A building and loan association chartered under a state law considering it to be a savings and loan association appears to be eligible to make application for federal deposit insurance even though it is open only one day a week. Section 103 of the Monetary Control Act defines a “depository institution” as any institution that is eligible to make application for federal deposit insurance. Therefore, such an association is subject to federal reserve requirements under Regulation D; however, Regulation D exempts smaller institutions from some (or all) reporting and reserve maintenance requirements. STAFF OP. of Nov. 3, 1980.

Since the National Credit Union Administration has stated that Nebraska “cooperative credit associations” are not eligible to apply for federal deposit insurance even though they resemble credit unions, the associations are not depository institutions for purposes of Regulation D. Section 103 of the Monetary Control Act defines a “depository institution” as any institution that is eligible to make application for federal deposit insurance. STAFF OP. of Feb. 10, 1981.

Regulation D does not apply to a depository institution located outside the United States; thus, such an institution is not required to report deposits to or maintain reserves with the Federal Reserve. STAFF OP. of July 17, 1981.

Before the passage of the Monetary Control Act, a member bank could not deposit more than 10 percent of its capital and surplus in a nonmember depository institution. Section 105(e) of the Monetary Control Act amended section 19(e) of the Federal Reserve Act to provide that a member bank could not deposit more than 10 percent of its capital and surplus in any depository institution that is not authorized to have access to Federal Reserve advances under section 10(b) of the Federal Reserve Act (12 USC 347b). Section 103 of the Monetary Control Act amended the Federal Reserve Act to provide in section 19(b)(7) that “[a]ny depository institution in which transaction accounts or nonpersonal time deposits are held shall be entitled to the same discount and borrowing privileges as member banks.” This provision is regarded as providing nonmember depository institutions that possess reservable transaction accounts and nonpersonal time deposits with access to the Federal Reserve discount window. Indeed, the sole purpose of the amendment to section 19(e) was to enable member banks to keep on deposit with nonmembers that have access to the Federal Reserve’s discount window any amount so desired. Consequently, a member bank may maintain more than 10 percent of its capital and surplus in a nonmember institution that has reservable transaction accounts or nonpersonal time deposits. STAFF OP. of Aug. 6, 1981.

Authority: FRA §§ 19(b)(7) and 19(e), 12 USC 461(b)(7) and 463.

A credit union, operated as a cooperative insurance corporation under state law, that insures state-chartered credit unions is exempt from reporting and maintenance requirements of Regulation D because it is ineligible to apply for federal insurance. If a credit union of such standing acquires federal share insurance, it must comply with the reporting and maintenance requirements of Regulation D. STAFF OP. of Dec. 22, 1981.

In 1981, the Rhode Island legislature amended its law to classify loan and investment companies chartered under Rhode Island law as loan and investment banks. As a result, the FDIC has concluded that a loan and investment bank in Rhode Island is eligible to apply to the FDIC to become an insured bank under section 5 of the Federal Deposit Insurance Act. Section 103(b)(1)(A)(i) of the Monetary Control Act of 1980 defines “depository institution” to mean a bank that is eligible to apply to become an insured bank under section 5 of the Federal Deposit Insurance Act. Section 103(b)(2) of the Monetary Control Act requires every depository institution to maintain reserves against its transaction accounts and nonpersonal time deposits in accordance with the Board’s regulations. Since the FDIC now regards loan and investment banks in Rhode Island as eligible to apply for federal deposit insurance, such institutions are depository institutions under the Monetary Control Act and are now required to file reports and maintain reserves in accordance with the Monetary Control Act and Regulation D. STAFF OP. of Jan. 18, 1982.

Payment instruments that are similar to traveler’s checks and are presented for payment by one or several payable-through banks, rather than being presented directly to the issuers for payment, qualify for treatment as cash items in process of collection for purposes of Regulation D. STAFF OP. of Sept. 25, 1980.

The question was raised whether items in the process of collection pursuant to section 204.2(i)(1)(iii) of Regulation D qualify for the cash items in the process of collection (CIPC) deduction in the same manner that items defined under section 204.2(i)(1)(i) qualify. Under clause (i), a check on hand that will be presented for payment or forwarded for collection on the next following business day by the depository institution is considered to be in the process of collection. Clause (iii) does not contain an elaboration of the concept of “in the process of collection.” However, in its opinion at 2-307.1, in which it said that savings bonds cannot be counted as vault cash, the staff stated that “[R]edeemed savings bonds give rise to a ‘cash item in process of collection’ deduction while in the collection process if shipped for collection on the next business day.”

Under Regulation D, depository institutions are required to submit information regarding time deposits on Form FR 2900. If an institution posts its general ledger daily or generates a daily balance sheet, then all amounts reported for reserve requirement purposes on the FR 2900 are required to be updated daily. Weekly updating of balances is permissible only if it is the accepted accounting standard and practice for a particular segment of the industry to post the general ledger less frequently than daily. STAFF OP. of Jan. 9, 1981.

A cash management plan can be regarded as bona fide when an institution and a depositor have agreed that the institution may use the balance in one account to offset the overdrafts in another account of the same or a related depositor, even though such an agreement is not incorporated in writing, and where some bona fide cash management purpose is served. While a written agreement is not required, there should be some indicia of this purpose that can be referred to in order to demonstrate the bona fide nature of the arrangement. Staff does not believe that a bona fide cash management purpose is served when an institution nets a depositor’s multiple accounts after an overdraft occurs in one of those accounts merely to reduce its net transactions accounts. Of course, it should be recognized that, depending on the nature and extent of any cash management plan, sound banking practice may require that the institution’s authority and responsibility be documented. This is especially true when overdrafts occur through a prearranged credit authorization and are not covered by positive balances on hand. STAFF OP. of April 1, 1981.

A question has arisen regarding the applicability of Regulation D to instruments issued by savings and loan associations but drawn against a servicing bank. The payment instruments serve purposes similar to officers’ or cashiers’ checks, but they are drawn on a bank other than the selling institution, which remits proceeds of the sales periodically to the drawee bank. Depository institutions have been advised that when an institution issues checks or drafts drawn on an account at a correspondent bank and remits funds either periodically or when advised that the checks have been presented, the amount of the checks represent an amount due to another depository institution (see 2-306.7). Although section 204.2(b)(2) of Regulation D provides that a check or draft drawn by a depository institution on another depository institution is not a demand deposit of the drawer, that rule applies only when the check or draft is drawn against a positive balance at another institution, since such a draft would properly represent a reduction in an asset account. However, in arrangements such as that described, a depository institution is regarded as having issued a reservable liability until it reimburses its correspondent.

Carryover deficiencies of reserves in a depository institution cannot be met by the use of excess vault cash. Section 204.3(c) and (h) of Regulation D reveal the Board’s intent to distinguish between vault cash and reserve balances maintained by the institution at the Reserve Bank. In addition, vault cash does not constitute a reserve balance within the meaning of Regulation D, and the 2 percent carry over provision does not apply to excess vault cash.

Two reserve maintenance options exist for a correspondent passing through required reserve balances of respondents whose main offices are located in the same Federal Reserve territory as its own main office. A correspondent may maintain such balances, along with its own required reserve balances, in a single commingled account at the Federal Reserve Bank office in the territory where its main office is located, or it may maintain in a separate commingled account the required reserve balances passed through for respondents whose main offices are located in the same Federal Reserve territory as the correspondent’s main office.

