[Federal Register Volume 73, Number 248 (Wednesday, December 24, 2008)]
[Notices]
[Pages 79109-79127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30627]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1345]
Policy on Payment System Risk
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Policy statement.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
has adopted revisions to part II of its Policy on Payment System Risk
(PSR) that are designed to improve intraday liquidity management and
payment flows for the banking system, while also helping to mitigate
credit exposures of the Federal Reserve Banks (Reserve Banks) from
daylight overdrafts. The adopted changes to the PSR policy are
substantially the same as those proposed for comment, including a new
approach that explicitly recognizes the role of the central bank in
providing intraday balances and credit to healthy depository
institutions, a zero fee for collateralized daylight overdrafts, a 50
basis point (annual rate) charge for uncollateralized daylight
overdrafts, and a biweekly daylight overdraft fee waiver of $150. The
implementation of the changes will take place between the fourth
quarter of 2010 and first quarter of 2011. A specific date will be
announced by the Board at least 90 days in advance. The Board also
approved for foreign banking organizations (FBO) an interim policy
change related to the calculation of the deductible amount from
daylight overdraft fees under the existing policy and early
implementation of the proposed streamlined procedure for maximum
daylight overdraft capacity (max cap). The interim policy change for
the deductible and streamlined max cap procedure will be effective on
March 26, 2009. In addition, the Board endorsed a four-prong strategy,
which includes these policy changes, through which the Federal Reserve
and industry will address related intraday liquidity, operational, and
credit risks in the wholesale payment system.
DATES: Effective Dates: The policy will take effect between the fourth
quarter of 2010 and first quarter of 2011 with a specific date
announced at least 90 days in advance.
The interim policy for the deductible and streamlined max cap
procedure will be effective on March 26, 2009.
FOR FURTHER INFORMATION CONTACT: Jeffrey Marquardt, Deputy Director
(202-452-2360) or Susan Foley, Assistant Director (202-452-3596),
Division of Reserve Bank Operations and Payment Systems, Board of
Governors of the Federal Reserve System; for users of
Telecommunications Device for the Deaf (``TDD'') only, contact (202)
263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
On March 7, 2008, the Board requested comment on a new approach to
intraday central bank balances and credit that formally recognizes the
role of the central bank in providing such balances and credit to
depository institutions and encourages them to collateralize explicitly
their daylight overdrafts.\1\ The Board proposed a policy of supplying
intraday balances to healthy depository institutions predominantly
through explicitly collateralized daylight overdrafts. Under this
proposal, the Board would allow depository institutions to pledge
collateral voluntarily to secure daylight overdrafts, and
collateralized daylight overdrafts would be charged a zero fee. To
further encourage the voluntary use of collateral, the Board would
raise the fee for uncollateralized daylight overdrafts to 50 basis
points (annual rate) from the current 36 basis points. The Board also
proposed increasing the biweekly daylight overdraft fee waiver to $150
from $25 to minimize the effect of the proposed policy changes on
institutions that use small amounts of daylight overdrafts. In
addition, the Board proposed changes to other elements of the PSR
policy dealing with daylight overdrafts, including adjusting net debit
caps, streamlining max cap procedures for certain FBOs, eliminating the
current deductible for daylight overdraft fees, and increasing the
penalty daylight overdraft fee for ineligible institutions to 150 basis
points (annual rate) from the current 136 basis points.
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\1\ See 73 FR 12417, March 7, 2008.
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The Federal Reserve has been reviewing for several years the long-
term effects of operational, market, and policy changes by the industry
and the Federal Reserve on intraday liquidity, operational, and credit
risks in the payment system, including intraday account overdrafts at
the Reserve
[[Page 79110]]
Banks.\2\ The proposed changes reflect the culmination of this work,
along with companion efforts by the banking industry.
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\2\ As part of its review, in June 2006, the Board published for
public comment the Consultation Paper on Intraday Liquidity
Management and the Payments System Risk Policy (71 FR 35679, June
21, 2006) seeking information from financial institutions and other
interested parties on their experience in managing liquidity,
operational, and credit risks related to Fedwire funds transfers,
especially late-day transfers. The paper included a list of detailed
objectives relating to safety and efficiency that the Board has
previously used to conduct payment system risk analysis. An
important goal of the consultation process was to identify
opportunities to improve the safety/efficiency trade-offs in the
payment system over the long run. For a summary of comments on the
consultation paper, see 73 FR 12417, March 7, 2008.
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Significant changes to U.S. payment and settlement systems over the
past twenty-five years have helped reduce systemic risk. In accord with
U.S. and international risk policies and standards, several of these
changes have relied increasingly on the use of central bank money--in
this context, balances that financial institutions and private clearing
and settlement organizations hold in accounts at Reserve Banks--to
strengthen the management of credit and liquidity risk in private-
sector clearing and settlement arrangements. Such changes have had the
effect of increasing significantly the intraday demand for central bank
money and hence the demand for daylight overdrafts at the Reserve
Banks.
Overall, however, the combined effect of changes at clearing and
settlement organizations, depository institutions' intraday liquidity
management strategies, and late-day market activity has been to shift
the sending of larger Fedwire funds transfers to later in the day. From
an operational risk perspective, waiting to send large payments late in
the day increases the potential magnitude of liquidity dislocation and
risk in the financial industry if late-in-the-day operational
disruptions occur. An increase in such risk is particularly troublesome
in an era of heightened concern about operational disruptions
generally.
To address the combination of intraday liquidity, operational, and
credit risks in the wholesale payment system, the Board considered
changes to its PSR policy, which sets out the general public policy
objectives of safety and efficiency for payment and settlement systems.
The changes to the PSR policy, however, are only one effort under a
four-pronged strategy involving the Federal Reserve and the financial
industry. The second effort involves the Reserve Banks working with the
industry to investigate the potential development of a liquidity-saving
mechanism for the Fedwire Funds System.\3\ The third and fourth efforts
involve The Clearing House Interbank Payment System (CHIPS) and
Depository Trust & Clearing Corporation identifying opportunities to
improve transaction processing and liquidity use in their systems and
processes that relate to large-value funds and securities settlement,
respectively.\4\
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\3\ The creation of a liquidity-saving mechanism would conserve
on account balances or daylight overdrafts and would also reduce the
amount of collateral needed to achieve costless daylight overdrafts
under the zero fee for collateralized daylight overdrafts. The
liquidity-saving mechanism could involve adding new features to the
Fedwire Funds Service that depository institutions could use to
coordinate better the timing and settlement of their payments as
well as to economize on the use of intraday central bank money,
daylight overdrafts, and collateral. The existing real-time gross
settlement functionality of Fedwire would be retained.
\4\ CHIPS is a real-time final payment system operated by The
Clearing House Payments Company. In January 2001, The Clearing House
implemented operational and rule changes to allow all transactions
settled in CHIPS to be final upon release from a central queuing
system. Depository Trust & Clearing Corporation operates six
subsidiaries that provide clearance, settlement, and information
services for many financial instruments, including equities,
corporate and municipal bonds, government and mortgage-backed
securities, money market instruments, and over-the-counter
derivatives.
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II. Summary of Comments and Analysis
The Board received nineteen comment letters on its proposed policy.
The commenters included thirteen commercial banking organizations, four
trade organizations, one private-sector clearing and settlement system,
and the Federal Reserve Bank of New York's Payment Risk Committee.\5\
Most commenters (seventeen) supported the proposed policy changes. One
commenter opposed the proposed policy because it does not believe fees
are necessary to encourage the pledging of collateral if net debit caps
are in place to control the Reserve Banks' risk. One commenter did not
indicate support or opposition.
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\5\ The Payment Risk Committee (PRC) is sponsored by the Federal
Reserve Bank of New York and works to identify and analyze issues of
mutual interest related to risk in payments and settlement. The
institutions represented on the PRC include Bank of America, Bank of
New York Mellon, Bank of Tokyo-Mitsubishi UFJ, Citibank, Deutsche
Bank, HSBC, JPMorgan Chase, State Street, UBS, Wachovia, and Wells
Fargo. The Wholesale Customer Advisory Group (WCAG) advises the
Wholesale Product Office on business issues and is composed of
depository institutions that are major users of Fedwire.
Institutions represented on this group include ABN AMRO, Bank of
America, Bank of New York Mellon, Citibank, Deutsche Bank, HSBC,
JPMorgan Chase, Key Bank, Mellon Financial, State Street, SunTrust,
UBS, US Bank, US Central Credit Union, Wachovia, and Wells Fargo.
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Comments on Proposed PSR Policy Changes
Several commenters noted that the new approach and specifically the
zero fee for collateralized overdrafts would contribute to an increase
in intraday liquidity and an overall reduction in operational and
credit risks in the payment system. They also believed that the
proposed policy would provide an incentive for institutions to reduce
payments held in internal queues to manage liquidity use, and that the
earlier release of these payments would increase the velocity of
overall payment flows and liquidity circulation. Other commenters
commended the Board for recognizing explicitly its role in providing
intraday balances and credit, for introducing a two-tiered pricing
system, and for proposing changes that improve the balance between
payment system safety and efficiency objectives.
While commenters acknowledged areas where the proposed changes
would likely achieve positive outcomes, such as encouraging the release
of more payments from internal liquidity queues, a few commenters
indicated that they did not believe the proposed policy changes would
address fully the late-day compression of Fedwire funds transfers. As
of third quarter 2008, 31 percent of the value of Fedwire payments are
sent after 5 p.m., a 41 percent increase from just 10 years ago.\6\
This growth is driven by the largest-valued payments (the 99th
percentile), which averaged about $1.25 billion through mid-2008. The
compression results to a certain extent from payments held in liquidity
queues until later in the day but is also importantly driven by
processes at clearing and settlement organizations and late-day market
activity. For instance, private-sector payment systems have created a
structural demand for intraday central bank balances and related credit
averaging about $50 billion per day. This credit supports these
systems' routine settlement and risk management activities, and the
associated balances are released late in the day. On peak days, this
demand for balances can exceed $150 billion. A significant proportion
of such balances are not currently released to depository institutions
until after 4:30 p.m. for general use in the payment system. Overall,
from an operational risk perspective, the compression of payments,
particularly large payments, sent late in the day increases the
potential magnitude of liquidity dislocation and risk in the financial
[[Page 79111]]
industry if late-in-the-day operational disruptions should occur.
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\6\ All times referenced are eastern time.
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Comments on Four-Prong Strategy Involving Federal Reserve and Industry
Efforts
Several commenters recognized that additional efforts are needed to
address the late-day compression of payments and strongly encouraged
continued work on the three other efforts under the four-prong strategy
endorsed by the Board. The three other efforts cover the potential
development of a liquidity-saving mechanism for the Fedwire Funds
Service, improvements in payments processing for CHIPS, and
improvements in liquidity usage within the Depository Trust & Clearing
Corporation, particularly its Depository Trust Company (DTC)
subsidiary.\7\ These initiatives have been a collaborative effort by
the Federal Reserve and industry and are ongoing.
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\7\ DTC provides custody and settlement services for corporate
and municipal securities and money market instruments. DTC is a
member of the Federal Reserve System and a clearing agency
registered with the Securities and Exchange Commission.
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The Reserve Banks have been exploring with the industry the
possibility of developing a liquidity-saving mechanism for the Fedwire
Funds Service. Such a mechanism would also potentially economize on the
amount of collateral needed to settle a given value of transactions.
For example, the creation of the mechanism could further encourage the
coordinated release of payments held in the liquidity queues of
depository institutions by reducing the total liquidity (and
collateral) used to fund those payments. Four comment letters, one of
which represented sixteen large depository institutions, strongly
supported the development of a liquidity-saving mechanism. One
commenter specifically discussed the efficiency gains of moving
payments from individual institution queues to a centralized queue that
would enable timely matching and offsetting of payments.
