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F ederal R eserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
P R E S ID E N T
AND
C H IE F E X E C U T IV E
O F F IC E R
DALLAS, TEXAS 7 5 2 2 2
September 9, 1992
Notice 92-82
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Final Amendments to Regulation D
(Reserve Requirements of Depository Institutions)
DETAILS
The Federal Reserve Board has announced adoption of amendments to
Regulation D (Reserve Requirements of Depository Institutions) to enhance
proper maintenance of reserve requirements. The amendments are designed to
prevent erosion of the reserve base for transactions accounts and will:
• Treat certain so-called "sweep accounts" involving
commingled time deposits as reservable;
• Reclassify as reservable multiple savings accounts
where the depository institution suggests, or other
wise promotes, multiple accounts to permit transfers
in excess of the limits applicable to individual
savings accounts;
• Prohibit the use of "due from" deductions where a
large bank has moved funds to a smaller bank to take
advantage of the lower reserve requirements imposed
on small banks and has received the funds back in a
reserve-free transaction;
• Treat previously nonreservable teller’s checks the
same as reservable cashier’s checks;
• Include bonds and coupons as "cash items in
the
process of collection" only if the bonds and coupons
have matured or been called; and,
• Prohibit the netting of trust balances in a commin
gled transaction account held by the trust depart
ment of a banking institution for various trusts.
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
The first three amendments are effective September 29, 1992.
last three amendments are effective December 22, 1992.
The
ATTACHMENT
Attached is a copy of the Board’s final amendments as they appear on
pages 38417-30, Vol. 57, No. 165, of the Federal Register dated August 25,
1992.
MORE INFORMATION
For more information, please contact Stephen Welch at (214)
922-5402. For additional copies of this Bank’s notice, please contact the
Public Affairs Department at (214) 922-5254.
Sincerely yours,
J9.
Federal Register / Vol. 57, No, 165 / Tuesday, August 25, 1992 / Rules and Regulations
38417
12 CFR Part 204
[Regulation D; Docket No. R-0729]
Reserve Requirements of Depository
Institutions
Board of Governors of the
Federal Reserve System.
ACTION: Final rule.
AGENCY:
The Board is adopting a
number of amendments to its Regulation
D relating to the definition of
“transaction account” and concerning
the calculation of reserves. The
amendments include adding “teller’s
checks" to the definition of "transaction
account" and clarifying the definition of
“cash items in the process of collection."
The Board is also adopting four
interpretations concerning the definition
of “transaction account” and
arrangements used to avoid transaction
account reserve requirements.
sum m ary:
September 29,1992,
except for §§ 204.2(a)(1), (b)(1), and (u)
(teller’s checks), § 204.2(i) (cash items in
the process of collection), and § 204.136
(netting of trust balances), which will be
effective December 22,1992.
EFFECTIVE OATES:
FOR FURTHER INFORMATION CONTACT:
t
Oliver Ireland, Associate General
Counsel (202/452-3625), Patrick J.
McDivitt. Attorney (202/452-3818), or
Lawranne Stewart, Attorney (202/4523513), Legal Division; or Thomas Brady.
Chief, Banking and Money Market
Statistics Section (202/452-2469),
Division of Monetary Affairs, Board of
Governors of the Federal Reserve
System. For the hearing impaired only.
Telecommunications Device for the Deaf
(TDD), Dorothea Thompson (202/4523544). Board of Governors of the Federal
Reserve System, 20th and C Streets,
NW., Washington DC 20551
On April
12.1991, and by notice published in the
Federal Register, 56 FR 15,522. April 17.
1991, the Board proposed a number of
revisions to its Regulation D, Reserve
Requirements of Depository Institutions,
12 CFR part 204, and a number of
interpretations of the Federal Reserve
Act and Regulation D. These proposals
primarily relate to the definition of
"transaction account" and the
calculation of required reserves on
transaction accounts. Comments were
due on the proposals by June 24,1991.
The Board has reviewed the comments
received on the proposals and is now
adopting final amendments to
SUPPLEMENTARY INFORMATION:
38418
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
Regulation D and final interpretations to
the Federal Reserve Act and Regulation
D.
Under Regulation D, transaction
accounts generally are subject to, a 10
percent reserve requirement.1 Currently,
the reserve requirement applicable to all
other deposit accounts is zero.2 The
Board has identified a number of
practices that result in depository
institutions: (1) issuing nonreservable
payment instruments in place of
functionally equivalent reservable
instruments; (2) classifying accounts as
time deposits when the accounts are
used to provide funds directly or
indirectly for the purpose of making
payments or transfers to third persons
or others and are therefore the
functional equivalent of transaction
accounts; (3) taking inappropriate “due
from" or '"'cash item in the process of
collection" deductions from their gross
demand deposits in calculating required1
reserves; o r (4) inappropriately netting
negative trust account balances against
positive balances in unaffiliated
accounts in order to reduce reserve
requirements on transaction accounts
containing commingled trust funds.
The described practices avoid or
reduce transaction account reserves,
reducing the reserve base available for
the conduct of monetary policy.
Avoiding reserve requirements by
exploiting the technical language of the
regulation frustrates congressional
intent that transaction accounts be
subject to reserve requirements, results
in inequitable treatm ent of similar
transactions at other depository
institutions, an d favors depository
institutions that have the legal and
automation resources to develop reserve
avoidance practices and are willing to
implement such practices. Moreover, the
increased use of such reserve avoidance
practices could reduce required reserve
balances at institutions using these
practices to levels below those needed
for clearing purposes, potentially
resulting in much less predictable
demands for Federal Reserve balances,
and more volatile funds rates.
The Board believes that reductions in
reserve requirements on transaction
accounts should be accomplished by the
Board through changes in the ratio of
transaction account reserves under
section 19{b){2}(B} of the Federal
Reserve Act, such as the Board's action
1 A reduction in reserve requirements on
transaction accounts from 12 percent to 10 percent
became effective April 8,1992. 57 FR 8059. March 8,
1992.
2 In'December1990 the Board reduced reserve
requirements on nonpersonal time deposits with a
maturity of less than 18 months and net
Eurocurrency liabilities from three percent to zero
percent. 55 FR 50540, Dec. 7,1990.
reducing this ratio from 12 percent to 10
percent, rather than through the growth
of arrangements and accounts designed
to avoid or reduce reserve requirements.
Accordingly,, the Board is adopting a
number of amendments to Regulation D
and interpretations to the Federal
Reserve A ct and Regulation D to treat
certain transaction account substitutes
as transaction accounts subject to
reserve requirements and to clarify the
deductions that may be made in
computing required reserves.
Comments on the April Proposals
The Board received comments on the
proposals from the following 67
commenters:
Type
Number
Commercial Banks......................
Bank Holding Companies...........
Financial Service Providers........
Federal Reserve Banks.............
Savings and. Loans---------------Individuals..............................._...
22
20
a
5
4
4
3
1
67
The comments are summarized
below .3
G eneral Comments
One trade association urged that the
comment period be extended an
additional 120 d ays so that credit unions
could study the effect of the teller's
check proposal. This comment was
received on the last day of the comment
period and did not elaborate on the
reasons, a longer comment period was
needed other than to refer to other
Board proposals that were outstanding.
Because the request w as received after
most commenters had already submitted
their comments and because it did not
dem onstrate a clear need for an
extension, the Board did not extend the
comment period.
One eommenter suggested that the
Board should pay interest on reserves.
The Board does not, however, have
express statutory authority to pay
interest on reserves. Another eommenter
suggested that Regulation D be clarified
generally. One eommenter urged the
Board to provide transitional relief (such
as a ninety-day period) if it adopts the
proposals to permit depository
institutions to institute operational
changes. The Board is deferring for 120
days the effective date of the
amendments defining teller’s checks and
incorporating teller’s checks in the
definition of transaction account, the
amendments modifying the definition of
cash items in the process of collection,
and the proposed interpretation on trust
netting. The other proposals will be
effective thirty days after the date of
publication in the Federal Register.
A number of commenters questioned
the economic validity of the reserve
function or suggested that the proposals
would increase the regulatory burden
imposed on depository institutions.
Nineteen commenters generally
expressed concern that more stringent
applications of reserve requirements
would increase the competitive
disadvantage that depository
institutions have, particularly in
competing with money market funds and
other financial institutions. For example,
one eommenter suggested that if
reserves are a necessity, they should
apply to all forms of deposits at every
depository institution and any
organization that provides paym ent
services. Another eommenter suggested
that no change be made in Regulation D
until an overall strategic direction is
established: for the Regulation. Five
commenters claimed that the proposals
would result in funds leaving the
banking system for other financial
institutions, and would therefore
adversely affect the ability of the Board
to control the reserve base for monetary
policy purposes.