A bank holding company established an interbank funds-management arrangement for its subsidiary banks under which banks with net transaction-account balances in excess of $41.5 million, which is currently the cutoff for the low reserve tranche, “transferred” funds in excess of that amount to affiliate banks with net transaction account balances of less than $41.5 million. The transfers were accomplished through federal-funds sales to the smaller institutions. The large banks received compensation for funds transferred to the smaller banks at what the holding company determined was the market rate of interest paid by the smaller banks on the funds received. The transferring banks then treated the amounts due from the transferee banks as balances subject to immediate withdrawal due from other depository institutions and deducted them from their gross transaction accounts. The purpose of these transactions was to reduce the overall reserve requirements for the holding company’s subsidiary banks.

A bank’s liability to another bank may be classified as “other borrowings” rather than “deposits” for the purposes of Regulation D, unless such liabilities are recognized by the parties as “deposits.” STAFF OP. of Oct. 15, 1969.

A participation in a pool of assets does not constitute a deposit as long as the purchaser relies on the underlying assets within the pool for payments of interest and principal. However, if the bank has the primary legal obligation to pay either the interest or principal out of its own funds, the participation is a deposit. A participation is usually a deposit liability if the purchaser, by having placed funds with the bank either for a specified time or for an indefinite time to be determined by the purchaser, has the right to require the bank to repurchase the participation. The bank’s obligation to repay the customer a sum certain at the maturity date is the type of obligation contemplated by the terms “promissory note” and “acknowledgment of advance,” which are included in the definition of “deposit.” If the bank’s reservation of the right to repurchase serves the same binding function and is being so used, Regulation D would apply. STAFF OP. of May 27, 1971.

The term “federal funds” is used generally to refer to obligations of a member bank that are exempt from Regulation D reserve requirements. Such obligations are exempt if issued to or undertaken with respect to, and held for the account of, a bank or a domestic banking office of a bank. A member bank may not purchase federal funds from a trust company engaged solely in trust business, since the obligation would not be held for the account of a bank or domestic banking office of another bank. Rather, the obligation would be held for the beneficiaries of the trust accounts, who are generally individuals and corporations. Accordingly, obligations of a member bank issued to a second bank are not exempt from reserve requirements if the second bank is acting as a trustee for various trust accounts and the funds used represent funds of these trust accounts. STAFF OP. of Feb 17, 1976.

Mortgage-backed securities do not give rise to a deposit liability if a bank’s exposure to loss is limited to no more than 10 percent of a pool of high-quality, conventional, one- to four-family mortgages and the bank maintains an adequate reserve for losses. A bank’s commitment to advance funds, which is intended to maintain a regular flow of scheduled payments to certificate holders rather than to insure against losses, does not entail a greater risk of loss than is permissible. In order to give investors an explicit understanding of a bank’s liability associated with the securities, the certificate should prominently disclose (1) that the securities are not liabilities of, nor guaranteed by, the bank or a subsidiary mortgage service company; (2) that the securities are not deposits and are not insured by the FDIC or any government agency; and (3) that the bank’s liability for the full timely payment of interest and principal is limited by the terms of the agreement to advance funds, which terms should be clearly set forth. STAFF OP. of Dec. 4, 1979.

Authority: 12 CFR 204.2(a)(1)(ix).

A depository institution proposes to enter into an arrangement in which an underwriter will either purchase industrial development revenue bonds in the depository institution’s possession and sell them to third parties as underwriter or market the bonds as agent of the institution. The selling institution will also arrange for an insurance policy for the bonds sold which provides that the insurance company will guarantee, in full, payment of principal and interest to the purchasers; the depository institution will pay the policy premium and will indemnify the insurance company for any payments made under the policy. The purchasers will be unaware of the fact that the bonds were previously part of the depository institution’s portfolio and will not have rights against the depository institution if the insurer does not make the necessary payments. The nature of this transaction is substantially identical to that of an indorser or guarantor and, thus, is a conditional liability that need not be classified as a deposit for purposes of Regulations D and Q. STAFF OP. of Oct. 28, 1980.

The exemption from reserve requirements for eligible acceptances under section 204.2(a)(1)(vii)(E) of Regulation D also should be regarded as applicable to dollar exchange acceptances described in paragraph 12 of section 13 of the Federal Reserve Act. STAFF OP. of Jan. 15, 1981.

When proceeds from a promissory note issued by the nonbank affiliate of the commercial bank are used by the affiliate to repay its outstanding loan with the bank, those funds are not regarded as funds being supplied by the affiliate to the bank for the purpose of being used in the banking business (i.e., lending and investment activities) or to maintain the availability of such funds for that purpose. Thus, these proceeds would not be regarded as deposits under section 204.2(a)(1)(v) of Regulation D.

Banker’s acceptances issued to finance domestic storage of diesel engines and parts do not meet specifications regarding eligibility for discounts by Federal Reserve Banks. The creation, discount, and sale of such acceptances would produce an obligation that would be a deposit for purposes of the reserve requirement of Regulation D. STAFF OP. of Dec. 18, 1981.

A U.S. bank proposed that its foreign branch aggregate individual banker’s-acceptance transactions and issue a draft in its own name on behalf of the foreign branch’s customers. The draft would be accepted and discounted by the U.S. bank. The fact that the U.S. bank and the foreign branch are part of the same entity does not change the economic reality of the transaction. In addition, the character of the underlying acceptances aggregated by the foreign branch involving the importation or exportation of goods should carry through to the acceptance issued by the U.S. bank. STAFF OP. of Jan. 27, 1983.

Overnight unsecured loans by a bank holding company to its subsidiary banks to help the banks adjust their reserve positions are deposits under Regulation D. Included within the definition of “deposit” is “any liability of a depository institution on any promissory note, acknowledgment of advance, banker’s acceptance, or similar obligation (written or oral), including mortgage-backed bonds, that is issued or undertaken by a depository institution as a means of obtaining funds.” The Board also regards funds supplied from nondepository affiliates to depository institutions, even if not in the form of a direct obligation, as deposits. Accordingly, overnight loans by a bank holding company to its bank subsidiary are deposits and, given their maturity of less than 14 days, subject to transaction-account reserve requirements. STAFF OP. of May 4, 1983.

The question has arisen whether certain tax-exempt bonds sold by a member bank and held in its investment and loan portfolio are reservable deposits when the assets are guaranteed in some manner by the bank. The bank proposes in some of these sale transactions to issue a letter of credit that the purchaser may draw upon if the bond issuer defaults. In certain other cases, the bank proposes to sell the bonds subject to a put option that would permit the purchaser to put the bond back to the bank at a stated price on a specified date or dates.

A domestic bank proposes to create a banker’s acceptance on behalf of a U.S. branch or agency of a foreign bank that would cover a trade transaction involving the shipment of goods from one foreign country to another. Reserve requirements do not apply to banker’s acceptances of the type described in section 13, paragraph 7 of the Federal Reserve Act, which includes as eligible those banker’s acceptances that “grow out of transactions involving the importation or exportation of goods” and have a maturity of not more than six months’ sight to run. The Board has determined that, for purposes of determining eligibility, acceptances arising from transactions involving shipments between two foreign countries grow out of transactions involving the importation or exportation of goods (1916 Fed. Res. Bull. 532).

A bank inquired whether two different loan participation sales subject to certain repurchase arrangements are deposits under Regulation D. Under the first arrangement, the bank would be unconditionally obligated to repurchase the loan participation on a designated date prior to the maturity of the loan. If the borrower defaulted during the term of the participation, the purchaser of the participation would bear the risk of loss on the portion of the loan conveyed through the participation.