As part of industry efforts, CHIPS, working with its members, has
pursued ideas to facilitate faster matching and offsetting of large-
value payments throughout the day to reduce the number of unresolved
payments that need to be settled at the end of the CHIPS operating day.
Similarly, DTC has explored possible operational and technical changes
that may reduce liquidity used in its systems and processes related to
securities settlement. The money market instrument clearing and
settlement processes, in particular, currently requires a substantial
amount of liquidity to be transferred to and remain at DTC until end-
of-day settlement around 4:30 p.m. when the liquidity is released back
to DTC's participants. Several comment letters strongly supported
ongoing efforts by CHIPS and DTC. Many of these commenters stressed the
importance of taking further steps to ease end-of-day liquidity
``traps.''
The Board fully supports continued progress on the three efforts.
The Board agrees that the approved changes to the PSR policy alone are
not sufficient to address late-day payment compression and liquidity
pressures in the payment system. The Board approved the revised PSR
policy based on the expectation that the financial industry will
continue to pursue the elements of the four-prong strategy to address
the combination of related intraday liquidity, operational, and credit
risks in the wholesale payment and settlement system. In addition,
further efforts may be needed to review market clearing and settlement
practices that help push payments later in the day than may be
necessary.
Revised PSR policy
As noted in the Board's Consultation Paper on Intraday Liquidity
Management and the Payments System Risk Policy and in its request for
comment on proposed changes to the PSR policy, the Board conducted a
broad policy review.\8\ A key component of this review included
assessing anew the role of the central bank in the payment system.
Current thinking about the role of central banks in providing intraday
balances to the payment system has evolved significantly over the past
twenty years and now explicitly recognizes that central banks have an
important role in providing intraday (central bank money) balances to
foster the smooth operation and settlement of payment systems.\9\
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\8\ See 71 FR 35679, June 21, 2006, and 73 FR 12417, March 7,
2008.
\9\ See ``The Role of Central Bank Money in the Payment
System,'' Committee on Payment and Settlement Systems, August 2003
at http://www.bis.org/publ/cpss55.pdf.
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In view of this perspective, the Board proposed adopting a new
approach to enhance intraday liquidity and the flow of payments, while
controlling risk to the Reserve Banks. The approach would
(1) Explicitly recognize that the Federal Reserve has an important
role in providing intraday balances and credit to foster the smooth
operation of the payment system.
(2) Provide temporary, intraday balances to healthy depository
institutions predominantly through collateralized intraday overdrafts.
(3) Reduce over time the reliance of the banking industry on
uncollateralized daylight credit if this can be done without
significantly disrupting the operation of the payment system or causing
other unintended adverse consequences.
Commenters generally supported this new approach and did not
recommend changes. Several commenters requested information about how
collateral management and monitoring systems would be changed in
implementing the approach. One commenter also noted that the complexity
of collateral management could introduce a new type of operational risk
that would need to be managed. The Board recognizes that under the
revised policy depository institutions will have an increased need to
manage actively their collateral pledged to the Reserve Banks. In the
past, depository institutions have pledged significant amounts of loans
as collateral for discount window and PSR purposes, along with smaller
amounts of securities. Loan collateral traditionally has had a low
opportunity cost. For some institutions and at certain times, however,
securities can be an important source of collateral pledged to the
Reserve Banks and could play an important role in fine-tuning
collateral positions to meet daily PSR needs. In some cases,
institutions may also seek to pledge securities on an intraday basis
and not keep them on deposit at a Reserve Bank overnight. The Reserve
Banks will be implementing changes over both the short and long term to
their operational systems and processes in anticipation of depository
institutions' changing needs for collateral management. These changes
are discussed later in the collateral section.
The Board also received one comment letter that supported the
collateralization portion of the new approach but opposed moving to a
mandatory collateral regime. The move toward voluntary
collateralization under the new approach reflects the Board's
sensitivity to sudden and disruptive changes in policy, the possibility
of creating unintended intraday liquidity and operational risks for the
payment system, and the potential burden on the banking industry. An
important aspect of the new approach is the shift to a greater use of
collateral in a way that minimizes the cost and administrative burden
of the policy on most users of daylight overdrafts.
Overall, the Board believes the new approach significantly improves
the tradeoffs between safety and efficiency
[[Page 79112]]
objectives of the PSR policy for the payment system and its
participants. In approving this approach, the Board expects
institutions to reduce over time their reliance on uncollateralized
daylight credit. If this does not occur, the Board may choose, for
example, to evaluate the effectiveness of the level of the fee for
uncollateralized overdrafts in encouraging the transition to a
predominantly collateralized daylight overdraft regime. The Board will
also continue to monitor developments over time, and at some future
date, may evaluate the costs and benefits of moving further toward a
fully collateralized structure.
Specific Changes to Revised PSR policy
To implement the new approach, the Board has approved changes to
certain terms and fees for providing daylight overdrafts. The following
table summarizes the specific elements of the current and revised PSR
policy.
Table--Summary of Key Elements of the Current and Revised PSR Policy *
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Current policy Revised policy
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Collateral Required for problem Additional provision
institutions** and that explicitly
institutions with applies collateral
max caps. pledged by
Collateral institutions to
eligibility and daylight overdrafts
margins same as for for pricing
discount window. purposes.
Fee for collateralized 36 basis points..... Zero fee.
daylight overdrafts.
Fee for uncollateralized 36 basis points..... 50 basis points.
daylight overdrafts.
Deductible.................. 10 percent of an Replaced by zero fee
institution's for collateralized
capital measure. daylight overdrafts
and fee waiver.
Fee waiver.................. Up to $25 biweekly.. $150 biweekly ***.
Net debit cap............... Two-week average Two-week average
limit and higher limit eliminated;
single-day limit. single-day limit
Ex post counseling retained.
if exceed limit. Flexibility in ex
post counseling if
fully
collateralized.
Max cap..................... Additional Streamlined process
collateralized for certain FBOs up
capacity above net to a limit
debit cap for self- (effective March
assessed 26, 2009). Minor
institutions. changes apply for
all institutions.
Penalty fee for ineligible 136 bps............. 150 bps.
institutions.
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* Access to daylight credit would continue to be available only to
institutions with regular access to the discount window as is the case
today.
** Problem institutions are institutions that are in weak financial
condition and should refrain from incurring daylight overdrafts and
institutions that chronically incur daylight overdrafts in excess of
their net debit caps in violation of the PSR policy.
*** The proposed $150 waiver would be subtracted from the gross fees (in
a two-week reserve-maintenance period) assessed on any depository
institution eligible to incur daylight overdrafts. This procedure
differs from the current policy in which the waiver only eliminates
gross fees of institutions that have charges less than or equal to $25
in a two-week period but includes a deductible.
To assist institutions in understanding the effect of the revised
policy on their daylight overdraft fees, the Board has made available a
simplified fee calculator. The calculator enables institutions to
provide daylight overdraft and collateral data to estimate their
daylight overdraft fees under the revised PSR policy. The calculator
will be available until 30 days after the to-be-announced effective
date of the revised policy and is located on the Board's Web site at
https://www.federalreserve.gov/apps/RPFCalc/.
A. Collateral
The Board proposed supplying intraday balances to healthy
depository institutions predominantly through explicitly collateralized
daylight overdrafts provided by Reserve Banks. The Board proposed
allowing the use of collateral to be voluntary to avoid disrupting the
operation of the payment system and increasing the cost burden of the
policy on a large number of smaller users of daylight overdrafts. As
part of the proposal, collateral eligibility and margins would remain
the same for PSR policy purposes as for the discount window.\10\ The
pledging of in-transit securities would remain a collateral option for
PSR purposes at Reserve Banks' discretion.\11\
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\10\ See http://www.frbdiscountwindow.org/ for information on
the discount window and PSR collateral acceptance policy and
collateral margins.
\11\ In-transit securities are book-entry securities transferred
over the Fedwire securities system that have been purchased by a
depository institution but not yet paid for or owned by the
institution's customers.
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The comment letters generally supported the application of
collateral to daylight overdrafts, specifically with a zero fee.
Several commenters noted that, broadly across the industry,
institutions will likely increase the amount of collateral pledged to
Reserve Banks. Several commenters addressed how their individual
institutions may adjust collateral positions or payments activities in
response to a zero fee for collateralized overdrafts and higher fee for
uncollateralized overdrafts. Three commenters stated they would
increase collateral pledged with their Reserve Bank. Two commenters
stated that they had enough collateral to cover any potential daylight
overdraft and would not pledge additional collateral. In addition, six
commenters noted that deciding whether to pledge collateral would
depend on the opportunity cost of collateral in relation to the cost of
the daylight overdraft.
Commenters overall believed there could be a substantial
opportunity cost to pledge collateral depending on market conditions
and whether the lowest-cost collateral has already been pledged for
discount window purposes by a depository institution. One commenter
estimated the cost of collateral at between 26 and 50 basis points for
collateral that has already been pledged but potentially much higher
for currently unpledged collateral that might be needed to obtain
incremental intraday liquidity. Another commenter estimated the cost of
additional collateral to exceed 50 basis points. Other commenters
discussed the potential high cost to pledge additional collateral but
did not provide estimates. Two commenters noted that the cost of
collateral would be relatively high in a volatile market when demand
for collateral increases and supply is scarce. Another commenter noted
that, in order to cover all potential daylight overdrafts, the
institution would incur a high monthly expense to
[[Page 79113]]
overcollateralize its daylight overdraft balance. For many of these
institutions, the decision to pledge higher-cost collateral would
depend on the opportunity cost of pledging a particular asset relative
to the level of the uncollateralized daylight overdraft fee.
Some commenters also responded to the Board's question on the
potential effects of the collateral policy on other financial market
activities. Five commenters noted that pledging collateral for daylight
overdraft purposes would reduce the pool for funding or investing
activities. Conversely, two commenters believed that the policy would
not have an effect on market activity because of the wide range of
collateral accepted by Reserve Banks.
Two commenters requested that collateral pledged for daylight
overdrafts be automatically available to cover unforeseen overnight
overdrafts, which in effect creates an overnight discount window loan.
Two commenters wanted the ability to pledge collateral through a
central cross-border utility accessed by multiple central banks. The
cross-border utility would enable global institutions to manage more
effectively collateral held in different jurisdictions and to take
advantage of differences in time zones. Finally, one commenter asked
that deadlines to pledge and withdraw collateral be extended to cover
the settlements of DTC and CHIPS and be as late as the close of the
Fedwire Funds Service. Today, the Reserve Banks accept pledges of some
securities up until 3 p.m. Securities held in the Fedwire Securities
Service, however, can be pledged to the Reserve Banks up until 7 p.m.
(or a half-hour after the Fedwire Funds Service closes).
While commenters raised several points for the Board's
consideration, commenters appeared to have few significant concerns
with the proposed voluntary collateralization regime. The most
significant concern, which was raised by the majority of commenters,
related to system and process enhancements for collateral management
and monitoring at the Reserve Banks. For some commenters, support for
the proposed policy was contingent on increased efficiency in
collateral processing and real-time or near-real-time information on
collateral pledged. About half the commenters expressed strong
preferences that the Reserve Banks' collateral management systems
facilitate the pledging and withdrawal of securities intraday. Five
commenters also made suggestions to expand the range of eligible
collateral, including additional types of cross-border securities. The
Board recognizes that enhancements to collateral management systems and
processes are an important aspect of implementing the revised PSR
policy, and the Federal Reserve is developing a plan to mitigate the
concerns raised as discussed in the next section.