The Board believes that reserves
continue to be an important tool for
implementing monetary policy and
therefore believes that it is im portant to
continue to maintain the integrity of the
reserve base. To the extent that
reductions in reserve requirements on
transaction accounts are appropriate,
the Board believes that such reductions
should be accomplished by the Board
through changes in the ratio of
transaction account reserves under
section 19(b)(2)(B) of the Federal
Reserve A ct. As noted above, the Board
has recendy reduced from 12 percent to
10 percent the ratio applicable to
transaction account balances of over
$42.2 million. In addition, the Board from
time to time may consider the level of
reserve requirements to ensure that they
are appropriate.
Transaction Account Definition
A m endm ents
Teller's Checks
3 The Board specifically requested comments
from the Federal Deposit Insurance Corporation, the
Office of Thrift Supervision and the National Credit
Union Administration, but did not receive written
comments from any of these agencies.
M any depository institutions use
cheeks ("teller’s checks”) draw n by the
depository institution on accounts at
other depository institutions, Federal
Federal Register / Vol. 57, No. 1.65 / Tuesday, August 25, 1992 / Rules and Regulations
Home Loan Banks, or Federal Reserve
Banks, or payable through or at
depository institutions, as a substitute
for reservable cashier's checks. Teller's
checks are effective substitutes for
cashier’s checks, which are drawn by a
depository institution on itself, because
teller’s checks bear the important legal
characteristics of cashier’s checks (See
§ 3-413(2) and § 3~802(l)(a) of the
Uniform Commercial Code, Pre-1990
Official Text (UCC)). Under § 3-413(2) of
the UCC, a bank drawing a check is
liable on the check, whether it be a
cashier’s check or a teller’s check, if-the
check is dishonored by the drawee.
Under Section 3-802(l)(a) of the UCC.
payment by either cashier's check or
teller’s check results in pro tanto
discharge of the underlying obligation.
However, under Regulation D, teller's
checks have not been subject to reserve
requirements while cashier’s checks
have been.
Teller’s checks are often more
economical to issue than cashier’s
checks, in part because they have not
been subject to reserve requirements.
Because of the cost savings attributable
to shifting from cashier’s checks to
teller’s checks, the Board is concerned
that competitive pressures will
encourage depository institutions to use
teller’s checks to avoid the cost of
holding reserves against cashier’s
checks, and that this shift could
materially affect the reserve base.
Further, the disparate treatment
accorded these instruments has put
depository institutions using cashier’s
checks rather than nonreservable teller’s
checks, as well as teller's checks service
providers that are bank affiliates, at a
competitive disadvantage/
4 The Board has conditioned approval of bank
holding company applications to issue and sell
large-denomination payment instruments, including
teller's checks, on several commitments that th»
bank holding company file weekly reports of the
level of this activity and comply with certain
deposit reserve requirements. These conditions
were designed to counter the potential reserve
avoidance characteristics of stich instruments and
to ensure accurate reporting of related monetary
statistics. Midland Bonk PLC. 76 Federal Reserve
Bulletin 860 (1990); Midland Bank Pl.C. 74 Federal
Reserve Bulletin 252 (1938); Hong Kong and
Shanghai Banking Corporation, 73 Federal Reserve
Bulletin 808 (1987); BankAmericc Corporation. 73
Federal Reserve Bulletin 727 (1S87); FirstBank
Holding Company o f Colorado, 72 Federal Reserve
Bulletin 662 (1986); Wells Fargo & Company, 72
Federal Reserve Bulletin 148 (1986); The Chase
Manhattan Corporation. 71 Federal Reserve Bulletin
905 (1985); RepublicBank Corporation. 71 Federal
Reserve Bulletin 724 (1985); Citicorp. 71 Federal
Reserve Bulletin 58 (1985); BankAmerica
Corporation. 70 Federal Reserve Bulletin 364 (1984)>
In addition, a number of the Board orders
referenced above include limits on the
denominations of some payment instruments. The
Board will entertain applications and requests for
Accordingly, the Board proposed
amendments to Regulation D to change
the manner in which reserve
requirements apply to teller’s checks,
including checks drawn on Federal
Home Loan Banks and Federal Reserve
Banks. Under the proposal, a teller's
check would be a transaction account of
the depository institution drawing the
check until the check is paid by the
drawee. To the extent that the check is
covered by immediately withdrawable
funds of the selling depository
institution on deposit in an account of
the selling institution at the depository
institution on which the check is draw n
(or at or through which the check is
payable), the selling depository
institution would be able to take a “due
from" deduction under § 204.3(f) of
Regulation D.5
The proposal would: (1) amend
Regulation D to include a definition of
teller’s checks; (2) amend §
204.2(a)(l)(iii) of Regulation D to define
“deposit" to include teller’s checks; (3)
amend § 204.2(b)(l)(ii) of Regulation D
to define “demand deposit" to include
teller’s checks; and (4) delete
§ 204.2(b)(3)(iv) of Regulation D, which
excludes teller’s checks from the
definition of demand deposit.
The Board received thirty-three
comments on this proposal. Seven of
these commenters generally supported
the proposal, tw enty objected to the
proposal generally, and six supported or
did not object to the proposal as long as
clarifications to the language of the
provision were made. The objecting
commenters claimed that adoption of
this proposal would impose burdens on
depository institutions, and suggested
that reserves on teller’s checks were
unnecessary or should also be imposed
on all financial institutions, not just
depository institutions. One eommenter
suggested that the Board has not
included teller’s checks in the reserve
base for eleven years and has not
demonstrated a compelling reason to
impose reserves on these items now.
Another eommenter noted that
depository institutions can obtain
economies of scale by using teller’s
checks provided by non-depository
relief from conditions from bank holding companies
subject to these limits or requirements.
8 This deduction would not be available for
accounts that do not meet the requirements for a
due from deduction in 5 204.3(f)(3) of Regulation D
such as escrow accounts and balances held at a
Federal Reserve Bank, or of pass-through reserves
held at a Federal Home Loan Bank. 12 CFR
204.3(f)(3). In order for a depository institution to
take a “due from” deduction for funds held at
another depository institution, the funds generally
must be held in an account in the name of the
depositing institution and be subject to immediate
withdrawal by the depositing institution.
38419
service providers. Another eommenter
suggested that the proposal should be
limited to instruments drawn on a
Federal Reserve Bank or a Federal
Home Loan Bank because other
transactions were already properly
reflected in the reserve requirements
calculation.
Teller’s checks draw n on or payable
through or at depository institutions as
well as teller’s checks drawn on Federal
Reserve Banks and Federal Home Loan
Banks currently are treated differently
from cashier's checks for reserve
purposes. In the proposal, the Board
noted that, because of the cost savings
attributable to shifting from the use of
cashier’s checks to teller’s checks where
the teller’s check service provider is not
subject to reserve requirements, the
increased use of teller’s checks could
materially affect the reserve base. The
Board also noted that market pressures
could increase this effect. After a review
of the comments, the Board continues to
believe that its conclusions are correct.
Three commenters expressed concern
that the proposal would require the
same liability to be reserved against
twice—once on the teller’s check, and
once by the depository institution where
the funds are placed. The Board believes
that the proposal generally would not
produce this effect. Outstanding teller’s
check balances generally are not held in
reservable deposit accounts at the
drawee or paying bank. The Board
understands that outstanding balances
are generally invested by the service
provider in order to earn a return on the
funds for the service provider and the
selling institutions.
The commenters indicated that the
issuance of a teller’s check resulted in a
reduction of the due from account for
the bank on which the check was
drawn. For Call Report purposes, to the
extent that a selling institution has a
balance due from the drawee or paying
bank, this balance must be reduced by
the amount of any teller's checks drawn.
For purposes of calculating reserve
requirements, however, a depository
institution may continue to take a due
from deduction for a qualifying account
at another depository institution until
the balance in that account is debited to
pay the teller’s checks.
Nine commenters were concerned that
depository institutions should not be
subject to reserves on checks on which
they have no liability (such as where the
institution serves solely as agent for the
entity drawing the instrument). Another
eommenter asserted that the proposal
should be amended to apply to these
instruments specifically. The Board's
proposal would not impose reserve
38420
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
requirements on sellers of checks sold in suggested that the proposal should be
an agency capacity where that capacity
revised to include an exception for
is clearly stated on the face of the check, teller's checks under $10,000. Another
as the selling bank would not be the
eommenter suggested that teller’s
draw er of the check. (See Article 3-403
checks that w ere only used for certain
of the Uniform Commercial Code Pre
classes of transactions, such as
1990 Official Text and Article 3-403 of
international payments, should be
the 1990 Official Text.) The Board
exempt from reserve requirements. The
believes that it would not be appropriate Board does not believe that a special
to impose reserve requirements on the
purpose test for determining the
selling bank for instruments on which
applicability of teller’s check reserve
the selling bank has no liability, as such requirements is practical. Depository
checks are not the equivalent of
institutions can, however, provide their
cashier’s checks.®
customers with checks on which the
Another eommenter, a teller’s check
selling institution does not act as
service provider, claimed that some
drawer. Such instruments would
banks offer these checks as agent for a
function as substitutes for money orders,
non-depository institution (and therefore rather than as substitutes for cashier’s
have no liability on the check), but that
checks, and would not be reservable
the depository institution still is the
under the Board’s proposal.
issuer of the obligation. For this reason,
One trade association suggested that
the eommenter argued, the check is a
depository
institutions with less than
"teller’s check” for purposes of the
$100 million in assets should be exempt
Board's Regulation CC (12 CFR Part
from reserves on their teller’s checks.