The question has arisen whether portions of a banker’s acceptance meet the eligibility criteria of section 13, paragraph 7 of the Federal Reserve Act if the entire acceptance meets the eligibility criteria. The transaction in question is as follows. Bank A creates, discounts, and resells an eligible acceptance to Bank B. Bank B then sells portions of the acceptance to Banks C and D and provides them with written confirmations of the sale. The confirmations specify the acceptance and the dollar amount of the portion being sold. The documentation is generally retained by Bank B or by another bank as safekeeping agent for Bank B. Generally, Bank B provides Banks C and D with a safekeeping receipt evidencing that Bank B is holding the acceptance as implied agent for Banks C and D.

Regulation D exempts from reserve requirements any deposit arising from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States or any agency thereof that the bank is obligated to repurchase. The Board requires that the obligation underlying the repurchase agreement by a U.S. government or agency security. Municipal obligations that are secured by a pledge or escrow of U.S. government or agency securities do not meet this criterion, because the underlying instrument remains that of the municipality or political subdivision in question. In addition, the U.S. government has not undertaken to guarantee such obligations. Therefore, repurchase agreements involving municipal obligations, even if secured by pledges of U.S. government securities, do not quality as exempt obligations under Regulation D, and they would be subject to reserve requirements. STAFF OP. of May 17, 1982.

Authority: 12 CFR 204.2(a)(1)(vii)(B).

An obligation issued by a depository institution to entities within the Farm Credit Administration (Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives) is eligible for an exemption considered to be equivalent to the interbank exemption from reserve requirements. Although the Federal Land Bank, Federal Intermediate Credit Bank, and Bank for Cooperatives do not appear to be “depository institutions” as this term is defined in section 204.2(m)(1) of Regulation D, these entities are federally chartered instruments and therefore may be regarded as “the United States government or an agency thereof” for purposes of section 204.2(a)(1)(vii)(A)(2) of Regulation D. STAFF OP. of Nov. 12, 1982.

The Federal National Mortgage Association (FNMA) offers a servicing arrangement in which the lender pays FNMA a 25-basis-point guaranty fee. Under this plan, the lender remains liable for losses on mortgage defaults and FNMA is liable if the lender defaults. A member bank that holds a FNMA participation certificate under such a servicing arrangement bears the risk of loss in connection with the pool of mortgages underlying the obligation because it would be required to absorb any losses resulting from defaults by mortgagers. Thus, the issue arises whether the bank’s risk of loss on the underlying mortgage is such that a repurchase agreement issued against such a security would be subject to reserve requirements.

When a depository institution issues a due bill with a maturity of less than three days and has no intention of collateralizing the due bill or of attempting to purchase the described security, the transactions cannot legitimately be regarded as due bills and should be regarded as deposits for purposes of Regulation D. Such transactions constitute devices to avoid reserve requirements. STAFF OP. of Jan. 14, 1983.

Authority: 12 CFR 204.2(a)(1)(iv).

Any obligation of a depository institution arising from a transfer of direct U.S. government obligations or those fully guaranteed as to principal and interest by the U.S. government or its agencies, that the depository institution is obligated to repurchase, is not a deposit for purposes of Regulation D. A company asked whether certain obligations may be regarded as obligations of the United States, and thus whether repurchase agreements issued on them would be classified as deposits.

The interbank exception of section 204.2 (a)(1)(vii)(A)(1) of Regulation D does not apply in the case of a certificate of deposit issued either to another U.S. depository institution or to the U.S. agency of a foreign bank located in the United States. Generally, exceptions specified in section 204.2(a)(1)(vii) apply only to the types of deposits covered by that subparagraph and not to other types of deposits that are specifically described in other subparagraphs of section 204.2(a)(1). A certificate of deposit, identified as such, and issued by one depository institution to another is specifically described in section 204.2(a)(1)(i). Consequently, a certificate of deposit is a deposit upon which reserves must be maintained and does not fall within the interbank exception specified in section 204.2(a)(1)(vii)(A)(1).

Any portion of a repurchase transaction that exceeds the market value of the securities at the time of the sale by the bank does not qualify as a repurchase transaction excepted from the definition of “deposit” under section 204.2(a)(1)(vii) of Regulation D. The repurchase exception is intended to apply only to bona fide transactions; otherwise, there would be nothing to prevent a bank from engaging in a $50 million “repurchase transaction” on the basis of a $1,000 security. That result was not contemplated in Regulation D. There is no bona fide transaction to the extent the market value of the securities transferred by the bank at the beginning of the transaction is less than the price the customer paid for the securities. For example, if a bank exchanges government securities that, for purposes of the transaction, are valued at $1 million even though their market value is only $800,000 (with a commitment to repurchase the securities for $1 million on the next day), then $800,000 would qualify for the repurchase exception, and $200,000 would be a deposit under Regulation D. STAFF OP. of December 13, 1991.

A deposit in a foreign branch made by a foreign bank, payable as a matter of right only outside the United States, is exempt from Regulations D and Q whether the foreign bank is acting as undisclosed principal for a U.S. individual or corporation, for a controlled foreign subsidiary of a U.S. corporation, or for a foreign national. STAFF OP. of July 29, 1970.

The trust department of a bank places trust cash in a non-interest-bearing time deposit at the bank’s Nassau branch. Funds placed in the Nassau branch are not subject to reserve requirements and create a greater credit for the trust department than funds deposited with the bank’s U.S. offices, which are subject to reserves. There is no written agreement between the Nassau branch and the trust department for this arrangement, and funds deposited have a one-day maturity.

A bank proposed to issue, in New York City, certificates of deposit that would be payable at a branch of the bank outside of the United States. No provision in Regulation D or Q requires that a certificate of deposit be physically issued outside of the United States in order to qualify for the exemption from the reserve requirements and interest limitations. The only requirement is that the deposit be payable only at an office outside the United States, as defined in section 204.2(t). STAFF OP. of March 21, 1983.

Reserve requirements do not apply to an obligation that is payable only at an office located outside the United States. This exemption is intended principally to enable foreign branches of U.S. banks to compete on a more equal basis with other banks in foreign countries in accordance with the laws and regulations of those countries. A customer who makes a deposit that is payable solely at a foreign office assumes the risk that the foreign country might impose restrictions on withdrawals. A U.S. bank inquires whether a certificate of deposit issued by a foreign subsidiary but guaranteed by the U.S. bank to be payable in the United States is a reservable obligation of the U.S. bank even though the U.S. bank does not receive any funds for use in its banking business.

A foreign branch of a domestic depository institution proposes to have its foreign branch issue time deposits for which a U.S.-based collection agent would be appointed and asks whether the deposit is exempt from reserves.

Outstanding extensions of credit from non-U.S. offices of U.S. depository institutions or Edge or agreement corporations to U.S. residents are regarded as Eurocurrency liabilities subject to a 3 percent reserve requirement. An exemption from reserve requirements on Eurocurrency liabilities is requested for a transaction that involves loans by foreign branches of U.S. banks to a U.S. company that in turn, under a credit agreement, lends the proceeds of the loans to a foreign company with operations solely outside the United States. The sole business of the borrower is to provide funding to the foreign company through remitting either the proceeds of such loans or the proceeds of commercial paper issued in the United States. The transaction allows the foreign company to obtain a more favorable interest rate on commercial paper borrowings from U.S. sources.

An IBF time deposit held by a non-U.S. resident may consist of funds used only to support the depositor’s operations outside the United States. A depositor’s personal investment activities could be regarded as operations under these provisions. Thus, an IBF could offer an IBF time deposit to an individual who is not a U.S. resident if the account represents funds that will be used solely to support personal investment activities outside the United States. STAFF OP. of Nov. 19, 1981.

