, quoted on the basis of a 24-hour day. To obtain the 
effective annual rate for the standard Fedwire operating day, the 
quoted 36-basis-point fee is multiplied by the fraction of a 24-hour 
day during which Fedwire is scheduled to operate. For example, under an 
18-hour scheduled Fedwire operating day, the effective annual rate used 
to calculate daylight overdraft fees equals 27 basis points (36 basis 
points multiplied by 18/24).\10\ The effective daily rate is calculated 
by dividing the effective annual rate by 360.
---------------------------------------------------------------------------

    \10\ A change in the length of the scheduled Fedwire operating 
day would not change the amount of fees charged because the 
effective daily rate is applied to average daylight overdrafts, 
which, in turn, would be adjusted by the change in the operating 
day.
---------------------------------------------------------------------------

    An institution's average daily daylight overdraft is calculated by 
dividing the sum of its negative Federal Reserve account balances at 
the end of each minute of the scheduled Fedwire operating day (with 
positive balances set to zero) by the total number of minutes in the 
scheduled Fedwire operating day.
    The daily daylight overdraft charge is reduced by a deductible, 
valued at the effective daily rate for a 10-hour operating day. The 
deductible equals 10 percent of a capital measure (see section I.C.3., 
``Capital''). Because the effective daily rate applicable to the 
deductible is kept constant at the 10-hour-operating-day rate, any 
changes to the scheduled Fedwire operating day will not affect the 
value of the deductible.

C. Net Debit Caps

1. Definition
    To limit the aggregate amount of daylight credit that the Reserve 
Banks extend, each institution incurring daylight overdrafts in its 
Federal Reserve account must adopt a net debit cap, that is, a ceiling 
on the daylight overdraft position that it can incur during a given 
interval. Alternatively, if an institution's daylight overdrafts 
generally do not exceed the lesser of $10 million or 20 percent of its 
capital, the institution may qualify for the exempt-from-filing cap. An 
institution must be financially healthy and have regular access to the 
discount window in order to adopt a net debit cap greater than zero or 
qualify for the filing exemption.
    An institution's cap category and capital measure determine the 
size of its net debit cap. More specifically, the net debit cap is 
calculated as an institution's cap multiple times its capital measure:
net debit cap = cap multiple  x  capital measure
    Cap categories (see section I.C.2., ``Cap categories'') and their 
associated cap levels, set as multiples of capital, are listed below:

                                             Net Debit Cap Multiples
----------------------------------------------------------------------------------------------------------------
           Cap category                           Single day                         Two-week  average
----------------------------------------------------------------------------------------------------------------
High..............................  2.25.................................  1.50
Above average.....................  1.875................................  1.125
Average...........................  1.125................................  0.75
De minimis........................  0.40.................................  0.40
Exempt from filing \11\...........  $10 million or 0.20..................  $10 million or 0.20
Zero..............................  0.0..................................  0.0
----------------------------------------------------------------------------------------------------------------
\11\ The net debit cap for the exempt-from-filing category is equal to the lesser of $10 million or 0.20
  multiplied by a capital measure.

    An institution is expected to avoid incurring daylight overdrafts 
that, on average over a two-week period, exceed its two-week average 
cap, and, on any day, exceed its single-day cap. The two-week average 
cap provides flexibility, in recognition that fluctuations in payments 
can occur from day to day. The purpose of the higher single-day cap is 
to limit excessive daylight overdrafts on any day and to ensure that 
institutions develop internal controls that focus on their exposures 
each day, as well as over time.
    The two-week average cap is measured against the average, over a 
two-week reserve-maintenance period, of an institution's daily maximum 
daylight overdraft positions in its Federal Reserve account. In 
calculating the two-week average, the Federal Reserve treats each 
positive end-of-minute balance in an institution's Federal Reserve 
account as if the account balance were equal to zero. The number of 
days used in calculating the average is the number of business days the 
institution's Reserve Bank is open during the reserve-maintenance 
period.
    The Board's policy on net debit caps is based on a specific set of 
guidelines and some degree of examiner oversight. Under the Board's 
policy, a Reserve Bank may limit or prohibit an institution's use of 
Federal Reserve intraday credit if (1) the institution's use of 
daylight credit is deemed by the institution's supervisor to be unsafe 
or unsound; (2) the institution does not qualify for a positive net 
debit cap (see section I.C.2., ``Cap categories''); or (3) the 
institution poses excessive risk to a Reserve Bank by incurring chronic 
overdrafts in excess of what the Reserve Bank determines is prudent.
    While capital measures differ, the net debit cap provisions of this 
policy apply to foreign banking organizations (FBOs) to the same extent 
that they apply to U.S. institutions. The Reserve Banks will advise 
home-country supervisors of the daylight overdraft capacity of U.S. 
branches and agencies of FBOs under their jurisdiction, as well as of 
other pertinent information related to the FBOs' caps. The Reserve 
Banks will also provide information on the daylight overdrafts in the 
Federal Reserve accounts of FBOs' U.S. branches and agencies in 
response to requests from home-country supervisors.
2. Cap Categories
    The policy defines the following six cap categories, described in 
more detail below: zero, exempt-from-filing, de minimis, average, above 
average, and high. The average, above average, and high cap categories 
are referred to as ``self-assessed'' caps.
    a. Self-assessed. In order to establish a net debit cap category of 
average, above average, or high, an institution must perform a self-
assessment of its own creditworthiness, intraday funds management and 
control, customer credit policies and controls, and operating controls 
and contingency