On balance, the Board believes that the proposed voluntary
collateralization regime will better meet the needs of the Reserve
Banks and industry than the current policy. The Board also believes
that unencumbered collateral pledged to Reserve Banks should be
available to support the use of intraday credit.\12\ In addition, the
Board believes that it is important for consistency to maintain for PSR
policy purposes the same collateral eligibility and margins as for the
discount window.\13\
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\12\ Under some circumstances, rules for determining whether
collateral is available may differ for PSR and discount window
purposes. For example, under term lending (announced July 30, 2008),
institutions requesting an advance of more than 28 days will need to
hold an additional 33 percent of collateral in excess of the
collateral required for the advance. This additional collateral may
not available for discount window purposes but would be considered
available (unencumbered) for PSR purposes.
\13\ In-transit securities would also remain an eligible
collateral option for PSR policy purposes at the Reserve Banks'
discretion. Reserve Banks will require detailed information on a
minute-by-minute basis to be submitted.
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Collateral management. The Federal Reserve is in the process of
assessing its collateral-management systems and processes. It has
identified a number of possible improvement opportunities and has begun
engaging the industry in dialogue about needed and desired
functionality and process improvements.\14\
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\14\ The Federal Reserve is also in dialogue with depository
institutions interested in pledging in-transit collateral for
pricing purposes to discuss new data requirements and processes.
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Based on comment letters and initial industry discussions, the
Federal Reserve identified a number of changes that it intends to
implement prior to the effective date of the revised policy. This
short-term strategy involves several initiatives to improve the
pledging and withdrawal of specific types of securities. The strategy
also includes increasing information available intraday and interday on
pledged collateral through the Reserve Banks' Account Management
Information application (AMI).\15\ In addition, the Federal Reserve
will be publishing general timing guidelines for collateral pledging
and withdrawal to help institutions better track when collateral is
determined to be pledged to and released by the Reserve Banks.
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\15\ AMI is an online tool offered by the Reserve Banks that
supplies real-time information about an institution's Federal
Reserve account balance and provides access to a variety of summary
and detail reports.
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Following the effective date for the revised PSR policy, the
Reserve Banks will continue with initiatives to improve the pledging
and withdrawal process for securities collateral. These initiatives
will largely be similar to those in the short-term strategy but include
enhancements involving sufficient complexity and resource requirements
that completion may not be possible before the implementation date of
the new policy. Some of these enhancements may take place relatively
soon--perhaps within six months--after the implementation date, while
others may take somewhat longer. Collectively, these enhancements
should enable greater rates of straight-through processing of
securities collateral by the Reserve Banks and quicker withdrawal of
unencumbered securities, and should provide tools to assist
institutions in monitoring intraday their daylight overdraft and
collateral positions.
Over the longer term, the Reserve Banks intend to collaborate with
the industry to identify additional enhancements that will continue to
improve the efficiency and effectiveness of processes for pledging,
withdrawing, and monitoring of collateral. The Federal Reserve expects
that institutions' needs will evolve and grow as they gain experience
with the revised PSR policy and with the collateral-management
enhancements the Reserve Banks implement in the short and medium term.
Over time, the Federal Reserve will be providing more-specific
information to the industry about upcoming enhancements to collateral
and information systems. This communication will help institutions
understand the forthcoming changes and will also help them identify any
changes they may need to make to their systems.
B. Fees for Collateralized Daylight Overdrafts
The Board proposed lowering the fee for collateralized daylight
overdrafts to zero and raising the uncollateralized daylight overdraft
fee to 50 basis points to encourage institutions to pledge collateral
and to reduce payments held in liquidity-management queues. The
commenters strongly supported the proposal of a zero fee for
collateralized daylight overdrafts. Most commenters believed that a
zero fee for collateralized daylight overdrafts will encourage
institutions that queue payments for liquidity purposes to release more
of those payments earlier in the day.
[[Page 79114]]
Commenters acknowledged that institutions may still hold some payments
in liquidity queues for reasons including counterparty risk, internal
comfort with daylight overdraft levels, and uncollateralized daylight
overdraft fee management. One institution noted that it believed the
zero fee would help change certain depository institutions' tactical
behavior of only sending payments when payments are received in order
to reduce daylight overdraft costs. Another commenter believed a zero
fee was appropriate because charging for collateralized overdrafts
would amount to an unfair tax.
The majority of commenters noted that the zero fee for
collateralized daylight overdrafts would also likely lead depository
institutions to increase collectively intraday credit use. Five
commenters believed that their individual institution's intraday credit
use would increase, while three other commenters estimated no change to
their institution's use. The credit risk to the Reserve Banks from the
predicted increases in daylight overdraft use would be controlled by
traditional banking tools used in providing credit (eligibility
requirements, collateral, caps, and monitoring). In addition, as
institutions release payments earlier from liquidity queues, liquidity
should circulate more quickly with a resulting faster flow of payments
and thus on net mitigate somewhat the predicted increase in daylight
overdraft use. On balance, the Board believes that setting the
collateralized daylight overdraft fee at zero will improve tradeoffs
among liquidity, operational, and credit risks in the payment system.
The Board requested comment on two possible changes in market
practices as a result of the zero fee for collateralized daylight
overdrafts. One question covered the possible effect on the market for
early return of fed funds loans. Several commenters believed that the
practice of returning fed funds loans earlier would be positively
affected, at least somewhat, by the proposed two-tiered pricing.
Specifically, the fee reduction could increase the incentive to return
fed funds loans earlier for institutions that have sufficient
collateral to cover any overdraft incurred. One commenter believed a
change would not happen automatically without market intervention to
encourage the early return. Another commenter was unsure of any changes
because of uncertain market dynamics and the historical resistance to
return funds early. Some comments suggest that certain institutions may
be more willing to return fed funds loans earlier. At the same time,
institutions that, under the revised policy, have sufficient collateral
to cover their daylight overdrafts may not have a significant incentive
to demand the early return of funds. Overall, it is difficult at this
stage to predict the net effect on the market for the early return of
fed funds loans.
The Board also requested comment on whether collateralized
overdrafts at a zero fee would eliminate incentives for depository
institutions and their customers to process securities used in
repurchase agreements early in the morning. The Board was concerned
that a zero overdraft fee could remove the incentive for the early
processing of securities, which it has viewed as an important
operational success by the banking and securities industry from the
time daylight overdraft fees were first implemented. Prior to the
introduction of daylight overdraft fees in 1994, U.S. government
securities dealers would arrange for and deliver securities designated
for repurchase agreements largely after noon, creating a late-day
compression of payments and securities deliveries in the Fedwire
Securities Service operating day. Consequently, it was not uncommon for
the Fedwire Securities Service operating day to be extended until 4
p.m. or later to address the volume of transfers that arrived late in
the afternoon.\16\ In anticipation of being charged daylight overdraft
fees, the U.S. government securities dealers (and their clearing banks)
introduced processes and technology that facilitated the arrangement of
repurchase agreements and delivery of the securities early in the
morning. By arranging trades and delivering securities early in the
morning, dealers gained use of the incoming cash from their
counterparties in the repurchase agreements, reducing the duration of
their daylight overdrafts. On the return leg, counterparties to the
repurchase agreements also began sending back the securities to the
dealers first thing in the morning. This market movement shifted the
peak in daylight overdrafts significantly earlier in the morning and
reduced dramatically securities-related daylight overdrafts.
---------------------------------------------------------------------------
\16\ The Fedwire Securities service operating hours today are
8:30 a.m. to 3:30 p.m.
---------------------------------------------------------------------------
Most commenters believed that practices either would not change or
were unsure if practices would change because of well-established
current procedures and technology that support the market. One
commenter, however, expressed concern that the zero fee for
collateralized daylight overdrafts may have unintended consequences on
the government securities market. The commenter believed that over time
certain participants in the government securities market will revert to
pre-1994 behavior without the cost incentive rooted in daylight
overdraft fees to deliver securities early.
While it is not possible at this stage to know how U.S. government
securities dealers will respond to a zero fee for collateralized
daylight overdrafts for depository institutions, the Board does believe
that competing business or processing incentives, such as managing
securities inventories, may result in some change in behavior to shift
later the delivery of securities. The change initially may be limited
to certain types of securities or to specific dealers and thus would be
of minor consequence. The main concern is that a change will become
pervasive, undoing the successes achieved under the initial regime of
charging for daylight overdrafts.
Some mitigating factors may influence the magnitude of behavioral
changes. The market for early deliveries is well entrenched today and
is supported by automation. A significant change in this market may
require institutions to make systems changes, which could be costly. In
addition, the $50 million limit on the size of securities transfers
over Fedwire Securities Service reduces the incentive to build
positions. Securities dealers in the past held securities until near
the close of the Fedwire Securities Service operating day to ensure
they could complete the delivery in full and avoid costly failures to
deliver. This practice is said to continue in some cases even today.
While the Board continues to be concerned about the possible effect
of a zero fee on the timing of securities transfers, it believes there
are significant benefits in reducing the fee to zero for collateralized
daylight overdrafts. This view is also strongly supported by the
comment letters. The Board believes that a zero fee for collateralized
daylight overdrafts provides incentives for institutions to release
funds transfers held in internal queues for liquidity reasons,
improving liquidity circulation and reducing operational risk in the
Fedwire Funds Service. A zero fee also creates incentives to pledge
additional collateral to the Reserve Banks, mitigating their credit
risk in providing intraday balances. On balance, the Board believes the
expected benefits warrant reducing the fee for collateralized daylight
overdrafts to zero.
The Board, however, will monitor delivery practices in the
securities market to determine if securities transfers shift later in
the day. To assist
[[Page 79115]]
in this monitoring, the Board will require government securities
clearing banks to submit data to the Board before and after the
implementation of the revised policy to help identify shifts in
behavior by dealers; the data collection requirements will be discussed
directly with the clearing banks.\17\ If a substantial shift does
occur, the Board will take appropriate steps as needed. The Board
strongly believes that reverting to pre-1994 behavior of late
deliveries of securities poses unacceptable operational risks to the
payment system.
---------------------------------------------------------------------------
\17\ While the Board has access to data indicating the timing of
transfers by depository institutions over the Fedwire Funds Service
and Fedwire Securities Service, these data do not provide
sufficiently detailed information to track effectively when dealers
are delivering securities designated for repurchase agreements.
---------------------------------------------------------------------------
C. Fees for Uncollateralized Daylight Overdrafts
The Board proposed raising the fee to 50 from 36 basis points
(annual rate) for uncollateralized daylight overdrafts to encourage the
collateralization of daylight overdrafts.\18\
---------------------------------------------------------------------------
\18\ In calculating an institution's fees, the value of
unencumbered collateral pledged to the Reserve Banks will be
subtracted from negative Federal Reserve account balances at the end
of each minute to determine the institution's uncollateralized
negative Federal Reserve account balance. The uncollateralized
negative Federal Reserve account balance per minute will be summed
and divided by the number of minutes in the Fedwire Funds Service
operating day to arrive at the average daily uncollateralized
daylight overdraft, which will be assessed a 50 basis point fee
(annual rate). The value of collateral pledged is the same for PSR
and discount window purposes.
---------------------------------------------------------------------------
While acknowledging the intent of increasing the uncollateralized
fee, some commenters raised concerns that the higher fee may introduce
liquidity challenges for collateral-constrained institutions. These
commenters generally believed that institutions without sufficient
collateral to support daylight overdrafts would have an incentive to
hold payments for liquidity purposes to avoid daylight overdraft
charges. Commenters, including an organization representing sixteen
large depository institutions, stated that the collective benefits from
speeding up the flow of payments would only be attained if all
participants acted for the collective good rather than minimizing
individual institutions' own costs and risks. These commenters also
indicated that they would not continue to release payments from queues
if counterparties did not reciprocate.
To mitigate the risk that institutions do not act for the overall
benefit of the industry, several commenters discussed options for
monitoring and promoting bilateral payment flows. Two commenters
suggested individual institutions monitor counterparties, while two
other commenters recommended the Federal Reserve monitor institutions'
activities. Two commenters also suggested that the Federal Reserve
devise incentives for institutions to release payments queued prior to
2 p.m., including time-of-day pricing.