Under a proposed arrangement, the Cayman Islands branch (“branch”) of a bank intends to transfer to the bank’s IBF a 100 percent participation in each of certain advances and commitments termed “identified credits.” The IBF would credit an account of, or otherwise pay to, the branch an amount equal to the aggregate outstanding principal balance of the identified credits that had been advanced and would agree to make available to the branch for disbursement to the borrowers all amounts required to be advanced pursuant to commitments to make loans. The branch would pay over to the IBF all amounts received from each borrower in connection with the identified credits (except for interest accrued to the date of the participations) but would have no obligation to the IBF should any borrower default. In addition, the letter states that “borrowers will not be notified that such participations have been made.”

Under the IBF regulation (12 CFR 204.8), a non-New York IBF could receive loan payments through a New York banking office by having an account with its establishing entity for settlement purposes and having the syndicated loan made through an account maintained by the establishing entity at a New York banking office such as an affiliated Edge corporation. Current rules would prohibit non-New York IBFs from maintaining a settlement account with a New York IBF (such as the IBF of the establishing entity’s New York Edge corporation), because IBFs are not permitted to offer demand deposit accounts. However, the Legal Division believes the following procedure is consistent with the regulations for IBFs and operationally would facilitate loan syndications of IBFs.

As long as the bank fully discloses the fact that it is not guaranteeing the interest rate on IRA deposits once a depositor reaches age 59½, and the depositor agrees to the terms, the bank may change the interest rate on IRA deposits at any time, so long as the change is consistent with the deposit agreement. The exception from the imposition of the early withdrawal penalty is permissive. Since a member bank is not compelled to pay IRA funds prior to maturity, it need not necessarily consider the funds to be immediately available to the depositor. Consequently, a bank may impose restrictions on the manner in which IRA funds are withdrawn by the depositor who reaches age 59½ or becomes disabled. From an operational standpoint the bank may maintain IRA deposits in any form it wishes as long as the funds are properly reported on all the bank’s financial and reporting statements as time deposits with a specified maturity and as long as the bank continues to observe the terms of the IRA deposits agreement (e.g., annuity-like payments). STAFF OP. of March 9, 1977.

It is not appropriate to permit penalty-free withdrawals when IRA funds are being rolled over in accordance with IRS provisions, because such withdrawals could cause destabilizing shifts of funds among financial institutions. Since, under IRS regulations, a person may have more than one IRA as long as the total annual contribution does not exceed the statutory limit, the above policy should not hamper individuals. An individual who intends to move to a different geographical location or join another qualified pension plan may leave existing IRA funds with the first institution and transfer them upon maturity. STAFF OP. of March 10, 1977.

If a bank, in accordance with the deposit agreement, wants to terminate its IRA program for administrative reasons, application of the early withdrawal penalty is not required. Since it is likely that IRA participants would roll their deposits over to another depository institution in view of the substantial tax penalty that would be imposed for a premature distribution, depositors would not be receiving funds for a general use. STAFF OP. of Feb. 23, 1979.

Computation of the actual penalty for early withdrawal of an IRA or Keogh time deposit depends initially on whether each deposit in the account resets the maturity of the entire account or whether each deposit has a separate maturity. Assuming that each deposit resets the maturity of the account, all interest earned by and credited to the account could be paid without the imposition of a penalty for early withdrawal. If each deposit has a separate maturity under the terms of the account, the bank could pay penalty-free interest earned on each deposit for the specific maturity period. If the maturity period for the deposit has lapsed and either the interest rate on or maturity period of the renewal term is different, interest on the deposit may not be paid penalty-free, since it would be included as part of the principal in the account.

The early withdrawal penalty should be imposed upon premature withdrawal of excess contributions to IRAs. To permit an exception to section 204.2(c) might encourage individuals to overcontribute to an IRA with the knowledge that they would be permitted to withdraw any excess contribution without penalty. A member bank may, however, agree to transfer funds held pursuant to, or overcontributed to, another account of the depositor, so long as the maturity of the deposits in the second account is the same as, or longer than, the maturity of the original deposit. No opinion is expressed on whether such transfers are permissible under applicable IRA laws and regulations, which may impose other, unrelated penalties. STAFF OP. of Jan. 21, 1980.

A member bank may pay all or a portion of IRA time deposit funds before maturity without penalty when the participant attains age 59½ or is disabled. The regulation does not require that the withdrawal constitute a “distribution” under the IRC and IRS regulations. While some sophisticated IRA participants may be able to use the early withdrawal exception to obtain higher interest rates, such a practice is not widespread nor otherwise a threat to the competitive balance between depository institutions. In any event, the member bank always has the right to structure the terms of the IRA agreement to be more restrictive than Board regulations. STAFF OP. of Feb. 7, 1980.

A member bank is not required to impose an early withdrawal penalty for premature withdrawals from an IRA account after the depositor reaches the age of 59½. Withdrawal may be in the form of a lump sum payment or periodic annuity-like payments to the depositor. However, if the money withdrawn is reinvested in a non-IRA time deposit, a member bank must impose the appropriate penalty if the reinvested money is withdrawn prior to maturity. STAFF OP. of Dec. 22, 1981.

Authority: 12 CFR 204.2(c).

The question was raised whether a bank may waive the penalty for early withdrawals of excess contributions to an IRA when the depositor is 59½ years of age or older or is disabled. Depository institutions may waive the early withdrawal penalty with regard to an IRA or a Keogh plan when the depositor attains age 59½ or is disabled. Although excess contributions to an IRA are not considered part of the IRA for tax-deduction purposes, the depository institution may nevertheless waive the early withdrawal penalty for excess contributions if the depositor is 59½ years of age or older or is disabled. Insofar as depository institutions are concerned, the balance of an IRA deposit are “funds contributed to an individual retirement account.” Further, in view of the substantial deregulation of interest rate ceilings in the past year, it is unlikely that depositors would regularly make excess contributions to IRAs in an attempt to circumvent interest rate ceilings or avoid possible early withdrawal penalties. In addition, requiring the imposition of an early withdrawal penalty on excess contributions could affect the asset flexibility of IRA participants and have an adverse effect upon the objective of encouraging individuals to save for their retirement. Consequently, little purpose would be served in requiring that withdrawals of excess contributions to an IRA be treated differently than withdrawals of regular contributions to an IRA. STAFF OP. of June 15, 1984.

Deposits of governmental units such as states and political subdivisions are considered nonpersonal time deposits subject to reserve requirements under Regulation D because the beneficial interest of public funds is not held solely by natural persons. STAFF OP. of Sept. 26, 1980.

Deposits held under a capital equivalency deposit agreement established pursuant to section 4(g) of the International Banking Act are not personal time deposits and are subject to federal reserve requirements. STAFF OP. of Oct. 7, 1980.

A depository institution proposes to make an annuity program available to its customers. Under the program, an insurance company will issue annuity contracts to owners of deposit instruments issued by the institution. The deposit instruments will fund the annuity contract and will be re-registered in the name of the insurance company in an account at the institution. The records will reflect the beneficial interest of the annuitant, and a contract owner has rights only with respect to the assets allocated to his or her contract. The deposit accounts underlying the annuity contracts could be regarded as time deposits in which the entire beneficial interest is held by natural persons. STAFF OP. of Nov. 19, 1980.

Authority: 12 CFR 204.2(c)(1), (e), and (f)(1).

