[Federal Register Volume 74, Number 250 (Thursday, December 31, 2009)]
[Proposed Rules]
[Pages 69301-69304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-31040]


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FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-1381]


Reserve Requirements of Depository Institutions Policy on Payment 
System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking; request for public comment.

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SUMMARY: The Board is requesting public comment on proposed amendments 
to Regulation D, Reserve Requirements of Depository Institutions, to 
authorize the establishment of term deposits. Term deposits are 
intended to facilitate the conduct of monetary policy by providing a 
tool for managing the aggregate quantity of reserve balances. 
Institutions eligible to receive earnings on their balances in accounts 
at Federal Reserve Banks (``eligible institutions'') could hold term 
deposits and receive earnings at a rate that would not exceed the 
general level of short-term interest rates. Term deposits would be 
separate and distinct from those maintained in an institution's master 
account at a Reserve Bank (``master account'') as well as from those 
maintained in an excess balance account. Term deposits would not 
satisfy required reserve balances or contractual clearing balances and 
would not be available to clear payments or to cover daylight or 
overnight overdrafts. The proposal also would make minor amendments to 
the posting rules for intraday debits and credits to master accounts as 
set forth in the Board's Policy on Payment System Risk to address 
transactions associated with term deposits.

DATES: Comments must be submitted by February 1, 2010.

ADDRESSES: You may submit comments, identified by Docket No. R-1381, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

    . Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information.
    Public comments may also be viewed electronically or in paper in 
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) 
between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel 
(202/452-3565), or Dena L. Milligan, Staff Attorney (202/452-3900), 
Legal Division, or Seth Carpenter, Associate Director (202/452-2385), 
or Margaret Gillis DeBoer, Section Chief (202/452-3139), Division of 
Monetary Affairs; for users of Telecommunications Device for

[[Page 69302]]

the Deaf (TDD) only, contact (202/263-4869); Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

I. Interest on Balances of Eligible Institutions at Reserve Banks

    Section 19(b)(12) of the Federal Reserve Act (the ``Act'') (12 
U.S.C. 461(b)(2)) authorizes ``eligible institutions'' \1\ to receive 
earnings on balances maintained at Reserve Banks, to be paid at least 
once each quarter at a rate or rates not to exceed the general level of 
short-term interest rates. The same section of the Act authorizes the 
Board to prescribe regulations concerning the payment of such earnings. 
Effective October 9, 2008, the Board amended Regulation D to direct the 
Reserve Banks to pay earnings on balances of eligible institutions held 
at Reserve Banks to satisfy reserve requirements (``required reserve 
balances'') \2\ and on balances held in excess of required reserve 
balances and clearing balance requirements \3\ (``excess 
balances'').\4\ (73 FR 59482) (Oct. 9, 2008). Regulation D currently 
provides that the rate of interest on both required reserve balances 
and on excess balances is equal to \1/4\ percent. The Board may from 
time to time determine any other rate or rates for such balances 
subject to the limitation that such rates may not exceed the general 
level of short-term interest rates.
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    \1\ ``Eligible institution'' includes the depository 
institutions defined in section 19(b)(1)(A) of the Act, including 
banks, savings associations, savings banks and credit unions that 
are Federally insured or eligible to apply for Federal insurance. 12 
CFR 204.2(y). ``Eligible institution'' also includes trust 
companies, Edge and agreement corporations, and U.S. agencies and 
branches of foreign banks. Id. The definition does not include all 
entities for which the Reserve Banks hold accounts, such as entities 
for which the Reserve Banks act as fiscal agents, including Federal 
Home Loan Banks, Fannie Mae, and Freddie Mac.
    \2\ 12 CFR 204.2(bb) (definition of ``required reserve 
balance'').
    \3\ 12 CFR 204.2(v) (definition of ``clearing balance'').
    \4\ 12 CFR 204.2(z) (definition of ``excess balance''). Excess 
balances may be maintained in the institution's own account at a 
Reserve Bank, in the account of the institution's correspondent, or 
in a limited-purpose ``excess balance account.'' Cf. 12 CFR 
204.2(aa) (definition of ``excess balance account''); 12 CFR 
204.10(d) (regarding excess balance accounts).
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II. Term Deposit Proposal

