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Board Interpretations of Regulation D

2-259

“BANKERS’ BANK”

The Federal Reserve Act, as amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221), imposes federal reserve requirements on depository institutions that maintain transaction accounts or nonpersonal time deposits. Under section 19(b)(9), however, a depository institution is not required to maintain reserves if it—
  • is organized solely to do business with other financial institutions;
  • is owned primarily by the financial institutions with which it does business; and
  • does not do business with the general public.
Depository institutions that satisfy all of these requirements are regarded as “bankers’ banks.”
In its application of these requirements to specific institutions, the Board will use the following standards:
  • A depository institution may be regarded as organized solely to do business with other depository institutions even if, as an incidental part to its activities, it does business to a limited extent with entities other than depository institutions. The extent to which the institution may do business with other entities and continue to be regarded as a bankers’ bank is specified in the paragraph after next, below [“A depository institution will not be regarded . . .”].
  • A depository institution will be regarded as being owned primarily by the institutions with which it does business if 75 percent or more of its capital is owned by other depository institutions. The 75 percent or more ownership rule applies regardless of the type of depository institution.
  • A depository institution will not be regarded as doing business with the general public if it meets two conditions. First, the range of customers with which the institution does business must be limited to depository institutions, including subsidiaries or organizations owned by depository institutions; directors, officers or employees of the same or other depository institutions; individuals whose accounts are acquired at the request of the institution’s supervisory authority due to the actual or impending failure of another depository institution; share insurance funds; depository institution trade associations and such others as the Board may determine on a case-by-case basis consistent with the purposes of the act and the bankers’ bank exemption. Second, the extent to which the depository institution makes loans to, or investments in, the above entities (other than depository institutions) cannot exceed 10 percent of total assets, and the extent to which it receives deposits (or shares if the institution does not receive deposits) from or issues other liabilities to the above entities (other than depository institutions) cannot exceed 10 percent of total liabilities (or net worth if the institution does not receive deposits).
If a depository institution is unable to meet all of these requirements on a continuing basis, it will not be regarded as a bankers’ bank and will be required to satisfy federal reserve requirements on all of its transaction accounts and nonpersonal time deposits.
Section 19(c)(1) of the Federal Reserve Act, as amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221) provides that federal reserve requirements may be satisfied by the maintenance of vault cash or balances in a Federal Reserve Bank. Depository institutions that are not members of the Federal Reserve System may also satisfy reserve requirements by maintaining a balance in another depository institution that maintains required reserve balances at a Federal Reserve Bank, in a Federal Home Loan Bank, or in the National Credit Union Administration Central Liquidity Facility if the balances maintained by such institutions are subsequently passed through to the Federal Reserve Bank.
On August 27, 1980, the Board announced the procedures that will apply to such pass-through arrangements (45 Fed. Reg. 58,099). Section 204.3(i)(1) provides that the Board may permit, on a case-by-case basis, depository institutions that are not themselves required to maintain reserves (“bankers’ banks”) to act as pass-through correspondents if certain criteria are satisfied. The Board has determined that a bankers’ bank may act as a pass-through correspondent if it enters into an agreement with the Federal Reserve to accept responsibility for the maintenance of pass-through reserve accounts in accordance with Regulation D (12 CFR 204.3(i)) and if the Federal Reserve is satisfied that the quality of management and financial resources of the institution are adequate in order to enable the institution to serve as a pass-through correspondent in accordance with Regulation D. Satisfaction of these criteria will assure that pass-through arrangements are maintained properly without additional financial risk to the Federal Reserve.
In order to determine uniformly the adequacy of managerial and financial resources, the Board will consult with the federal supervisor for the type of institution under consideration. Because the Board does not possess direct experience with supervising depository institutions other than commercial banks, and does not intend to involve itself in the direct supervision of such institutions, it will request the National Credit Union Administration to review requests from credit unions that qualify as bankers’ banks and the Federal Home Loan Bank Board to review requests from savings and loan associations that qualify as bankers’ banks, regardless of charter or insurance status. (The Board, itself, will consider requests from all commercial banks that qualify as bankers’ banks.) If the federal supervisor does not find the institution’s managerial or financial resources to be adequate, the Board will not permit the institution to act as a pass-through correspondent. In order to assure the continued adequacy of managerial and financial resources, it is anticipated that the appropriate federal supervisor will, on a periodic basis, review and evaluate the managerial and financial resources of the institution in order to determine whether it should continue to be permitted to act as a pass-through correspondent. It is anticipated that, with respect to state-chartered institutions, the federal supervisor may discuss the request with the institution’s state supervisor. The Board believes that this procedure will promote uniformity of treatment for all types of bankers’ banks, and provide consistent advice concerning managerial ability and financial strength from supervisory authorities that are in a better position to evaluate these criteria for depository institutions that are not commercial banks.
Requests for a determination as to whether a depository institution will be regarded as a bankers’ bank for purposes of the Federal Reserve Act or for permission to act as a pass-through correspondent may be addressed to the Federal Reserve Bank in whose District the main office of the depository institution is located or to the Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. The Board will act promptly on all requests received directly or through Federal Reserve Banks. 1980 Fed. Res. Bull. 901; 12 CFR 204.121.
2-260