It will be important for the industry and Federal Reserve to
monitor changes in payment activities over time to evaluate whether
institutions continue to hold payments for liquidity reasons. It is not
fully clear, however, whether the fee increase to 50 basis points would
exacerbate this problem for some institutions and whether institutions
will queue payments to some degree at any positive fee, including at a
zero fee, for reasons of internal liquidity risk management. On
balance, the Board believes that the increase to 50 basis points for
uncollateralized daylight overdrafts is appropriate in conjunction with
the fee reduction to zero for collateralized daylight overdrafts. The
changes together balance the overall tradeoffs between safety and
efficiency by providing incentives to pledge collateral, which
mitigates the Reserve Banks' risks, and incentives to increase the flow
of payments, which increases liquidity circulation.
D. Deductible and Fee Waiver
The Board proposed eliminating the deductible as a source of free
intraday credit with the intent of providing such credit through
collateralized daylight overdrafts charged at a zero fee. The Board
also proposed to increase the fee waiver to $150 from $25 to reduce the
burden of the PSR policy on institutions that use small amounts of
daylight overdrafts. As proposed, the $150 waiver would be subtracted
from the gross fees (in a two-week reserve-maintenance period) assessed
on any user of daylight overdrafts in contrast to the current waiver
that only applies to gross fees of institutions that have charges less
than or equal to $25 (in a two-week reserve-maintenance period).\19\
---------------------------------------------------------------------------
\19\ The waiver would not result in refunds or credits to an
institution and cannot be carried to another reserve maintenance
period. The waiver would not apply to institutions subject to the
penalty fee.
---------------------------------------------------------------------------
While none of the comment letters explicitly addressed the
introduction of a higher fee waiver, two commenters strongly supported
the elimination of the deductible. These commenters believed this
change would remove a competitive disparity they have identified
between FBOs and U.S.-chartered depository institutions. Under the
current policy, U.S.-chartered depository institutions receive a net
debit cap and deductible based on their worldwide capital, while FBOs
receive a net debit cap and deductible based on no more than 35 percent
of their worldwide capital. By eliminating the deductible for all
depository institutions and providing free collateralized intraday
credit to eligible depository institutions, including FBOs, the revised
policy will address the concerns that some commenters expressed
regarding the negative incentive effects of the deductible
calculations.
The Board believes it is still appropriate to provide some amount
of free uncollateralized liquidity to depository institutions to reduce
the administrative burden on Reserve Banks and on a large number of
depository institutions that incur small amounts of uncollateralized
daylight overdrafts. The Board believes that the $150 fee waiver will
serve those purposes under the revised PSR policy. With the Board
adopting these changes, institutions should receive ample free
liquidity through zero-priced collateralized daylight overdrafts. In
addition, most small users of uncollateralized intraday credit should
not observe a change in their daylight overdraft charges between the
current and revised PSR policies.
E. Net Debit Caps \20\
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\20\ Net debit caps limit the aggregate amount of daylight
credit that the Reserve Banks extend. Net debit caps are a function
of qualifying capital and a multiplier per cap category. There are
four cap categories: (in ascending order) zero, exempt-from-filing,
de minimis, and self assessed (which includes high, above-average,
and average multipliers).
---------------------------------------------------------------------------
The Board proposed eliminating the current two-week average cap on
daylight overdrafts for healthy depository institutions while retaining
the higher single-day cap. Under the proposal, the single-day cap would
apply to the total of collateralized and uncollateralized daylight
overdrafts.\21\ The Board did not receive specific comments on the
removal of the two-week net debit cap or retention of the single-day
net debit cap.
---------------------------------------------------------------------------
\21\ Under the current policy, net debit caps limit the amount
of uncollateralized daylight overdrafts, while max caps limit the
amount of approved collateralized capacity in addition to the
uncollateralized amount allowed under net debit caps. Under the
revised policy, the single-day cap will limit the total of
collateralized and uncollateralized daylight overdrafts within the
predefined net debit cap amount, and any collateralized portion
would not increase the total amount. Institutions needing capacity
that exceeds the net debit cap will still need to apply for a max
cap.
---------------------------------------------------------------------------
The Board also proposed providing Reserve Banks additional
flexibility in
[[Page 79116]]
the administration of net debit caps for fully collateralized daylight
overdrafts. The Reserve Bank may forgo ex post counseling for two
incidents of fully collateralized overdrafts per two consecutive
reserve-maintenance periods (four weeks).\22\ The additional
flexibility would apply to institutions that have de minimis or self-
assessed net debit caps or max caps.\23\ Exempt-cap institutions are
excluded from this additional flexibility because they already are
allowed to exceed their cap limit twice in two consecutive reserve-
maintenance periods. Zero cap institutions will not be eligible. The
Board did not receive any comments on the proposed additional
flexibility for ex post counseling.
---------------------------------------------------------------------------
\22\ The ex post counseling regime includes a series of actions
by the Reserve Bank that are aimed at deterring an institution from
violating the PSR policy by exceeding its net debit cap. These
actions may include an assessment of the causes of the overdrafts, a
counseling letter to the institution, a review of the institution's
account-management practices, and an assessment of whether a higher
net debit cap may be warranted. In situations involving problem
institutions, the Reserve Bank may assign the institution a zero cap
and impose other account controls, such as requiring the institution
to pledge collateral; imposing clearing balance requirements;
rejecting Fedwire funds transfers, ACH credit originations, or
National Settlement Service transactions that would cause or
increase an institution's daylight overdraft; or requiring the
institution to prefund certain transactions.
\23\ FBOs will continue to be monitored at their cap level in
real time. If an institution's account is monitored in real time,
any outgoing Fedwire funds transfer, National Settlement Service
transaction, or ACH credit origination that exceeds available funds
is rejected. If an FBO exceeds its cap periodically due to payments,
such as securities transactions, that are not covered under a real-
time monitor, the Reserve Bank may waive counseling if the daylight
overdrafts are fully collateralized.
---------------------------------------------------------------------------
The Board continues to believe that it is appropriate and prudent
to have limits on intraday credit even when the credit is fully
collateralized. Collateral may not always be sufficient to protect
against credit risks. While haircuts on collateral help mitigate the
risk that the liquidation value of collateral will fall below the
credit exposure, they are not designed to eliminate the risk entirely.
Thus, limits or caps complement the use of collateral in risk
mitigation. Among other things, caps provide a risk management tool for
institutions and the Reserve Banks in measuring and managing the size
of exposures and take some pressure off the use of haircuts to address
credit risks.
The Board also continues to believe that flexibility may be
appropriate in counseling an institution if the daylight overdraft is
fully collateralized. This flexibility to waive counseling reflects the
lower risk of a fully collateralized daylight overdraft relative to an
uncollateralized daylight overdraft. The limited number of waivers
reflects the fact that collateral may not fully protect a Reserve Bank
and that frequent violations of agreed caps may suggest other concerns
about a depository institution.
Based on this analysis, the Board adopted the proposed changes to
net debit caps. The elimination of the two-week average cap will
increase the routine daylight overdraft capacity of institutions with
self-assessed caps approximately 50 percent from the current policy.
The Board also adopted the proposed additional flexibility in
counseling an institution exceeding its cap when its daylight
overdrafts are fully collateralized.
F. Maximum Daylight Overdraft Capacity
During its policy review, the Board evaluated potential
simplifications to the current process through which institutions may
apply for max caps. First, the Board proposed removing the requirement
that institutions must have already explored other alternatives to
address their increased liquidity needs before considering a max cap. A
depository institution interested in obtaining a max cap would contact
its administrative Reserve Bank, which would work with the institution
to determine an appropriate capacity level based on the business case
and would assess relevant financial and supervisory information in
making such a credit decision. None of the comment letters addressed
this proposed change.
Second, the Board proposed a streamlined max cap procedure that
would allow eligible FBOs to acquire additional capacity that in total
would provide up to 100 percent of worldwide capital times the self-
assessed cap multiple. The streamlined procedure would enable a
financial holding company or SOSA 1-rated institution to request from
its administrative Reserve Bank a max cap without documenting a
specific business need for additional capacity or providing a board of
directors resolution authorizing the request for a max cap.\24\ The
Reserve Bank would assess the ability of eligible FBOs to manage the
intraday capacity permitted by the max cap as part of its review of
relevant financial and supervisory information. The Reserve Bank, in
consultation with the home country supervisor, would engage in initial
as well as periodic dialogue with the institution that would be
analogous to the periodic review of liquidity plans performed with
U.S.-chartered institutions to ensure the institution's intraday
liquidity risk is managed appropriately. Under this proposal, however,
if an FBO requests capacity in excess of 100 percent of worldwide
capital times the self-assessed cap multiple, it would be subject to
the general max cap procedure applicable to all institutions.
---------------------------------------------------------------------------
\24\ The FBO would still be required to complete a self-
assessment and provide a board of directors resolution for the self-
assessed cap.
---------------------------------------------------------------------------
Four commenters supported the proposed streamlined max cap
procedure for FBOs that are financial holding companies or SOSA 1-rated
institutions. The commenters believed that the streamlined max cap
would facilitate institutions' managing their payments activity. Three
of these commenters, however, requested that the Board reconsider
calculating the net debit cap for financial holding company or SOSA 1-
rated FBOs on 100 percent (rather than up to 35 percent) of their
worldwide capital without requiring collateral for the additional
capacity. The commenters stated that the streamlined max cap would
continue to create a competitive disadvantage for FBOs by not allowing
them to decide whether to pledge collateral to support daylight
overdrafts, while U.S.-chartered depository institutions can make
business decisions regarding how much, if at all, to collateralize. One
commenter believed that a mandatory collateralized regime would resolve
this disparity by requiring all institutions to collateralize 100
percent of their overdrafts. Another commenter representing several
FBOs noted that if all institutions collateralized their daylight
overdrafts as a result of the proposed policy changes, the streamlined
max cap procedure would make any differences largely moot as a
practical matter.
The Board continues to view the max cap as an important tool in
helping Reserve Banks and depository institutions manage intraday risk
in a manner that supports the payment needs of individual institutions
and the payment system as a whole. The Board believes the proposed
changes will introduce additional flexibility into this program,
thereby improving the flow of payments and liquidity in the payment
system, and will more effectively reflect the strategic direction of
the new policy. The Board also continues to believe the streamlined max
cap procedure effectively balances the safety and efficiency objectives
of the PSR policy and improves the position of FBOs. The procedure
provides a more efficient method for FBOs to gain additional capacity
than current procedures while helping to resolve the increased risk
[[Page 79117]]
associated with FBOs because of the timeliness and scope of available
supervisory information and other supervisory issues that may arise
because of the cross-border nature of the FBO's business (for example,
application of different legal regimes).
The Board has adopted the proposed change to remove the
requirements to pursue first all other options. The Board has also
approved the proposed streamlined max cap procedure. In addition, the
Board has approved an early implementation date for the streamlined max
cap procedure on March 26, 2009. The early implementation should help
FBOs manage their payment activity more effectively, particularly when
combined with the deductible changes under the interim policy
(discussed later).
G. Penalty Fees
The Board proposed to increase the penalty fee for daylight
overdrafts to 150 from 136 basis points. The penalty rate structure has
traditionally been the regular daylight overdraft fee plus 100 basis
points. The Board did not receive any comments related to the increase
in fees.
The Board continues to believe that it is appropriate to maintain a
100 basis point spread between the regular and penalty rates for
daylight overdrafts and adopted the proposed penalty fee of 150 basis
points. The penalty rate will continue to be applied to institutions
that incur daylight overdrafts but do not have regular access to the
discount window and thus are not eligible under the PSR policy for
intraday credit.