229), and thus is entitled to next day
The BcJard does not believe that such an
availability under that regulation. The
exemption is appropriate, as smaller
eommenter further argued that, under
institutions already have low er reserve
state law (UCC section 3-102(l)(a)), the
requirements relative to their total
issuer and the draw er are not
reservable deposits under the zero and
necessarily the same person. The Board
low reserve tranches, and report
believes that this comment reflects a
deposits considerably less frequently
misunderstanding of the provisions of
than larger banks. In addition, an
Regulation CC. Under § 229.2(gg) of
Regulation CC, the term "teller’s check” exemption for depository institutions
under $100 million in assets would allow
is limited to checks drawn by banks (as
the current erosion in the reserve base
that term is defined in Regulation CC.)
to continue as exempted institutions
Therefore, under Regulation CC, checks
sold by a depository institution as agent, moved from cashier’s to teller’s checks.
Another trade association suggested
but on whjch a depository institution
that, rather th an adopt this proposal, the
w as not the drawer, would not be
Board could impose additional reserves
considered to be teller’s checks even if
on depository institutions that
the checks were “issued” by the
habitually draw teller’s checks in such a
depository institution.
m anner that they avoid reserves. The
One eommenter suggested that, in
Board regards a "habitual abuser” test
states that have not adopted the new
for determining the applicability of
section 3^414 of the UCC, the Board
teller’s check reserve requirements as
would be assessing reserves on a bank
beyond the Board’s statutory authority if impractical, as it would require the
Board to determine the motivation for
the proposal applied to banks issuing
teller’s checks without recourse. Under
the use of teller’s checks.
the Board’s proposal, checks draw n
Two commenters suggested that the
without recourse against the draw er are Board permit an arrangement whereby
not defined as teller’s checks. Two
teller’s check service providers would
commenters also were concerned that
hold the reserves relating to teller’s
the proposal would subject depository
checks for their customer depository
institutions to reserves on traveler’s
institution. While nonmember
checks, and one suggested the Board
depository institutions may hold their
clarify that this is not the case. The
reserves through another depository
Board's proposal does not apply to
institution, a Federal Home Loan Bank,
instruments sold as traveler’s checks
or the National Credit Union Central
unless the checks are draw n by a
Liquidity Facility, the Federal Reserve
depository institution. Two commenters Act does not permit banks that are
members of the Federal Reserve System
“ If the selling bank is acling as agent for another
to m aintain reserves through another
depository institution, however, that depository
depository institution.7 Reporting of
institution wouid be required to hold reserves
against the checks drawn by it or by the selling
bank as its agent, as these checks would be drawn
by that depository institution.
7 See section 19(c)(1) of the Federal Reserve Act
(12U.SC. 461).
account balances, however, must be
done by the account holding depository
institution, in this case the selling
institution.
One eommenter argued that the
proposal would require depository
institutions drawing teller’s checks to
track and report outstanding teller’s
checks themselves and that this might
cause depository institutions to return to
the use of less efficient cashier’s checks.
This eommenter further argued that,
under certain existing teller’s check
programs, the drawee bank reserves
against the teller’s checks and that these
arrangements should be perm itted to
continue in order to satisfy reserve
requirements on teller’s checks.
Specifically, this eommenter suggested
that teller’s checks be considered to be
reservable deposits until paid by the
draw ee “or until the issuing depository
institution has remitted immediately
available funds to the draw ee bank or
payable through bank in satisfaction of
the issuer’s liability.” This eommenter
further suggested that the Board require
that the receipt of funds by the paying
bank be a reservable deposit of the
paying bank until the item had been
paid or otherwise disbursed, and that
the selling institution be permitted to
take a “due from” deduction against
funds remitted to the paying bank,
regardless of the disposition of the funds
after receipt by the paying bank. The
eommenter indicated that funds held by
the paying bank are held in “omnibus
accounts” for reasons of efficiency and
to protect teller’s check purchasers, and
argued that separate accounts subject to
w ithdraw al by the selling institutions
should not be required in order for each
selling institution to take a “due from”
deduction against the accounts.
The Board has considered a number
of alternatives for centralizing the
holding of reserves against teller's
checks, including the suggestion made
by this eommenter. Each alternative,
however, suffers from significant
practical or legal difficulties.
In order to create a liability subject to
reserves that would be "centralized,” a
service provider would have to create a
deposit subject to reserve requirements
that could substitute for the liabilities of
the individual depository institutions
selling teller’s checks. For example, the
reserves could be m aintained against
the proceeds of outstanding teller’s
checks that are remitted to the service
provider, instead of by the remitting
depository institution, if the service
provider placed the proceeds in a
demand deposit account. This
arrangement does not appear to be
economically viable, as funds held in
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
such a deposit account would not earn
interest The Board understands that
teller's check service providers
generally pay a ,return to sellers of
teller's checks based on outstanding
balances of funds remitted to the service
provider to cover checks sold.8 Sellers
of teller’s checks would no longer be
able to earn such returns, as the service
provider would receive no interest on its
demand deposit and would not have
earnings to pass on to selling
institutions. Similarly, if the proceeds of
the teller’s checks were placed in an
account under an agreement between
the account holding depository
institution and a depository institution
selling the teller’s checks to pay these
checks, payment of interest on the
account by the depository institution to
the selling institution would constitute
payment of interest on a demand
account.
Finally, as noted above, while the
holding of reserves against teller's
checks could be centralized for many
depository institutions by those
institutions holding all their reserves
through a single depository institution
under a “pass through" arrangement
under § 204.3(i) of Regulation D, section
19(c)(1) of the Federal Reserve Act
precludes such arrangements for
member banks.
Accordingly, the Board believes that
the proposed structure of teller’s check
reserve requirements is appropriate.
Staff will work with teller's check
sellers an d service providers to explore
procedures to facilitate the holding of
reserves against teller’s checks.
Twelve commenters expressed
concern that depository institutions
would have to incur significant
operating changes to treat teller’s checks
as reservable liabilities. One eommenter
asserted that a depository institution
will not have the information it needs to
report teller's checks for reserve
purposes and, accordingly, should not
be subject to reserves on these
instruments. One eommenter suggested
that depository institutions be permitted
to use the average outstanding balance
of such instruments. Commenters
indicated that drawers of teller’s checks
often do not track outstanding balances
of teller’s checks because this tracking is
performed by the teller’s check service
providers, which may report activity to
their customers only on a monthly basis.
For a weekly reporter (generally a
depository institution with deposits in
excess of $44.8 million) to report teller’s
check data on a timely basis,
s Similarly, depository Institution)* earn a return
or
proceeds o f the sale of Cfcshiur's checks until
■ 16 cashier's checks are presented for payment.
confirmation of the daily outstanding
balances of teller’s checks would be
required from the service provider with
only a short lag.
The Board is concerned that it may
not be appropriate to base teller’s
checks reporting requirements on
average outstanding balances while
other reporting requirements are based
on actual balances. Special reporting
arrangements would continue to favor
the use of teller's -checks over
economically and legally similar
cashier's checks. Further, daily deposit
data permit verification o f the data and
ensure proper seasonal adjustments.
The Board recognizes, however, that
implementation of the teller’s check
amendments will require operational
changes for some draw ers of teller's
checks and for teller's check service
providers, particularly for weekly
reporters. These changes should be less
significant for smaller institutions that
report quarterly, as they are not required
to track daily outstanding -balances
throughout die year. The Board is
deferring the effective date of the teller's
check amendment for 120 days. During
that period, Board sta ff will w ork with
teller's check sellers and service
providers to ease potential reporting
burdens.
Finally, one eommenter suggested that
the reference to teller’s checks in
proposed § 204.2(v)(iii) conflicted with
the definition of teller's checks in
proposed § 204.2(u). Section
204.2(a)(l)(iii) and § 204.2(b)(l)(ii) have
been redrafted for clarity and § 204.2(h )
has been revised to include checks
payable through the drawing depository'
institution in the definition of teller’s
checks.