COMPUTATION OF RESERVES—Pursuant to Monetary Control Act of 1980

The Monetary Control Act of 1980 (title I of Pub. L. 96-221) (“act”) provides that any bank that was a member bank on July 1, 1979, and which withdraws from membership in the Federal Reserve System during the period beginning on July 1, 1979, and ending on March 30, 1980, is required to maintain reserves in an amount equal to the amount of reserves it would have been required to maintain if it had been a member bank on March 31, 1980. The act further provides that any bank that withdraws from membership in the Federal Reserve System on or after March 31, 1980, shall maintain reserves in the same amount as member banks. The Board of Governors has established certain policies and procedures to implement these provisions.
1. Determination of date of withdrawal from membership. Any bank that was a member bank, but which withdrew from membership in the Federal Reserve System prior to July 1, 1979, as determined below, will be subject to federal reserve requirements on September 1, 1980, the effective date of the remaining provisions of the Monetary Control Act. Such banks will be entitled to an eight-year phase-in of reserve requirements. A bank that is determined to have withdrawn from membership on July 1, 1979, or thereafter, is subject to federal reserve requirements pursuant to Regulation D in the same manner as a member bank.
The date of withdrawal from membership in the System for a state member bank will be determined by the date on which the Federal Reserve Bank received notice of the decision of the bank’s board of directors (and shareholders where state law requires) to withdraw from membership.1 With regard to a national bank, the date of withdrawal is the date on which such national bank received a state charter whether by conversion, merger, or consolidation.
In recognition of the fact that there may have been individual bank circumstances that delayed an individual bank’s withdrawal or acquisition of a state charter, the Board, consistent with the legislative history of section 103 of the act, will consider evidence from a former member bank that it made an unambiguous irrevocable decision to withdraw from membership before July 1, 1979, and, thus, is entitled to an eight-year phase-in of required reserves. A bank that was a state member bank whose directors (and shareholders where state law requires) voted to leave the System prior to July 1, 1979, or a bank that was a national bank whose shareholders voted to convert to a state charter (including conversion by merger or consolidation) prior to July 1, 1979, and was not a member bank on March 31, 1980, may present the Board with clear, unambiguous documentation of such actions. Upon review of such information, the Board may then determine that the date that an individual bank made such an irrevocable decision is its date of withdrawal from membership. Any bank that believes that it meets these criteria, should submit full documentation to the Board as soon as possible, but in any event, no later than June 16, 1980. Such submissions should be addressed to Secretary of the Board, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551.
2. Reserve requirements of former member banks. The Board has determined, with respect to banks that withdrew from the System (other than by merger or consolidation) on or after July 1, 1979, and ceased maintaining reserves pursuant to Regulation D prior to March 31, 1980, to waive all federal reserve requirements for the period from March 31, 1980, through the maintenance period ending August 27, 1980.2 Such banks will be required to maintain currently prescribed levels of federal reserves commencing with the reserve maintenance period that begins on August 28, 1980. A former member bank may commence maintaining reserves with a Federal Reserve Bank beginning on or after June 5, 1980, in order to have sufficient balances available for Federal reserve requirement purposes for the August 28-September 3 maintenance period. A former member bank that maintains full reserve balances on or after June 5, 1980, will receive access to all System services.
The Board recognizes that certain former member banks may experience hardships by being subjected to federal reserve requirements in the same manner as a member bank, notwithstanding the delayed effective date that has been established. In order to accommodate former member banks that may incur significant hardship by maintaining full reserve balances by the maintenance period beginning August 28, the Board will consider granting limited extensions beyond that date in extraordinary circumstances. A former member bank that placed its federal reserve balances, prior to March 31, 1980, in assets that have declined significantly in value and that cannot be converted to cash before August 28, 1980, without incurring significant losses may be granted a limited extension of time by the Board to maintain full federal reserve requirements. A former member bank requesting such an extension should submit information concerning such placements of reserve balances withdrawn by July 15, 1980. Such submissions should be addressed to Secretary of the Board, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551.
Any bank that maintained federal reserves pursuant to Regulation D during the maintenance period that included March 31, 1980, and any member bank that withdraws from the System (other than by merger or consolidation) on or after March 31, 1980, is required to maintain federal reserves against its deposits in the same manner as a member bank.
3. Mergers. Banks that withdraw from membership due to mergers or consolidations on or after July 1, 1979, will be required to maintain federal reserves in the same manner as a member bank on the proportion of their deposits attributable to former member banks. The date of a merger will be determined in accordance with the procedures established in item 1 above.
Where a nonmember bank merges or consolidates on or after July 1, 1979, with a member bank and the surviving bank is a nonmember bank, the bank is required to maintain federal reserves in the same manner as a member bank on a proportion of its deposits attributable to the absorbed member bank. This proportion will be the ratio that daily average deposits of the absorbed member bank were to the daily average deposits of the combined banks during the reserve computation period immediately preceding the date of the merger. For example, if during the last full computation period before the date of a merger or consolidation between a member bank and a nonmember bank, the ratio of member bank daily average deposits to the daily average total deposits of the merged entity is 25 percent, then the surviving nonmember bank will maintain federal reserve requirements in the same manner as a member bank on 25 percent of its deposits. The portion of the surviving bank’s deposits representing nonmember bank deposits, that is, 75 percent, will be subject to federal reserve requirements on an eight-year phase-in schedule under the Act.
A ratio also will be computed for vault cash, and only the proportion of the vault cash attributable to the absorbed member bank will be permitted to be used in determining the amount of reserve balances required to be held at the Federal Reserve. For example, if during the last full computation period before the date of a merger or consolidation between a member bank and a nonmember bank, the ratio of member bank daily average vault cash to the daily average total vault cash of the merged entity is 35 percent, then the surviving nonmember bank will take that proportion of its vault cash into account in computing the reserve balance required to be maintained against its deposits attributable to the absorbed member bank.
For mergers or consolidations taking place between July 1, 1979, and August 27, 1980, where the surviving bank is a nonmember bank, federal reserves will be required to be maintained on that portion of the bank’s deposits representing member bank deposits during the maintenance period beginning August 28, 1980.
Mergers and consolidations that take place on or after March 31, 1980, between a member and nonmember bank that was engaged in business on July 1, 1979, where a member bank is the surviving bank will be treated on a proportionate basis for reserve purposes. However, only the amount of deposits and vault cash of the nonmember bank outstanding on a daily average basis during the computation period immediately preceding the date of the merger will be eligible for an eight-year phase-in of reserves. The balance of the deposits of the surviving member bank will continue to be subject to member bank reserve requirements.
Mergers and consolidations involving two member banks will continue to be subject to the Board’s current policy of a two-year transitional phase-in of increased reserve requirements.
4. Access to services. Any bank maintaining full federal reserves pursuant to the above policies will be permitted access to all Federal Reserve services, except that Federal Reserve Banks may require satisfactory clearing balances. However, a nonmember bank that is maintaining reserves due to the acquisition of a member bank will have access to services if it maintains federal reserves pursuant to Regulation D against all of its deposits. 1980 Fed. Res. Bull. 414.
1
See 126 Cong. Rec. E 1619 (daily ed. March 28, 1980) (remarks of Rep. Brademas and Rep. Reuss); 126 Cong. Rec. S 3176 (daily ed. March 28, 1980) (remarks of Senators Bayh, Proxmire, and Lugar).
2
Such banks will continue to be subject to the special deposit requirement on managed liabilities pursuant to subpart C of 12 CFR 229 (1980).
2-260.1

COMPUTATION OF RESERVES—Gold Coin and Bullion

The Board has received numerous inquiries from member banks relating to the repeal of the ban on ownership of gold by United States citizens. Listed below are questions and answers which affect member banks and relate to the responsibilities of the Federal Reserve System.
May gold in the form of coins or bullion be counted as vault cash in order to satisfy reserve requirements? No. Section 19(c) of the Federal Reserve Act requires that reserve balances be satisfied either by a balance maintained at the Federal Reserve Bank or by vault cash, consisting of United States currency and coin. Gold in bullion form is not United States currency. Since the bullion value of United States gold coins far exceeds their face value, member banks would not in practice distribute them over the counter at face value to satisfy customer demands.
Will the Federal Reserve Banks perform services for member banks with respect to gold, such a safekeeping or assaying? No.
Will a Federal Reserve Bank accept gold as collateral for an advance to a member bank under section 10(b) of the Federal Reserve Act? No. 1975 Fed. Res. Bull. 33; 12 CFR 250.260.
2-260.11

COMPUTATION OF RESERVES—Shifting Funds Between Depository Institutions to Make Use of Low Reserve Tranche

Authority
Under section 19(a) of the Federal Reserve Act (12 USC 461(a)) the Board is authorized to define terms used in section 19, and to prescribe regulations to implement and to prevent evasions of the requirements of that section. Section 19(b)(2) establishes general reserve requirements on transaction accounts and nonpersonal time deposits. In addition to its authority to define terms under section 19(a), section 19(g) of the Federal Reserve Act also gives the Board the specific authority to define terms relating to deductions allowed in reserve computation, including “balances due from other banks.” This interpretation is adopted under these authorities.
Background
Currently, the Board requires reserves of zero, 3, or 10 percent on transaction accounts, depending upon the amount of transaction deposits in the depository institution, and of zero percent on nonpersonal time deposits. In determining its reserve balance under Regulation D, a depository institution may deduct the balances it maintains in another depository institution located in the United States if those balances are subject to immediate withdrawal by the depositing depository institution (§ 204.3(f)). This deduction is commonly known as the due-from deduction. In addition, Regulation D at section 204.2(a) (1)(vii)(A) exempts from the definition of “deposit” any liability of a depository institution on a promissory note or similar obligation that is issued or undertaken and held for the account of an office located in the United States of another depository institution. Transactions falling within this exemption from the definition of “deposit” include federal funds or “fed funds” transactions.
Under section 19(b)(2) of the Federal Reserve Act (12 USC 461(b)(2)), the Board is required to impose reserves of 3 percent on total transaction deposits at or below an amount determined under a formula. Transaction deposits falling within this amount are in the “low reserve tranche.” Currently the low reserve tranche runs up to $42.2 million. Under section 19(b)(11) of the Federal Reserve Act (12 USC 461(b)(11)) the Board is also required to impose reserves of zero percent on reservable liabilities at or below an amount determined under a formula. Currently that amount is $3.6 million.
Shifting Funds Between Depository Institutions
The Board is aware that certain depository institutions with transaction account balances in an amount greater than the low reserve tranche have entered into transactions with affiliated depository institutions that have transaction account balances below the maximum low reserve tranche amount. These transactions are intended to lower the transaction reserves of the larger depository institution and leave the economic position of the smaller depository institutions unaffected, and have no apparent purpose other than to reduce required reserves of the larger institution. The larger depository institution places funds in a demand deposit at a small domestic depository institution. The larger depository institution considers those funds to be subject to the due-from deduction, and accordingly reduces its transaction reserves in the amount of the demand deposit. The larger depository institution then reduces its transaction-account reserves by 10 percent of the deposited amount. The small depository institution, because it is within the low reserve tranche, must maintain transaction-account reserves of 3 percent on the funds deposited by the larger depository institution. The small depository institution then transfers all but 3 percent of the funds deposited by the larger depository institution back to the larger depository institution in a transaction that qualifies as a fed-funds transaction. The 3 percent not transferred to the larger depository institution is the amount of the larger depository institution’s deposit that the small depository institution must maintain as transaction-account reserves. Because the larger depository institution books this second part of the transaction as a fed-funds transaction, the larger depository institution does not maintain reserves on the funds that it receives back from the small depository institution. As a consequence, the larger depository institution has available for its use 97 percent of the amount transferred to the small depository institution. Had the larger depository institution not entered into the transaction, it would have maintained transaction account reserves of 10 percent on that amount and would have had only 90 percent of that amount for use in its business.
Determination
The Board believes that the practice described above generally is a device to evade the reserves imposed by Regulation D. Consequently, the Board has determined that, in the circumstances described above, the larger depository institution depositing funds in the smaller institution may not take a due-from deduction on account of the funds in the demand deposit account if, and to the extent that, funds flow back to the larger depository institution from the small depository institution by means of a transaction that is exempt from transaction-account reserve requirements. 12 CFR 204.135.
2-260.12