[[Page 64429]]

procedures.\12\ The assessment of creditworthiness is based on the 
institution's supervisory rating and Prompt Corrective Action (PCA) 
designation.\13\ An institution may perform a full assessment of its 
creditworthiness in certain limited circumstances, for example, if its 
condition has changed significantly since its last examination, or if 
it possesses additional substantive information regarding its financial 
condition. An institution performing a self-assessment must also 
evaluate its intraday funds-management procedures and its procedures 
for evaluating the financial condition of and establishing intraday 
credit limits for its customers. Finally, the institution must evaluate 
its operating controls and contingency procedures to determine if they 
are sufficient to prevent losses due to fraud or system failures. The 
``Guide to the Federal Reserve's Payments System Risk Policy,'' 
available on line at http://www.federalreserve.gov/PaymentSystems/PSR 
or from any Reserve Bank, includes a detailed explanation of the self-
assessment process.
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    \12\ This assessment should be done on an individual-institution 
basis, treating as separate entities each commercial bank, each Edge 
corporation (and its branches), each thrift institution, and so on. 
An exception is made in the case of U.S. branches and agencies of 
FBOs. Because these entities have no existence separate from the 
FBO, all the U.S. offices of FBOs (excluding U.S.-chartered bank 
subsidiaries and U.S.-chartered Edge subsidiaries) should be treated 
as a consolidated family relying on the FBO's capital.
    \13\ Section 131 of the 1991 FDICIA defines five PCA 
designations. An insured depository institution is (1) ``well 
capitalized'' if it significantly exceeds the required minimum level 
for each relevant capital measure, (2) ``adequately capitalized'' if 
it meets the required minimum level for each relevant capital 
measure, (3) ``undercapitalized'' if it fails to meet the required 
minimum level for any relevant capital measure, (4) ``significantly 
undercapitalized'' if it is significantly below the required minimum 
level for any relevant capital measure, or (5) ``critically 
undercapitalized'' if it fails to meet any level specified under 
subsection (c)(3)(A), which provides that each appropriate Federal 
banking agency shall, by regulation, in consultation with the FDIC, 
specify the ratio of tangible equity to total assets at which an 
insured depository institution is critically undercapitalized 
(Public Law 102-242, title I, Sec. 131(a), December 19, 1991, 105 
Stat. 2253).
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    Each institution's board of directors must review the self-
assessment and determine the appropriate cap category. The process of 
self-assessment, with board-of-directors review, should be conducted at 
least once in each twelve-month period. A cap determination may be 
reviewed and approved by the board of directors of a holding company 
parent of a depository institution, provided that (1) the self-
assessment is performed by each entity incurring daylight overdrafts, 
(2) the entity's cap is based on the entity's own capital, and (3) each 
entity maintains for its primary supervisor's review its own file with 
supporting documents for its self-assessment and a record of the 
parent's board-of-directors review.\14\
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    \14\ An FBO should undergo the same self-assessment process as a 
domestic bank in determining a net debit cap for its U.S. branches 
and agencies. Many FBOs, however, do not have the same management 
structure as U.S. depository institutions, and adjustments should be 
made as appropriate. If an FBO's board of directors has a more 
limited role to play in the bank's management than a U.S. board has, 
the self-assessment and cap category should be reviewed by senior 
management at the FBO's head office that exercises authority over 
the FBO equivalent to the authority exercised by a board of 
directors over a U.S. depository institution. In cases in which the 
board of directors exercises authority equivalent to that of a U.S. 
board, cap determination should be made by the board of directors.
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    In applying these guidelines, each institution should maintain a 
file for examiner review that includes (1) worksheets and supporting 
analysis used in its self-assessment of its own risk category, (2) 