The Board is adopting the teller’s
check proposal subject to the drafting
changes discussed above, with the
effective date of this amendment
deferred for 120 days to permit
depository institutions to make
appropriate arrangements to provide
teller’s check and other payment
instrument services consistent with this
amendment.
Incorporation of Reference to
Interpretations
The definition o f “transaction
account" in Regulation D includes “(a]ll
deposits other than time and savings
deposits." 12 CFR 204.2(e)(6). The
proposal would amend this
subparagraph to refer also to accounts
that may be nominally time or savings
accounts, but that the Board has.
.determined, by rule or order, to be
transaction accounts. This amendment
w as intended to provide a reference to
the Board's interpretations on
38421
transaction accounts. The only comment
received on this amendment supported
the amendment. The amendment is
being adopted as proposed.
Interpretations
' The Board identified two practices
involving the use of time deposits
(including savings deposits) that it
believed were designed to provide funds
directly or indirectly for the purpose of
making payments or transfers to third
persons or others. The Board believes
that these time deposits should be
considered to be transaction accounts.
Accordingly, the Board proposed for
comment two interpretations identifying
as transaction accounts certain deposits
that would otherwise be considered to
be time deposits. The Board is adopting
these interpretations with certain
modifications discussed below. If other
practices become prevalent in which
time deposits are used directly or
indirectly for the purpose of making
payments or transfers to third persons
or others, the Board will consider
appropriate action to ensure th at such
deposits are not used to avoid reserve
requirements on transaction accounts.
Linked Savings A ccounts [§ 204.133J
The Board proposed an interpretation,
to be published at 12 CFR 204.133, that
would require a depository institution to
treat multiple savings deposits as
transaction accounts in certain
circumstances. The proposed
interpretation would prohibit a
depository institution from assisting a
customer to establish multiple savings
deposits with transfer abilities unless
the customer has a legitimate purpose
for the multiple accounts.
The Board received twenty-nine
comments on this proposal, all but three
of which opposed the proposal.
Three commenters contended that
multiple accounts are not used to avoid
transfer limits, but rather to meet
customer needs. Three commenters
claimed th at the proposal would force
institutions to use complicated
arrangements to move funds out of the
depository institution overnight to earn
a return for their customers without
violating the regulation. The proposal
w as intended to maintain the distinction
between savings deposits and
transaction accounts. The Board
recognizes that maintaining this
distinction imposes costs on depository
institutions, but believes that it is
necessary to maintain this distinction
for monetary policy purposes. One
eommenter suggested that the final
interpretation clearly state that it does
not apply to sweep arrangements
38422
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
involving only a single savings account.
multiple savings deposits established by depositors’ transaction accounts are
swept into one or more time deposits.
While this interpretation applies only to a single customer when the depository
New deposits made, as well as funds
arrangements involving multiple savings institution suggests or otherwise
accounts, the Board believes that sweep promotes the establishment or operation from any maturing time deposits, are
available each day to pay checks or
of multiple savings deposit
arrangements involving only a single
arrangements to increase the customer’s other charges to the transaction
savings account could constitute
accounts of any of the depositors
transfer capabilities and the multiple
evasions of reserve requirements in
accounts do not have another legitimate participating in the arrangement.
certain circumstances not addressed
purpose. The Board believes that, while
here.
The depository institution’s decision
some customers of depository
whether to pay checks draw n on an
Thirteen commenters asserted that
institutions may be able to avoid the
individual depositor’s transaction
depository institutions would have
account is based on the aggregate
difficulties in determining whether there transfer limits on savings deposits on
their own initiative, the revised
amount of funds that the depositor has
was a legitimate business purpose for
invested in the arrangement, including
the use of multiple savings deposits, and interpretation will lessen the
administrative burden on depository
any amount that may be invested in
expressed uncertainty as to the efforts
unmatured time deposits. Only if checks
that a depository institution would have institutions and will prevent
proliferation of linked savings accounts
drawn by all depositors participating in
to make to comply with the proposal.
the arrangement exceed the total
For example, one eommenter stated that that are encouraged by depository
institutions.
balance of funds available that day is a
because depository institutions could
One eommenter suggested redrafting
time deposit withdrawn prior to
not judge the legitimacy of the
the interpretation so that the language of maturity so as to incur an early
classification, the burden .should be on
the interpretation would be more
withdraw al penalty. Because the
the Board to judge the legitimacy of a
consistent with the language of
aggregate of individual participants’
customer’s purpose in opening an
Regulation D, thereby avoiding
deposits plus the time deposit maturing
account. One eommenter urged that the
confusion or reclassification of an
each day tends to exceed the aggregate
proposal be revised to eliminate any
account as a result of an occasional
of individual participants’ withdrawals
duty to determine whether there is a
lapse by a customer or an oversight by
on any day, the total balance
business purpose for the opening of
the depository institution. The language
maintained in the arrangement is highly
multiple accounts. One eommenter
that concerned the eommenter has been
stable and an early withdraw al of time
noted that customers wishing to
revised
to parallel the language in
deposits is rarely, if ever, necessary. The
circumvent the restrictions would simply
arrangement may be marketed as an
present false reasons for opening up the Regulation D more closely.
The Board has adopted proposed
arrangement to provide the customers
accounts. Another eommenter asked
interpretation § 204.133 subject to the
unlimited access to their funds with a
w hether the "business purpose” test
high rate of interest.
could be met by establishing a "personal modifications discussed above.
business” purpose, and noted that if that L inked Time D eposits and Transaction
The Board believes that (1) these
were the case, customers could easily
arrangements substitute time deposit
A ccounts (§ 204.134)
justify a purpose for multiple accounts.
The Board proposed an interpretation, balances for transaction accounts
One eommenter contended that, as long
balance with no meaningful reduction in
to be published at 12 CFR 204.134, that
as the depository institution does not
the depositors’ access to their funds in
would require depository institutions to
promote multiple accounts, the
practice, and (2) the time deposits in
classify certain deposits as transaction
depository institution should be able to
accounts that at present are classified as such arrangements are used to provide
assume that there is a legitimate
funds indirectly for the purposes of
time deposits. The reclassification
purpose for the multiple accounts. That
making payments or transfers to third
would apply to time deposits w here a
eommenter also argued that the
persons. Accordingly, the Board
number of participating depositors
proposal relies upon whether the
proposed an interpretation to be
maintain transaction accounts linked to
accounts are "solely” for transfer
published at § 204.134 that would
time deposits in an arrangement that
purposes, and that a bank: would have a permits each depositor to draw checks
require that such time deposits be
nearly impossible time of monitoring
considered to be transaction accounts.
based on the aggregate amount held by
compliance. Another eommenter
The Board received eighteen
that depositor in these accounts,
suggested that specific guidance be
comments on this proposal. Three
including unmatured time deposits. The
provided for the treatment of accounts
comments supported the proposal
time deposits in such arrangements are
of related persons, such as close family
although one of these commenters urged
held directly by the depositor or
members. One eommenter requested a
the Board to permit depository
indirectly through a trust or other
clarification that credit unions could
institutions to compete against
arrangement that generally contains the
continue to use a sub-account
nondepository institutions for
commingled funds of a number of
arrangement if the purpose w as not to
transaction balances. Ten commenters
depositors. The individual depositor’s
evade Regulation D. Another
claimed that the purpose of this kind of
interest in time deposits may be
eommenter, also a credit union, claimed identifiable, with an agreement by the
program w as not to avoid reserves, but
that under the proposal it would have to participating depositors that balances
to compete with nonbanking entities.
convert all its savings accounts to
One eommenter contended that
held in the arrangement may be used to
transaction accounts.
providing higher yield transaction
pay checks drawn by other depositors
In order to address the comments as
accounts rather than reduction in
participating in the arrangement, or the
to the difficulty of identifying the
depositors may have undivided interests reserves w as the driving force behind
legitimacy of customer purposes for
such arrangements. The Board notes,
in a series of time deposits. The time
establishing multiple savings deposits,
however, that while the practice covered
deposits have staggered maturities so
the Board has revised the proposed
by the interpretation enables depositors
that one time deposit matures each
interpretation. The final interpretation
to earn a higher rate of return than
business day. At the end of each day,
classifies as transactions accounts
would be possible in the absence of
funds over a specified balance in the
Federal Register / Vol. 57. No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
these practices, it does so by allowing
the depository institution to reclassify
transaction accounts as time deposits,
thereby avoiding the transaction
account reserve requirement. Even
though these funds remain in the
banking system, reservable liabilities
and the reserve base may be
substantially reduced, impairing the
ability of the Federal Reserve to conduct
monetary policy. In addition, such
arrangements allow depository
institutions with the resources to
establish such arrangements to reduce
their reservable liabilities while other,
often smaller, depository institutions
lack the resources or sizeable deposit
base necessary to establish similar
programs.