COMPUTATION OF RESERVES—Treatment of Trust Overdrafts

Authority
Under section 19(a) of the Federal Reserve Act (12 USC 461(a)), the Board is authorized to define the terms used in section 19, and to prescribe regulations to implement and prevent evasions of the requirements of that section. Section 19(b) establishes general reserve requirements on transaction accounts and nonpersonal time deposits. Under section 19(b)(1)(F), the Board also is authorized to determine, by regulation or order, that an account or deposit is a transaction account if such account is used directly or indirectly for the purpose of making payments to third persons or others. This interpretation is adopted under these authorities.
Netting of Trust-Account Balances
Not all depository institutions have treated overdrafts in trust accounts administered by a trust department in the same manner when calculating the balance in a commingled transaction account in the depository institution for the account of the trust department of the institution. In some cases, depository institutions carry the aggregate of the positive balances in the individual trust accounts as the balance on which reserves are computed for the commingled account. In other cases depository institutions net positive balances in some trust accounts against negative balances in other trust accounts, thus reducing the balance in the commingled account and lowering the reserve requirements. Except in limited circumstances, negative balances in individual trust accounts should not be netted against positive balances in other trust accounts when determining the balance in a trust department’s commingled transaction account maintained in a depository institution’s commercial department. The netting of positive and negative balances has the effect of reducing the aggregate of a commingled transaction account reported by the depository institution to the Federal Reserve and reduces the reserves the institution must hold against transaction accounts under Regulation D. Unless the governing trust agreement or state law authorizes the depository institution, as trustee, to lend money in one trust to another trust, the negative balances in effect, for purposes of Regulation D, represent a loan from the depository institution. Consequently, negative balances in individual trust accounts should not be netted against positive balances in other individual trust accounts, and the balance in any transaction account containing commingled trust balances should reflect positive or zero balances for each individual trust.
For example, where a trust department engages in securities lending activities for trust accounts, overdrafts might occur because of the trust department’s attempt to “normalize” the effects of timing delays between the depository institution’s receipt of the cash collateral from the broker and the trust department’s posting of the transaction to the lending trust account. When securities are lent from a trust customer to a broker that pledges cash as collateral, the broker usually transfers the cash collateral to the depository institution on the day that the securities are made available. While the institution has the use of the funds from the time of the transfer, the trust department’s normal posting procedures may not reflect receipt of the cash collateral by the individual account until the next day. On the day that the loan is terminated, the broker returns the securities to the lending trust account and the trust customer’s account is debited for the amount of the cash collateral that is returned by the depository institution to the broker. The trust department, however, often does not liquidate the investment made with the cash collateral until the day after the loan terminates, a delay that normally causes a one-day overdraft in the trust account. Regulation D requires that, on the day the loan is terminated, the depository institution regard the negative balance in the customer’s account as zero for reserve requirement reporting purposes and not net the overdraft against positive balances in other accounts.
Procedures
In order to meet the requirements of Regulation D, a depository institution must have procedures to determine the aggregate of trust-department transaction-account balances for Regulation D on a daily basis. The procedures must consider only the positive balances in individual trust accounts without netting negative balances except in those limited circumstances where loans are legally permitted from one trust to another, or where offsetting is permitted pursuant to trust law or written agreement, or where the amount that caused the overdraft is still available in a settlement, suspense, or other trust account within the trust department and may be used to offset the overdraft. 12 CFR 204.136.
2-260.5

“DEPOSIT”—Mortgage-Backed Securities Issued by Bank and Guaranteed by GNMA*

This is in response to your letter of May 8, 1970, asking for the Board’s views on certain questions relating to securities (1) issued by a member bank, (2) based on and backed by a pool of mortgages insured by the Federal Housing Administration or the Farmers’ Home Administration, or insured or guaranteed by the Veterans’ Administration, and (3) guaranteed by the Government National Mortgage Association pursuant to section 306(g) of the National Housing Act (12 USC 1721).
The Board understands that securities issued under the mortgage-backed pass-through program are of two types: (1) “straight pass-through” and (2) “modified pass-through.” Under the straight pass-through arrangement, the issuer (the member bank) promises to pay the holder only his proportionate share of the proceeds of principal and interest as collected on mortgages in the pool. Under the modified pass-through arrangement, the issuer promises to pay all instalments of principal and interest on the securities as they become due, irrespective of whether collections on the mortgages are sufficient for such payments. GNMA guarantees timely payment of principal and interest on the securities in accordance with the terms of the securities.
The holder of a security has recourse against the issuer for failing to make payments on the securities to the extent that collections on the mortgages are available. However, the holder has no recourse against the issuer or any of its assets in the event the issuer does not pay when collections are insufficient to meet payments due on the securities, despite the promise of the issuer referred to in the preceding paragraph. The holder’s recourse in that event is solely against GNMA.
You ask whether a member bank that issues the securities will have a deposit liability subject to Regulation Q as a result of its promises as to payments on the securities. Subject to specified exceptions, a member bank shall treat as a deposit liability any obligation undertaken by it principally as a means of obtaining funds to be used in its banking business. Based on the Board’s understanding of the nature of the bank’s promises and the holder’s lack of recourse against the bank, as set forth above and confirmed by Mr.
of your staff in a meeting with Messrs.
and
of the Board’s staff, a bank that issues mortgage-backed securities of the pass-through type does not have an obligation with respect to such securities within the coverage of section 217.1(f) of Regulation Q (or of section 204.1(f) of Regulation D, relating to member bank reserve requirements). The holder has no right to require the bank to make payment on the securities out of its own funds, nor does the operation of the pool in effect result in the holder having that right. Accordingly, the member bank’s promises included in the mortgage-backed securities issued by it and guaranteed by GNMA do not give rise to a deposit liability subject to Regulation Q.
You also ask whether a member state bank that issues the securities must include on its books any indication of a liability with respect to them. Again, in view of the nature of the bank’s promises and the holder’s remedies, a member state bank need not include in its statement of condition any indication of a liability with respect to the securities, although it might wish to make a footnote explanation of its participation in the securities program and its practices as to payments on the securities issued by it.
Finally, you ask whether the foregoing answers would be the same for subsidiaries of member banks. Under the Board’s interpretations, a member bank may perform, through a wholly owned subsidiary, functions the bank is empowered to perform directly. Such a subsidiary is subject to the same restrictions as the parent and is treated by the Board the same as the bank (12 CFR 250.141; 1968 Fed. Res. Bull. 681; FRRS 3–415.4). Therefore, mortgage-backed securities issued by a wholly owned subsidiary of a member bank are the equivalent of securities issued by the member bank itself, and the foregoing answers apply to securities issued by a member bank directly or indirectly through a wholly owned subsidiary. S-2135; June 1, 1970.
*
This statement should be read with section 204.2(a)(1)(vii) and (a)(2)(ix) of Regulation D. This statement may also be affected by the Board’s pending rule making regarding the treatment of the proceeds of certain asset sales under Regulation D.
2-260.51

“DEPOSIT”—Sale of Federal Funds by Investment Companies and Trusts in Which Entire Beneficial Interest Is Held by Depository Institutions

The Federal Reserve Act, as amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221) imposes federal reserve requirements on transaction accounts and nonpersonal time deposits held by depository institutions. The Board is empowered under the act to determine what types of obligations shall be deemed a deposit. Regulation D, Reserve Requirements of Depository Institutions, exempts from the definition of “deposit” those obligations of a depository institution that are issued or undertaken and held for the account of a domestic office of another depository institution (12 CFR 204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of “deposit” are known collectively as the “federal-funds” or “interbank” exemption.
Title IV of the Depository Institutions Deregulation and Monetary Control Act of 1980 authorizes federal savings and loan associations to invest in open-ended management investment companies provided the funds’ investment portfolios are limited to the types of investments that a federal savings and loan association could hold without limit as to percentage of assets (12 USC 1464(c)(1)(Q)). Such investments include mortgages, U.S. government and agency securities, securities of states and political subdivisions, sales of federal funds and deposits held at banks insured by the Federal Deposit Insurance Corporation. The Federal Credit Union Act authorizes federal credit unions to aggregate their funds in trusts provided the trust is limited to such investments that federal credit unions could otherwise make. Such investments include loans to credit union members, obligations of the U.S. government or secured by the U.S. government, loans to other credit unions, shares or accounts held at savings and loan associations or mutual savings banks insured by FSLIC or FDIC, sales of federal funds and shares of any central credit union whose investments are specifically authorized by the board of directors of the federal credit union making the investment (12 USC 1757(7)).
The Board has considered whether an investment company or trust whose entire beneficial interest is held by depository institutions, as defined in Regulation D, would be eligible for the federal funds exemption from reserve requirements and interest rate limitations. The Board has determined that such investment companies or trusts are eligible to participate in the federal funds market be cause, in effect, they act as mere conduits for the holders of their beneficial interest. To be regarded by the Board as acting as a conduit and, thus, be eligible for participation in the federal-funds market, an investment company or trust must meet each of the following conditions:
  • 1. The entire beneficial interest in the investment company or trust must be held by depository institutions, as defined in Regulation D. These institutions presently may participate directly in the federal-funds market. If the entire beneficial interest in the investment company or trust is held only by depository institutions, the Board will regard the investment company or trust as a mere conduit for the holders of its beneficial interest.
  • 2. The assets of the investment company or trust must be limited to investments that all of the holders of the beneficial interest could make directly without limit.
  • 3. Holders of the beneficial interest in the investment company or trust must not be allowed to make third-party payments from their accounts with the investment company or trust. The Board does not regard an investment company or trust that offers third-party payment capabilities or other similar services which actively transform the nature of the funds passing between the holders of the beneficial interest and the federal funds market as mere conduits.
The Board expects that the above conditions will be included in materials filed by an investment company or trust with the appropriate regulatory agencies.
The Board believes that permitting sales of federal funds by investment companies or trusts whose beneficial interests are held exclusively by depository institutions that—
  • 1. invest solely in assets that the holders of their beneficial interests can otherwise invest in without limit and
  • 2. do not provide third-party payment capabilities
offers the potential for an increased yield for thrifts. This is consistent with congressional intent to provide thrifts with convenient liquidity vehicles. 12 CFR 204.123.
2-260.52