Staff has reviewed the status of funds of Indian tribes as nonpersonal time deposits under Regulation D. Funds held in a fiduciary capacity for the sole benefit of one or more individuals may qualify as personal time deposits under section 204.2(g) of Regulation D if the specific individuals’ interests in the funds are clearly identifiable; however, funds held in trust for various Indian tribes are not funds of individuals but rather are equivalent to funds of governmental units. In this connection, the Supreme Court has ruled that “Indian tribes are ‘distinct independent political communities, retaining their original natural rights’ in matters of local self-government.”¹ As an analogy, it can be argued that funds of state and local governmental units are held for the “sole benefit of natural persons” in that the purpose of any governmental unit is to provide services and benefits for all the persons residing therein; however, such persons do not have any specific, identifiable interest in the governmental funds that they shall be entitled to claim at some future time. Similarly, based on general information about the nature of tribal trust funds, it does not appear that individual members of any given tribe have identifiable interests in funds held in trust by the Bureau of Indian Affairs.² Rather, individual Indians have what might be described as an inchoate interest in tribal funds. Consequently, funds held in trust by the Bureau of Indian Affairs for various Indian tribes must be treated as nonpersonal time deposits for purposes of Regulation D. STAFF OP. of Oct. 30, 1981.

A husband and wife operating a profit-making business as individuals, but not as a partnership or other financial business organization, may maintain a NOW account at a member bank, since it is impracticable to distinguish between funds that are used in their business and other funds of those individuals. STAFF OP. of Jan. 23, 1979.

Agencies of a foreign government may not maintain NOW accounts, because the beneficial interest in their funds remains with the foreign government, which is organized primarily for foreign government purposes. A consulate or embassy of a foreign government may not maintain NOW accounts, because the beneficial interest in the funds deposited by such consulates is with the government it represents. Federal law (12 USC 1832(a)) provides that only domestic governmental units are eligible to maintain NOW accounts. Similarly, U.N. officers (embassy staff) may not maintain NOW accounts if the funds deposited are funds of the United Nations or funds in which any beneficial interest is held by the United Nations, because the primary purpose of the organization is not charitable, fraternal, or educational (even though an element of a fraternal purpose is evidenced by the charter). STAFF OP. of March 5, 1979.

Professionals operating on an unassociated basis are among the class of depositors eligible to maintain NOW accounts, since it is impracticable to distinguish between funds used in their individual and business capacity. Professionals operating as partnerships or corporations, however, are not eligible, since Congress intended that NOW accounts be made available only to individuals, and funds of such business organizations would always be used for business purposes. STAFF OP. of May 1, 1979.

Authority: 12 CFR 204.130.

The question has been raised whether attorney trust funds may be deposited in interest-bearing NOW accounts at member banks when the funds are maintained under the interest on lawyer trust account (IOLTA).

A husband and wife partnership is not eligible to maintain a NOW account at a member bank. Eligibility for NOW accounts is established by 12 USC 1832(a), which authorizes institutions to offer NOW accounts. Paragraph (2) of that section specifically excludes for-profit partnerships. Although a husband-and-wife for-profit partnership cannot maintain a NOW account, a husband and wife are permitted to maintain a joint NOW account for their nonpartnership purposes. STAFF OP. of Oct. 16, 1986.

Embassies of foreign governments are not eligible to maintain NOW accounts at member banks under Board interpretation 12 CFR 204.130 (at 2-275). That interpretation states that governmental units are generally eligible to maintain NOW accounts at member banks and is based on the statute authorizing depository institutions to offer NOW accounts (12 USC 1832(a)).

A question was raised about the legality of a depository institution’s establishing a NOW account to hold trust funds for a law firm other than under the programs known as interest on lawyer trust accounts (IOLTAs) described in 2-341.12. This proposed account would be established in the name of the law firm that is a partnership composed of professional associations. The law firm would have an interest in approximately 35 percent of the deposited funds, but interest earned on the funds would inure to the benefit of clients of the firm, and these clients would all be natural persons.

Department of Education regulations concerning student loan programs require participating institutions to set up a Perkins Loan Fund containing student loan monies, which must be maintained in interest-bearing accounts. The participating institution does not have the right to receive any of the income generated by assets in the account, which remain the property of the loan fund. Income from the account is considered to be held in trust for the Department of Education, and the account holder is not taxed on that income.

A question was raised about the eligibility of single-member limited liability companies (SMLLCs) to maintain a NOW account. Section 1832 of title 12 of the U.S. Code authorizes depository institutions (as defined in that section) “to permit the owner of a deposit or account on which interest or dividends are paid to make withdrawals by negotiable or transferable instruments for the purpose of making transfers to third parties” (12 USC 1832(a)). This authorization extends, however, only to certain accounts or deposits, namely those “which consist solely of funds in which the entire beneficial interest is held by one or more individuals or by an organization which is operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes and which is not operated for profit, and with respect to deposits of public funds by an officer, employee, or agent of the United States, any State, county, municipality, or political subdivision thereof, the District of Columbia, the Commonwealth of Puerto Rico, American Samoa, Guam, any territory or possession of the United States, or any political subdivision thereof” (12 USC 1832(b)). In summary, section 1832 authorizes depository institutions to offer interest-bearing checking accounts to individuals, certain nonprofit organizations, and domestic governmental units.

See 2-343.1.

A savings account is often used as a vehicle for a Totten trust, a tentative, revocable trust that is created by the deposit of one’s own money as a trustee for another with a presumption that title passes on the death of the trustee. The question has arisen whether the money market deposit account (MMDA) is suitable for use as a Totten trust in the same manner as a regular savings account. Regulation D treats an MMDA as a type of savings account, and Board staff is aware of no federal law that would prohibit the use of an MMDA as a vehicle for a Totten trust. However, private counsel should be consulted to determine whether, under state law, an MMDA is an appropriate vehicle by which to establish a Totten trust. STAFF OP. of April 7, 1983.

The question has arisen whether an arrangement whereby a depository institution sends an employee to a customer’s place of business to receive authorization to make a transfer from the MMDA to another account of the depositor at the same institution would be regarded as a transfer subject to the limit of six preauthorized or automatic transfers per month. Such transfers are regarded as preauthorized transfers and therefore subject to the six-per-month limitation. STAFF OP. of June 27, 1983.

A bank offers an account arrangement in which a corporation opens a zero-balance checking account and a money market deposit account (MMDA). At the same time, the corporation enters into a messenger agreement and authorization with a messenger service and the bank. The messenger service is not owned or controlled by, or otherwise affiliated with, the bank. Under the messenger agreement, the corporation authorizes the messenger to deliver to the bank instructions to make transfers from the corporation’s MMDA to its checking account. The authorization also indicates that the messenger is authorized to receive information confirming transactions from the bank and transmit it to the customer. The bank absorbs the expense associated with the messenger service.

A bank proposes to offer MMDAs and to provide overdraft protection on these accounts under an arrangement by which the bank will transfer funds into the accounts to cover debits against the accounts in excess of the account balances. Transfers out of each MMDA will be restricted to not more than six per month.

Regulations of the Department of Transportation specify that a “depository agreement” must be executed among a bank, an air carrier, and a tour operator and must provide for the return of funds to charter-flight participants if certain conditions are not met. A bank proposes to place the escrowed funds attributable to each tour operator in one money market deposit account (MMDA) per operator. Each tour operator may have 20 to 30 charter trips scheduled over a given period and will need to make at least three withdrawals by telephone transfer or by check per trip. Several of the 20 to 30 charter trips will be scheduled to depart each month, thus necessitating more than six transfers from each MMDA monthly.