copies of senior-management reports to the board of directors of the 
institution or its parent (as appropriate) regarding that self-
assessment, and (3) copies of the minutes of the discussion at the 
appropriate board-of-directors meeting concerning the institution's 
adoption of a cap category.\15\
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    \15\ In addition, for FBOs, the file that is made available for 
examiner review by the U.S. offices of an FBO should contain the 
report on the self-assessment that the management of U.S. operations 
made to the FBO's senior management and a record of the appropriate 
senior management's response or the minutes of the meeting of the 
FBO's board of directors or other appropriate management group, at 
which the self-assessment was discussed.
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    As part of its normal examination, the depository institution's 
examiners may review the contents of the self-assessment file.\16\ The 
objective of this review is to ensure that the institution has applied 
the guidelines seriously and diligently, that the underlying analysis 
and method were reasonable, and that the resultant self-assessment was 
generally consistent with the examination findings. Examiner comments, 
if any, should be forwarded to the board of directors of the 
institution. The examiner, however, would generally not require a 
modification of the self-assessed cap category, but rather would inform 
the appropriate Reserve Bank of any concerns. The Reserve Bank would 
then decide whether to modify the cap category. For example, if the 
institution's level of daylight overdrafts constitutes an unsafe or 
unsound banking practice, the Reserve Bank would likely assign the 
institution a zero net debit cap and impose additional risk controls.
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    \16\ Between examinations, examiners or Reserve Bank staff may 
contact an institution about its cap if statistical or supervisory 
reports or ad hoc information suggest that there may have been a 
change in the institution's financial condition.
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    The contents of the self-assessment file will be considered 
confidential by the institution's examiner. Similarly, the Federal 
Reserve and the institution's examiner will hold the actual cap level 
selected by the institution confidential. Net debit cap information 
should not be shared with outside parties or mentioned in any public 
documents; however, net debit cap information will be shared with the 
home-country supervisor of U.S. branches and agencies of foreign banks.
    The Reserve Banks will review the status of any institution with a 
self-assessed net debit cap that exceeds its cap during a two-week 
reserve-maintenance period and will decide if the cap should be 
maintained or if additional action should be taken (see section I.F., 
``Monitoring'').
    b. De minimis. Many depository institutions incur relatively small 
overdrafts and thus pose little risk to the Federal Reserve. To ease 
the burden on these small overdrafters of engaging in the self-
assessment process and to ease the burden on the Federal Reserve of 
administering caps, the Board allows institutions that meet reasonable 
safety standards to incur de minimis amounts of daylight overdrafts 
without performing a self-assessment. A depository institution may 
incur daylight overdrafts up to 40 percent of its capital if the 
institution submits a board-of-directors resolution.
    An institution with a de minimis cap must submit to its Reserve 
Bank at least once each year a copy of its board-of-directors 
resolution (or a resolution by its holding company's board) approving 
the depository institution's use of daylight credit up to the de 
minimis level. The Reserve Banks will review the status of a de minimis 
cap institution that exceeds its cap during a two-week reserve-
maintenance period and will decide if the de minimis cap should be 
maintained or if the institution will be required to perform a self-
assessment for a higher cap.
    c. Exempt-from-filing. Depository institutions that only rarely 
incur daylight overdrafts in their Federal Reserve accounts that exceed 
the lesser of $10 million or 20 percent of their capital are excused 
from performing self-assessments and filing board-of-directors 
resolutions with their Reserve Banks. This dual test is designed to 
limit the filing exemption to depository institutions that create only 
low-dollar risks to the Reserve Banks and that

