Full text of District Notices (Federal Reserve Bank of Dallas) : Interpretation of Regulation D Relating to Reserves Against Commercial Paper of Member Banks and Their Affiliates, Circular No. 73-157

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F ederal

reserve bank of

DALLAS, T E X A S

Dallas

75222

Circular No. 73-157
July 3, 1973

INTERPRETATION OF REGULATION D RELATING TO RESERVES AGAINST
COMMERCIAL PAPER OF MEMBER BANKS AND THEIR AFFILIATES

To All Member Banks in the
Eleventh Federal Reserve District:

There is attached an interpretation of Regulation D effective
June 15, 1973.

This interpretation answers questions that have recently

arisen concerning reserves against commercial paper of member banks and
their affiliates according to Regulation D and concerning the Board's
recently adopted marginal reserve requirements.
Yours very truly,
P.

E.

C o ld w e ll
P re sid e n t

A tta c h m e n t

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

TITLE 12 — BANKS A N D BANKING
CHAPTER II — FEDERAL RESERVE SYSTEM
SUBCHAPTER A — BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
[Reg. D1

PART 204 — RESERVES OF MEMBER
BANKS
COMMERCIAL PAPER
1. Effective June 15, 1973, § 204.117 is added
to read as follows:
SE C T IO N

2 0 4 .1 1 7

RESERVES

A G A IN S T

C O M M E R C IA L P A P E R .
(a) A number of questions have recently arisen
concerning 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 require­
ments.
(b) The question has been presented whether
the commercial paper isued by an “operations
subsidiary” of a member bank is subject to the
provisions of the last sentence of § 2 0 4 .1 (f) —
which is applicable to “affiliates” 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 interpretation on
“operations subsidiaries”, which defines such sub­
sidiaries as “separately-incorporated departments
of the bank, performing, at locations at which
the bank is authorized to engage in business, func­
tions 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 whollyowned subsidiary corporation engaged in activities
that the bank itself may perform is simply a con­
venient alternative organizational arrangement” to
department organization. Also in 1968, the Comp­
troller revised his ruling on “operating subsid­
iaries” to state that “[e]xcept as otherwise per­
mitted by statute or regulation, all provisions of
Federal banking laws applicable to the operations
of the parent bank shall be equally applicable to
the op eration s o f its operating su b sid iaries.”
COMPTROLLER’S M A N U A L H 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 com ­
mercial paper obligations is subject to the pro­
visions of the last sentence of § 2 0 4 .1 (f).
(c) The q uestion 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 deposit 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. (Pro­
ceeds channeled 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
2 0 4 .1 1 5 (c ).) Thus, in determining demand de­
posit 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 promis­
sory 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) (1) (ii) and (2 ) (ii) of Regula­
tion 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 co­
operating with the Board’s marginal reserve pro­
gram, then the base for the resulting member
bank is the total of the two bases of the two
formerly independent banks. If a member bank
merges with a nonmember bank that is not co­
operating 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 program, 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 reason­
able estimate of the base should be provided in
that event as well.