One eommenter suggested that the
Board create a "super NOW" account
upon which the first $5,000 would be
reserved as a transaction account, and
the balance as a savings deposit. The
Board believes that such an exemption
would provide an inequitable benefit by
reducing reserve requirements on large
deposits in transaction accounts while
retaining reserve requirements on small
deposits in transaction accounts.
Two commenters suggested that the
arrangements covered by the proposal
were preferable to other sweep
arrangements where funds are
transferred out of the bank to a
securities dealer. These commenters
believed that the Board should not
encourage such arrangements because
they are contrary to Board concerns
about the systemic risks arising from a
failure of the securities dealer, a
computer system failure, or the failure of
a bank in a large daylight overdraft
position. The Board recognizes that
funds transfers due to nightly sweep
arrangements may involve operational
and credit risks, but believes that
permitting unlimited sweep
arrangements within a depository
institution could virtually eliminate
transaction accounts and reduce reserve
balances below the level necessary for
the conduct of monetary policy.
One bank holding company contended
that, under the proposed interpretation,
large businesses and wealthy
individuals have access to other sweep
arrangements, but that others on the
lower end of the economic spectrum
would not. This eommenter also argued
that adoption of the proposal would not
be fair because the eommenter had
developed its program after consultation
with Board staff, and that, if the
eommenter’s service had to be
discontinued, it would lose a significant
amount in research and development
costs. At one time. Board staff had
advised certain depository institutions
that the program did not violate
Regulation D, as it appeared that the
time deposits met the requirements for
time deposits under Regulation D.
Experience with the arrangement,
however, has demonstrated that the
time deposits serve as an effective
substitute for transaction accounts.
Accordingly, the Board is exercising its
authority under sections 19(a) and
19(b)(1)(F) of the Federal Reserve Act to
treat such time deposits as transaction
accounts.
Two commenters asked for
clarification of the effect of this proposal
on cash management sweep accounts
generally. The proposal applies to the
sweep arrangements described in the
interpretation and does not necessarily
apply to other sweep arrangements,
although the Board might view other
arrangements where funds are swept
between transaction accounts and time
deposits similarly.
Two commenters claimed that the
Board's proposal would make
transaction accounts out of certain
commingled time deposits opened by
trust departments for their fiduciary
customers as allowed by state law and
by regulations of the Comptroller of the
Currency. The Board's interpretation is
limited to the arrangements described in
the interpretation and it does not
necessarily apply to other arrangements.
For example, where a bona fide trust or
collective fund invests in certificates of
deposit of the fiduciary bank, the
proposed interpretation would not
require the classification of these time
deposits as a transaction account for
Regulation D purposes in the absence of
an arrangement under which these funds
were used to fund a transaction account
or to pay overdrafts incurred in a
transaction account. Similarly,
arrangements under the Comptroller’s
Interpretation section 9.3206 (See,
Comptroller’s Handbook for Fiduciary
Activities, section 9.3206), in W'hich
funds are swept from demand deposits
maintained by the trust department into
a commingled interest bearing account
maintained by the trust department and
the trust department makes withdrawals
from this account to carry out the terms
of the trust agreement, would not
necessarily be affected by the proposed
interpretation. The Board notes,
however, that an arrangement that is
permissible under the Comptroller’s
rulings or is within a permissible trust
activity may result in the reclassification
of accounts under Regulation D if the
arrangement is being used to avoid
reserve requirements.
38423
Two commenters expressed concern
that the proposed interpretation,
coupled with a recently issued staff
interpretation on trust department use of
non-interest bearing time deposit open
accounts, would have the cumulative
effect of prohibiting the long-standing
practice of bank trust departments of
segregating a portion of the trust
department's commingled demand
account into one or more time accounts.
The practice of segregating a portion of
the demand account into a non-interest
bearing time account was the subject of
a staff opinion letter dated May 17,1991,
which discussed the rescission in
December 1987 of a 1959 interpretation
of Regulation D (FRRS 2-491). The 1959
interpretation recognized the practice of
classifying a portion of a demand
deposit as a time deposit where the
practice w as consistent with principles
of fiduciary law. The May 1991 staff
letter expressed the opinion that, in
view of recent technological advances,
the practice of maintaining zero interest
bearing time deposits is inconsistent
with a trustee’s responsibility to make
productive use of trust funds (unless
specific consent or authorization to the
contrary is obtained). The proposed
interpretation is directed at the use of
time deposits to provide funds,
indirectly, for the purpose of making
payments or transfers to third persons.
It is not directed at the segregation into
time deposits of trust department
balances that are not required for
immediate disbursement.
The Board has adopted the
interpretation § 204.134 as proposed.
Time Deposit W ithdrawal Penalty
Section 204.2(c)(l)(i) of Regulation D
defines "time deposit" generally to
include a deposit from which the
depositor does not have a right and is
not permitted to make withdrawals
within six days after the date of deposit,
unless the w ithdrawal is subject to an
early withdraw al penalty of at least
seven days' simple interest. One type of
time deposit, known as a “time deposit
open account." does not have a stated
maturity and may be payable any time
after the expiration of a specified time
not less than seven days after the date
of deposit. See 12 CFR 204.2(c)(l)(i)(A).
Unlike savings deposits, this type of
time deposit may have no restrictions on
the number of transfers from the
account that can be made each
statement period. If the early
withdrawal penalty is not imposed on a
time deposit, the account becomes either
a savings deposit subject to limitations
on withdrawals and transfers or a
transaction account.
39424
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
Depository institutions have asked
whether the six-day period runs from
the date of the last deposit or the date
that an amount corresponding to the
amount of the w ithdrawal w as initially
deposited. Under a first-in first-out, or
"FIFO”, accounting treatment,
depositors could regularly withdraw
funds from the account if a like amount
had been on deposit for more than six
days. Such w ithdraw als would not be
subject to an early withdrawal penalty
and would not be limited by the transfer
limits on savings deposits.
The Board w as concerned that a FIFO
rule would facilitate the use of a time
deposit open account to make transfers,
in excess of those permissible for a
savings deposit, from the time deposit to
a transaction account for the purpose of
making payments to third persons, thus
avoiding transaction account reserves.
Accordingly, for reserve purposes the
Board proposed to adopt a last-in firstout or "LIFO” accounting treatment for
time deposits. To this end, the Board
proposed amending § 204.2(c)(l)(i) by
adding the words the "last” before the
word "deposit” at the end of the first
sentence of that paragraph.
The Board received twelve comments
on this proposal. Three commenters
supported this proposal or indicated that
it corresponded to their current practice.
The remainder opposed the proposal.
Four commenters contended that the
proposal would freeze funds in the
accounts and would be inconsistent
with the expectation of customers that
the customers can have access to their
funds as long as an amount equal to the
amount withdrawn had been on deposit
for six days. A nother eommenter
claimed that the proposal would
preclude the use of time deposits for
investing idle trust funds. One
eommenter argued that LIFO accounting
for time deposits would permit as many
w ithdrawals as FIFO accounting where
only large periodic deposits are made.
Four commenters noted that the
proposal would cause institutions to
incur significant costs to implement and
to monitor compliance with the
proposal. One of these cited the. costs
associated with notifying customers of
the change.
This amendment w as proposed to
prevent a time deposit from being used
for the purpose of funding a transaction
account through transfers from the time
deposit in excess of the six transfers per
month that can be made from a savings
deposit to a transaction account. While
the Board regards such an arrangement
as a method erf evading reserve •
requirements, the Board wishes to avoid
imposing unnecessary costs on
depository institutions that do not use
time deposits for this purpose.
Accordingly, the Board is not adopting
the proposed amendment at this time.
The Board may reconsider this proposal
if the use of time deposits to fund
transaction accounts proliferates.
Computation of Reserve Requirements
Am endm ents
that have been called can qualify for the
deduction.
One eommenter urged that bonds and
coupons be eligible for the “cash item in
the process of collection” deduction for
two days prior to maturity. This
eommenter further maintained that the
proposed treatment of bonds and
coupons is inconsistent with some
depository institutions’ treatment of
other items in the process of collection.
The eommenter indicated that some
depository institutions take a cash item
in the process of collection deduction for
commercial paper and bankers’
acceptances that have not yet matured,
as well as for post-dated drafts.
