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F ederal Reserve bank of Dallas

DALLAS, TEXAS

75222

Circular No. 68-207
October 2, 1968

To All Member Banks
in the
Eleventh Federal Reserve District:
There is enclosed a copy of a statement for thepress
by the Board of Governors of the Federal Reserve System dated
September 25, 19^8, together with a copy of a notice proposing
an amendment to Regulation D, "Reserves of Member Banks," and
Regulation Q, "Payment of Interest on Deposits."
The proposal would limit the types of promissory notes
which are exempt from the rules governing member bank reserves
(Regulation D) and the payment of interest on deposits (Regula­
tion Q).
To aid in the consideration of this matter by the
Board, interested persons are invited to submit relevant data,
views, or arguments in writing to the Secretary, Board of Gover­
nors of the Federal Reserve System, Washington, D. C. 20551> to
be received not later than October 28, 1 9 6 8 .
Yours very truly,
P. E. Coldwell
President
Enclosures (2)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL RESERVE SYSTEM
[12 CFR Parts 204, 217]
[Regs. D, Q]
RESERVES OF MEMBER BANKS; PAYMENT OF INTEREST ON DEPOSITS
Promissory Notes as Deposits
The Board of Governors is considering amending section 204.1(f)
and section 217.1(f) to read as follows:
§ 204.1
§ 217.1

Definitions.
Definitions.
* * *

(f)

Deposits as including certain promissory notes. For the

purposes of this part, the term "deposits" shall be deemed to include the
proceeds of any promissory note, acknowledgment of advance, due bill, or
similar obligation (written or oral) that is issued by a member bank prin­
cipally as a means of obtaining funds to be used in its banking business,
except any such instrument (1) that is issued to and held by another bank,
a foreign government, a monetary or financial authority of a foreign gov­
ernment when acting as such, or an international financial institution of
which the United States is a member, (2) that evidences an indebtedness
arising from a transfer of obligations that are direct obligations of the
United States or any agency thereof or are fully guaranteed as to prin­
cipal and interest by the United States or any agency thereof (other than
a pro rata interest in a pool of such obligations) that the bank is obli­
gated to repurchase, or (3) that has an original maturity of more than
two years and states expressly that it is subordinated to the claims of
depositors.

This paragraph shall not, however, affect the status, for

the purposes of this part, of any instrument issued before June 27, 1966,
or any instrument that evidences an indebtedness arising from a transfer
of assets under repurchase agreement issued before September 25, 1968.

2*

*

*

*

*

The principal purpose of the proposal is to limit the scope of
the repurchase agreement exemption from deposits for the purposes of rules
governing member bank reserves (Regulation D) and payment of interest on
deposits (Regulation Q).

At present the exemption applies to any indebted­

ness (written or oral) arising from a transfer of any assets under repur­
chase agreement.

Broadly speaking, under the proposed §§ 204*1(f) and

217.1(f) the exemption would apply only to repurchase agreements, evidenced
in writing, with respect to obligations of the United States or its agen­
cies as to which the bank transfers its entire interest.

Limiting the scope

of such exemption has become necessary in view of recent and contemplated
use by certain banks of repurchase agreements to avoid reserve requirements
and the rules governing payment of interest on deposits.
The proposal is also designed to expand the scope of the inter­
bank exemption from deposits to include liabilities on promissory notes
issued by a member bank to nonbank foreign monetary or financial authori­
ties.

Under section 217.3(a) the time deposits of such organizations are

exempt from interest rate limitations.

Making the inter-bank exemption

completely parallel with the exemption from time deposit interest rate
limitations insofar as institutions are concerned seems reasonable in view
of their international nature, the possible benefits from the standpoint of
the balance of payments, and the unlikelihood that the limited expansion of
the inter-bank exemption that is involved could be used as a device by banks
to avoid the purposes of Regulations D and Q.

-3 This notice is published pursuant to section 553(b) of Title 5,
United States Code, and section 262•2(a) of the rules of procedure of the
Board of Governors.
To aid in the consideration of this matter by the Board, inter­
ested persons are invited to submit relevant data, views, or arguments,
Any such material should be submitted in writing to the Secretary, Board
of Governors of the Federal Reserve System, Washington, D* C., 20551, to
be received not later than October 28, 1968*
Dated at Washington, D. C., this 25th day of September, 1968.
By order of the Board of Governors.

(Signed)

Kenneth A. Kenyon
Kenneth A. Kenyon,
Deputy Secretary.

(SEAL)

For immediate release.

September 25, 1968.

The Board of Governors of the Federal Reserve System today
published for comment a proposal to limit the types of promissory
notes which are exempt from rules governing member bank reserves
(Regulation D) and the payment of interest on deposits (Regulation Q ) .
Major purpose of the proposed change would be to narrow the
scope of an exemption for bank liabilities on repurchase agreements
(those involving sales of instruments with an agreement for subsequent
repurchase) from classification as deposits subject to those
regulations.
At present, the exemption applies to any indebtedness of a
bank, written or oral, arising from a transfer of any assets under a
repurchase agreement.

Under the proposed change the exemption would

apply generally only to written repurchase agreements on obligations
of the U. S. Government or its agencies as to which the bank transfers
its entire interest.
On all other repurchase agreements with a person other than
a bank, the bank would be required under the proposal to maintain
reserves as provided under Regulation D and would be limited under
Regulation Q to the amount of interest it could pay on funds borrowed
in this manner.

Liabilities on any repurchase agreement with a bank

would remain exempt from classification as a deposit.
The Board said limiting the exemption appears necessary
because of recent and contemplated use by some banks of repurchase

-2 -

agreements to avoid reserve requirements and the rules governing
payment of interest on deposits.
The Board said comments from interested parties should be
submitted in writing within 30 days.
A copy of the notice of proposed rule making submitted for
publication in the Federal Register is attached.

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102