[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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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:
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

     35 percent of capital for FBOs that are financial holding 
companies (FHCs). \31\
---------------------------------------------------------------------------

    \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)).

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

[[Page 79119]]

     25 percent of capital for FBOs that are not FHCs and have 
a strength of support assessment ranking (SOSA) of 1.\32\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \56\ The waiver shall not result in refunds or credits to an 
institution and cannot be carried to another reserve maintenance 
period.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

    \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