“DEPOSIT”—Repos Involving Shares of MMMF Whose Portfolio Consists Wholly of U.S. Treasury and Federal Agency Securities

The Federal Reserve Act, as amended by the Monetary Control Act of 1980 (title I of Pub. L. 96-221) imposes federal reserve requirements on transaction accounts and nonpersonal time deposits held by depository institutions. The Board is empowered under the act to determine what types of obligations shall be deemed a deposit (12 USC 461). Regulation D, Reserve Requirements of Depository Institutions, exempts from the definition of “deposit” those obligations of a depository institution that arise from a transfer of direct obligations of, or obligations that are fully guaranteed as to principal and interest by, the United States government or any agency thereof that the depository institution is obligated to repurchase (12 CFR 204.2(a) (1)(vii)(B)).
The National Bank Act provides that a national bank may purchase for its own account investment securities under limitations and restrictions as the Comptroller may prescribe (12 USC 24, ¶ 7). The statute defines “investment securities” to mean marketable obligations evidencing indebtedness of any person in the form of bonds, notes, and debentures. The act further limits a national bank’s holdings of any one security to no more than an amount equal to 10 percent of the bank’s capital stock and surplus. However, these limitations do not apply to obligations issued by the United States, general obligations of any state and certain obligations of federal agencies. In addition, generally a national bank is not permitted to purchase for its own account stock of any corporation. These restrictions also apply to state member banks (12 USC 335).
The Comptroller of the Currency has permitted national banks to purchase for their own accounts shares of open-end investment companies that are purchased and sold at par (i.e., money market mutual funds) provided the portfolios of such companies consist solely of securities that a national bank may purchase directly (Banking Bulletin B-83-58). The Board of Governors has permitted state member banks to purchase, to the extent permitted under applicable state law, shares of money market mutual funds (MMMFs) whose portfolios consist solely of securities that the state member bank may purchase directly.
The Board has determined that an obligation arising from a repurchase agreement involving shares of a MMMF whose portfolio consists wholly of securities of the United States government or any agency thereof1 would not be a “deposit” for purposes of Regulations D and Q. The Board believes that a repurchase agreement involving shares of such a MMMF is the functional equivalent of a repurchase agreement directly involving United States government or agency obligations. A purchaser of shares of a MMMF obtains an interest in a pro rata portion of the assets that comprise the MMMF’s portfolio. Accordingly, regardless of whether the repurchase agreement involves United States government or agency obligations directly or shares in a MMMF whose portfolio consists entirely of United States government or agency obligations, an equitable and undivided interest in United States and agency government obligations is being transferred. Moreover, the Board believes that this interpretation will further the purpose of the exemption in Regulations D and Q for repurchase agreements involving United States government or federal obligations by enhancing the market for such obligations. 12 CFR 204.124.
1
The term “United States government or any agency thereof” as used herein shall have the same meaning as in section 204.2(a)(1)(vii)(B) of Regulation D (12 CFR 204.2(a)(1)(vii)(B)).
2-260.53

“DEPOSIT”—Participation of Depository Institutions in Federal-Funds Market

Under section 204.2(a)(1)(vii)(A), there is an exemption from Regulation D for member bank obligations in nondeposit form to another bank. To ensure the effectiveness of the limitations on persons who sell federal funds to depository institutions, Regulation D applies to nondocumentary obligations undertaken by a depository institution to obtain funds for use in its banking business, as well as to documentary obligations. Under section 204.2(a)(1)(vii) of Regulation D, a depository institution’s liability under informal arrangements as well as those formally embodied in a document are within the coverage of Regulation D.
The exemption in section 204.2(a)(1) (vii)(A) applies to obligations owed by a depository institution to a domestic office of any entity listed in that section (the “exempt institutions”). The “exempt institutions” explicitly include another depository institution, foreign bank, Edge or agreement corporation, New York Investment (article XII) Company, the Export-Import Bank of the United States, Minbanc Capital Corp., and certain other credit sources. The term “exempt institutions” also includes subsidiaries of depository institutions (1) that engage in businesses in which their parents are authorized to engage or (2) the stock of which by statute is explicitly eligible for purchase by national banks.
To ensure that this exemption for liabilities to exempt institutions is not used as a means by which nondepository institutions may arrange through an exempt institution to “sell” federal funds to a depository institution, obligations within the exemption must be issued to an exempt institution for its own account. In view of this requirement, a depository institution that “purchases” federal funds should ascertain the character (not necessarily the identity) of the actual “seller” in order to justify classification of its liability on the transaction as “federal funds purchased” rather than as a deposit. Any exempt institution that has given general assurance to the purchasing depository institution that sales by it of federal funds ordinarily will be for its own account and thereafter executes such transactions for the account of others, should disclose the nature of the actual lender with respect to each such transaction. If it fails to do so, the depository institution would be deemed by the Board as indirectly violating section 19 of the Federal Reserve Act and Regulation D. 1970 Fed. Res. Bull. 38; 1973 Fed. Res. Bull. 524; 1979 Fed. Res. Bull. 927; 1988 Fed. Res. Bull. 122; 12 CFR 204.126.
2-260.54

“DEPOSIT”—Participation of Nondepository in Federal-Funds Market

The Board has considered whether the use of “inter-depository institution loan participations” (IDLPs) which involve participation by third parties other than depository institutions in federal-funds transactions comes within the exemption from “deposit” classification for certain obligations owed by a depository institution to an institution exempt in section 204.2(a)(1)(vii)(A) of Regulation D. An IDLP transaction is one through which an institution that has sold federal funds to a depository institution subsequently “sells” or participates out that obligation to a nondepository third party without notifying the obligated institution.
The Board’s interpretation regarding federal-funds transactions (12 CFR 204.126 at 2-260.53) clarified that a depository institution’s liability must be issued to an exempt institution described in section 204.2(a) (1)(vii)(A) of Regulation D for its own account in order to come within the nondeposit exemption for interdepository liabilities. The Board regards transactions which result in third parties’ gaining access to the federal-funds market as contrary to the exemption contained in section 204.2(a)(1)(vii)(A) of Regulation D regardless of whether the non- depository institution third party is a party to the initial transaction or thereafter becomes a participant in the transaction through purchase of all or part of the obligation held by the “selling” depository institution.
The Board regards the notice requirements set out in 12 CFR 204.126 as applicable to IDLP-type transactions as described herein so that a depository institution “selling” federal funds must provide to the purchaser (1) notice of its intention, at the time of the initial transaction, to sell or participate out its loan contract to a nondepository third party and (2) full and prompt notice whenever it (the “selling” depository institution) subsequently sells or participates out its loan contract to a nondepository third party. 1974 Fed. Res. Bull. 36; 1988 Fed. Res. Bull. 123; 12 CFR 204.127.
2-260.55