H. Implementation
Along with the general support for the proposed PSR policy changes,
the Board received several requests to shorten the time until
implementation. The Board proposed that the policy changes could be
implemented approximately two years from the announcement of a final
rule. Six commenters requested that the Board implement the proposed
policy within one year of publication of the final rule so that they
may take advantage sooner of the zero fee for collateralized
overdrafts. Another commenter believed that institutions should have
the ability to take advantage of the proposed policy in six months from
the final rule.\25\ Most commenters believed that they would only need
to make minimal procedural or systems changes to be prepared for the
policy change, although two commenters noted that the degree of
procedural or systems modifications would depend on changes the Reserve
Banks make to their collateral-management and collateral-monitoring
systems. One commenter believed that a two-year time frame was
appropriate to provide all institutions sufficient time to make the
necessary modifications to internal processes and systems.
---------------------------------------------------------------------------
\25\ The commenter wanted to implement the proposed PSR policy
changes in tandem with the proposed posting rule changes affecting
ACH debit transfers. The Board had proposed to shift from 11 a.m. to
8:30 a.m., eastern time, the posting time for commercial and
government ACH debit transfers that are processed by the Reserve
Banks' FedACH service. See 73 CFR 12443, March 7, 2008. The Board
issued a separate notice today in the Federal Register with its
decision not to pursue at this time the proposed posting rules
changes.
---------------------------------------------------------------------------
The Board recognizes the industry's interest in an earlier
implementation of the revised policy. Many commenters, however,
requested changes to Reserve Banks' systems and processes for enhanced
collateral management and monitoring. The Reserve Banks' plan to make
several systems changes, discussed in a previous section, related to
collateral management and monitoring, and these changes will require
time to implement. Given the importance of these and other systems'
changes, the Board approved an implementation window from the fourth
quarter of 2010 to the first quarter of 2011 with a specific effective
date to be announced at least 90 days in advance. The implementation
window provides needed flexibility to the Reserve Banks for systems
changes not only to enhance collateral management and monitoring but
also to implement all aspects of this policy as well as other important
policies.
In the near term, the Board approved, effective March 26, 2009, the
streamlined max cap procedure that will allow certain FBOs to obtain
more quickly additional collateralized capacity up to 100 percent of
worldwide capital times the self-assessed cap multiples. Eligible FBOs
interested in the streamlined max cap should contact their
administrative Reserve Banks.
III. Interim Policy
In addition to the comments on the proposed PSR policy changes, two
commenters requested that the Board consider an interim policy change
to the calculation of the current deductible for FBOs to reflect 100
percent of worldwide capital rather than the current level of up to 35
percent. These commenters indicated that the current deductible
calculation puts FBOs at a competitive disadvantage relative to
comparable U.S.-chartered depository institutions, and although the
proposed elimination of the deductible addresses this issue, the
changes will not take effect for more than a year.
The deductible calculation has prompted some FBOs to delay payment
flows. Several commenters to the Consultation Paper on Intraday
Liquidity Management and the Payments System Risk Policy stated that
FBOs instituted the process of queuing payments for liquidity reasons
to respond to the lower deductible that is based on up to 35 percent of
worldwide capital.\26\ Commenters discussed minimizing fees in some
cases by managing payment flows to the level of free credit provided by
the deductible. A deductible based on 100 percent of capital, however,
would provide additional free credit that should enable the release of
payments being held in internal liquidity queues.
---------------------------------------------------------------------------
\26\ See 71 FR 35679, June 21, 2006.
---------------------------------------------------------------------------
The Board considered the concerns raised regarding competitive
disparities created by the current deductible calculation as well as
the implications for holding payments. The Board also considered the
increased risk associated with FBOs related to the timeliness and scope
of available supervisory information and other supervisory issues that
may arise because of the cross-border nature of the FBO's business (for
example, application of different legal regimes). In weighing these
factors, the Board approved an interim policy that will use 100 percent
of worldwide capital for eligible FBOs rather than up to 35 percent in
calculating the deductible amount.\27\ An eligible FBO must request and
receive Reserve Bank approval for a streamlined max cap and have
collateral pledged at all times to its Reserve Bank equal to or greater
than the amount of the deductible.\28\
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\27\ The deductible calculation involves the fraction of
eligible worldwide capital times 10 percent.
\28\ If an FBO meets the criteria for the streamlined procedure
for max caps but was granted a max cap before implementation of the
streamlined procedure (effective March 26, 2009) or is approved for
a max cap under the general procedure because the limit being
requested is greater than 100 percent of worldwide capital, the FBO
would still qualify for the higher deductible if it also met the
collateralization requirement.
---------------------------------------------------------------------------
The Board sought to balance efficiency and safety objectives in its
interim policy. The increased deductible provides eligible institutions
with an increase from potentially 35 percent to 100 percent of
worldwide capital, significantly increasing the amount of free credit
provided by the Reserve Banks to eligible FBOs. At the same time, the
increased deductible is available only to the highest-rated FBOs that
would also be eligible for the
[[Page 79118]]
streamlined max cap and those FBOs that hold collateral up to the
amount of the deductible. These requirements help limit the Reserve
Banks' exposure from the greater risk associated with FBOs and the
likely increase in daylight overdraft use.
The interim policy will be effective on March 26, 2009 and will
remain in effect until implementation of the revised PSR policy. The
effective date is consistent with the early implementation of the
streamlined max cap procedure.
IV. Competitive Impact Analysis
The Board has established procedures for assessing the competitive
impact of a rule or policy change that has a substantial effect on
payment systems participants.\29\ 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 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
modification 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.
---------------------------------------------------------------------------
\29\ These procedures are described in the Board's policy
statement ``The Federal Reserve in the Payment System,'' as revised
in March 1990. (55 FR 11648, March 29, 1990).
---------------------------------------------------------------------------
Intraday balances of central bank money help ensure the smooth flow
of payment and settlement in systems whether they are operated by the
Reserve Banks or private-sector organizations. The demand for intraday
balances at the Reserve Banks for processing payments for private-
sector clearing and settlement systems can in normal market conditions
substantially exceed the supply of overnight balances in Federal
Reserve accounts, making intraday credit from the Reserve Banks the key
marginal source of intraday funding for the market and for making
payments, particularly over the Reserve Banks' payment systems. For
some large users of intraday credit, the adopted PSR policy changes may
result in a reduction in daylight overdraft fees and thus lower
explicit costs of using central bank money to fund payments activity.
The lower explicit cost of using intraday balances of central bank
money will lower the implicit cost of using the Reserve Banks' payments
services. The Board, however, does not believe this lower cost will
have an adverse material effect on the ability of other service
providers to compete with the Reserve Banks because private-sector
clearing and settlement systems will gain from the lower explicit cost
of funding net debit caps and other risk and operational controls
employed by those systems. Generally, the Board expects that both the
Reserve Banks and private-sector clearing and settlement systems will
benefit to some extent from the reduced costs for collateralized
daylight overdrafts.
V. 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 policy statement
under the authority delegated to the Board by the Office of Management
and Budget. The revised policy statement does not contain any new or
revised collection of information pursuant to the Paperwork Reduction
Act.
VI. Federal Reserve Policy on Payment System Risk (Effective March 26,
2009)
Effective March 26, 2009, the ``Federal Reserve Policy on Payment
System Risk'' is amended to change all references to payments systems
or payments system to payment systems or payment system and make other
conforming changes. It is also amended as follows.
Introduction [No Change]
Risks in Payment and Settlement Sytems [No Change]
I. Risk Management in Payment and Settlement Systems [No Change]
A. Scope
B. General Policy Expectations
C. Systemically Important Systems
1. Principles for Systemically Important Payment Systems
2. Minimum Standards for Systemically Important Securities
Settlement Systems and Central Counterparties
3. Self-Assessments by Systemically Important Systems
II. Federal Reserve Intraday Credit Policies [II C.3. and II. D
Revised]
A. Daylight Overdraft Definition and Measurement [No Change]
B. Pricing [No Change]
C. Net Debit Caps
1. Definition [No Change]
2. Cap Categories [No Change]
a. Self-Assessed [No Change]
b. De Minimis [No Change]
c. Exempt-From-Filing [No Change]
d. Zero [No Change]
3. Capital Measure
a. U.S.-Chartered Institutions [No Change]
b. U.S. Branches and Agencies of Foreign Banks
D. Maximum Daylight Overdraft Capacity
1. General Procedure
2. Streamlined Procedure for Certain FBOs
E. Special Situations [No Change]
1. Edge and Agreement Corporations [No Change]
2. Bankers' Banks [No Change]
3. Limited-Purpose Trust Companies [No Change]
4. Government-Sponsored Enterprises and International
Organizations [No Change]
5. Problem Institutions [No Change]
F. Monitoring [No Change]
1. Ex post [No Change]
2. Real time [No Change]
3. Multi-District Institutions [No Change]
G. Transfer-Size Limit on Book-Entry Securities [No Change]
Introduction [No Change]
Risks in Payment and Settlement Systems [No Change]
I. Risk Management in Payment and Settlement Systems [No Change]
II. Federal Reserve Intraday Credit Policies [II C.3. and II D Revised]
A. Daylight Overdraft Definition and Measurement [No Change]
B. Pricing [No Change]
C. Net Debit Caps
1. Definition [No Change]
2. Cap Categories [No Change]
3. Capital Measure
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. [No change]
b. U.S. branches and agencies of foreign banks. For U.S. branches
and agencies of foreign banks, net debit caps on daylight overdrafts in
Federal Reserve accounts are calculated by applying the cap multiples
for each cap category to the FBO's U.S. capital equivalency
measure.\30\ U.S. capital equivalency is equal to the following:
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\30\ 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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35 percent of capital for FBOs that are financial holding
companies (FHCs). \31\
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\31\ The Gramm-Leach-Bliley Act 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 (12 U.S.C.
1841(p)). 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 (12 U.S.C. 1843(l)).
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[[Page 79119]]
25 percent of capital for FBOs that are not FHCs and have
a strength of support assessment ranking (SOSA) of 1.\32\
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\32\ 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.
An FBO that is a FHC or has a SOSA rating of 1 may be eligible for
a streamlined procedure (see section II.D.) for obtaining additional
collateralized intraday credit under the maximum daylight overdraft
capacity provision.
Granting a net debit cap, or any extension of intraday credit, to
an 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.
For purposes of calculating the deductible for daylight overdraft
pricing, eligible FBOs will be granted a capital measure of 100 percent
of capital. Eligible FBOs must have requested and been approved for a
streamlined max cap and have unencumbered collateral pledged at all
times to their Reserve Bank equal to or greater than the amount of the
deductible.33 34
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\33\ If an FBO meets the criteria for the streamlined procedure
for max caps but was granted a max cap before implementation of the
streamlined procedure (effective March 26, 2009) or is approved for
a max cap under the general procedure because the limit being
requested is greater than 100 percent of worldwide capital, the FBO
would still qualify for the higher deductible if it also met the
collateralization requirement.
\34\ Under some circumstances, rules for determining whether
collateral is available may differ for PSR and discount window
purposes. All collateral must be acceptable to the Reserve Banks.
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D. Maximum Daylight Overdraft Capacity
The Board recognizes that while net debit caps provide sufficient
liquidity to most institutions, some 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 and to remove barriers, as appropriate, to foster risk-
reducing payment system initiatives. Consequently, certain 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.35 36 This policy is intended to provide extra
liquidity through the use of unencumbered collateral by the few
institutions that might otherwise be constrained from participating in
risk-reducing payment system initiatives.\37\ The Board believes that
providing extra liquidity to these few institutions should help reduce
liquidity-related market disruptions.
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\35\ The administrative Reserve Bank is responsible for the
administration of Federal Reserve credit, reserves, and risk-
management policies for a given institution or other legal entity.