    Introduction and Basic Structure. The Federal Reserve has addressed 
the financial market turmoil of the past two years in part by greatly 
expanding its balance sheet and by supplying an unprecedented volume of 
reserves to the banking system. Term deposits could be part of the 
Federal Reserve's tool kit to drain reserves, if necessary, and thus 
support the implementation of monetary policy.
    Term deposits would be distinct from balances held by eligible 
institutions in their master accounts. Term deposits could not be 
withdrawn prior to maturity, would not satisfy required reserve 
balances or contractual clearing balances, and would not be available 
to clear payments or cover daylight or overnight overdrafts. Term 
deposits would, however, be eligible to collateralize discount window 
advances.
    Term deposits could be structured in many different ways. For 
example, term deposits could be offered at one maturity or several 
maturities. Moreover, the interest rate or rates paid on term deposits 
could be set through an auction mechanism or, alternatively, could be 
set administratively or by a formula. A basic proposal in which term 
deposits are offered through an auction process is described below.
    Term Deposit Auctions. The Federal Reserve could hold regular 
auctions of term deposits, offering a fixed quantity of term deposits 
with relatively short maturities. Auctions could be held shortly before 
the end of each two-week reserve maintenance period, with settlement 
occurring on the first day of the subsequent maintenance period. The 
Federal Reserve would announce each auction in advance and would 
specify both the quantity of term deposits offered and their maturity. 
Term deposits of more than one maturity could be outstanding 
simultaneously.\5\ Terms and conditions for each auction could specify 
various parameters, such as minimum and maximum bid amounts and a 
maximum-allowable bid rate.
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    \5\ Auctions of multiple tenors could be staggered. For example, 
an auction of 28-day term deposits could be held at the end of one 
maintenance period, and an auction of 84-day term deposits could be 
held at the end of the next maintenance period. Alternatively, 
auctions of multiple tenors could be conducted simultaneously, with, 
for example, auctions of 14-day and 28-day term deposits held every 
second week.
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    Eligible institutions that wished to hold term deposits would bid 
in a competitive auction, indicating both the interest rate at which 
they are willing to hold term deposits and the quantity they wish to 
hold at that rate. At the submission deadline, all bids received would 
be considered final and could not be modified or withdrawn. Starting 
with the lowest interest rate and working up, the Federal Reserve would 
accept as many bids as necessary to reach the announced quantity of 
term deposits, but would not accept bids at an interest rate that 
exceeds the stated maximum rate. All winning bidders would receive the 
highest accepted rate; bids at lower rates would be accepted in full 
while bids at the highest accepted rate would be prorated as necessary. 
The auction would settle at least one day after winning bidders are 
notified of their awards.
    To settle the auction, the Federal Reserve would transfer balances 
from the master account of each institution that submits a winning bid 
(or, if a winning bidder does not maintain such an account, from the 
master account of its correspondent) to a term deposit. Winning bidders 
would maintain their term deposits at the Reserve Bank in whose 
District the winning bidder is located.\6\ When the term deposit 
matures, the Federal Reserve would transfer the term deposit principal 
plus accrued interest into the institution's master account (or the 
master account of its correspondent).
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    \6\ For an account-holding eligible institution, term deposits 
would be placed at the Reserve Bank that maintains the institution's 
master account (as defined in Reserve Bank Operating Circular 1, 
``Account Relationships,'' http://www.frbservices.org/files/regulations/pdf/operating_circular_1.pdf). For non-account-holding 
eligible institutions, term deposits would be placed at the Reserve 
Bank in whose District the institution is located for purposes of 
Section 3(g) of Regulation D, 12 CFR 204.3(g).
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    The maximum-allowable rate for each auction of term deposits would 
be no higher than the general level of short-term interest rates. For 
these purposes, ``short-term interest rates'' would be defined as the 
primary credit rate and rates on obligations with maturities of up to 
one year in which eligible institutions may invest, such as rates on 
term Federal funds, term repurchase agreements, commercial paper, term 
Eurodollar deposits, and other similar rates.
    Participation Eligibility. Any ``eligible institution'' could hold 
term deposits.\7\ Branches and agencies of foreign banks are included 
within the definition of ``eligible institution'' and could therefore 
hold term deposits. Unlike branches of domestic banks, branches and 
agencies of the same foreign bank that are located in different Reserve 
Bank Districts may have separate master accounts at the corresponding 
Reserve Banks. The proposal anticipates that each affiliated branch of 
a foreign bank would be eligible to bid separately at term deposit 
auctions and maintain separate term deposits at that branch's Reserve 
Bank unless the Board determines otherwise.
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    \7\ See footnote 1, supra.