The Board believes that the
commenters have not demonstrated that
the costs of reconciling bonds and
coupons in the process of collection will
outweigh the potential use of this
deduction to avoid reserve
requirements. W ith respect to
commercial paper and bankers’
acceptances that have not yet matured
and post-dated drafts, which some
depository institutions may be treating
currently as cash items in the process of
collection, the Board believes that these
instruments do not fit within the current
definition of "cash item in the process of
collection,” a s these items are not
“payable immediately upon
presentation” when the deduction is
taken, as required by § 204.2(i)(l)(iii) of
Regulation D. Accordingly, the Board
has adopted the amendment, with t{ie
clarification that called bonds may be
considered to be cash items in the
process of collection. The effective date
of this amendment h as been deferred for
120 days to permit depository
institutions to make any necessary
modifications to their systems.
Cash Items in the Process of Collection
Section 204.2(i)(l) of Regulation D
defines the term “cash items in the
process of collection" to include
redeemed bonds and coupons. Section
204.3(f) provides that, in determining the
reserve balance required by Regulation
D, a depository institution may deduct
the amount of cash items in the process
of collection from its gross transaction
accounts. The reference to redeemed
bonds and coupons in § 204.2(i)(l)(iii)(B)
has caused confusion, as bonds and
coupons that have been redeem ed by
the paying agent have no further need
for collection. The term "redeemed”
could be interpreted, however, to refer
to the receipt for redemption of bonds or
coupons by a depository institution in
order to send them for collection,
regardless of when the bonds or
coupons mature, if the depository
institution has given credit for the bonds
or coupons.
Such an interpretation could allow a
depository institution to send bonds or
coupons for redemption and extend
credit on the security of the bonds or
coupons while receiving a “cash item in
the process of collection” deduction
until the bonds or coupons were
redeemed by the paying agent on
maturity. This practice could materially
reduce the amount of reserves held
against transaction accounts in a way
that the Board believes is inappropriate
and inconsistent with the purpose of the
“cash items in the process of collection” Interpretations
deduction.
Due from Deduction (§ 204.135]
The Board proposed an amendment to
A number of depository institutions
the definition of the term "cash item in
have been engaging in practices
the process of collection" in
designed to reduce their reserve
§ 204.2(i)(l)(iii)(B) of Regulation D to
delete the term “redeem ed” and replace requirements by increasing the use of
the low reserve tranche among affiliated
it with the term "matured.” Bonds that
depository institutions. Under
have not reached the original maturity
§ 204.9(a)(2) of Regulation D, a deposi tory
date, but that have been called and are
payable immediately upon presentation, institution is exempt from reserve
requirements on its first $3.6 million in
would be considered matured for the
reservable liabilities and is subject to
purposes of this provision.
three percent reserves on its transaction
The Board received seven comments
account balances of up to $42.2 million.
on this proposal. Three commenters
supported the proposal. One eommenter Under § 204.3(f)(1) of Regulation D,
noted that this proposal would be
balances subject to immediate
w ithdraw al from other depository
cumbersome and time consuming as
normal account reconciliation would not institutions located in the United States
necessarily coincide with reporting
may be deducted from gross transaction
accounts in computing reserve
dates. One eommenter suggested that
the Board’s regulation clarify that bonds requirements. Further, under
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
§ 204.2(a}(l)(vii)(A){l) of Regulation D,
federal funds transactions with other
offices located in the United States of
depository institutions and certain other
entities generally are exempt from
reserve requirements. In a number of
cases, depository institutions have used
the relationship between these
provisions to reduce their reserve
requirements through a series of
transactions entered into for that
purpose.
For example, when small depository
institutions in an affiliated family of
depository institutions do not take full
advantage of the low reserve tranche in
§ 204.9(a)(1) of Regulation D (i.e. the 3
percent reserve ratio on transaction
account balances up to $42.2 million),
these small depository institutions may
accept demand deposits from larger
affiliates to increase the small
institutions’ total transaction accounts
up to the $42.2 million limit. These
deposits may be subject to immediate
withdrawal by the larger depository
institution and thereby generate a “due
from" deduction for the larger
depository institution. The transaction
account balances at the small
depository institutions are subject to a 3
percent reserve requirement rather than
the full 10 percent requirement. The
small depository institutions then return
the funds to the larger depository
institution, less an amount equal to the 3
percent reserve requirement that the
small depository institutions must hold
against the larger depository
institution’s deposit. The funds are
returned by means of a federal funds
transaction. The federal funds
transaction is exempt from reserve
requirements under
§ 204.2(a)(l)(vii)(A)(l) of Regulation D.
The larger depository institution may
then invest or lend the funds. The net
effect of these transactions is to reduce
the reserve requirements of the larger
depository institution by 7 percentage
points on the amount transferred to the
smaller depository institutions at a cost
of a few bookkeeping entries and funds
transfers.
The Board believes these transactions
are designed to avoid reserve
requirements, and are inconsistent with
the purpose for which Congress
provided the low reserve tranche, and
proposed an interpretation that would
eliminate the due from deduction under
these circumstances.
The Board received ten comments on
this proposal. Three commenters
supported the proposal. One of these
commenters suggested that the proposal
should also cover similar transactions
that are designed to take advantage of
the transition provisions of Regulation
D, under which some institutions,
including de novo or merged institutions,
may be subject to lower reserve
requirements during a phase-in period.
The Board did not include such
transactions in the final interpretation,
but will monitor them to determine
whether such transactions are being
used to evade reserve requirements,
Seven commenters opposed the
proposal. Generally, these commenters
argued that the proposal would serve to
penalize banks for legitimate
transactions, such as deposits placed to
compensate the smaller institution for
services provided to the larger
institution, or deposits to buttress the
deposit base of the smaller institution or
deposits for other prudent business
purposes. Two commenters suggested
that transactions between larger banks
and smaller affiliates be permitted if the
funds either do not flow back to the
larger bank or. if they do, interest is
charged at the going fed funds rate.
The Board recognizes that there may
be legitimate reasons for large banks to
place deposits subject to immediate
withdrawal, and that are therefore
eligible for the due from deduction, in
small affiliated banks. However, in the
case of deposits subject to immediate
w ithdraw al by large banks in small
affiliated banks or other small banks,
the Board believes that there are few. if
any. legitimate reasons for the small
banks to then sell federal funds to the
larger bank in lieu of the large bank
withdrawing its deposit. This is
particularly true in cases in which such
sales are made at a low or zero rate of
in terest
One eommenter argued that this
problem could be eliminated by
elimination of the low reserve tranche.
The low reserve tranche is established
by section 19(b)(2) of the Federal
Reserve Act. and therefore the Board
does not believe that it has the authority
to eliminate the low reserve tranche.
The Board has adopted the proposed
interpretation with revisions to clarify
that it applies to all situations in which
funds are returned to the larger
institution by a transaction that is
exempt from reserve requirements, such
as a sale of federal funds.
Commingled Trust Deposit Netting
(§204.136)
Depository institutions’ trust
departments often commingle the idle
balances of the individual trusts and
place the funds in a single transaction
account in the depository institution.
This account is subject to reserve
requirements as a transaction account.
In some cases, the trust department nets
38425
negative balances in some trust
accounts against positive balances in
other trust accounts in order to arrive at
a net amount that it credits to the
commingled transaction account. This
ractice generally understates the
alances in the transaction account.
Individual trust instruments generally do
not authorize the trustee to use the
funds in one trust to lend to another
trust. Consequently, any overdraft in a
trust is covered, in effect, by a loan from
the bank where the bank makes a
payment on behalf of the trust. A
negative balance in a trust account
should be reflected as a zero balance
and should not be netted against
positive balances in other trusts in
computing the amount in the
commingled transaction account each
day.
Accordingly, the Board proposed a;n
interpretation to be published at 12 CFR
204.136 that, in certain circumstances,
would prohibit the netting of negative
balances in individual trust accounts
against positive balances in other trust
accounts. The effect of this proposal
would be to increase aggregate trust
departm ent transaction account
balances for reserve requirement
purposes in certain depository
institutions. The prohibition would not
apply, however, if the applicable trust
law specifically permitted the netting, or
if a written trust agreement, valid under
applicable trust law, permitted a trust to
lend money to another trust account.
The Board received seventeen
comments on this proposal, one of
which supported the proposal. Seven
commenters contended that adoption of
the proposal would result in a
competitive advantage for trust
companies that deposit their institution’s
uninvested trust balances at another
bank. They argued that those trust
companies would not be subject to the
prohibition on netting of trust balances
because such netting would take place
outside of the institution determining the
reserves, while at the same time, trust
demand deposit accounts of the
reserving bank’s own trust department
would be subject to reserves on a gross
basis even though the accounts at both
institutions serve the same purpose.
Additionally, these cortimenters claimed
that prohibiting netting would inflate
trust cash balances.