[[Page 64430]]

incur small overdrafts relative to their capital.
    The Reserve Banks will review the status of an exempt depository 
institution that incurs overdrafts in its Federal Reserve account in 
excess of $10 million or 20 percent of capital on more than two days in 
any two consecutive two-week reserve-maintenance periods. The Reserve 
Bank will decide if the exemption should be maintained or if the 
institution will be required to file for a cap. Any exemptions for 
depository institutions that meet the size and frequency standards are 
granted at the discretion of the Reserve Bank.
    d. Zero. Some financially healthy depository institutions that 
could obtain positive net debit caps choose to have zero caps. Often 
these institutions have very conservative internal policies regarding 
the use of Federal Reserve daylight credit or simply want to ensure 
that they do not incur daylight overdrafts to avoid any daylight 
overdraft fees. If a depository institution that has adopted a zero cap 
incurs a daylight overdraft, the Reserve Bank counsels the institution 
and may monitor the institution's activity in real time and reject or 
delay certain transactions that would cause an overdraft. In addition, 
if the institution qualifies for a positive cap, the Reserve Bank may 
suggest that the institution adopt an exempt-from-filing cap or file 
for a higher cap if the institution believes that it will continue to 
incur daylight overdrafts.
    In addition, a Reserve Bank may assign a depository institution a 
zero net debit cap. Institutions that may pose special risks to the 
Reserve Banks, such as those without regular access to the discount 
window, those incurring daylight overdrafts in violation of this 
policy, or those in weak financial condition, are generally assigned a 
zero cap (see section I.E.4., ``Problem institutions''). Recently-
chartered institutions may also be assigned a zero net debit cap.
3. Capital
    As described above, an institution's cap category and capital 
measure determine the size of its net debit cap. The capital measure 
used in calculating an institution's net debit cap depends upon its 
chartering authority and home-country supervisor.
    a. U.S.-chartered institutions. For depository institutions 
chartered in the United States, net debit caps are multiples of 
``qualifying'' or similar capital measures that consist of those 
capital instruments that can be used to satisfy risk-based capital 
standards, as set forth in the capital adequacy guidelines of the 
federal financial regulatory agencies. All of the federal financial 
regulatory agencies collect, as part of their required reports, data on 
the amount of capital that can be used for risk-based purposes--``risk-
based'' capital for commercial and savings banks and savings 
associations and total regulatory reserves for credit unions. Other 
U.S.-chartered entities that incur daylight overdrafts in their Federal 
Reserve accounts should provide similar data to their Reserve Banks.
    b. U.S. branches and agencies of foreign banks. The following 
policy on U.S. branches and agencies of foreign banks' net debit caps 
is effective through February 20, 2002.
    For U.S. agencies and branches 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 consolidated U.S. 
capital equivalency measure.\17\
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    \17\ The term ``U.S. capital equivalency'' is used in this 
context to refer to the particular capital measure used to calculate 
net debit caps and does not necessarily represent an appropriate 
capital measure for supervisory or other purposes.
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    For a foreign bank whose home-country supervisor adheres 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 total 
liabilities of each agency or branch, including acceptances, but 
excluding accrued expenses and amounts due and other liabilities to 
offices, branches, and subsidiaries of the foreign bank. In the absence 
of contrary information, the Reserve Banks presume that all banks 
chartered in G-10 countries meet the acceptable prudential capital and 
supervisory standards and will consider any bank chartered in any other 
nation that adopts the Basle Capital Accord (or requires capital at 
least as great and in the same form as called for by the accord) 
eligible for the Reserve Banks' review for meeting acceptable 
prudential capital and supervisory standards.
    For all other foreign banks, 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 
total liabilities of each agency or branch, including acceptances, but 
excluding accrued expenses and amounts due and other liabilities to 
offices, branches, and subsidiaries of the foreign bank.
    The following policy replaces the above policy on U.S. branches and 
agencies of foreign banks' net debit caps beginning on February 21, 
2002.
    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 the FBO's U.S. 
capital equivalency measure.\18\ U.S. capital equivalency is equal to 
the following:
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    \18\ See footnote 17.
---------------------------------------------------------------------------

     35 percent of capital for FBOs that are financial holding 
companies (FHCs) \19\
---------------------------------------------------------------------------