\36\ All collateral must be acceptable to the Reserve Banks. The
Reserve Banks may accept securities in transit on the Fedwire book-
entry securities system as collateral to support the maximum
daylight overdraft capacity level. Securities in transit refer to
book-entry securities transferred over the Fedwire Securities
Service that have been purchased by an institution but not yet paid
for and owned by the institution's customers. Collateral eligibility
and margins are the same for PSR policy purposes as for the discount
window. See http://www.frbdiscountwindow.org/ for information.
\37\ Institutions may consider applying for a maximum daylight
overdraft capacity level for daylight overdrafts resulting from
Fedwire funds transfers, Fedwire book-entry securities transfers,
National Settlement Service entries, and ACH credit originations.
Institutions incurring daylight overdrafts as a result of other
payment activity may be eligible for administrative counseling
flexibility (59 FR 54915-18, Nov. 2, 1994).
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1. General Procedure
An 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. Institutions that request
daylight overdraft capacity beyond the net debit cap must have already
explored other alternatives to address their increased liquidity
needs.\38\ The Reserve Bank will work with an institution that requests
additional daylight overdraft capacity to determine the appropriate
maximum daylight overdraft capacity level. In considering the
institution's request, the Reserve Bank will evaluate the institution's
rationale for requesting additional daylight overdraft capacity as well
as its financial and supervisory information. 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). An institution
approved for a maximum daylight overdraft capacity level must submit at
least once in each twelve-month period a board of directors resolution
indicating its board's approval of that level.
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\38\ Some potential alternatives available to an institution to
address increased intraday credit needs include shifting funding
patterns, delaying the origination of funds transfers in a way that
does not significantly increase operational risks, or transferring
some payments processing business to a correspondent bank.
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If the Reserve Bank approves an institution's request, the Reserve
Bank approves a maximum daylight overdraft capacity level. The maximum
daylight overdraft capacity is defined as follows: maximum daylight
overdraft capacity = net debit cap + collateralized capacity.\39\
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\39\ Collateralized capacity, on any given day, equals the
amount of collateral pledged to the Reserve Bank, not to exceed the
difference between the institution's maximum daylight overdraft
capacity level and its net debit cap.
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The Reserve Banks will review the status of any institution that
exceeds its maximum daylight overdraft capacity limit during a two-week
reserve-maintenance period and will decide if the maximum daylight
overdraft capacity should be maintained or if additional action should
be taken (see section II.F.).
Institutions with exempt-from-filing and de minimis net debit caps
may not obtain additional daylight overdraft capacity by pledging
additional collateral without first obtaining a self-assessed net debit
cap. Likewise, institutions that have voluntarily adopted zero net
debit caps may not obtain additional daylight overdraft capacity
without first obtaining a self-assessed net debit cap. 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.
2. Streamlined Procedure for Certain FBOs
An FBO that is a FHC or has a SOSA rating of 1 and has a self-
assessed net debit cap may request from its Reserve Bank a streamlined
procedure to obtain a maximum daylight overdraft capacity. These FBOs
are not required to provide documentation of the business need or
obtain the board of directors' resolution for collateralized capacity
in an amount that exceeds its current net debit cap (which is based on
up to 35 percent worldwide capital times its cap multiple), as long as
the requested total capacity is 100 percent or less of worldwide
capital times a self-assessed
[[Page 79120]]
cap multiple.\40\ In order to ensure that intraday liquidity risk is
managed appropriately and that the FBO will be able to repay daylight
overdrafts, eligible FBOs under the streamlined procedure will be
subject to initial and periodic reviews of liquidity plans that are
analogous to the liquidity reviews undergone by U.S. institutions.\41\
If an eligible FBO requests capacity in excess of 100 percent of
worldwide capital times the self-assessed cap multiple, it would be
subject to the general procedure.
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\40\ For example, a financial holding company is eligible for
uncollateralized capacity of 35 percent of worldwide capital times
the cap multiple. The streamlined max cap procedure would provide
such an institution with additional collateralized capacity of 65
percent of worldwide capital times the cap multiple.
\41\ The liquidity reviews will be conducted by the
administrative Reserve Bank, in consultation with each FBO's home-
country supervisor.
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E. Special Situations [No Change]
F. Monitoring [No change]
G. Transfer-Size Limit on Book-Entry Securities [No Change]
VII. Federal Reserve Policy on Payment System Risk (Effective When
Announced)
The ``Federal Reserve Policy on Payment System Risk'' is amended as
follows when announced in a subsequent Federal Register notice.
Introduction [Revised]
Risks in Payment and Settlement Systems [Revised]
I. Risk Management in Payment and Settlement Systems [No Change]
A. Scope
B. General Policy Expectations
C. Systemically Important Systems
1. Principles for Systemically Important Payment Systems
2. Minimum Standards for Systemically Important Securities
Settlement Systems and Central Counterparties
3. Self-Assessments by Systemically Important Systems
II. Federal Reserve Intraday Credit Policies [II and II B Through II
G Revised]
A. Daylight Overdraft Definition and Measurement [No Change]
B. Collateral
C. Pricing
D. Net Debit Caps
1. Definition
2. Cap Categories
a. Self-Assessed
b. De Minimis
c. Exempt-From-Filing
d. Zero
3. Capital Measure
a. U.S.-Chartered Institutions
b. U.S. Branches and Agencies of Foreign Banks
E. Maximum Daylight Overdraft Capacity
1. General Procedure
2. Streamlined Procedure for Certain FBOs
F. Special Situations
1. Edge and Agreement Corporations
2. Bankers' Banks
3. Limited-Purpose Trust Companies
4. Government-Sponsored Enterprises and International
Organizations
5. Problem Institutions
G. Monitoring
1. Ex Post
2. Real Time
3. Multi-District Institutions
H. Transfer-Size Limit on Book-Entry Securities [No Change]
Introduction
Payment and settlement systems are critical components of the
nation's financial system. The smooth functioning of these systems is
vital to the financial stability of the U.S. economy. Given the
importance of these systems, the Board has developed this policy to
address the risks that payment and settlement activity present to the
financial system and to the Federal Reserve Banks (Reserve Banks).
In adopting this policy, the Board's objectives are to foster the
safety and efficiency of payment and settlement systems. These policy
objectives are consistent with (1) The Board's long-standing objectives
to promote the integrity, efficiency, and accessibility of the payment
system; (2) industry and supervisory methods for risk management; and
(3) internationally accepted risk-management principles and minimum
standards for systemically important payment and settlement
systems.\42\
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\42\ For the Board's long-standing objectives in the payment
system, see ``The Federal Reserve in the Payments System,''
September 2001, FRRS 9-1550, available at http://www.federalreserve.gov/paymentsystems/pricing/frpaysys.htm.
---------------------------------------------------------------------------
Part I of this policy sets out the Board's views, and related
principles and minimum standards, regarding the management of risks in
payment and settlement systems, including those operated by the Reserve
Banks. In setting out its views, the Board seeks to encourage payment
and settlement systems, and their primary regulators, to take the
principles and minimum standards in this policy into consideration in
the design, operation, monitoring, and assessing of these systems. The
Board also will be guided by this part, in conjunction with relevant
laws and other Federal Reserve policies, when exercising its authority
over certain systems or their participants, when providing payment and
settlement services to systems, or when providing intraday credit to
Federal Reserve account holders.
Part II of this policy governs the provision of intraday credit or
``daylight overdrafts'' in accounts at the Reserve Banks and sets out
the general methods used by the Reserve Banks to control their intraday
credit exposures.\43\ Under this part, the Board explicitly recognizes
that the Federal Reserve has an important role in providing intraday
balances and credit to foster the smooth operation of the payment
system. The Reserve Banks provide intraday balances by way of supplying
temporary, intraday credit to healthy depository institutions,
predominantly through collateralized intraday overdrafts.\44\ The Board
believes that such a strategy enhances intraday liquidity, while
controlling risk to the Reserve Banks. Over time, the Board aims to
reduce the reliance of the banking industry on uncollateralized
intraday credit by providing incentives to collateralize daylight
overdrafts. The Board also aims to limit the burden of the policy on
healthy depository institutions that use small amounts of intraday
credit.
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\43\ To assist depository institutions in implementing this part
of the Board's payment system risk policy, the Federal Reserve has
prepared two documents, the Overview of the Federal Reserve's
Payment System Risk Policy and the Guide to the Federal Reserve's
Payment System Risk Policy, which are available on line at http://www.federalreserve.gov/paymentsystems/PSR/relpol.htm. The Overview
of the Federal Reserve's Payment System Risk Policy summarizes the
Board's policy on the provision of intraday credit, including net
debit caps and daylight overdraft fees. The overview is intended for
use by institutions that incur only small amounts of daylight
overdrafts. The Guide to the Federal Reserve's Payment 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.
\44\ The term ``depository institution,'' as used in this
policy, refers 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, trust companies, and bankers' banks, unless the
context indicates a different reading.
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Through this policy, the Board expects financial system
participants, including the Reserve Banks, to reduce and control
settlement and systemic risks arising in payment and settlement
systems, consistent with the smooth operation of the financial system.
This policy is designed to provide intraday balances and credit while
controlling the Reserve Bank risk by (1) Making financial system
participants and system operators aware of the types of basic risks
that arise in the settlement process and the Board's expectations with
regard to risk management, (2) setting explicit risk-management
expectations for systemically important systems, and (3) establishing
the policy conditions governing the provision of
[[Page 79121]]
Federal Reserve intraday credit to account holders. The Board's
adoption of this policy in no way diminishes the primary
responsibilities of financial system participants generally and
settlement system operators, participants, and Federal Reserve account
holders more specifically, to address the risks that may arise through
their operation of, or participation in, payment and settlement
systems.
Risks in Payment and Settlement Systems
The basic risks in payment and settlement systems are credit risk,
liquidity risk, operational risk, and legal risk. In the context of
this policy, these risks are defined as follows.\45\
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\45\ These definitions of credit risk, liquidity risk, and legal
risk are based upon those presented in the Core Principles for
Systemically Important Payment Systems (Core Principles) and the
Recommendations for Securities Settlement Systems (Recommendations
for SSS). The definition of operational risk is based on the Basel
Committee on Banking Supervision's ``Sound Practices for the
Management and Supervision of Operational Risk,'' available at
http://www.bis.org/publ/bcbs96.htm. Each of these definitions is
largely consistent with those included in the Recommendations for
Central Counterparties (Recommendations for CCP).
---------------------------------------------------------------------------
Credit Risk. The risk that a counterparty will not settle an
obligation for full value either when due or anytime thereafter.
Liquidity Risk. The risk that a counterparty will not settle an
obligation for full value when due.
Operational Risk. The risk of loss resulting from inadequate or
failed internal processes, people, and systems, or from external
events. This type of risk includes various physical and information
security risks.
Legal Risk. The risk of loss because of the unexpected application
of a law or regulation or because a contract cannot be enforced.
These risks arise between financial institutions as they settle
payments and other financial transactions and must be managed by
institutions, both individually and collectively.46 47
Multilateral payment and settlement systems, in particular, may
increase, shift, concentrate, or otherwise transform risks in
unanticipated ways. These systems also may pose systemic risk to the
financial system where the inability of a system participant to meet
its obligations when due may cause other participants to be unable to
meet their obligations when due. The failure of one or more
participants to settle their payments or other financial transactions,
in turn, could create credit or liquidity problems for other
participants, the system operator, or depository institutions. Systemic
risk might lead ultimately to a disruption in the financial system more
broadly or undermine public confidence in the nation's financial
infrastructure.
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\46\ The term ``financial institution,'' as used in this policy,
includes a broad array of types of organizations that engage in
financial activity, including depository institutions and securities
dealers.
\47\ Several existing regulatory and bank supervision guidelines
and policies also are directed at institutions' management of the
risks posed by interbank payment and settlement activity. For
example, Federal Reserve Regulation F (12 CFR 206) directs insured
depository institutions to establish policies and procedures to
avoid excessive exposures to any other depository institutions,
including exposures that may be generated through the clearing and
settlement of payments.