A depository institution proposes to offer a money market deposit account (MMDA) monitored to discourage withdrawals or transfers in excess of those permissible for MMDAs. The monitoring system would look to consecutive months in which there were transfer violations. After the first month in which there were excess transfers, the institution would send a letter reminding the customer of the transfer limit and informing the customer that the limit was exceeded. If excess transfers were made during the next month, the institution would send a letter informing the customer of the violation and stating that continued violation would result in elimination of the transfer capacity or conversion of the account to a checking account. If the depositor exceeded the transfer limit for a third consecutive month, the institution would send a letter informing the customer that the account has been converted to a transaction account.

The question was raised whether the use in retail outlets of electronic terminals that authorize transactions, including the disbursement of cash by the retail outlets, would result in withdrawals from an automated teller machine (ATM) rather than third-party transfers by debit card, particularly under section 204.2(d)(2) of Regulation D.

A bank proposes to compile monthly reports of customers who had excessive money market deposit account transactions the previous month, notify customers by letter regarding those excessive transfers, and close any account if the transfer limits were violated during four consecutive months.

A bank proposes to offer a money market deposit account (MMDA) arrangement in which deposits would be placed in the MMDA from various sources but daily transfers would be made to a commercial checking account of the customer. Instructions to make the transfer and instructions on third-party payments to be made from the checking account would be transmitted to the bank by facsimile machine.

The question has arisen whether transfers from a savings deposit to cover overdrafts on a checking account are subject to the three-check or six-transfer limit of Regulation D. If a deposit or account is maintained in connection with an overdraft arrangement under which transfers are made from a savings deposit to a transaction account to cover checks presented to the depository institution that exceed the balance in the account as those checks are presented, the transfers are subject to the six-transfer limit. On the other hand, if transfers are made from a savings deposit to repay prior credit that was extended by the bank to pay checks drawn on a transaction account, the transfers should be considered transfers to repay loans from the bank. In the former case, the use of the savings-deposit balance as a substitute for a transaction-account balance is effectively limited by the six-transfer limit. However, in the latter case, the savings-account balance could be a substitute for the transaction-account balance because the bank imposes no limit on the transfers to repay loans from the institution. Thus, overdraft-protection arrangements involving extensions of credit must be reviewed to determine whether the savings accounts should be considered transaction accounts.

A depository institution proposes the following system to monitor and enforce the transfer limits imposed on savings deposits. Whenever one to four transfers over the monthly maximum have occurred, a first notice would be sent to remind the customer of the prohibition against excess transfers or withdrawals. A second notice containing a strong message that excessive transfers or withdrawals will result in conversion of the account to a non-interest-bearing transaction account would be sent whenever any of the following occurred: five to fourteen transfers over the maximum in any month; three to four transfers over the monthly maximum in any two months out of the past 12 months; or three first notices in any 12-month period. Finally, if four first notices in any 12-month period or three second notices in a 12-month period have been sent, or if 15 or more transfers over the monthly maximum in any one month have been made, the depository institution would review the 12-month account history, including an averaging test, to determine whether there has been an attempt to evade the transfer limits. The depository institution would examine the average number of transfers per month to determine if the excess transfers result from the lack of customer control over the timing of negotiation of the checks or drafts (“bunching”). If the review does not reveal lack of intent to evade, or extenuating circumstances, then the depository institution would give third and final notice that the account had been converted to a non-interest-bearing transaction account.

The question has arisen whether a check that is deposited into a savings account and subsequently returned and charged back against the account must be considered one of the six transfers per month permitted under Regulation D.

Several questions have arisen concerning the transfer limits on savings deposits in section 204.2(d)(2) of Regulation D. Although the questions refer to savings and money market accounts as separate types of accounts, Regulation D no longer makes this distinction. (See 56 Fed. Reg. 15493 at 15494, April 17, 1991.)

A bank is free to impose a greater penalty for the withdrawal of time deposits before maturity than that prescribed by Regulation D, as long as the actual penalty is clearly brought to the attention of the depositor upon creation of the deposit agreement. STAFF OP. of Jan. 27, 1975.

An escrow account for tax and insurance premiums in which the entire beneficial interest is held by one or more individual mortgagees who qualify in their own right to hold a NOW account or a personal time deposit may qualify as such an account or deposit. STAFF OP. of May 1, 1975.

If a member bank transfers the assets and liabilities (including its certificates of deposit) of one of its branches to a newly chartered banking institution, the transfer of deposits does not constitute an early withdrawal of time deposit funds, and no early withdrawal penalty should be imposed so long as new certificates are issued on the same terms and conditions as the original certificates (that is, at the same rate of interest and maturity). It is appropriate, however, for the member bank to inform the depositors affected that they are under no obligation to exchange their certificates for newly issued instruments. In addition, the depositors should be notified that the early withdrawal penalty would be applied if they were to redeem their deposits prior to maturity, since a new certificate would represent only a change in the obligor of the instrument, and not a change in any of the terms, including the maturity and interest rate payable. STAFF OP. of Dec. 14, 1978.

The beneficiary of a “Totten trust” does not qualify as an “owner” for the purposes of the death exception to the early withdrawal penalty rule. “Owner” is defined as any individual who at the time of his or her death has either full legal title or beneficial title to all or a portion of the funds and full power of disposition and alienation with respect thereto. Under a “totten trust,” the beneficiary acquires legal title to the deposit only upon the unequivocal act or declaration of the grantor during his or her lifetime. In the absence of either of these events, the trust is tentative since the grantor has the power to revoke the trust at will, and the beneficiary lacks full power of disposition and alienation with respect to any portion of the funds. STAFF OP. of Aug. 3, 1979.

Authority: 12 CFR 204.2(c).

State law determines who is owner of time deposit funds, whether named or unnamed. Under the death exception to the early withdrawal penalty rule, a bank should require reasonable assurance that, at the time of his or her death, an individual qualified as an owner of the funds under state law, within the regulatory definition of the term “owner.” To facilitate determination of ownership, when the time deposit is established, the bank may wish to obtain from a depositor a statement concerning whether or not there are other owners. STAFF OP. of Dec. 9, 1977.

Authority: 12 CFR 204.2(c).

A time deposit would not be regarded as transferable if the depository institution added the name of another natural person to the deposit of a natural person in order to create joint ownership, as long as the transaction takes place on the books of the depository institution. STAFF OP. of Sept. 25, 1980.

A member bank is not required to apply the early withdrawal penalty prescribed in section 204.2 of Regulation D if the time deposit has renewed automatically after the death of the original depositor and title to the time deposit had passed automatically to the depositor’s surviving spouse. However, if at the maturity of the deposit, the owner’s heir or representative has reinvested the funds in a deposit with a maturity that varies from the maturity of the original deposit, the heir or representative is no longer able to request a penalty-free early withdrawal, because he or she has consciously chosen to change the nature of the decedent’s interest, and the new time deposit can therefore no longer be regarded as that of the decedent. STAFF OP. of April 8, 1981.

A member bank cannot agree in advance to pay a time deposit before maturity. STAFF OP. of Dec. 19, 1978.

Time deposits on which no interest is earned are not inappropriate per se. However, such time deposits should be carefully monitored in view of the opportunity for an institution to avoid or reduce required reserves by classifying funds otherwise subject to the higher reserve requirements of a demand deposit as a zero-interest-rate time deposit. A time deposit on which no interest is paid is subject to the provisions of Regulation D concerning payment before maturity. Since the early withdrawal penalty is a function of the interest rate being paid on the deposit, application of the early withdrawal penalty provides no disincentive to early withdrawal and, in fact, permits the time deposit to function as a demand deposit. Therefore, time deposits on which no interest is paid may not generally be paid before maturity unless one of the mandatory exceptions to the early withdrawal penalty is applicable. STAFF OP. of June 4, 1981.