“DEPOSIT”—At Foreign Branch, Guaranteed by Domestic Office

In accepting deposits at branches abroad, some depository institutions may enter into agreements from time to time with depositors that in effect guarantee payment of such deposits in the United States if the foreign branch is precluded from making payment. The question has arisen whether such deposits are subject to Regulation D, and this interpretation is intended as a clarification.
Section 19 of the Federal Reserve Act, which establishes reserve requirements, does not apply to deposits of a depository institution “payable only at an office thereof located outside of the States of the United States and the District of Columbia” (12 USC 371a; 12 CFR 204.1(c)(5)). The Board ruled in 1918 that the requirements of section 19 as to reserves to be carrried by member banks do not apply to foreign branches (1918 Fed. Res. Bull. 1123). The Board has also defined the phrase “any deposit that is payable only at an office located outside the United States” in section 204.2(t) of Regulation D.
The Board believes that this exemption from reserve requirements should be limited to deposits in foreign branches as to which the depositor is entitled, under his agreement with the depository institution, to demand payment only outside the United States, regardless of special circumstances. The exemption is intended principally to enable foreign branches of U.S. depository institutions to compete on a more nearly equal basis with 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 branch of the depository institution assumes whatever risk may exist that the foreign country in which a branch is located might impose restrictions on withdrawals. When payment of a deposit in a foreign branch is guaranteed by a promise of payment at an office in the United States if not paid at the foreign office, the depositor no longer assumes this risk but enjoys substantially the same rights as if the deposit had been made in a U.S office of the depository institution. To ensure the effectiveness of Regulation D and to prevent evasions thereof, the Board considers that such guaranteed foreign-branch deposits must be subject to that regulation.
Accordingly, a deposit in a foreign branch of a depository institution that is guaranteed by a domestic office is subject to the reserve requirements of Regulation D the same as if the deposit had been made in the domestic office. This interpretation is not designed in any respect to prevent the head office of a U.S. bank from repaying borrowings from, making advances to, or supplying capital funds to its foreign branches, subject to Eurocurrency liability reserve requirements. 1970 Fed. Res. Bull. 140; 1988 Fed. Res. Bull. 123; 12 CFR 204.128.
2-260.57

“DEPOSIT”—Loan-Strip Participations

Effective March 31, 1988, the glossary section of the instructions for the Report of Condition and Income (FFIEC 031-034; OMB No. 7100- 0036) (“call report”) was amended to clarify that certain short-term loan participation arrangements (sometimes known or styled as “loan strips” or “strip participations”) are regarded as borrowings rather than sales for call-report purposes in certain circumstances. Through this interpretation, the Board is clarifying that such transactions should be treated as deposits for purposes of Regulation D.
These transactions involve the sale (or placement) of a short-term loan by a depository institution that has been made under a long-term commitment of the depository institution to advance funds. For example, a 90-day loan made under a five-year revolving line of credit may be sold to or placed with a third party by the depository institution originating the loan. The depository institution originating the loan is obligated to renew the 90-day note itself (by advancing funds to its customer at the end of the 90-day period) in the event the original participant does not wish to renew the credit. Since, under these arrangements, the depository institution is obligated to make another loan at the end of 90 days (absent any event of default on the part of the borrower), the depository institution selling the loan or participation in effect must buy back the loan or participation at the maturity of the 90-day loan sold to or funded by the purchaser at the option of the purchaser. Accordingly, these transactions bear the essential characteristics of a repurchase agreement and, therefore, are reportable and reservable under Regulation D.
Because many of these transactions give rise to deposit liabilities in the form of promissory notes, acknowledgments of advance or similar obligations (written or oral) as described in section 204.2(a)(1)(vii) of Regulation D, the exemptions from the definition of “deposit” incorporated in that section may apply to the liability incurred by a depository institution when it offers or originates a loanstrip facility. Thus, for example, loan strips sold to domestic offices of other depository institutions are exempt from Regulation D under section 204.2(a)(1)(vii)(A)(1) because they are obligations issued or undertaken and held for the account of a U.S. office of another depository institution. Similarly, some of these transactions result in Eurocurrency liabilities and are reportable and reservable as such. 12 CFR 204.132.
2-261

INTERNATIONAL BANKING FACILITIES—Policy Statement on Use of IBF Deposits and Loans

The Board believes that authorization of IBFs will enhance the competitive position of U.S. offices of depository institutions and Edge and agreement corporations, and of U.S. branches and agencies of foreign banks. The Board expects that, with respect to nonbank customers located outside the United States, IBFs will accept only deposits that support the customer’s operations outside the United States and will extend credit only to finance the customer’s non-U.S. operations. Deposits should not be used as a means of circumventing interest rate restrictions or reserve requirements applicable to U.S. depository institutions, Edge or agreement corporations and U.S. branches and agencies of foreign banks. This policy is required to be communicated in writing to an IBF nonbank customer at the time a loan or deposit account relationship is first established. Furthermore, nonbank foreign affiliates of U.S. residents will be required to acknowledge in writing receipt of such notice.
The following model statement could be used by IBFs to advise their nonbank deposit and loan customers of the Board’s policy:
 It is the policy of the Board of Governors of the Federal Reserve System that, with respect to nonbank customers, deposits received by international banking facilities may be used only to support the non-U.S. operations of a depositor (or its foreign affiliates) located outside the United States and that extensions of credit by international banking facilities may be used only to finance the non-U.S. operations of a customer (or its foreign affiliates) located outside the U.S.
The following model statement could be used by IBFs to obtain an acknowledgment of receipt of such notice upon the opening of a deposit or loan relationship from nonbank customers that are foreign affiliates of U.S. residents. (A loan relationship may be established either by opening a line of credit or by granting a loan other than under a line of credit.)
  
, a nonbank entity located outside the United States, understands that it is the policy of the Board of Governors of the Federal Reserve System that deposits received by international banking facilities may be used only to support the non-U.S. operations of a depositor (or its foreign affiliates) located outside the United States and that extensions of credit by international banking facilities may be used only to finance the non-U.S. operations of a customer (or its foreign affiliates) located outside the U.S.
  
, acknowledges that funds it deposits with the IBF of
will be used solely in support of its non-U.S. operations, or that of its foreign affiliates, and that the proceeds of its borrowings from the IBF will be used solely to finance its operations outside the United States, or that of its foreign affiliates.
STATEMENT of June 18, 1981.
2-262

INTERNATIONAL BANKING FACILITIES—Loans to Finance Operations Outside the United States

Beginning December 3, 1981, international banking facilities (IBFs) will be permitted under Regulations D and Q (12 CFR 204 and 217)* to extend credit to a non-United States resident or to a foreign affiliate of a domestic corporation “provided that the funds are used only to finance the operations outside the United States of the borrower or its affiliates located outside the United States.” Numerous inquiries have been received as to the meaning of the phrase “to finance the operations outside the United States.” The purpose of this letter is to clarify some of the issues that have arisen in connection with this phrase.
An IBF will be permitted to extend credit to a foreign resident if the proceeds are to be used by the borrower to purchase goods and services for use in its non-U.S. operations, regardless of where the payment for such goods and services is made. The determining factor as to whether IBF credit is being used to finance operations outside the United States is where the goods and services ultimately will be used rather than to whom the funds will be paid. Accordingly, an IBF would be permitted, for example, to extend credit to a foreign corporation to finance the purchase of machinery and equipment from a U.S. manufacturer for use outside the United States, even if the loan proceeds are paid directly to the U.S. manufacturer.
An additional issue on which the staff has received questions involves a foreign resident’s international transportation and communication operations in which the United States is an end point. For example, questions have been raised whether the business of a foreign-based airline flying from foreign cities to points in the United States would be regarded as “operations outside the United States.” The staff believes that such operations should be considered as “operations outside the United States.” Thus, an IBF could extend credit to a foreign airline to purchase an airliner that will be used exclusively in flights from a foreign country to points in the United States and return or between points in other foreign countries. S-2451; Nov. 9, 1981.
*
This reference to 12 CFR 217 refers to the Board’s Regulation Q: Prohibition Against Payment of Interest on Demand Deposits, repealed effective July 21, 2011 (76 FR 42015, July 18, 2011).
2-263