The Board believes that the
prohibition against netting for reserve
purposes is consistent with accurate
accounting of a bank’s cash deposit
liability to its trust customers. Trust
principles apply to non-depository as
well as depository institutions engaged
in the administration of fiduciary
38426
Federal Register / VoL 57, No. 165 / Tuesday, August 25, 1992 / Rale3 and Regulations
accounts. These principles do not permit
a trustee to lend funds from one trust to
another trust unless specifically
authorized by the governing trust
agreement or State law. Consequently,
unless such loans are expressly
authorized, the negative balances in
individual trust accounts, in effect,
represent loans from the trustee
institution. Both non-deposit trust
companies and bank trust departm ents
must conduct their activities in
accordance with these trust principles.
Additionally, the adoption of the
interpretation should reduce, rather than
promote, competitive inequalities that
may now exist among trust institutions
by reminding all such institutions that
they are subject to the same fiduciary
principles in the determination of cash
balances for deposit.
Two commenters were concerned that
national banks would be required to
post additional collateral for trust
deposits if netting were prohibited.
National banks are required to post
collateral only where the cash balance
of an individual trust account is in
excess of Federal insurance. As
collateral requirements are not
determ ined on the aggregate balance in
a commingled trust department account,
the Board does not believe that
additional collateral will be required as
a result of the interpretation.
Two commenters maintained that the
proposed changes would place reserves
on transactions that are accomplished
on the trust side of the bank when
Regulation D specifically excludes these
transactions from reserve requirements.
One eommenter claimed that the
proposal could be interpreted a s a limit
on the authority of the bank to pay
overdrafts in a trust.
Fiduciary funds are not subject to
reserve requirements under Regulation
D unless they are placed in a deposit
account in a depository institution. Most
trust departments deposit uninvested
trust funds in their depository
institution. W here the institution has
netted uninvested trust fund balances, it
avoids reserve requirements by
reporting a lower balance than that for
which the fiduciary is responsible.
O ther commenters requested the
establishment of a safe harbor for
overdrafts of less than $200,000 p er day.
requested an exemption from separate
reporting for institutions with less than
$100 million in trust assets, and
requested guidance on the calculation of
overdrafts and the meaning of netting.
One eommenter argued that the costs of
complying with the proposal would be
greater than the costs of holding the
additional reserves that would be
required.
The Board believes that it is
unnecessary and in appropriate to
provide safe harbors or exemptions from
reserves for deposits by a depository
institution’s trust department. Further,
the Board believes that it is
inappropriate to specify detailed trust
accounting procedures in Regulation D.
Nine commenters argued that the
interpretation would prohibit overdrafts
that are “technical overdrafts,” i.e.
overdrafts for bookkeeping purposes
only, or that result from longstanding
practices that trust departments are
permitted to employ. Some of these
commenters cited as examples of
technical overdrafts negative balances
in suspense accounts used for the
prepayment of interest or dividends, and
negative balances in clearing house fund
accounts used for the processing of
securities transactions.
The proposed interpretation w as
intended to prohibit netting of true
overdrafts and w as not intended to
prohibit netting where overdrafts are
merely technical and where funds are
still available within the trust
departm ent to offset the overdraft. The
Board agrees th at technical overdrafts
may be netted provided there is a
corresponding positive balance fo r the
trust incurring the: overdraft that is
available for the offset. For example, a
negative balance in a trust account
could b e offset by a corresponding
credit in a securities settlement
suspense account until settlement date,
and a negative balance in a pre-credit
suspense account could be offset by a
corresponding positive balance in a trust
account until the dividend or interest
payment corresponding to these entries
is received Paragraph (d.) of the
interpretation h a s been revised to reflect
the permissibility of netting in these
circumstances.
One eommenter also urged that there
be no prohibition on netting overdrafts
in a common trust fund (using accrual
accounting methods} since such
overdrafts represent amounts, such as
interest o r dividends, that have been
distributed to participating individual
trust accounts. The eommenter noted
that OCC precedents require the use of
accrual accounting and that OCC
Regulations (12 CFR 9J8(b)(8)(i))
recognize the inevitability of net eash
overdrafts in common trust funds. The
only OCC precedent related to the
permissibility of netting overdrafts in
common trust funds appears to be OCC
Opinion 9.6900. This Opinion permits
offsetting within a single common trust
fund of overdrafts of income cash with
principal cash, where the income cash
overdraft is the result of a required
income distribution and the distribution
does not exceed total principal and
income cash then on hand. The Board's
interpretation is not intended to prohibit
netting in circumstances described in
OCC Opinion 9.6900 where the fund has
a legally permissible right of offset
betw een principal cash and income
cash. The Board notes, however, that the
cited Opinion does not authorize net
cash overdrafts, and that netting such
balances against other trust accounts is
prohibited by the interpretation.
One eommenter requested the Board
to clarify that the interpretation is not
intended to limit a bank's payment of
overdrafts in a trust account by means
of extensions of credit by the bank. The
proposal w as not intended to limit this
practice. Two commenters requested a
delay in the implementation of the
changes to allow institutions to make
system changes in order to comply with
the regulation.
The Board has adopted proposed
interpretation § 204.136 w ith revisions to
clarify its application to suspense
accounts and other issues raised by the
commenters. The Board is deferring the
effective date, of this interpretation for
120 days to permit depository
institutions to adapt their internal
system s to the interpretation.
Technical Amendments
In April 1991, the Board m ade several
technical amendments to Regulation D
concerning reserve deficiency charges.
56 FR 15483, April 17,1991. Two
conforming amendments are included in
this rule to substitute the term “reserve
deficiency charges" for “penalties" in
| 204.3.
Regulatory Flexibility Act
Pursuant to section 605(b) o f the
Regulatory Flexibility Act (Pub. L. 96354, 5 U.S.C. 601 et seq.), the Board
certifies that these amendments and
interpretations will not have a
significant economic impact on a
substantial member of small entities.
W ith the exception of the amendment
requiring sellers of teller's checks to
maintain reserves against the
outstanding balances of such checks, the
Board does not believe that the
am endm ents or interpretations would
impose any additional reporting or
recordkeeping requirements.
A s a result of the teller’s check
amendments, depository institutions
that'sell teller’s checks will be required
to obtain outstanding teller’s check
balances from teller’s check service
providers and to include these balances
in their reports of deposits. Currently,
sellers of tellers checks generally obtain
this information from teller’s checks
Federal Register / Vol. 57, No. 105 / Tuesday, August 25, 1992 / Rules and Regulations
service providers on a monthly basis.
make any substantive change to the
After adoption of the amendment,
regulation.
weekly reporters, that is, depository
List of Subjects in 12 CFR Part 204
institutions with assets of over $44.8
million, will need to obtain the
Banks, banking, Federal Reserve
information from providers on a more
System, Reporting and recordkeeping
timely basis in order to include teller’s
requirements.
check balances in their reports. Smaller
Pursuant to the Board’s authority
institutions, which are required to report under section 19 of the Federal Reserve
only on a quarterly basis, should
Act, 12 USC 461 et seq., the Board is
already be receiving sufficient
amending 12 CFR Part 204 as follows:
information from service providers to
include outstanding teller’s check
PART 204—RESERVE REQUIREMENTS
balances in their reports of deposit. The OF DEPOSITORY INSTITUTIONS
issues and alternatives considered by
1. The authority citation for Part 204
the Board in adopting this amendment
continues to read as follows;
are detailed in the Supplementary
Information.
Authority: Sections 11(a), 11(c), 19, 25, 25(a)
of the Federal Reserve Act (12 U.S.C. 248(a),
Although these amendments and
248(c), 371a, 371b, 461, 801, 611); section 7 of
interpretations may increase required
the International Banking Act of 1978 (12
reserves for some depository
U.S.C. 3105); and section 411 of the G am Stinstitutions, they should not have a
Germain
Depository Institutions Act of 1982
disproportionally adverse impact on
(12 U.S.C. 461).
small institutions, as Regulation D
2. Section 204.2 is am ended by
provides an exemption from reserve
revising paragraphs (a)(l)(iii), (b)(l)(ii),
requirements for the first $3.6 million of
(e)(6), and (i)(l)(iii)(B), by adding the
transaction account balances and a low
word "or” after the semicolon at the end
reserve tranche for transaction account
of paragraph (b)(3)(iii), by removing
balances above this limit up to $42.2
paragraph (b)(3)(iv), by redesignating
million, on which a lower rate of three
percent rather than the full 10 percent is paragraph (b)(3)(v) as (b)(3)(iv), and by
required. Although one of the
adding paragraph (u), to read as follows:
interpretations (§ 204.135) would reduce
§ 204.2 Definitions.
the use of the low reserve tranche in
♦
*
*
some circumstances, this interpretation
relates to the use of the low reserve
(a)(1) * * *
tranche by larger depository institutions
(iii) an outstanding teller’s check, or
affiliated with a small depository
an outstanding draft, certified check,
institution, and does not affect the
cashier's check, money order, or
ability of the small institution to use the
officer’s check draw n on the depository
low reserve tranche for their own
institution, issued in the usual course of
deposits. The Board does not expect that business for any purpose, including
the amendments and interpretations will payment for services, dividends or
have a significant negative impact on
purchases;
the ability of small institutions to attract *
*
*
*
*
deposits. Further, the Board believes
(b)(1) * * *
that the amendments and interpretations
(ii) certified, cashier's, teller’s, and
will improve the ability of small
officer’s checks (including such checks
institutions to compete in some areas, as
issued in payment of dividends);
many small institutions do not have the
* * * * *
resources available to develop and
(e) * * *
maintain reserve avoidance practices of
(6) Ail deposits other than time and
the kinds the proposals address.
savings accounts, including those
Negating the effect of these practices
accounts that are time and savings
will therefore improve the ability of
small institutions to compete with larger deposits in form but that the Board has
determined, by rule or order, to be
institutions that would otherwise be
transaction accounts.
able to use these reserve avoidance
*****
techniques.