The rule, formerly in section 217.4(f) of Regulation Q, requiring that the rate charged by a member bank on a loan to a depositor secured by the depositor’s time deposit must be no less than 1 percent in excess of the rate paid on the deposit, was rescinded by the Board effective April 1, 1986. Nevertheless, in certain circumstances, making a loan secured by a time deposit within six days after the date the deposit is opened, rather than assessing a penalty for an early withdrawal, might be considered an evasion of the reserve requirements of Regulation D—for example, if the depositor and the institution agree that the deposit will be withdrawn on the seventh day and used to pay off the loan. STAFF OP. of July 29, 1986.

The presence of certain call provisions in a contract for a nonpersonal time deposit with a maturity of 18 months or more would not necessarily require the certificate of deposit to be classified as a nonpersonal time deposit with a maturity of less than 18 months.

The presence of certain put provisions in a contract for a nonpersonal time deposit with a maturity of 18 months or more would not necessarily require the deposit to be classified as a nonpersonal time deposit with a maturity of less than 18 months.

The question has arisen whether a time deposit may be used to secure a line of credit if the customer could draw on the line of credit other than by appearing at the depository institution, and whether individual draws on a line of credit would count toward the Regulation D transfer limits for savings deposits.

See IRA/Keogh.

See Nonpersonal Time Deposits.

Under the account arrangement, a single statement of account is provided for a depositor’s savings and checking accounts. Transfers from savings to checking may be made only by teller or through the use of an automated teller machine. No preauthorized or telephone transfer access to the savings account is provided. Further, a depositor is not permitted to transfer funds from savings to checking solely for the purpose of making a payment to a third party.

Savings accounts should not be regarded as transaction accounts merely because customers of subsidiary banks of a bank holding company may effect cash withdrawals from those accounts through an automated teller machine (ATM) of either the bank at which they maintain their account or an affiliated bank or because they may effect transfers of funds from a savings account to another account maintained at the same bank by using an ATM or a check-verification terminal of the bank at which they maintain their accounts. Such transactions are similar to effecting a transaction by appearing in person at an institution. STAFF OP. of Dec. 22, 1980.

Authority: 12 CFR 204.2(e).

A company offers an insurance program to and through credit unions. Under the program, a master policy is issued to the credit union, and the credit union is required by the policy to (1) remit premiums for the portion of insurance that the credit union provides to all members at no cost and (2) remit premiums on behalf of credit union members who have elected to purchase optional additional insurance. The remittance is paid quarterly to the company after the credit union is furnished with a printout listing the total due from the credit union and each of its members participating in the optional insurance. The credit union apparently is authorized by each member to deduct the optional insurance premium from the member’s share account. The credit union then transfers each such payment to its general account and then draws a single credit union draft to cover the total amount due from the credit union under the group plan and from the members under the optional plan.

A state-chartered, state-insured savings and loan association proposes a savings account in which the depositor may make withdrawals by personal transactions at the office of the association or by specific written request. The depositor may also appoint an agent, or grant a power of attorney to another person or institution authorizing the agent to make withdrawals on the depositor’s behalf. Depositors would maintain accounts at other depository institutions and name these institutions as agents with respect to the accounts maintained at the institution proposing the plan, thus allowing the agent to make transfers between the accounts at the various institutions. These arrangements would be considered a preauthorized transfer within the meaning of section 204.2(e)(6) of Regulation D because the agent institution in the proposal would represent the third party to whom payment from the depositor’s account is made. STAFF OP. of Dec. 23, 1981.

An account is not a transaction account by virtue of permitting transfers to other accounts of the depositor at the same institution through an automated teller machine (ATM) or remote service unit (RSU). Whether or not an ATM or RSU is owned by the bank at which the account is maintained does not affect these rules. Expanding the number of ATMs or RSUs at which such transactions can be effected does not result in giving customers the degree of convenience normally associated with transactions accounts. Therefore, permitting account holders to transfer funds from a savings account to another account at the same bank through an ATM or check verification terminal of an affiliated bank would not result in the savings account being regarded as a transaction account for purposes of Regulation D. STAFF OP. of Dec. 24, 1981.

Authority: 12 CFR 204.2(e)(4).

A credit union proposes to offer a plan whereby members would authorize the credit union to debit their share deposit accounts and credit their IRA accounts at the credit union with the amount debited. The credit union would effectuate the debits and credits either regularly or at least in a manner such that the member does not have to initiate each particular transaction at the time it occurs. The share account may be a transaction account under section 204.2(e)(6) of Regulation D if the depositor is permitted to make more than three such preauthorized transfers in a calendar month or statement cycle of at least four weeks. STAFF OP. of Feb. 5, 1982.

Question 3-10 of the Official Staff Commentary on Regulation E states that automatic transfers of funds from deposit accounts to pay premiums on group life insurance available only through the depository institution are bona fide intrainstitutional transfers that are exempt from the provisions of Regulation E. Since Regulations D and E serve different purposes, the fact that certain transfers are exempt from Regulation E does not mean that accounts that permit such transfers are exempt from Regulation D. While the transaction does not require application of the consumer protections of Regulation E, the nature of the transaction as a third-party payment is specifically the type of transfer which, when permitted through a deposit account, is intended to subject such an account to the reserve requirements of Regulation D. STAFF OP. of May 14, 1982.

The question has arisen whether a certificate of deposit that is tied to a line of credit equal in amount to the certificate of deposit is a transaction account if the customer may access the line of credit only by appearing in person at the bank. Because the customer may gain access to the line of credit only by appearing in person at the bank, the certificate of deposit associated with this line of credit would not be a transaction account. STAFF OP. of July 27, 1983.

Generally, transfers by a customer at an automated teller machine (ATM) from one of the customer’s accounts to another at the same depository institution, and ATM withdrawals paid directly to the customer are not counted toward the permissible number of transfers and withdrawals from ordinary savings accounts or money market deposit accounts. It does not matter whether the depository institution owns the ATM, has exclusive use of it, or shares the ATM owned by another entity. However, all transactions involving a transfer of funds from a customer’s account to the account of a third party, whether through an ATM or a point-of-sale (POS) terminal, count toward the transfer limit. It is the character of the underlying transfer (that is, whether the payment initiated by the customer is made directly to the customer or the customer’s account rather than to a third party or third party’s account) that determines whether the transfer counts in distinguishing between a savings and a transaction account. STAFF OP. of July 29, 1986.

Authority: 12 CFR 204.2(d)(2).

This digest has been revised to clarify the original staff response that a transfer from a POS terminal to a third party counts toward the transfer limit.

A bank offers an automated teller machine (ATM) access card to its consumer customers to use on a network of ATMs to perform banking transactions affecting their accounts. The card is available to any holder of any consumer deposit account to which there is ATM access, which includes holders of savings, money market deposit, checking, and NOW accounts.

A depository institution may not net overdrafts in demand deposits or other transaction accounts against demand deposits or other transaction accounts with positive balances when calculating its aggregate transaction accounts for reserve purposes. Overdrafts are properly reflected on the books of the institution as assets in the form of extensions of credit. If overdrafts in accounts could be treated as negative balances and netted against positive balances in other accounts, depository institutions would under-report and under-reserve their aggregate transaction accounts. However, bona fide cash-management arrangements are excepted. The staff has been asked whether agreements for bona fide cash-management arrangements may be either oral or written and whether the arrangements may be used with intra-company accounts and with accounts held by affiliated companies.