INTERNATIONAL BANKING FACILITIES—Secondary Market Activities

Questions have been raised concerning the extent to which international banking facilities may purchase (or sell) IBF-eligible assets such as loans (including loan participations), securities, CDs, and banker’s acceptances from (or to) third parties. Under the Board’s regulations, as specified in section 204.8 of Regulation D, IBFs are limited, with respect to making loans and accepting deposits, to dealing only with certain customers, such as other IBFs and foreign offices of other organizations, and with the entity establishing the IBF. In addition, an IBF may extend credit to a nonbank customer only to finance the borrower’s non-U.S. operations and may accept deposits from a nonbank customer that are used only to support the depositor’s non-U.S. business.
Consistent with the Board’s intent, IBFs may purchase IBF-eligible assets1 from, or sell such assets to, any domestic or foreign customer provided that the transactions are at arm’s length without recourse. However, an IBF of a U.S. depository institution may not purchase assets from, or sell such assets to, any U.S. affiliate of the institution establishing the IBF; an IBF of an Edge or agreement corporation may not purchase assets from, or sell assets to, any U.S. affiliate of the Edge or agreement corporation or to U.S. branches of the Edge or agreement corporation other than the branch2 establishing the IBF; and an IBF of a U.S. branch or agency of a foreign bank may not purchase assets from, or sell assets to any U.S. affiliate of the foreign bank or to any other U.S. branch or agency of the same foreign bank.2 (This would not prevent an IBF from purchasing (or selling) assets directly from (or to) any IBF, including an IBF of an affiliate, or to the institution establishing the IBF; such purchases from the institution establishing the IBF would continue to be subject to Eurocurrency reserve requirements except during the initial four-week transition period.) Since repurchase agreements are regarded as loans, transactions involving repurchase agreements are permitted only with customers who are otherwise eligible to deal with IBFs, as specified in Regulation D.
In the case of purchases of assets, in order to determine that the Board’s use-of-proceeds requirement has been met, it is necessary for the IBF (1) to ascertain that the applicable IBF notices and acknowledgments have been provided; or (2) in the case of loans or securities, to review the documentation underlying the loan or security, or accompanying the security (e.g., the prospectus or offering statement), to determine that the proceeds are being used only to finance the obligor’s operations outside the United States; or (3) in the case of loans, to obtain a statement from either the seller or borrower that the proceeds are being used only to finance operations outside the United States, or in the case of securities, to obtain such a statement from the obligor; or (4) in the case of banker’s acceptances, to review the underlying documentation to determine that the proceeds are being used only to finance the parties’ operations outside the United States.
Under the Board’s regulations, IBFs are not permitted to issue negotiable Euro-CDs, banker’s acceptances, or similar instruments. Accordingly, consistent with the Board’s intent in this area, IBFs may sell such instruments issued by third parties that qualify as IBF-eligible assets provided that the IBF, its establishing institution, and any affiliate of the institution establishing the IBF do not endorse, accept, or otherwise guarantee the instrument. 12 CFR 204.122; S-2455, Dec. 16, 1981, and Jan. 12, 1982.
1
In order for an asset to be eligible to be held by an IBF, the obligor or issuer of the instrument, or in the case of banker’s acceptances, the customer and any endorser or acceptor, must be an IBF-eligible customer.
2
Branches of Edge or agreement corporations and agencies and branches of foreign banks that file a consolidated report for reserve requirements purposes (Form FR 2900) are considered to be the establishing entity of an IBF.
2-275

NOW ACCOUNT ELIGIBILITY

In response to many requests for rulings, the Board has determined to clarify the types of entities that may maintain NOW accounts at member banks.
Individuals. Any individual may maintain a NOW account regardless of the purposes that the funds will serve. Thus, deposits of an individual used in his or her business including a sole proprietor or an individual doing business under a trade name is eligible to maintain a NOW account in the individual’s name or in the DBA name. However, other entities organized or operated to make a profit such as corporations, partnerships, associations, business trusts, or other organizations may not maintain NOW accounts.
Pension funds, escrow accounts, security deposits, and other funds held under various agency agreements may also be classified as NOW accounts if the entire beneficial interest is held by individuals or other entities eligible to maintain NOW accounts directly. The Board believes that these accounts are similar in nature to trust accounts and should be accorded identical treatment. Therefore, such funds may be regarded as eligible for classification as NOW accounts.
Nonprofit organizations. A nonprofit organization that is operated primarily for religious, philanthropic, charitable, educational, political or other similar purposes may maintain a NOW account. The Board regards the following kinds of organizations as eligible for NOW accounts under this standard if they are not operated for profit:
  • Organizations described in section 501(c)(3) through (13), and (19) of the Internal Revenue Code (26 USC (IRC 1954) 501(c)(3)-(13) and (19));
  • Political organizations described in section 527 of the Internal Revenue Code (26 USC (IRC 1954) 527); and
  • Homeowners and condominium owners associations described in section 528 of the Internal Revenue Code (26 USC (IRC 1954) 528), including housing cooperative associations that perform similar functions.
All organizations that are operated for profit are not eligible to maintain NOW accounts at depository institutions.
The following types of organizations described in the cited provisions of the Internal Revenue Code are among those not eligible to maintain NOW accounts:
  • Credit unions and other mutual depository institutions described in section 501(c)(14) of the Internal Revenue Code (26 USC (IRC 1954) 501(c)(14));
  • Mutual insurance companies described in section 501(c)(15) of the Internal Revenue Code (26 USC (IRC 1954) 501(c)(15));
  • Crop financing organizations described in section 501(c)(16) of the Internal Revenue Code (26 USC (IRC 1954) 501(c)(16));
  • Organizations created to function as part of a qualified group legal services plan described in section 501(c)(20) of the Internal Revenue Code (26 USC (IRC 1954) 501(c)(20)); or
  • Farmers’ cooperatives described in section 521 of the Internal Revenue Code (26 USC (IRC 1954) 521).
Governmental units. Governmental units are generally eligible to maintain NOW accounts at member banks. NOW accounts may consist of funds in which the entire beneficial interest is held by the United States, any state of the United States, 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.
Funds held by a fiduciary. Under current provisions, funds held in a fiduciary capacity (either by an individual fiduciary or by a corporate fiduciary such as a bank trust department or a trustee in bankruptcy), including those awaiting distribution or investment, may be held in the form of NOW accounts if all of the beneficiaries are otherwise eligible to maintain NOW accounts. The Board believes that such a classification should continue since fiduciaries are required to invest even temporarily idle balances to the greatest extent feasible in order to responsibly carry out their fiduciary duties. The availability of NOW accounts provides a convenient vehicle for providing a short-term return on temporarily idle trust funds of beneficiaries eligible to maintain accounts in their own names.
Grandfather provision. In order to avoid unduly disrupting account relationships, a NOW account established at a member bank on or before August 31, 1981, that represents funds of a nonqualifying entity that previously qualified to maintain a NOW account may continue to be maintained in a NOW account. 1981 Fed. Res. Bull. 795; 1988 Fed. Res. Bull. 125; 12 CFR 204.130.
2-280

TIME DEPOSITS—Deposits of Exempt Foreign, International, and Supranational Entities

The entities referred to in sections 204.2(c)(1)(iii)(E) and (f)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5) are:
  • Europe
  •  Bank for International Settlements
  •  European Atomic Energy Community
  •  European Central Bank
  •  European Coal and Steel Community
  •  The European Communities
  •  European Development Fund
  •  European Economic Community
  •  European Free Trade Association
  •  European Fund
  •  European Investment Bank
  • Latin America
  •  Andean Development Corporation
  •  Andean Subregional Group
  •  Caribbean Development Bank
  •  Caribbean Free Trade Association
  •  Caribbean Regional Development Agency
  •  Central American Bank for Economic Integration
  •  The Central American Institute for Industrial Research and Technology
  •  Central American Monetary Stabilization Fund
  •  East Caribbean Common Market
  •  Latin American Free Trade Association
  •  Organization for Central American States
  •  Permanent Secretariat of the Central American General Treaty of Economic Integration
  •  River Plate Basin Commission
  • Africa
  •  African Development Bank
  •  Banque Centrale des Etats de l’Afrique Equatorial et du Cameroun
  •  Banque Centrale des Etats d’Afrique del’Ouest
  •  Conseil de l’Entente
  •  East African Community
  •  Organisation Commune Africaine et Malagache
  •  Organization of African Unity
  •  Union des Etats de l’Afrique Centrale
  •  Union Douaniere et Economique de l’Afrique Centrale
  •  Union Douaniere des Etats de l’Afrique de l’Ouest
  • Asia
  •  Asia and Pacific Council
  •  Association of Southeast Asian Nations
  •  Bank of Taiwan
  •  Korea Exchange Bank
  • Middle East
  •  Central Treaty Organization
  •  Regional Cooperation for Development
1988 Fed. Res. Bull. 122; 12 CFR 204.125.
2-280.1