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[[Page 69303]]

    Administration of Term Deposit Offerings. The Board would designate 
a single Reserve Bank as the ``Term Deposit Offering Administrator'' on 
behalf of all twelve Reserve Banks. The Term Deposit Administrator 
would be responsible for posting announcements and results of auctions. 
The Term Deposit Offering Administrator would also post the results for 
each auction to a public Web site. If the Board were to set the rate 
paid on term deposits administratively or by formula, the Term Deposit 
Offering Administrator would be responsible for posting announcements 
of available rates and maturities.
    Term Deposit Maturities. Term deposit maturities would not exceed 
one year and the Board anticipates that term deposits would likely have 
maturities ranging between one and six months. Maturities might be 
aligned with the first day of each 14-day reserve maintenance periods.
    No Early Withdrawal. In order to ensure that term deposits will be 
an effective reserve management tool, early withdrawals of term 
deposits will not be permitted.
    Mergers. If an institution with outstanding term deposits were to 
be merged into another institution, the surviving institution would 
assume the term deposits of the acquired institution.
    Discount Window Collateral. The ability of a participating 
institution to pledge its term deposits as collateral for the discount 
window could provide a means for an institution to address a pressing 
need for immediate funds. The Board contemplates that term deposits 
would be available as collateral for any discount window advances that 
the participating institution might request.8 9
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    \8\ Term deposits would also serve as collateral for daylight 
overdraft purposes. Collateral takes on additional importance upon 
implementation of the revised PSR in late 2010 or early 2011.
    \9\ The Board anticipates that no haircut would be applied to 
term deposits used as collateral.
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    Settlement and Posting Rules. Settlement for auctions of term 
deposits (the transfer of funds from participating institutions' master 
accounts or correspondents' master accounts) would occur on the 
announced settlement date. Principal plus interest would be returned to 
participating institutions' master accounts (or correspondents' master 
accounts) on the stated maturity date.
    Reserve Banks measure depository institutions' intraday account 
balances according to a set of posting rules outlined in the Board's 
Policy on Payment System Risk \10\ (``PSR Policy''). The PSR Policy 
posting rules set forth a schedule for the posting of debits and 
credits to an institution's master account for different types of 
payments. The Board expects that, on the announced settlement date for 
a particular offering, the Reserve Bank would fund the term deposits of 
the winning bidders by transferring funds from the master accounts of 
the winning bidders (or the master accounts of their correspondents) 
into term deposits at the Reserve Bank in whose District the winning 
bidder is located. Specifically, the transfer from a master account to 
fund a term deposit would post after the close of Fedwire Funds service 
on the settlement date. On the date that a term deposit matures, 
principal and interest would be returned to the master account of the 
participating institution (or its correspondent). The return of the 
funds representing the matured term deposit, together with accrued 
interest, would post to the participating institution's master account 
on the maturity date at 8:30 a.m.
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    \10\ http://www.federalreserve.gov/paymentsystems/psr_policy.htm.
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    Capital Treatment. Term deposits would receive a zero risk-weight 
for risk-based capital purposes, similar to other claims on the Federal 
Reserve.

III. Comments

    The Board seeks comments on all aspects of the proposal. In 
addition, the Board specifically requests comment on the following:
    1. Is it necessary to place any limitations on the maximum amount 
of term deposits that an institution may hold or on the maximum portion 
of a single offering that an institution may win at auction?
    2. What maturity or maturities would eligible institutions 
recommend as appropriate for term deposits, and should more than one 
maturity be offered?
    3. Are there basic terms and structures for term deposits other 
than those described in this notice that should be considered?

IV. Section-By-Section Analysis

A. Proposed Amendments to Regulation D

Section 204.2(dd)
    Proposed section 204.2(dd) would add a definition of ``term 
deposit'' to the regulation.
Section 204.10(b)(3)
    Proposed section 204.10(b)(3) would add a reference to ``term 
deposits'' to the provisions regarding the payment of interest on 
balances at any other rate or rates as determined by the Board from 
time to time and clarify that those rates may not exceed the general 
level of short-term interest rates. For purposes of this subsection, 
the proposal would define ``short-term interest rates'' as the primary 
credit rate and rates on obligations with maturities of up to one year 
in which eligible institutions may invest, such as rates on term 
Federal funds, term repurchase agreements, commercial paper, term 
Eurodollar deposits, and other similar rates.
Section 204.10(e)
    Proposed section 204.10(e) would add a new subsection, ``Term 
Deposits,'' to section 204.10, ``Payment of interest on balances.''
Section 204.10(e)(1)
    Proposed section 204.10(e)(1) would authorize Reserve Banks to 
establish term deposits for eligible institutions under the provisions 
of 204.10(e), subject to such terms and conditions as the Board may 
establish from time to time, including but not limited to conditions 
regarding the maturity of the term deposits being offered, maximum and 
minimum amounts that may be maintained by an eligible institution in a 
term deposit, the interest rate or rates offered and, if term deposits 
are offered through an auction mechanism, the size of the offering, and 
maximum and minimum bid amounts.
Section 204.10(e)(2)
    Proposed section 204.10(e)(2) would provide that term deposits will 
not satisfy any institution's required reserve balance or contractual 
clearing balance.
Section 204.10(e)(3)
    Proposed section 204.10(e)(3) would provide that a term deposit may 
not be used for general payments or other activities.