    \19\ The Gramm-Leach-Bliley Act (Public Law 106-102, 113 Stat. 
1338 (1999)) defines a financial holding company as a bank holding 
company that meets certain eligibility requirements. In order for a 
bank holding company to become a financial holding company and be 
eligible to engage in the new activities authorized under the Gramm-
Leach-Bliley Act, the Act requires that all depository institutions 
controlled by the bank holding company be well capitalized and well 
managed. With regard to a foreign bank that operates a branch or 
agency or owns or controls a commercial lending company in the 
United States, the Act requires the Board to apply comparable 
capital and management standards that give due regard to the 
principle of national treatment and equality of competitive 
opportunity.
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     25 percent of capital for FBOs that are not FHCs and have 
a strength of support assessment ranking (SOSA) of 1 \20\
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    \20\ The SOSA ranking is composed of four factors, including the 
FBO's financial condition and prospects, the system of supervision 
in the FBO's home country, the record of the home country's 
government in support of the banking system or other sources of 
support for the FBO; and transfer risk concerns. Transfer risk 
relates to the FBO's ability to access and transmit U.S. dollars, 
which is an essential factor in determining whether an FBO can 
support its U.S. operations. The SOSA ranking is based on a scale of 
1 through 3, with 1 representing the lowest level of supervisory 
concern.
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     10 percent of capital for FBOs that are not FHCs and are 
ranked a SOSA 2
     5 percent of ``net due to related depository 
institutions'' for FBOs that are not FHCs and are ranked a SOSA 3.
    Granting a net debit cap, or any extension of intraday credit, to a 
depository institution is at the discretion of the Reserve Bank. In the 
event a Reserve Bank grants a net debit cap or extends intraday credit 
to a financially healthy SOSA 3-ranked FBO, the Reserve Bank may 
require such credit to be fully collateralized, given the heightened 
supervisory concerns with SOSA 3-ranked FBOs.

D. Collateral

    The Board recognizes that while net debit caps provide sufficient 
liquidity to most institutions, some depository institutions may still 
experience liquidity pressures. The Board believes it is important to 
provide an environment in which payment systems may function 
effectively and efficiently

[[Page 64431]]

and remove barriers, as appropriate, to foster risk-reducing payment 
system initiatives. Consequently, certain 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, subject to Reserve Bank approval.\21\ 
The Board believes that requiring collateral allows the Federal Reserve 
to protect the public sector from additional credit risk 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.
---------------------------------------------------------------------------

    \21\ The administrative Reserve Bank is responsible for the 
administration of Federal Reserve credit, reserves, and risk 
management policies for a given depository institution or other 
legal entity.
---------------------------------------------------------------------------

    A depository institution with a self-assessed net debit cap that 
wishes to expand its daylight overdraft capacity by pledging collateral 
should consult with its administrative Reserve Bank. The Reserve Bank 
will consider the institution's reasons for requesting additional 
daylight overdraft capacity as well as its financial and supervisory 
information in determining the appropriate level of collateralized 
credit, if any, to grant above the net debit cap. The financial and 
supervisory information considered may include, but is not limited to, 
capital and liquidity ratios, the composition of balance sheet assets, 
CAMELS or other supervisory ratings and assessments, and SOSA rankings 
(for U.S. branches and agencies of foreign banks).
    The Reserve Banks will work with a depository institution that 
requests additional daylight overdraft capacity to decide on the 
appropriate maximum daylight overdraft capacity level. If the Reserve 
Bank approves the request for additional daylight overdraft capacity, 
the depository institution must submit a board-of-directors resolution 
at least once in each twelve-month period. An institution's maximum 
daylight overdraft capacity is defined as follows:

maximum daylight overdraft capacity =
net debit cap + Reserve Bank-approved collateralized credit

    This policy is intended to provide some additional liquidity to the 
few institutions that might otherwise be constrained from participating 
in risk-reducing payment system initiatives. Depository institutions 
that request daylight overdraft capacity beyond the net debit cap must 
have already explored other alternatives to address their increased 
liquidity needs.\22\ In addition, depository institutions have some 
flexibility as to the specific types of collateral they may pledge to 
the Reserve Banks; however, all collateral must be acceptable to the 
Reserve Banks.\23\
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    \22\ Some potential alternatives available to a depository 
institution to address increased intraday credit needs include (1) 
filing for a higher net debit cap, (2) shifting funding patterns or 
delaying the origination of funds transfers, or (3) transferring 
some payments processing business to a correspondent bank. 
Furthermore, the Board's policies on Federal Reserve daylight credit 
extensions are 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, requiring 
collateral, or applying for a maximum daylight overdraft capacity 
limit for daylight overdrafts caused by these transactions may be of 
limited use in reducing or managing the 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.
    \23\ The Reserve Banks may accept securities in transit on the 
Fedwire book-entry securities system as collateral to support a 
maximum daylight overdraft capacity level. Securities in transit 
refer to book-entry securities transferred over Fedwire's National 
Book-Entry System that have been purchased by a depository 
institution but not yet paid for and owned by the institution's 
customers.
---------------------------------------------------------------------------

