[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