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F ederal

reserve

Ban k

DALLAS, TEXAS

of

Dallas

75222

Circular No. 69-2^5
September 2k, 19^9

PROPOSED AMENDMENTS TO REGULATIONS D AND Q

To All Member Banks
in the Eleventh Federal Reserve District:
There is enclosed a copy of the press release and
attachment dated September 19, 19^9 > of the Board of Governors
of the Federal Reserve System regarding a revised proposal to
narrow the category of "Federal funds" transactions that are
exempt from Regulations D and Q.
Comments on the proposal should be received b y the
Board no later than October 20,

1969.

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)

F E D E R A L

l

i

l

press

R E S E R V E

release

For immediate release.

September 19, 1969.

The Board of Governors of the Federal Reserve System today
issued for comment a revised proposal to narrow the category of "Federal
funds 1 transactions that are exempt from Regulations D (reserves of
1
member banks) and Q (payment of interest on deposits)•
As revised, the proposal would exempt from the reserve require­
ments and interest rate limitations of these regulations a member b a n k ’s
liability on "Federal funds" transactions only with another bank and its
subsidiaries, various governmental institutions or a securities dealer.
Such transactions with mutual savings banks as well as commercial banks
would be exempt.
An earlier version issued on June 27 was modified after con­
sideration of comments received by the Board, and in view of the
complexity of the issues involved and subsequent related actions by the
Board involving Euro-dollars.

Comments on the revised proposal should

be received by the Board no later than October 20.
A "Federal funds" transaction is one involving the purchase
or sale of member bank deposits at Federal Reserve Banks (or other
immediately available funds) for one business day at a specified rate
of interest.
A copy of the revised proposal is attached.

Attachment
-0-

FEDERAL RESERVE SYSTEM
[12 CFR Parts 204, 217]
[Regs. D, Q]
RESERVES OF MEMBER BANKS; INTEREST ON DEPOSITS
Certain Borrowings Classified as Deposits
On June 27, 1969, the Board of Governors published for comment proposed
amendments to Part 204 (Regulation D) and Part 217 (Regulation Q) designed mainly
to narrow the category of so-called "Federal funds" transactions that are exempt
from such regulations (Federal Register of July 9, 1969, 34 F.R. 11384).*

In

view of comments received, the complexity of the issues involved and related
actions taken by the Board subsequent to the June 27 proposal, the Board considers
that it would be in the public interest to publish the present revised proposal
for further comment.
In the Board*s view, four classes of Federal funds "purchases" and other
short-term borrowings by member banks should be excluded from the provisions of
Regulations D and Q.

Borrowings from other banks are one such class, because

these are necessary for effective functioning of the Federal funds market, which
is useful in the implementation of monetary policy.
"repurchase"

Two other classes are (a)

(RP) transactions in Government and Federal agency securities

eligible for Federal Reserve purchase and (b) Federal funds borrowings from
securities dealers arising from the clearance of securities, both of which facili­
tate the effective functioning of United States financial markets.

Finally, the

Board considers that it is appropriate to permit short-term borrowings by member
banks from various governmental institutions outside the basic provisions of
Regulations D and Q.

*The June 27 proposal was a reoffering of the B o a r d ’s September 25, 1968, notice of
proposed rule making (Federal Register of October 1, 1968, 33 F.R. 14648) so far
as the earlier proposal related to bringing a bank*s liabilities on nondocumentary
"nondeposit" obligations within the coverage of Regulations D and Q. Adoption of
the proposal offered for comment at this time would complete the B o a r d fs action on
the September 25, 1968, proposal as well as the June 27, 1969, proposal.

-2 -

With this v ie w in mind, the Board is considering amending section
204«l(f) of Regulation D to read as follows:
(f) Deposits as including certain promissory notes

and other

For the purposes of this part, the term ' deposits 1 also includes
‘
1
liability on any promissory note, acknowledgment of advance,
obligation (written or oral)

obligations.

a member

b a n k 1s

due bill, or

similar

that is issued or undertaken by a member bank

principally as a means of obtaining funds to be used in its banking business,
except any such obligation that:
(1) is issued to, and held for the account of, (i) a domestic banking
5a/
office—
of a bank,

(ii) an "Edge” or "Agreement" corporation operating under

section 25(a) or section 25 of the Federal Reserve Act, or (iii) an agency of the
United States;
(2) evidences an indebtedness arising from a transfer of direct obligaations of, or obligations that are fully guaranteed as to principal and interest by,
the United States or any agency thereof that the bank is obligated to repurchase;
(3) has an original maturity of more than 2 years, is unsecured, and
states expressly that it is subordinated to the claims of depositors; or
(4) arises from a borrowing by a member bank from a dealer in securities,
for one business day, of proceeds of a transfer of deposit credit in a Federal
Reserve Bank (or other immediately available funds), commonly referred to as
"Federal funds", received by such dealer on the date of the loan in connection
with clearance of securities transactions,
This paragraph shall not, however, affect (i) any instrument issued before
June 27, 1966, or (ii) any instrument that evidences an indebtedness arising
from a transfer of assets under repurchase agreement issued before July 25, 1969.

5a/ Any banking office in any State of the United States or the District of
Columbia of a bank organized under domestic or foreign law.