    Depository institutions with exempt-from-filing and de minimis net 
debit caps may not obtain additional daylight overdraft capacity by 
pledging collateral. These depository institutions must first file for 
a higher net debit cap to obtain additional daylight overdraft 
capacity.
    Similarly, depository institutions with zero net debit caps may not 
obtain additional daylight overdraft capacity by pledging collateral. 
If an institution has voluntarily adopted a zero net debit cap, but 
qualifies for a positive net debit cap, it must file for a positive net 
debit cap to obtain daylight overdraft capacity. Depository 
institutions that have been assigned a zero net debit cap by their 
administrative Reserve Bank are not eligible to apply for any daylight 
overdraft capacity.
    A self-assessed institution that has been approved for additional 
daylight overdraft capacity should avoid incurring daylight overdrafts 
that, on average over a two-week period, exceed its two-week average 
limit, and, on any day, exceed its single-day limit. The two-week 
average limit is equal to the two-week average cap plus the amount of 
applicable Reserve Bank-approved collateral, averaged over a two-week 
reserve-maintenance period. The single-day limit is equal to an 
institution's net debit cap plus the amount of applicable Reserve Bank-
approved collateral.\24\
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    \24\ A depository institution with a self-assessed cap that has 
been approved for additional daylight overdraft capacity may, at any 
time, pledge more or less collateral than its Reserve Bank-approved 
collateral limit. Applicable collateral to be used in the 
calculation of an institution's single-day and two-week average 
limit must be less than or equal to the amount of collateral 
approved by the Reserve Bank.
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    The Reserve Banks will review the status of any institution that 
exceeds its maximum daylight overdraft capacity during a two-week 
reserve-maintenance period and will decide if this limit should be 
maintained or if additional action should be taken (see section I.F., 
``Monitoring'').

E. Special Situations

    Special risks are presented by the participation on Fedwire of Edge 
and agreement corporations, bankers' banks that are not subject to 
reserve requirements, limited-purpose trust companies, and institutions 
that have been assigned a zero cap by their Reserve Banks. Most of 
these institutions lack regular discount-window access. In developing 
its policy for these institutions, the Board has sought to balance the 
goal of reducing and managing risk in the payments system, including 
risk to the Federal Reserve, with that of minimizing the adverse 
effects on the payments operations of these institutions.
    Regular access to the Federal Reserve discount window generally is 
available to institutions that are subject to reserve requirements. If 
an institution that is not subject to reserve requirements and thus 
does not have regular discount-window access were to incur a daylight 
overdraft, the Federal Reserve might end up extending overnight credit 
to that institution if the daylight overdraft were not covered by the 
end of the business day. Such a credit extension would be contrary to 
the quid pro quo of reserves for regular discount-window access as 
reflected in the Federal Reserve Act and in Board regulations. Thus, 
institutions that do not have regular access to the discount window 
should not incur daylight overdrafts in their Federal Reserve accounts.
    Certain institutions are subject to a daylight-overdraft penalty 
fee levied against the average daily daylight overdraft incurred by the 
institution. These include Edge and agreement corporations, bankers' 
banks that are not subject to reserve requirements, and limited-purpose 
trust companies. The annual rate used to determine the daylight-
overdraft penalty fee is equal to the annual rate applicable to the

[[Page 64432]]