TIME DEPOSITS—Institution’s Purchase of Own in Secondary Market

Background. In 1982, the Board issued an interpretation concerning the effect of a member bank’s purchase of its own time deposits in the secondary market in order to ensure compliance with regulatory restrictions on the payment of interest on time deposits, with the prohibition against payment of interest on demand deposits, and with regulatory requirements designed to distinguish between time deposits and demand deposits for federal reserve requirement purposes (47 Fed. Reg. 37,878). The interpretation was designed to ensure that the regulatory early withdrawal penalties in Regulation Q used to achieve these three purposes were not evaded through the purchase by a member bank or its affiliate of a time deposit of the member bank prior to the maturity of the deposit.
Because the expiration of the Depository Institutions Deregulation Act (title II of Public Law 96-221) on April 1, 1986, removed the authority to set interest rate ceilings on deposits, one of the purposes for adopting the interpretation was eliminated. The removal of the authority to set interest rate ceilings on deposits required the Board to revise the early withdrawal penalties, which were also used to distinguish between types of deposits for reserve requirement purposes. Effective April 1, 1986, the Board amended its Regulation D to incorporate early withdrawal penalties applicable to all depository institutions for this purpose (51 Fed. Reg. 9,629). Although the new early withdrawal penalties differ from the penalties used to enforce interest rate ceilings, secondary-market purchases still effectively shorten the maturities of deposits and may be used to evade reserve requirements. This interpretation replaces the prior interpretation and states the application of the new early withdrawal penalties to purchases by depository institutions and their affiliates of the depository institution’s time deposits. The interpretation applies only to situations in which the Board’s regulatory penalties apply.
Secondary-market purchases under the rule. The Board has determined that a depository institution purchasing a time deposit it has issued should be regarded as having paid the time deposit prior to maturity. The effect of the transaction is that the depository institution has cancelled a liability as opposed to having acquired an asset for its portfolio. Thus, the depository institution is required to impose any early withdrawal penalty required by Regulation D on the party from whom it purchases the instrument by deducting the amount of the penalty from the purchase price. The Board recognizes, however, that secondary-market sales of time deposits are often done without regard to the identity of the original owner of the deposit. Such sales typically involve a pool of time deposits with the price based on the aggregate face value and average rate of return on the deposits. A depository institution purchasing time deposits from persons other than the person to whom the deposit was originally issued should be aware of the parties named on each of the deposits it is purchasing but through failure to inspect the deposits prior to the purchase may not be aware at the time it purchases a pool of time deposits that it originally issued one or more of the deposits in the pool. In such cases, if a purchasing depository institution does not wish to assess an applicable early withdrawal penalty, the deposit may be sold immediately in the secondary market as an alternative to imposing the early withdrawal penalty.
Purchases by affiliates. On a consolidated basis, if an affiliate (as defined in section 204.2(q) of Regulation D) of a depository institution purchases a CD issued by the depository institution, the purchase does not reduce their consolidated liabilities and could be accomplished primarily to assist the depository institution in avoiding the requirements of the Board’s Regulation D. Because the effect of the early withdrawal penalty rule could be easily circumvented by purchases of time deposits by affiliates, such purchases are also regarded as an early withdrawal of the time deposit, and the purchase should be treated as if the depository institution made the purchase directly. Thus, the regulatory requirements for early withdrawal penalties apply to affiliates of a depository institution as well as to the institution itself.
Depository institution acting as broker. The Board believes that it is permissible for a depository institution to facilitate the secondary market for its own time deposits by finding a purchaser for a time deposit that a customer is trying to sell. In such instances, the depository institution will not be paying out any of its own funds, and the depositor does not have a guarantee that the depository institution will actually be able to find a buyer.
Third-party market makers. A depository institution may also establish and advertise arrangements whereby an unaffiliated third party agrees in advance to purchase time deposits issued by the institution. The Board would not regard these transactions as inconsistent with the purposes that the early withdrawal penalty is intended to serve unless a depository institution pays a fee to the third-party purchaser as compensation for making the purchases or to remove the risk from purchasing the deposits. In this regard, any interim financing provided to such a third party by a depository institution in connection with the institution’s secondary-market activity involving the institution’s time deposits must be made substantially on the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other similarly situated persons and may not involve more than the normal risk of repayment.
Reciprocal arrangements. Finally, while a depository institution may enter into an arrangement with an unaffiliated third party wherein the third party agrees to stand ready to purchase time deposits held by the depository institution’s customers, the Board will regard a reciprocal arrangement with another depository institution for purchase of each other’s time deposits as a circumvention of the early withdrawal penalty rule and the purposes it is designed to serve. 1988 Fed. Res. Bull. 126; 12 CFR 204.131.
2-280.2

TIME DEPOSITS—Early Withdrawal; Extensions in Maturity

Questions have been raised about the application to certain situations of the Board’s October 31, 1977 amendment to Regulation Q permitting extensions in the maturity of time deposits without imposition of an early withdrawal penalty. The attached letter, which provides examples of the impact of the amendment, should be distributed to member banks within your District.
Dear Sir:
On October 31, 1977, the Board amended section 217.4(d) of Regulation Q to permit extensions in the maturity of time deposits. This letter is intended to provide further explanation as to the circumstances under which the maturity of existing time deposit agreements may be extended without imposition of an early withdrawal penalty.
Section 217.4(d) of Regulation Q currently provides that any amendment of a time deposit contract that results in either an increase in the rate of interest paid or a change in the maturity of the deposit constitutes a payment of the time deposit before maturity that is subject to the early withdrawal penalty provision. As a result of the Board’s amendment, effective December 1, 1977, section 217.4(d) will provide that any amendment resulting either in an increase in the rate of interest paid or in a reduction in the maturity of the time deposit constitutes a payment of the deposit before maturity requiring imposition of the early withdrawal penalty. Therefore, the amendment enables a member bank, at the request of its depositor, to extend the maturity of an outstanding time deposit without treating such extension of maturity as an early withdrawal so long as the rate of interest paid is not increased.
Consistent with long-standing Board policy, if a member bank extends the maturity of an outstanding time deposit, the new certificate must have a maturity from the date of extension at least equal to the minimum period necessary under section 217.7 of Regulation Q to obtain the rate of interest to be paid under the extended deposit agreement. For example, a time certificate of deposit with an original maturity of four years that has two years remaining until maturity and earns interest at a rate of 7¼ percent, must be extended for at least an additional two years so that the total maturity of the certificate from the date of extension is at least four years, in order for the certificate to continue to earn interest at 7¼ percent. The fact that the deposit has already been on deposit for two years is not relevant in determining the minimum maturity from the date of extension. In the same situation, should the depositor desire to increase the maturity for only one additional year, leaving a total of three years remaining to maturity after extension, the maximum permissible rate on such a deposit would be 6.50 percent.
Without a restriction of the kind described above, the maturity of an outstanding certificate could be extended so as to enable the depositor to obtain interest at a rate higher than that permitted for the additional time the funds will remain on deposit and thus could result in evasions of the limitations on maximum interest rates prescribed by the Board. Thus, if a four-year certificate could be amended to extend its maturity for an additional month and could continue to earn interest at the four-year rate, successive extensions would make it possible for the depositor, after an initial four years, to continue to obtain the maximum rate of 7¼ percent while in effect being able to withdraw his deposit at the end of each additional month. Therefore, under the Board’s amendment, this type of extension is not permitted without imposition of a penalty.
The amendment to the penalty rule also enables a member bank to consolidate a customer’s outstanding certificates of deposit into one new certificate so long as the rate of interest paid on the consolidated time deposit is not higher than the lowest rate of interest paid on any of the certificates being consolidated. Of course, as in the case of an extension of maturity of a single time deposit, it is required that from the date of consolidation the new certificate possess a minimum maturity at least equal to the minimum period necessary under section 217.7 of Regulation Q to obtain the rate of interest to be paid on the consolidated deposit. In no event may the maturity of any of the time deposits being consolidated be reduced as the result of the consolidation unless an early withdrawal penalty is imposed. Additional examples of the application of the new rule follow.
Example 1
The depositor holds a time certificate of deposit earning interest at a rate of 7½ percent with an original maturity of six years. The certificate has three years remaining until maturity. In this situation, the maturity of the certificate must be extended for at least three years so that the maturity of the certificate from the date of extension is at least six years, in order for the bank to continue to pay interest on the certificate at a rate of 7½ percent. If the maturity of the certificate is extended for only one year so that the maturity from the date of extension is four years, the maximum rate of interest that may be paid on the certificate from the date of extension is 7¼ percent.
Example 2
The depositor holds several certificates obtained on different dates all with original maturities of four years and earning interest at the rate of 7¼ percent. These certificates may be consolidated into one new certificate with a maturity from the date of consolidation of four years that earns interest at the rate of 7¼ percent.
Example 3
The depositor holds two certificates with original maturities of four years and six years earning interest at rates of 7¼ and 7½ percent, respectively. The certificates have remaining maturities of two years and four years, respectively. In this case, the certificates could be consolidated into one new certificate with a maturity of four or more years from the date of consolidation earning interest at the maximum rate of 7¼ percent. Consolidation into one new certificate earning interest at the rate of 7½ percent would not be possible without imposing an early withdrawal penalty even if the maturity were six years or more from the date of consolidation since such action would result in an increase in the rate of interest paid on one of the original deposits from 7¼ to 7½ percent. In order to pay interest on the new certificate at the rate of 7½ percent, the bank would be required to impose the early withdrawal penalty only upon the funds represent ed by the certificate with the original maturity of four years earning interest at the rate of 7½ percent.
A copy of the earlier press release and Federal Register notice of the Board’s action in this matter is enclosed. S-2360; Nov. 16, 1977.
Time deposits are now covered by section 204.2(c) of Regulation D.