-3Section 217.1(f) of Regulation Q would be amended to read as follows:
(f)

Deposits as including certain promissory notes and other obligati

For the purposes of this part, the term "deposits" also includes a member bank's
liability on any promissory note, acknowledgment of advance, due bill, or similar
obligation (written or oral) that is issued or undertaken by a member bank
principally as a means of obtaining funds to be used in its banking business,
except any such obligation that:
(1) is issued to, and held for the account of,

(i) a bank, foreign

government, monetary or financial authority of a foreign government when acting
as such, or international financial institution of which the United States is a
member,

(ii) an "Edge" or "Agreement" corporation operating under section 25(a)

or section 25 of the Federal Reserve Act, or (iii) an agency of the United States;
(2) evidences an indebtedness arising from a transfer of direct obliga­
tions of, or obligations that are fully guaranteed as to principal and interest
by, the United States or any agency thereof that the bank is obligated to
repurchase;
(3) has an original maturity of more than 2 years, is unsecured, and
states expressly that it is subordinated to the claims of depositors; or
(4) arises from a borrowing by a member bank from a dealer in securities,
for one business day, of proceeds of a transfer of deposit credit in a Federal
Reserve Bank (or other immediately available funds), commonly referred to as
"Federal funds", received by such dealer on the date of the loan in connection
with clearance of securities transactions.
This paragraph shall not, however, affect
June 27, 1966, or

(i) any instrument issued before

(ii) any instrument that evidences an indebtedness arising

from a transfer of assets under repurchase agreement issued before July 25, 1969.

-4 Upon adoption of these proposed amendments, the interpretation
published as § 217.137 (Published Interpretations of the Board, S 3261)
I
("Transfer from deposit account to *borrowed money* account and payment of
interest thereon") would be revoked.
T he principal effect of the proposal is to bring within the coverage
of Regulations D and Q a member bank's liability on a so-called "Federal funds"
transaction with any person other than a bank and its subsidiaries, various
governmental institutions, or a securities dealer.**
Under the proposal, a member bank that "purchases" Federal funds
would be under a duty to take such action as may be necessary to ascertain the
nature of the "seller" in order to justify classification of its liability on
the transaction as "Federal funds purchased" rather than as a deposit.

Any

member bank that has given general assurance to another member bank that sales
by it of Federal funds ordinarily will be for its own account, and thereafter
executes such transactions for the account of others, would be expected to
indicate the nature of the actual lender

with respect to each such transaction.

If it failed to do so, the selling bank would be responsible for any resulting
violation of Regulation Q and would be deemed by the Board as violating section 19
and Regulation Q , since it would have caused the purchasing bank*s inadvertent
non-conformance.

** The only liability on a Federal funds transaction with a securities dealer
that would be exempt from the reserve requirements and interest rate limitations
of Regulations D and Q is one that arises from a borrowing for one business
day of Federal funds received by the dealer from the clearance of securities
transactions on the date of the borrowing. The Board considers that the option
of settling securities transactions in Federal funds facilitates the efficient
functioning of certain key United States securities markets.
Use of this option
might tend to be inhibited if dealer sales of such Federal funds to banks were
subject to the regulations.

-5Although the proposal relates mainly to the permissible scope of
Federal funds transactions outside Regulations D and Q, the proposal is also
designed to maintain the effectiveness of the B o a r d fs 1966 action under which
promissory notes issued by a member bank principally as a means of obtaining
funds to be used in its banking business are classified as deposits.***
To the same extent as at present, liabilities on borrowings from a
bank (including a member bank, a nonmember commercial bank, a mutual savings
bank, a cooperative bank, the Export-Import Bank of the United States, the
Government Development Bank in Puerto Rico, and a foreign bank) would remain
exempt from the reserve requirements and interest rate limitations of Regula­
tions D and Q.

In particular, liabilities on borrowings from foreign offices

of banks, while remaining exempt from Regulation Q, would remain subject to
the special reserve requirements of § 204.5(c) of Regulation D, which became
effective September 4, 1969 (Federal Register of August 20, 1969, 34 F.R. 13409).
N e w provisions would be added under which (1) a member bank's
liability on a borrowing from a Federal agency would be exempt from Regulations
D and Q, and (2) a member bank's liability on a borrowing from a foreign govern­
ment, a monetary or financial authority of a foreign government when acting as such,
or an international financial institution of which the United States is a member
would be exempt from Regulation Q.

If the latter provision is adopted,

§ 204.5(c)

*** Where a member bank issues an obligation principally for another purpose such as usually would be the case with respect to a due bill issued to evidence
the bank's liability to deliver securities or foreign exchange sold - it need not
classify its liability thereon as a deposit.
However, the circumstances sur­
rounding an- obligation issued principally for a purpose other than obtaining funds
for use in the ordinary course of business may cause an obligation to become sub­
ject to Regulation Q - for example, if the bank's liability on a due bill extended
beyond a period exceeding that necessary to complete the securities sale, or if
the bank paid interest to the customer in excess of the amount that accrued on
the securities sold during the delay in delivery.

-6of Regulation D will be amended so that the special reserve requirement thereof
would apply to borrowings from the specified classes of institutions, just as are
borrowings from foreign banking offices.
The proposal applies to nondocumentary obligations as well as
documentary obligations undertaken by a member bank to obtain funds for use in
its banking business.

Also, under the proposal, in order for any bank liability

to another bank, Edge or Agreement corporation, or certain official institutions
to be classified as a nondeposit, the liability must be for the account of such
an organization.

Except for Federal funds transactions, the procedures with

respect to which have already been described, the Board expects that any such
liability would be issued on a nontransferable basis.
To aid in the consideration of this matter by the Board, interested
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 20, 1969,

Under the B o a r d 1s rules regarding availability

of information (12 CFR Part 261), such materials will be made available for
inspection and copying upon request unless the person submitting the material
requests that it be considered confidential.
By order of the Board of Governors, September 18, 1969,

(signed) Robert P, Forrestal

Robert P. Forrestal,
Assistant Secretary.

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