If a member bank owns or uses automatic teller machines (ATMs) that cannot be readily modified to permit direct withdrawals from a savings deposit subject to automatic transfers, an ATM may be used to initiate a withdrawal from a checking account that would result in an automatic transfer from the savings deposit account. The bank must, however, provide alternate means of access to savings deposit accounts subject to ATS, such as effecting a withdrawal by personal appearance at the bank or by telephone. Withdrawal slips for a savings account subject to automatic transfer do not have to be made available in the bank lobby, and a bank may require depositors to request the slips from bank personnel. However, customers should be notified of this fact when the automatic transfer service is authorized.

An overdraft-protection plan that involves transfers from a savings account to cover overdrafts in a NOW account would not cause the account to be regarded as a transaction account unless more than three transfers can be effected by telephone or through preauthorized arrangement in one calendar month or one monthly billing cycle. STAFF OP. of Sept. 24, 1980.

A company is considering offering a service that will allow a customer to make purchases at a POS location with a debit card (with direct credit to the merchant’s account) or with scrip obtained at the POS terminal (with an immediate debit to the customer’s account and credit to the merchant’s account). The customer would also have the option of exchanging the scrip for cash from that merchant rather than using the scrip to make a purchase from that merchant. Under either arrangement, the customer is in effect making a third-party payment to the merchant. Several questions were raised about the effect of alternative features of the service on the reserve treatment of accounts subject to POS access.

The staff has been asked about the proper treatment of a proposed arrangement consisting of an account intended to qualify as a money market deposit account (MMDA), a demand deposit account, and a line of credit to cover overdrafts in the demand deposit account. Checks drawn on the demand deposit account in excess of the balance would be paid from loan proceeds transferred to the account, and the bank would note a drawing on the line of credit. Once a week, funds from the MMDA would be transferred to cover outstanding balances on the line of credit. The interest rate imposed on drawings on the line of credit would be equal to that paid on the MMDA, adjusted to account for the effect of reserves. The MMDA would secure the line of credit, which would be limited to the amount deposited in the MMDA. If, at the end of a day, there are balances in the demand deposit account in excess of a specified minimum, the excess would be used to pay any amount owed on the line of credit and any excess would be transferred into the MMDA.

Several depository institutions were offering an account arrangement to some customers that combined a money market deposit account (MMDA) with a demand deposit. Typically, the depository institution allowed a customer to create overdrafts in a demand deposit during the week and then pay off the aggregate overdraft at the end of the week with one transfer from the MMDA. The rate of interest paid on the money market deposit account equals the rate of interest charged on the overdraft line of credit, and the number of transfers from the MMDA to cover the overdrafts would never exceed the six-per-month limit that applies to automatic interaccount transfers. Thus, the depository institution considered the demand account balance as zero when it calculated its transaction accounts and included the balance in the MMDA in its time deposits when filing Form FR 2900.

A bank proposes to provide a service to customers that would involve coordination among the bank, its customers, and an independent trust company organized under state law. Each customer would authorize the bank to transfer the amount above a predetermined level in its demand account to a pooled demand account maintained by the trust company at the bank. At the direction of the customer, the trust company would then place those funds in a variety of investments, including a money market account at the bank and professionally managed money funds. The customer would deal directly with the trust company on all issues involving the invested funds. The bank would not be involved with the funds other than to facilitate the transfer of funds between accounts as directed by the customer or the trust company. Demand-account overdrafts are not anticipated, but if an overdraft did occur, the bank would inform the trust company, which would transfer funds to the customer’s account to cover the overdraft.

A two-year phase-in period applies to a U.S. agency of a foreign bank that becomes subject to reserve requirements by virtue of its parent’s asset growth above $1 billion. Accordingly, the phase-in schedule that appears in section 204.4(c) would apply, although the specific dates indicated therein should be modified to reflect the date on which the institution’s total worldwide consolidated assets surpassed $1 billion. STAFF OP. of Sept. 28, 1981.

After acquiring another bank holding company, a bank holding company (the acquirer) reorganized to integrate the acquired organization’s subsidiaries. This integration was accomplished through three simultaneous transactions in which the assets and liabilities of the acquired organization’s bank were divided between two banks and a trust company of the acquirer. One part of the transaction required a national bank to purchase the assets and assume some of the branches of the acquired organization’s bank, which was a nonmember bank. The acquirer asked whether the acquisition of the assets and deposit liabilities of the branches by the national bank, a member bank, qualifies for treatment under section 204.4 of Regulation D or whether the assets and liabilities must be treated as a de novo branch.

The Reserve Banks have been treating the reservable liabilities of new thrift institutions that result from supervisory closings of their financially troubled predecessors as though the new thrifts merged with their predecessors under section 204.4(e) of Regulation D, and they have not applied a phase-in or reduction of reserve requirements of the new thrifts. Some new thrifts maintain that supervisory transfers of the assets and liabilities of financially troubled thrifts to the new thrifts should not be treated as mergers or consolidations. Rather, the new thrifts believe they should be treated as de novo institutions subject to a two-year phase-in under section 204.4(c).

Foreign diplomats and employees of international organizations who reside in the United States are considered U.S. residents for purposes of Regulation D. STAFF OP. of Nov. 18, 1981.

A resident of Guam is not a United States resident for purposes of Regulations D and Q. STAFF OP. of July 17, 1981.

A courier company, as agent for a domestic bank, picks up U.S. currency one day each week from banks located overseas for delivery to the domestic bank. The domestic bank’s account with each of the foreign banks is debited on the same day the currency is picked up. In one instance, the currency arrived in the city of the domestic bank’s head office on the same day, but too late for delivery to the bank’s office. Thus, the courier had to store the currency in its own vaults overnight, until delivery could be made the following day. Because the courier was acting as agent for the domestic bank while holding the currency, the question arises whether currency in transit from a foreign depository institution located outside the United States to a domestic depository institution can be treated as vault cash for purposes of the Report of Transaction Accounts, Other Deposits and Vault Cash (Form FR 2900) before the domestic institution receives the cash at its office. currency

Currency and coin sent by armored carrier from a retail establishment, such as a grocery store, to a depository institution qualifies as cash in transit for purposes of Regulation D. For the currency and coin to apply toward a depository institution’s reserve requirements under section 204.3(b), they must qualify as “vault cash” as defined in section 204.2(k). To qualify, currency and coin in transit must be in transit to or from a Federal Reserve Bank or a correspondent depository institution. Here, the currency and coin are in transit from a retail establishment to the depository institution and thus cannot be considered vault cash. STAFF OP. of Sept. 10, 1986.

Bank A proposes to enter into transactions with some of its correspondent banks, some of which may be affiliates of Bank A. Under the proposed transactions, a correspondent bank would sell coin and currency to Bank A, which would credit or cause to be credited the account of the correspondent bank at Bank A or at a Federal Reserve Bank. Bank A and the correspondent bank would enter into a safekeeping agreement whereby the correspondent bank would segregate and hold in its vault the coin and currency that it sold to Bank A. This coin and currency would be owned by Bank A, which would have the right to have the coin and currency on demand. It is anticipated that Bank A would collect the coin and currency at least weekly, but there is no commitment by Bank A to collect the coin and currency on any schedule. Bank A would not collect the coin and currency daily because of the costs of transportation.

See 2-320.12.