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These risks stem, in part, from the multilateral and time-sensitive
credit and liquidity interdependencies among financial institutions.
These interdependencies often create complex transaction flows that, in
combination with a system's design, can lead to significant demands for
intraday credit, either on a regular or extraordinary basis. The Board
explicitly recognizes that the Federal Reserve has an important role in
providing intraday balances and credit to foster the smooth operation
of the payment system. To the extent that financial institutions or the
Reserve Banks are the direct or indirect source of intraday credit,
they may face a direct risk of loss if daylight overdrafts are not
extinguished as planned. In addition, measures taken by Reserve Banks
to limit their intraday credit exposures may shift some or all of the
associated risks to private-sector systems.
The smooth functioning of payment and settlement systems is also
critical to certain public policy objectives in the areas of monetary
policy and banking supervision. The effective implementation of
monetary policy, for example, depends on both the orderly settlement of
open market operations and the efficient distribution of reserve
balances throughout the banking system via the money market and payment
system. Likewise, supervisory objectives regarding the safety and
soundness of depository institutions must take into account the risks
payment and settlement systems pose to depository institutions that
participate directly or indirectly in, or provide settlement, custody,
or credit services to, such systems.
I. Risk Management in Payment and Settlement Systems [No Change]
II. Federal Reserve Intraday Credit Policies [II and II B Through II G
Revised]
This part outlines the methods used to provide intraday credit to
ensure the smooth functioning of payment and settlement systems, while
controlling credit risk to the Reserve Banks associated with such
intraday credit. These methods include voluntary collateralization of
intraday credit, a limit on total daylight overdrafts in institutions'
Federal Reserve accounts, and a fee for uncollateralized daylight
overdrafts. This part also provides a fee waiver to limit the impact of
collateralization on depository institutions that use relatively small
amounts of intraday credit.
To assist institutions in implementing this part of the policy, the
Federal Reserve has prepared two documents: the Overview of the Federal
Reserve's Payment System Risk Policy on Intraday Credit (Overview) and
the Guide to the Federal Reserve's Payment System Risk Policy on
Intraday Credit (Guide).\48\ The Overview summarizes the Board's policy
on the provision of intraday credit, including net debit caps, daylight
overdraft fees, and the fee waiver. This document is intended for use
by institutions that incur only small amounts of daylight overdrafts.
The Guide 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.
---------------------------------------------------------------------------
\48\ Available at http://www.federalreserve.gov/paymentsystems/PSR/relpol.htm.
---------------------------------------------------------------------------
A. Daylight Overdraft Definition and Measurement [No Change]
B. Collateral
To help meet institutions' demand for intraday balances while
mitigating Reserve Bank credit risk, the Board sets forth this policy
whereby the Reserve Banks supply intraday balances and credit
predominantly through explicitly collateralized daylight overdrafts to
healthy depository institutions.\49\ This policy offers pricing
incentives to encourage greater collateralization (see section II.C.).
To avoid disrupting the operation of the payment system and increasing
the cost burden on a large
[[Page 79122]]
number of institutions using small amounts of daylight overdrafts, the
use of collateral is generally voluntary.\50\
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\49\ Collateral is also used to manage risk posed by daylight
overdrafts of problem institutions (institutions in a weak or
deteriorating financial condition), entities not eligible for
Federal Reserve intraday credit (see section II.F.), and
institutions that have obtained maximum daylight overdraft capacity
(see section II.E.).
\50\ The Reserve Banks may require collateral in certain
circumstances, such as when institutions breach their net debit
caps.
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Collateral eligibility and margins remain the same for PSR policy
purposes as for the discount window.\51\ Unencumbered collateral can be
used to collateralize daylight overdrafts.\52\ In-transit securities
are eligible collateral to pledge for PSR purposes at Reserve Banks'
discretion.\53\ All collateral must be acceptable to the Reserve Banks.
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\51\ See http://www.frbdiscountwindow.org/ for information on
the discount window and PSR collateral acceptance policy and
collateral margins.
\52\ Under some circumstances, rules for determining whether
collateral is available may differ for PSR and discount window
purposes.
\53\ In-transit securities are book-entry securities transferred
over the Fedwire Securities Service that have been purchased by a
depository institution but not yet paid for or owned by the
institution's customers.
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C. Pricing
Under the voluntary collateralization regime, the fee for
collateralized overdrafts is zero, while the fee for uncollateralized
overdrafts is 50 basis points. The two-tiered fee for collateralized
and uncollateralized overdrafts is intended to provide a strong
incentive for a depository institution to pledge collateral to its
Reserve Bank to reduce or eliminate the institution's uncollateralized
daylight overdrafts and associated charges for its use of intraday
credit.
Reserve Banks charge institutions for daylight overdrafts incurred
in their Federal Reserve accounts. For each two-week reserve-
maintenance period, the Reserve Banks calculate and assess daylight
overdraft fees, which are equal to the sum of any daily
uncollateralized daylight overdraft charges during the period.
Daylight overdraft fees for uncollateralized overdrafts (or the
uncollateralized portion of a partially collateralized overdraft) are
calculated using an annual rate of 50 basis points, quoted on the basis
of a 24-hour day and a 360-day year. To obtain the effective annual
rate for the standard Fedwire operating day, the 50-basis-point annual
rate is multiplied by the fraction of a 24-hour day during which
Fedwire is scheduled to operate. For example, under a 21.5-hour
scheduled Fedwire operating day, the effective annual rate used to
calculate daylight overdraft fees equals 44.79 basis points (50 basis
points multiplied by 21.5/24).\54\ The effective daily rate is
calculated by dividing the effective annual rate by 360.\55\ An
institution's daily daylight overdraft charge is equal to the effective
daily rate multiplied by the institution's average daily
uncollateralized daylight overdraft.
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\54\ A change in the length of the scheduled Fedwire operating
day should not significantly change the amount of fees charged
because the effective daily rate is applied to average daylight
overdrafts, whose calculation would also reflect the change in the
operating day.
\55\ Under the current 21.5-hour Fedwire operating day, the
effective daily daylight-overdraft rate is truncated to 0.0000124.
---------------------------------------------------------------------------
An institution's average daily uncollateralized daylight overdraft
is calculated by dividing the sum of its negative uncollateralized
Federal Reserve account balances at the end of each minute of the
scheduled Fedwire operating day by the total number of minutes in the
scheduled Fedwire operating day. A negative uncollateralized Federal
Reserve account balance is calculated by subtracting the unencumbered,
net lendable value of collateral pledged from the total negative
Federal Reserve account balance at the end of each minute. Each
positive end-of-minute balance in an institution's Federal Reserve
account is set to equal zero. Fully collateralized end-of-minute
negative balances are similarly set to zero.
The daily daylight overdraft charge is reduced by a fee waiver of
$150, which is primarily intended to minimize the burden of the PSR
policy on institutions that use small amounts of intraday credit. The
waiver is subtracted from gross fees in a two-week reserve-maintenance
period.\56\
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\56\ The waiver shall not result in refunds or credits to an
institution and cannot be carried to another reserve maintenance
period.
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Certain institutions are subject to a penalty fee and modified
daylight overdraft fee calculation as described in section II.F. The
fee waiver is not available to these institutions.\57\
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\57\ The fee waiver is not available to Edge and agreement
corporations, bankers' banks that have not waived their exemption
from reserve requirements, limited-purpose trust companies, and
government-sponsored enterprises and international organizations.
These types of institutions do not have regular access to the
discount window and, therefore, are expected not to incur daylight
overdrafts in their Federal Reserve accounts.
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D. Net Debit Caps
1. Definition
In accord with sound risk-management practices, to limit the amount
of intraday credit that a Reserve Bank extends to an individual
institution and the associated risk, each institution incurring
daylight overdrafts in its Federal Reserve account must adopt a net
debit cap, that is, a ceiling on the total daylight overdraft position
that it can incur during any given day. 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. Granting a net debit
cap, or any extension of intraday credit, to an institution is at the
discretion of the Reserve Bank.
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 II.D.2.) and their associated cap
levels, set as multiples of capital measure, are listed below:
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\58\ The net debit cap for the exempt-from-filing category is
equal to the lesser of $10 million or 0.20 multiplied by the capital
measure.
Net Debit Cap Multiples
------------------------------------------------------------------------
Cap category Cap multiple
------------------------------------------------------------------------
High.................................. 2.25
Above average......................... 1.875
Average............................... 1.125
De minimis............................ 0.4
Exempt-from-filing \58\............... $10 million or 0.20
Zero.................................. 0
------------------------------------------------------------------------
The cap is applied to the total of collateralized and
uncollateralized daylight overdrafts.\59\ For the treatment of
overdrafts that exceed the cap, see section II.G.
---------------------------------------------------------------------------
\59\ Collateral will not increase the net debit cap limit.
Institutions seeking capacity that exceeds the net debit cap need to
apply for the maximum daylight overdraft capacity (see section II.
E).
---------------------------------------------------------------------------
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 further limit or prohibit an institution's
use of Federal Reserve intraday credit if (1) The institution's
supervisor determines that the institution is unsafe or unsound; (2)
the institution does not qualify for a positive net debit cap (see
section II.D.2.); or (3) the Reserve Bank determines that the
institution poses excessive risk.
While capital measures differ, the net debit cap provisions of this
policy apply similarly to foreign banking organizations (FBOs) as to
U.S. institutions. Consistent with practices for U.S.-chartered
depository 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
[[Page 79123]]
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: High, above average, average, de minimis, exempt-
from-filing, and zero. The high, above average, and average cap
categories are referred to as ``self-assessed'' caps.
a. Self-assessed. In order to establish a net debit cap category of
high, above average, or average, 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 procedures.\60\ The assessment of creditworthiness is
based on the institution's supervisory rating and Prompt Corrective
Action (PCA) designation.\61\ 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 includes a detailed explanation of
the self-assessment process.
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\60\ 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.
\61\ 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 leverage limit (the ratio
of tangible equity to total assets) specified by the appropriate
federal banking agency, in consultation with the FDIC, or any other
relevant capital measure established by the agency to determine when
an institution is critically undercapitalized (12 U.S.C. 1831o).
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Each institution's board of directors must review that
institution's self-assessment and recommended cap category. The process
of self-assessment, with the 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 an institution, provided that (1) The self-
assessment is performed by each entity incurring daylight overdrafts,
(2) the entity's cap is based on the measure of 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.\62\
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\62\ An FBO should undergo the same self-assessment process as a
U.S.-chartered institution 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. 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. 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 cap 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.\63\
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\63\ 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 institution's examiners may
review the contents of the self-assessment file.\64\ The objective of
this review is to ensure that the institution has applied the
guidelines appropriately 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. If an examiner has concerns, the Reserve Bank would 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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\64\ Between examinations, examiners or Reserve Bank staff may
contact an institution about its cap if there is other relevant
information, such as statistical or supervisory reports, that
suggests 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 net debit cap during a
two-week reserve-maintenance period and will decide if additional
action should be taken (see section II.G.).
b. De minimis. Many 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 and soundness
standards to incur de minimis amounts of daylight overdrafts without
performing a self-assessment. An institution may incur daylight
overdrafts of up to 40 percent of its capital measure 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 in each 12-month period a copy of its board of
directors resolution (or a resolution by its holding company's board)
approving the institution's use of intraday credit up to the de minimis
level. The Reserve Banks will review the status of any institution with
a de minimis net debit cap that exceeds its net debit cap during a two-
week reserve-maintenance period and will decide if additional action
should be taken (see section II.G.).
c. Exempt-from-filing. Institutions that only rarely incur daylight
overdrafts in
[[Page 79124]]
their Federal Reserve accounts that exceed the lesser of $10 million or
20 percent of their capital measure are excused from performing self-
assessments and filing board of directors resolutions with their
Reserve Banks. This dual test of dollar amount and percent of capital
measure is designed to limit the filing exemption to institutions that
create only low-dollar risks to the Reserve Banks and that incur small
overdrafts relative to their capital measure.