daylight overdrafts of other depository institutions (36 basis points) 
plus 100 basis points multiplied by the fraction of a 24-hour day 
during which Fedwire is scheduled to operate (18/24). The daily 
daylight-overdraft penalty rate is calculated by dividing the annual 
penalty rate by 360.
    The daylight-overdraft penalty rate applies to the institution's 
average daily daylight overdraft in its Federal Reserve account. The 
daylight-overdraft penalty rate is charged in lieu of, not in addition 
to, the rate used to calculate daylight overdraft fees for depository 
institutions described in section I.B. While daylight overdraft fees 
are calculated differently for these institutions than for depository 
institutions, overnight overdrafts at these institutions are generally 
priced the same as overnight overdrafts at other depository 
institutions.
1. Edge and Agreement Corporations
    Edge \25\ and agreement corporations should refrain from incurring 
daylight overdrafts in their Federal Reserve accounts. In the event 
that any daylight overdrafts occur, the Edge or agreement corporation 
must post collateral to cover the overdrafts. In addition to posting 
collateral, the Edge or agreement corporation would be subject to the 
daylight-overdraft penalty rate levied against the average daily 
daylight overdrafts incurred by the institution, as described above.
    This policy reflects the Board's concerns that these institutions 
lack regular access to the discount window and the possibility that the 
parent company may be unable or unwilling to cover its subsidiary's 
overdraft on a timely basis. The Board notes that the parent of an Edge 
or agreement corporation could fund its subsidiary during the day over 
Fedwire or the parent could substitute itself for its subsidiary on 
private systems. Such an approach by the parent could both reduce 
systemic risk exposure and permit the Edge or agreement corporation to 
continue to service its customers. Edge and agreement corporation 
subsidiaries of foreign banking organizations are treated in the same 
manner as their domestically owned counterparts.
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    \25\ These institutions are organized under section 25A of the 
Federal Reserve Act (12 U.S.C. 611-631) or have an agreement or 
undertaking with the Board under section 25 of the Federal Reserve 
Act (12 U.S.C. 601-604a).
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2. Bankers' Banks
    Bankers banks \26\ are exempt from reserve requirements and do not 
have regular access to the discount window. They do, however, have 
access to Federal Reserve payment services. The Board's policy provides 
that bankers' banks should refrain from incurring daylight overdrafts 
and post collateral to cover any overdrafts they do incur. In addition 
to posting collateral, a bankers' bank would be subject to the 
daylight-overdraft penalty fee levied against the average daily 
daylight overdrafts incurred by the institution, as described above.
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    \26\ For the purposes of this policy statement, a bankers' bank 
is a depository institution that is not required to maintain 
reserves under the Board's Regulation D (12 CFR 204) because it is 
organized solely to do business with other financial institutions, 
is owned primarily by the financial institutions with which it does 
business, and does not do business with the general public. Such 
bankers' banks also generally are not eligible for Federal Reserve 
Bank credit under the Board's Regulation A (12 CFR 201.2(c)(2)).
---------------------------------------------------------------------------

    The Board's policy for bankers' banks reflects the Reserve Banks' 
need to protect themselves from potential losses resulting from 
daylight overdrafts incurred by bankers' banks. The policy also 
considers the fact that some bankers' banks do not incur the costs of 
maintaining reserves as do other depository institutions and do not 
have regular access to the discount window.
    Bankers' banks may voluntarily waive their exemption from reserve 
requirements, thus gaining access to the discount window. Such bankers' 
banks are free to establish net debit caps and would be subject to the 
same policy as other depository institutions. The policy set out in 
this section applies only to those bankers' banks that have not waived 
their exemption from reserve requirements.
3. Limited-Purpose Trust Companies \27\
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    \27\ For the purposes of this policy statement, a limited-
purpose trust company is a trust company that is a member of the 
Federal Reserve System but that does not meet the definition of 
``depository institution'' in section 19(b)(1)(A) of the Federal 
Reserve Act (12 U.S.C. 461(b)(1)(A)).
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    The Federal Reserve Act permits the Board to grant Federal Reserve 
membership to limited-purpose trust companies subject to conditions the 
Board may prescribe pursuant to the Act. As a general matter, member 
limited-purpose trust companies do not accept reservable deposits, do 
not have regular discount-window access, and may not incur daylight 
overdrafts.
    Limited-purpose trust companies are subject to the same daylight-
overdraft penalty rate as other institutions that do not maintain 
reserves and do not have regular discount-window access. Limited-
purpose trust companies should refrain from incurring overdrafts and 
should post collateral to cover any overdrafts they do incur.
4. Problem Institutions
    For depository institutions that are in weak financial condition, 
the Reserve Banks will impose a zero cap. The Reserve Bank will also 
monitor the institution's activity in real time and reject or delay 
certain transactions that would create an overdraft. Problem 
institutions should refrain from incurring daylight overdrafts and must 
post collateral to cover any daylight overdrafts they do incur.