TIME DEPOSITS—Linked to Transaction Accounts

See 2-287.
2-285

TRANSACTION ACCOUNTS—NOW Accounts and MMDAs

It is our understanding that at least one depository institution is offering, and several institutions have inquired about offering, an account arrangement that integrates both a money market deposit account (MMDA) and a NOW account. Under the arrangement, the depositor would initially open an MMDA. If the depositor actually exceeds the permissible number of transfers per month (six preauthorized, automatic, or telephone transfers, no more than three of which may be checks), the account automatically would be converted to a NOW account the first time a transfer occurs in excess of the limit. The account would remain a NOW for the rest of the statement cycle. At the beginning of the next statement cycle, the account would be converted back to an MMDA and the procedure would recommence. The underlying objective of such an arrangement is to allow the institution to report the account as a savings deposit for that part of the statement cycle during which the account is regarded as an MMDA, thereby avoiding transaction account reserve requirements.
Under Regulation D, the account arrangement described above is regarded as a transaction account at all times and should be reported as such, since the arrangement permits the depositor to make more than six preauthorized or telephone transfers and draw more than three checks per month. It is well established under Regulation D that the characterization of an account as a transaction account is dependent upon whether the depositor has the ability to effectuate certain transactions rather than whether such transactions actually occur. In the account arrangement in question, the depositor is authorized to effectuate transactions in excess of the limit for an MMDA and the purported existence of two accounts is merely a device to avoid reserve requirements. Any such arrangement must be reported as a NOW at all times and not as an MMDA. In addition, permitting an account to shift status as proposed would greatly complicate the interpretation of the monetary aggregates.
In establishing the reserve requirements applicable to the MMDA, the Board indicated that an MMDA will not be regarded as a transaction account if the account satisfies the conditions of section 204.2(d)(2)(ii) of Regulation D and is not otherwise regarded as a transaction account. Under Regulation D, a depository institution may monitor MMDAs on an ex post basis and contact depositors who exceed those limits on more than an occasional basis. It should be noted that an MMDA subject to such procedures is not a transaction account even if the customer has made inadvertent transfers in excess of the limit during the month and such accounts are not to be reported as transaction accounts. For customers that continue to exceed the transactions limit after being contacted, the institution is required to close the account or take away the transactions capability. Jan. 18, 1983 (revised).
2-286

TRANSACTION ACCOUNTS—Multiple Savings Deposits Treated as

Authority
Under section 19(a) of the Federal Reserve Act, the Board is authorized to define the terms used in section 19, and to prescribe regulations to implement and prevent evasions of the requirements of that section. Section 19(b) establishes general reserve requirements on transaction accounts and non-personal time deposits. Under section 19(b)(1)(F), the Board also is authorized to determine, by regulation or order, that an account or deposit is a transaction account if such account is used directly or indirectly for the purpose of making payments to third persons or others. This interpretation is adopted under these authorities.
Background
Under Regulation D, 12 CFR 204.2(d)(2), the term “savings deposit” includes a deposit or an account that meets the requirements of section 204.2(d)(1) and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor is permitted or authorized to make up to six transfers or withdrawals per month or statement cycle of at least four weeks. The depository institution may authorize up to three of these six transfers to be made by check, draft, debit card, or similar order drawn by the depositor and payable to third parties. If more than six transfers (or more than three third-party transfers by check, etc.) are permitted or authorized per month or statement cycle, the depository institution may not classify the account as a savings deposit. If the depositor, during the period, makes more than six transfers or withdrawals (or more than three third-party transfers by check, etc.), the depository institution may, depending upon the facts and circumstances, be required by Regulation D (footnote 5 at section 204.2(d)(2)) to reclassify or close the account.
Use of Multiple Savings Deposits
Depository institutions have asked for guidance as to when a depositor may maintain more than one savings deposit and be permitted to make all the transfers or withdrawals authorized for savings deposits under Regulation D from each savings deposit. The Board has determined that, if a depository institution suggests or otherwise promotes the establishment of or operation of multiple savings accounts with transfer capabilities in order to permit transfers and withdrawals in excess of those permitted by Regulation D for an individual savings account, the accounts generally should be considered to be transaction accounts. This determination applies regardless of whether the deposits have entirely separate account numbers or are subsidiary accounts of a master deposit account. Multiple savings accounts, however, should not be considered to be transaction accounts if there is a legitimate purpose, other than increasing the number of transfers or withdrawals, for opening more than one savings deposit.
Examples
The distinction between appropriate and inappropriate uses of multiple accounts is illustrated by the following examples:
Example 1. X wishes to open an account that maximizes his interest earnings but also permits X to draw up to ten checks a month against the account. X’s bank suggests an arrangement under which X establishes four savings deposits at Bank. Under the arrangement, X deposits funds in the first account and then draws three checks against that account. X then instructs Bank to transfer all funds in excess of the amount of the three checks to the second account and draws an additional three checks. Funds are continually shifted between accounts when additional checks are drawn so that no more than three checks are drawn against each account each month.
Suggesting the use of four savings accounts in the name of X in this example is designed solely to permit the customer to exceed the transfer limitations on savings accounts. Accordingly, the savings accounts should be classified as transaction accounts.
Example 2. X is trustee of separate trusts for each of his four children. X’s bank suggests that X, as trustee, open a savings deposit in a depository institution for each of his four children in order to ensure an independent accounting of the funds held by each trust.
X’s bank’s suggestion to use four savings deposits in the name of X in this example is appropriate, and the third party transfers from one account should not be considered in determing whether the transfer and withdrawal limit was exceeded on any other account. X established a legitimate purpose, the segregation of the trust assets, for each account separate from the need to make third-party transfers. Furthermore, there is no indication, such as by the direct or indirect transfer of funds from one account to another, that the accounts are being used for any purpose other than to make transfers to the appropriate trust.
Example 3. X opens four savings accounts with Bank. X regularly draws up to three checks against each account and transfers funds between the accounts in order to ensure that the checks on the separate accounts are covered. X’s bank did not suggest or otherwise promote the arrangement.
X’s bank may treat the multiple accounts as savings deposits for Regulation D purposes, even if it discovers that X is using the accounts to increase the transfer limits applicable to savings accounts because X’s bank did not suggest or otherwise promote the establishment of or operation of the arrangement. 12 CFR 204.133.
2-287

TRANSACTION ACCOUNTS—Linked to Time Deposits

Authority
Under section 19(a) of the Federal Reserve Act (12 USC 461(a)), the Board is authorized to define the terms used in section 19, and to prescribe regulations to implement and prevent evasions of the requirements of that section. Section 19(b)(2) establishes general reserve requirements on transaction accounts and nonpersonal time deposits. Under section 19(b)(1)(F), the Board also is authorized to determine, by regulation or order, that an account or deposit is a transaction account if such account is used directly or indirectly for the purpose of making payments to third persons or others. This interpretation is adopted under these authorities.
Linked Time Deposits and Transaction Accounts
Some depository institutions are offering or proposing to offer account arrangements under which a group of participating depositors maintain transaction accounts and time deposits with a depository institution in an arrangement under which each depositor may draw checks up to the aggregate amount held by that depositor in these accounts. Under this account arrangement, at the end of the day funds over a specified balance in each depositor’s transaction account are swept from the transaction account into a commingled time deposit. A separate time deposit is opened on each business day with the balance of deposits received that day, as well as the proceeds of any time deposit that has matured that day that are not used to pay checks or withdrawals from the transaction accounts. The time deposits, which generally have maturities of seven days, are staggered so that one or more time deposits mature each business day. Funds are apportioned among the various time deposits in a manner calculated to minimize the possibility that the funds available on any given day would be insufficient to pay all items presented.
The time deposits involved in such an arrangement may be held directly by the depositor or indirectly through a trust or other arrangement. The individual depositor’s interest in time deposits may be identifiable, with an agreement by the depositors that balances held in the arrangement may be used to pay checks drawn by other depositors participating in the arrangement, or the depositor may have an undivided interest in a series of time deposits.
Each day funds from the maturing time deposits are available to pay checks or other charges to the depositor’s transaction account. The depository institution’s decision concerning whether to pay checks drawn on an individual depositor’s transaction account is based on the aggregate amount of funds that the depositor has invested in the arrangement, including any amount that may be invested in unmatured time deposits. Only if checks drawn by all participants in the arrangement exceed the total balance of funds available that day (i.e. funds from the time deposit that has matured that day as well as any deposits made to participating accounts during the day) is a time deposit withdrawn prior to maturity so as to incur an early withdrawal penalty. The arrangement may be marketed as providing the customer unlimited access to its funds with a high rate of interest.
Determination
In these arrangements, the aggregate deposit balances of all participants generally vary by a comparatively small amount, allowing the time deposits maturing on any day safely to cover any charges to the depositors’ transaction accounts and avoiding any early withdrawal penalties. Thus, this arrangement substitutes time-deposit balances for transaction-account balances with no practical restrictions on the depositors’ access to their funds, and serves no business purpose other than to allow the payment of higher interest through the avoidance of reserve requirements. As the time deposits may be used to provide funds indirectly for the purposes of making payments or transfers to third persons, the Board has determined that the time deposits should be considered to be transaction accounts for the purposes of Regulation D. 12 CFR 204.134.
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