The Reserve Banks will review the status of an exempt institution
that incurs overdrafts in its Federal Reserve account in excess of $10
million or 20 percent of its capital measure on more than two days in
any two consecutive two-week reserve-maintenance periods. The Reserve
Bank will decide whether the exemption should be maintained, the
institution should be required to file for a cap, or counseling should
be performed (see section II.G.). The Reserve Bank will assign the
exempt-from-filing net debit cap.
d. Zero. Some financially healthy 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 intraday credit. If an 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. 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 an 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 II.F.). Recently chartered institutions may also be
assigned a zero net debit cap.
3. Capital Measure
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 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
banks, 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. 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.\65\ U.S. capital equivalency is equal to the following:
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\65\ 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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35 percent of capital for FBOs that are financial holding
companies (FHCs).\66\
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\66\ The Gramm-Leach-Bliley Act 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 (12 U.S.C.
1841(p)). 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 (12 U.S.C. 1843(l)).
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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.\67\
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\67\ 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.
An FBO that is an FHC or has a SOSA rating of 1 may be eligible for
a streamlined procedure (see section II.E.) for obtaining additional
collateralized intraday credit under the maximum daylight overdraft
capacity provision.
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.
E. Maximum Daylight Overdraft Capacity
The Board recognizes that while net debit caps provide sufficient
liquidity to most institutions, some 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 and to remove barriers, as appropriate, to foster risk-
reducing payment system initiatives. Consequently, certain 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.68 69 This policy is intended to provide extra
liquidity through the pledge of collateral to the few institutions that
might otherwise be constrained from participating in risk-reducing
payment system initiatives.\70\ The Board believes that providing extra
liquidity to these few institutions should help reduce liquidity-
related market disruptions.
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\68\ The administrative Reserve Bank is responsible for the
administration of Federal Reserve credit, reserves, and risk-
management policies for a given institution or other legal entity.
\69\ All collateral must be acceptable to the Reserve Banks. The
Reserve Banks may accept securities in transit on the Fedwire
Securities Service as collateral to support the maximum daylight
overdraft capacity level. Collateral eligibility and margins are the
same for PSR policy purposes as for the discount window. See http://www.frbdiscountwindow.org/ for information.
\70\ Institutions may consider applying for a maximum daylight
overdraft capacity level for daylight overdrafts resulting from
Fedwire funds transfers, Fedwire book-entry securities transfers,
National Settlement Service entries, and ACH credit originations.
Institutions incurring daylight overdrafts as a result of other
payment activity may be eligible for administrative counseling
flexibility (59 FR 54915-18, Nov. 2, 1994).
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1. General Procedure
An 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
work with an institution that requests additional
[[Page 79125]]
daylight overdraft capacity to determine the appropriate maximum
daylight overdraft capacity level. In considering the institution's
request, the Reserve Bank will evaluate the institution's rationale for
requesting additional daylight overdraft capacity as well as its
financial and supervisory information. 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). An institution approved for a
maximum daylight overdraft capacity level must submit at least once in
each twelve-month period a board of directors resolution indicating its
board's approval of that level.
If the Reserve Bank approves an institution's request, the Reserve
Bank approves a maximum daylight overdraft capacity level. The maximum
daylight overdraft capacity is defined as follows: Maximum daylight
overdraft capacity = net debit cap + collateralized capacity.\71\
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\71\ Collateralized capacity, on any given day, equals the
amount of collateral pledged to the Reserve Bank, not to exceed the
difference between the institution's maximum daylight overdraft
capacity level and its net debit cap.
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The Reserve Banks will review the status of any institution that
exceeds its maximum daylight overdraft capacity limit during a two-week
reserve-maintenance period and will decide if the maximum daylight
overdraft capacity should be maintained or if additional action should
be taken (see section II.G.).
Institutions with exempt-from-filing and de minimis net debit caps
may not obtain additional daylight overdraft capacity by pledging
additional collateral without first obtaining a self-assessed net debit
cap. Likewise, institutions that have voluntarily adopted zero net
debit caps may not obtain additional daylight overdraft capacity
without first obtaining a self-assessed net debit cap. 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.
2. Streamlined Procedure for Certain FBOs
An FBO that is an FHC or has an SOSA rating of 1 and has a self-
assessed net debit cap may request from its Reserve Bank a streamlined
procedure to obtain a maximum daylight overdraft capacity. These FBOs
are not required to provide documentation of the business need or
obtain the board of directors' resolution for collateralized capacity
in an amount that exceeds its current net debit cap (which is based on
up to 35 percent worldwide capital times its cap multiple), as long as
the requested total capacity is 100 percent or less of worldwide
capital times a self-assessed cap multiple.\72\ In order to ensure that
intraday liquidity risk is managed appropriately and that the FBO will
be able to repay daylight overdrafts, eligible FBOs under the
streamlined procedure will be subject to initial and periodic reviews
of liquidity plans that are analogous to the liquidity reviews
undergone by U.S. institutions.\73\ If an eligible FBO requests
capacity in excess of 100 percent of worldwide capital times the self-
assessed cap multiple, it would be subject to the general procedure.
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\72\ For example, a financial holding company is eligible for
uncollateralized capacity of 35 percent of worldwide capital times
the cap multiple. The streamlined max cap procedure would provide
such an institution with additional collateralized capacity of 65
percent of worldwide capital times the cap multiple.
\73\ The liquidity reviews will be conducted by the
administrative Reserve Bank, in consultation with each FBO's home
country supervisor.
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F. Special Situations
Under the Board's policy, certain institutions warrant special
treatment primarily because of their charter types. As mentioned
previously, an institution must have regular access to the discount
window and be in sound financial condition in order to adopt a net
debit cap greater than zero. Institutions that do not have regular
access to the discount window include Edge and agreement corporations,
bankers' banks that are not subject to reserve requirements, limited-
purpose trust companies, government-sponsored enterprises (GSEs), and
certain international organizations. Institutions that have been
assigned a zero cap by their Reserve Banks are also subject to special
considerations under this policy based on the risks they pose. In
developing its policy for these institutions, the Board has sought to
balance the goal of reducing and managing risk in the payment system,
including risk to the Federal Reserve, with that of minimizing the
adverse effects on the payment 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
daylight overdrafts of other institutions (50 basis points) plus 100
basis points multiplied by the fraction of a 24-hour day during which
Fedwire is scheduled to operate (currently \21.5/24\). The daily
daylight-overdraft penalty rate is calculated by dividing the annual
penalty rate by 360.\74\ The daylight-overdraft penalty rate applies to
the institution's daily average 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 institutions described in this section.
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\74\ Under the current 21.5-hour Fedwire operating day, the
effective daily daylight-overdraft penalty rate is truncated to
0.0000373.
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Institutions that are subject to the daylight-overdraft penalty fee
are not eligible for the $150 fee waiver and are subject to a minimum
fee of $25 on any daylight overdrafts incurred in their Federal Reserve
accounts. While such institutions may be required to post collateral,
they are not eligible for the zero fee associated with collateralized
daylight overdrafts.
1. Edge and Agreement Corporations \75\
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\75\ 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. 601-604(a)).
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Edge 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
[[Page 79126]]
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 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
FBOs are treated in the same manner as their domestically owned
counterparts.
2. Bankers' Banks \76\
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\76\ For the purposes of this policy, 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 Sec. 201.2(c)(2)).
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Bankers' banks are exempt from reserve requirements and do not have
regular access to the discount window. Bankers' banks should refrain
from incurring daylight overdrafts and must 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.
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 some other 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 institutions that are eligible to incur daylight
overdrafts. 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 \77\
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\77\ For the purposes of this policy, 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 and
do not have regular discount-window access. Limited-purpose trust
companies should refrain from incurring daylight overdrafts and must
post collateral to cover any overdrafts they do incur. In addition to
posting collateral, limited-purpose trust companies would be subject to
the same daylight-overdraft penalty rate as other institutions that do
not have regular access to the discount window.
4. Government-Sponsored Enterprises and International Organizations
\78\
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\78\ The GSEs include Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie
Mac), entities of the Federal Home Loan Bank System (FHLBS), the
Farm Credit System, the Federal Agricultural Mortgage Corporation
(Farmer Mac), the Student Loan Marketing Association (Sallie Mae),
the Financing Corporation, and the Resolution Funding Corporation.
The international organizations include the World Bank, the Inter-
American Development Bank, the Asian Development Bank, and the
African Development Bank. The Student Loan Marketing Association
Reorganization Act of 1996 requires Sallie Mae to be completely
privatized by 2008; however, Sallie Mae completed privatization at
the end of 2004. The Reserve Banks no longer act as fiscal agents
for new issues of Sallie Mae securities, and Sallie Mae is not
considered a GSE.
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The Reserve Banks act as fiscal agents for certain GSEs and
international organizations in accordance with federal statutes. These
institutions, however, are not subject to reserve requirements and do
not have regular access to the discount window. GSEs and international
organizations should refrain from incurring daylight overdrafts and
must post collateral to cover any daylight overdrafts they do incur. In
addition to posting collateral, these institutions would be subject to
the same daylight-overdraft penalty rate as other institutions that do
not have regular access to the discount window.
5. Problem Institutions
For 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.
G. Monitoring
1. Ex Post
Under the Federal Reserve's 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. Overdrafts above the cap for institutions with de minimis, self-
assessed, and max caps may be treated differently, depending on whether
the overdraft is collateralized.\79\ If the overdraft is fully
collateralized, the Reserve Bank may choose not to contact the
institution for up to two incidents per two consecutive two-week
reserve-maintenance periods (the total of four weeks).
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\79\ For monitoring exempt institutions, overdrafts above the
exempt cap limit, regardless of whether such overdrafts are
collateralized or uncollateralized, should occur no more than twice
in two consecutive two-week reserve-maintenance periods (the total
of four weeks).
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Each Reserve Bank retains the right to protect its risk exposure
from individual institutions by unilaterally reducing net debit caps,
imposing (additional) collateralization or clearing-balance
requirements, rejecting or delaying certain transactions as described
below, or, in extreme cases, taking the institution offline or
prohibiting it from using Fedwire.
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 (additional)
collateral.\80\
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\80\ Institutions that are monitored in real time must fund the
total amount of their ACH credit originations through the Reserve
Banks in order for the transactions to be processed by the Federal
Reserve, even if those transactions are processed one or two days
before settlement.
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3. Multi-District Institutions
Institutions, such as those maintaining merger-transition accounts
and U.S. branches and agencies of a
[[Page 79127]]
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. For domestic 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.
In the case of families of U.S. branches and agencies of the same
FBO, the administrative Reserve Bank generally is the Reserve Bank that
exercises the Federal Reserve's oversight responsibilities under the
International Banking Act.\81\ The administrative Reserve Bank, in
consultation with the management of the foreign bank's U.S. operations
and with Reserve Banks in whose territory other U.S. agencies or
branches of the same foreign bank are located, may determine that these
agencies and branches will not be permitted to incur overdrafts in
Federal Reserve accounts. Alternatively, the administrative Reserve
Bank, after similar consultation, may allocate all or part of the
foreign family's net debit cap to the Federal Reserve accounts of
agencies or branches that are located outside of the administrative
Reserve Bank's District; in this case, the Reserve Bank in whose
Districts those agencies or branches are located will be responsible
for administering all or part of this policy.\82\
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\81\ 12 U.S.C. 3101-3108.
\82\ 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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H. Transfer-Size Limit on Book-Entry Securities [No Change]
By order of the Board of Governors of the Federal Reserve
System, dated: December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-30627 Filed 12-23-08; 8:45 am]
BILLING CODE 6210-01-P