B. Proposed Amendments to Policy on Payment System Risk

    The Board proposes to amend section II.A. of the PSR Policy under 
the heading ``Procedures for Measuring Daylight Overdrafts'' as follows 
(changes identified by italics):
Procedures for Measuring Daylight Overdrafts
Opening Balance (Previous Day's Closing Balance)
    Post at 8:30 a.m. Eastern Time:
    + Term deposit maturities and accrued interest
    Post After the Close of Fedwire Funds Service:

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    +/- All other transactions. These transactions include the 
following: local Federal Reserve Bank checks presented after 3 p.m. 
Eastern Time but before 3:00 p.m. local time; noncash collection; 
currency and coin shipments; small-dollar credit adjustments; term 
deposit settlements; and all debit adjustments.

V. Form of Comment Letters

    Comment letters should refer to Docket No. R-1381 and, when 
possible, should use a standard typeface with a font size of 10 or 12; 
this will enable the Board to convert text submitted in paper form to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Comments may be mailed 
electronically to [email protected].

VI. Solicitation of Comments Regarding Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809) 
requires the Board to use ``plain language'' in all proposed and final 
rules published after January 1, 2000. The Board invites comments on 
whether the interim final rule is clearly stated and effectively 
organized, and how the Board might make the text of the rule easier to 
understand.

VII. Regulatory Flexibility Act

    In accordance with Section 3(a) of the Regulatory Flexibility Act, 
5 U.S.C. 601 et seq. (RFA), the Board has reviewed the proposed 
amendments to Regulation D. A final regulatory flexibility analysis 
will be conducted after consideration of comments received during the 
public comment period.
    1. Statement of the objectives of the proposal. The Board is 
proposing to amend Regulation D to authorize Reserve Banks to offer 
deposits of specified maturities to eligible institutions. Term 
deposits are intended to facilitate the conduct of monetary policy by 
providing a tool that could be used to drain excess reserves, if 
necessary, to adjust the stance of monetary policy.
    2. Small entities affected by the proposal. The number of small 
entities affected by this proposal is unknown. The proposal would only 
affect those entities, regardless of size, that choose to hold term 
deposits at Reserve Banks. The impact on institutions choosing to hold 
term deposits at Reserve Banks would be positive and not adverse, 
because term deposits would expand the range of investment 
opportunities available to eligible institutions.
    3. Other Federal rules. The Board believes that no Federal rules 
duplicate, overlap, or conflict with the proposed amendments to 
Regulation D.
    4. Significant alternatives to the proposed revisions. The Board 
welcomes comment on any significant alternatives that would minimize 
the impact of the proposal on small entities.

VIII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The proposed rule contains no requirements 
subject to the PRA.

List of Subjects in 12 CFR Part 204

    Banks, banking, Reporting and recordkeeping requirements.

Authority and Issuance

    For the reasons set forth in the preamble, the Board is proposing 
to amend 12 CFR part 204 as follows:

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

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

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
6105.

    2. Amend Sec.  204.2 by adding paragraph (dd) to read as follows:


Sec.  204.2  Definitions.

* * * * *
    (dd) Term deposit means those funds of an eligible institution that 
are maintained by that institution for a specified maturity at a 
Federal Reserve Bank pursuant to Sec.  204.10(e) of this part.
    3. Section 204.10 is amended by revising paragraph (b)(3) and by 
adding a new paragraph (e) to read as follows:


Sec.  204.10  Payment of interest on balances.

* * * * *
    (b) * * *
    (3) For required reserve balances, excess balances, and term 
deposits, at any other rate or rates as determined by the Board from 
time to time, not to exceed the general level of short-term interest 
rates. For purposes of this subsection, ``short-term interest rates'' 
means the primary credit rate and rates on obligations with maturities 
of up to one year in which eligible institutions may invest, such as 
rates on term Federal funds, term repurchase agreements, commercial 
paper, term Eurodollar deposits, and other similar rates.
* * * * *
    (e) Term deposits. (1) A Federal Reserve Bank may accept term 
deposits from eligible institutions under the provisions of this 
paragraph (e) subject to such terms and conditions as the Board may 
establish from time to time, including but not limited to conditions 
regarding the maturity of the term deposits being offered, maximum and 
minimum amounts that may be maintained by an eligible institution in a 
term deposit, the interest rate or rates offered and, if term deposits 
are offered through an auction mechanism, the size of the offering, 
maximum and minimum bid amounts, and other relevant terms.
    (2) A term deposit will not satisfy any institution's required 
reserve balance or contractual clearing balance.
    (3) A term deposit may not be used for general payments or other 
activities.

    By order of the Board of Governors of the Federal Reserve 
System, December 23, 2009.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9-31040 Filed 12-30-09; 8:45 am]
BILLING CODE 6210-01-P