F. Monitoring

1. Ex Post
    Under the ex post monitoring procedures, an institution with a 
daylight overdraft in excess of its maximum daylight overdraft capacity 
or net debit cap may be contacted by its Reserve Bank.\28\ The Reserve 
Bank may 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 net debit caps, imposing collateralization or 
clearing-balance requirements, rejecting or delaying certain 
transactions during the day until the institution has collected 
balances in its Federal Reserve account, or, in extreme cases, taking 
the institution off line or prohibiting it from using Fedwire.
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    \28\ Even if the institution is not a state member bank, the 
Reserve Bank can make this contact when an overdraft occurs in a 
Federal Reserve account or when the institution is in a net debit 
position on a system that settles on the books of the Federal 
Reserve.
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2. Real Time
    A Reserve Bank will apply real-time monitoring to an individual 
institution's position when the Reserve Bank believes that it faces 
excessive risk exposure, for example, from problem banks or 
institutions with chronic overdrafts in excess of what the Reserve Bank 
determines is prudent. In such a case, the Reserve Bank will control 
its risk exposure by monitoring the institution's position in real-
time, rejecting or delaying certain transactions that would exceed the 
institution's maximum daylight overdraft capacity or net debit cap, and 
taking other prudential actions, including requiring collateral.\29\
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    \29\ Depository institutions that are monitored in real time 
must fund the total amount of their ACH credit originations when the 
transactions are processed by the Federal Reserve, even if those 
transactions are processed one or two days before settlement.

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[[Page 64433]]

3. Multi-District Institutions
    Depository institutions, such as those maintaining merger-
transition accounts and U.S. branches and agencies of a foreign bank, 
that access Fedwire through accounts in more than one Federal Reserve 
District are expected to manage their accounts so that the total 
daylight overdraft position across all accounts does not exceed their 
net debit caps. One Reserve Bank will act as the administrative Reserve 
Bank and will have overall risk-management responsibilities for 
institutions maintaining accounts in more than one Federal Reserve 
District. In the case of families of U.S. branches and agencies of the 
same foreign banking organization, net debit cap compliance will be 
monitored by the Reserve Bank that exercises the Federal Reserve's 
oversight responsibilities under the International Banking Act.\30\ The 
administrative Reserve Bank may determine, in consultation with Reserve 
Banks in whose territory other U.S. agencies or branches of the same 
foreign bank are located and with the management of the foreign bank's 
U.S. operations, that branches and agencies outside its District either 
will not be permitted to incur overdrafts in Federal Reserve accounts 
or will be required to allocate part or all of the foreign family's net 
debit cap (and the responsibility for administering part or all of the 
collateral requirement) to a Reserve Bank in whose District one or more 
of the foreign offices operate.\31\ For domestic depository 
institutions that have branches in multiple Federal Reserve Districts, 
the administrative Reserve Bank generally will be the Reserve Bank 
where the head office of the bank is located.
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    \30\ 2 USC 3101-3108.
    \31\ As in the case of Edge and agreement corporations and their 
branches, with the approval of the designated administrative Reserve 
Bank, a second Reserve Bank may assume the responsibility of 
managing and monitoring the net debit cap of particular foreign 
branch and agency families. This would often be the case when the 
payments activity and national administrative office of the foreign 
branch and agency family is located in one District, while the 
oversight responsibility under the International Banking Act is in 
another District. If a second Reserve Bank assumes management 
responsibility, monitoring data will be forwarded to the designated 
administrator for use in the supervisory process.
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G. Transfer-Size Limit on Book-Entry Securities

    Secondary-market book-entry securities transfers on Fedwire are 
limited to a transfer size of $50 million par value. This limit is 
intended to encourage partial deliveries of large trades in order to 
reduce position building by dealers, a major cause of book-entry 
securities overdrafts before the introduction of the transfer-size 
limit and daylight overdraft fees. This limitation does not apply to 
either of the following:
    a. Original issue deliveries of book-entry securities from a 
Reserve Bank to a depository institution.
    b. Transactions sent to or by a Reserve Bank in its capacity as 
fiscal agent of the United States, government agencies, or 
international organizations.
    Thus, requests to strip or reconstitute Treasury securities or to 
convert bearer or registered securities to or from book-entry form are 
exempt from this limitation. Also exempt are pledges of securities to a 
Reserve Bank as principal (for example, discount-window collateral) or 
as agent (for example, Treasury Tax and Loan collateral).

    By order of the Board of Governors of the Federal Reserve 
System, December 10, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-30811 Filed 12-12-01; 8:45 am]
BILLING CODE 6210-01-P