Full text of Federal Reserve Bank of New York Circulars : 7175. Interpretation of Regulation D

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FED ER AL RESERVE BANK
OF NEW YORK
T Circular No. 71751
L
July 3, 1973
J

INTERPRETATION OF REGULATION D
Reserves Against Commercial Paper; Base for Marginal Reserve Requirement
To the Member Banks of the Second Federal Reserve District:

Printed below is the text of an interpretation of Regulation D, “ Reserves of Member Banks,”
of the Board of Governors of the Federal Reserve System. The interpretation relates to reserves
against commercial paper of member banks and their affiliates and to the calculation of the base
for purposes of the new marginal reserve requirement in the event two banks merge.
Additional copies of this circular will be furnished upon request.
A

lfr ed

H

ayes,

President.
(Reg. D)
12 CFR

Part

204— RESERVES OF MEMBER BANKS

§ 204.117— Reserves against commercial paper
(a) A number of questions have recently arisen con­
cerning reserves against commercial paper of member
banks and their affiliates, under §204.1 (f) of the
Board’s Regulation D, and concerning the Board’s
recently adopted marginal reserve requirements.
(b ) The question has been presented whether the
commercial paper issued by an “ operations subsidiary”
of a member bank is subject to the provisions of the
last sentence o f §204.1 (f)— which is applicable to “ af­
filiates” of member banks— or whether it is subject to
the same regulatory provisions to which a member
bank is subject. In 1968, the Board published an in­
terpretation on “ operations subsidiaries” , which defines
such subsidiaries as “ separately-incorporated depart­
ments of the bank, performing, at locations at which
the bank is authorized to engage in business, functions
that the bank is empowered to perform directly.” 1968
Bulletin 681; 12 CFR 250.141. The Board indicated
that the incidental powers clause of the National Bank
Act permits the establishment of such a subsidiary,
since “ a wholly-owned subsidiary corporation engaged
in activities that the bank itself may perform is simply
a convenient alternative organizational arrangement”
to department organization. Also in 1968, the Comp­
troller revised his ruling on “ operating subsidiaries”
to state that “ [ejxcept as otherwise permitted by statute
or regulation, all provisions of Federal banking laws
applicable to the operations of the parent bank shall
be equally applicable to the operations of its operating
subsidiaries.” Comptroller’s Manual |[7.7376. Accord­
ingly, it is the Board’s view that the provisions of
Regulation D applicable to a member bank are equally
applicable to any of its “ operations subsidiaries.” The
liability of any other “ affiliate” of a member bank (as
such term is defined in section 2 of the Banking Act
of 1933) on commercial paper obligations is subject to
the provisions of the last sentence of §204.1 ( f ) .
(c ) The question has also been presented whether
the original maturity on the commercial paper of a
member bank’s affiliate is determinative of the status



of the proceeds supplied to the bank as a demand de­
posit or time deposit. For example, suppose the affiliate
issues promissory notes with an original maturity of
35 days, and after a delay of 15 days channels the
funds to the bank through the purchase of loans from
the bank. In this situation, the bank has use of the funds
for only 20 days, and, accordingly, demand deposit
reserve requirements should apply. (Proceeds chan­
neled to the bank in the form of a deposit would be
subject either to demand deposit or time deposit reserve
requirements, depending on the form the deposit takes.
See 12 CFR 204.115(c).) Thus, in determining de­
mand deposit or time deposit status, the operative con­
sideration is the period remaining to maturity at the
time the proceeds are supplied to the bank, rather than
the original maturity on the promissory notes issued
by the affiliate.
(d )
A question has also been raised concerning the
proper method of calculation of the base for purposes
of the marginal reserve requirement under §204.5 (a)
( l ) ( i i ) and ( 2 ) ( i i) of Regulation D, in the event
two banks merge. If two member banks merge, or if
a member bank merges with a nonmember bank that
is voluntarily cooperating with the Board’s marginal
reserve program, then the base for the resulting mem­
ber bank is the total of the two bases of the two for­
merly independent banks. If a member bank merges
with a nonmember bank that is not cooperating with
the marginal reserves program, the resulting member
bank will be asked to provide a reasonable estimate of
the base the nonmember bank would have had if it
had been cooperating with the marginal reserves pro­
gram, and the base for the resulting bank is the total
of the base of the merging member bank and the
estimated base of the nonmember. If a nonmember bank
that is not cooperating with the marginal reserves pro­
gram converts to member bank status, a reasonable
estimate of the base should be provided in that event
as well.
(Interprets and applies 12 U.S.C. 461.)
By order of the Board of Governors, June 15, 1973.