Notice and Public Participation
With the exception of the technical
amendments to § 204,3, all amendments
and interpretations included in this
notice have been published for notice
and comment. Notice and comment have
not been provided for the amendments
to § 204.3, as these are technical,
conforming amendments that do not
(i)(l) * * *
(iii) * * *
(B) matured bonds and coupons
(including bonds and coupons that have
been called and are payable on
presentation);
*
*
*
*
*
(u) Teller's check means a check
drawn by a depository institution on
another depository institution, a Federal
38427
Reserve Bank, or a Federal Home Loan
Bank, or payable at or through a
depository institution, a Federal Reserve
Bank, or a Federal Home Loan Bank,
and which the drawing depository
institution engages or is obliged to pay
upon dishonor.
3. Section 204.3 is amended by
revising the second sentence in
paragraphs (a) introductory text and (g)
to read as follows;
§ 204.3 Computation and maintenance.
(a) * * * Reserve deficiency charges
shall be assessed for deficiencies in
required reserves in accordance with the
provisions of § 204.7. * * * * *
*
* * * *
(g) * * * If a depository institution
draws against items before that time,
the charge will be made to its reserve
account if the balance is sufficient to
pay it; any resulting impairment of
reserve balances will be subject to the
penalties provided by law and to the
reserve deficiency charges provided by
this part. * * *
* * * * *
4. Section 204.133 is added to read as
follows:
§ 204.133 Muitiple savings deposits
treated as a transaction account.
(a) 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 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.
(b) 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
§ 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.)
38128
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
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
§ 204.2(d)(2)) to reclassify or close the
account.
(c) Use o f m ultiple 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
w hether 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
(d) Examples. The distinction between
appropriate and inappropriate uses of
multiple accounts is illustrated by the
following examples:
Example 1. (i) 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 draw s three checks against
that account. X then instructs Bank to
transfer ali funds in excess of the amount of
the three checks to the second account and
draw s 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.
(ii) 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. (i) X is trustee of separate trusts
for each of his four children. X's Bank
suggests that X, as trustee, open a savings
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.
(1) 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.
(2) Each day funds from the maturing
S.
Section 204.134 is added to read as
time deposits are available to pay
follows:
checks or other charges to the
depositor’s transaction account. The
§ 204.134 Linked time deposits and
transaction accounts.
depository institution’s decision
concerning whether to pay checks
(a) A uthority. Under section 19(a) of
draw n on an individual depositor’s
the Federal Reserve Act (12 U.S.C.
461(a)), the Board is authorized to define transaction account is based on the
aggregate amount of funds that the
the terms used in section 19, and to
depositor has invested in the
prescribe regulations to implement and
arrangement, including any amount that
prevent evasions of the requirements of
that section. Section 19(b)(2) establishes may be invested in unmatured time
deposits. Only if checks drawn by all
general reserve requirements on
participants in the arrangement exceed
transaction accounts and nonpersonal
the total balance of funds available that
time deposits. Under section 19(b)(1)(F),
day (i.e. funds from the time deposit that
the Board also is authorized to
has matured that day as well as any
determine, by regulation or order, that
deposits made to participating accounts
an account or deposit is a transaction
during the day) is a time deposit
account if such account is used directly
withdrawn prior to maturity so as to
or indirectly for the purpose of making
incur an early withdrawal penalty. The
payments to third persons or others.
arrangement may be marketed as
This interpretation is adopted under
providing the customer unlimited access
these authorities.
to its funds with a high rate of interest.
(b) Linked tim e deposits and
(c) D etermination. In these
transaction accounts. Some depository
arrangements, the aggregate deposit
institutions are offering or proposing to
offer account arrangements under which balances of all participants generally
vary by a comparatively small amount,
a group of participating depositors
allowing the time deposits maturing on
maintain transaction accounts and time
deposits with a depository institution in any day safely to cover any charges to
the depositors' transaction accounts and
an arrangement under which each
avoiding any early withdrawal
depositor may draw checks up to the
aggregate amount held by that depositor penalties. Thus, this arrangement
substitutes time deposit balances for
in these accounts. Under this account
arrangement, at the end of the day funds transaction accounts balances with no
over a specified balance in each
practical restrictions on the depositors’
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.
(ii) X’s Bank's suggestion to use four
savings deposits in the nair.fi of X in this
example is appropriate, and the third party
transfers from one account should not be
considered in determining whether the
transfer and withdrawal limit w as 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. (i) X opens four savings
accounts with Bank. X regularly draw s 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.
(ii) 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.
Federal Register / Vol. 57, No. 165 / Tuesday, August 25, 1992 / Rules and Regulations
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.
6.
Section 204.135 is added to read as
follows:
$ 204.135 Shifting funds between
depository institutions to make use of the
low reserve tranche.
(a) Authority. Under section 19{a) of
the Federal Reserve Act {12 U.S.C.
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 give 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.
(b) Background. (1) Currently, the
Board requires reserves of zero, three, or
ten 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 m aintains 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
§ 204.2(a)(l)(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.
(2) Under section 19(b)(2) of the
Federal Reserve Act (12 U.S.C.
461(b)(2)), the Board is required to
impose reserves of three percent on total
transaction deposits at or below an
amount determined under a formula.
Transaction deposits falling within this
amou»t *re in the "low reserve tranche.”
Currently the low reserve tranche runs
up to $42.2 million. Under section
19(b)(ll) of the Federal Reserve Act (12
U.S.C. 481(b)(ll)) 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.
(c) Shifting funds betw een depository
institutions. The Board is aw are 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
38429
transaction account reserves of 10
percent on that amount, and would have
had only 90 percent of that amount for
use in its business.
(d) D etermination. 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.
7.
Section 204.136 is added to read as
follows:
§ 204.136 Treatment of trust overdrafts
for reserve requirement reporting
purposes.
(a) Authority. Under section 19(a) of
the Federal Reserve Act (12 U.S.C.
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.
(b) N etting o f trust account balances.
(1) Not all depository institutions have
treated overdrafts in trust accounts
administered by a trust department in
the same m anner 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
3M30
Federal Register / Vol. 57, No. 165 / Tuesday. August 25, 1992 / Rules and Regulations
(c) Procedures. In order to meet the
balances in other trust accounts when
requirements of Regulation D, a
determining the balance in a trust
depository institution must have
department’s commingled transaction
procedures to determine the aggregate of
account maintained in a depository
trust department transaction account
institution’s commercial department.
balances for Regulation D on a daily
The netting of positive and negative
basis. The procedures must consider
balances has the effect of reducing the
only the positive balances in individual
aggregate of a commingled transaction
trust accounts without netting negative
account reported by the depository
balances except in those limited
institution to the Federal Reserve and
reduces the reserves the institution must circumstances where loans are legally
hold against transaction accounts under permitted from one trust to another, or
Regulation D. Unless the governing trust where offsetting is permitted pursuant to
trust law or w ritten agreement, or where
agreement or state law authorizes the
depository institution, as trustee, to lend the amount that caused the overdraft is
still available in a settlement, suspense
money in one trust to another trust, the
negative balances in effect, for purposes or other trust account within the trust
department and may be used to offset
of Regulation D, represent a loan from
the depository institution. Consequently, the overdraft.
negative balances in individual trust
By order of the Board of Governors of the
accounts should not be netted against
Federal Reserve System. August 19,1992.
positive balances in other individual
Jennifer J. Johnson,
trust accounts, and the balance in any
Associate Secretary' o f the Board.
transaction account containing
[FR Doc. 92-20269 Filed 8-24-92; 6:45 am]
commingled trust balances should
9SLUNG CODE 62TO-01-F
reflect positive or zero balances for each
individual .trust
(2) For example, where a trust
department engages in securities lending
activities for trust accounts, overdrafts
might occur because of the trust
department’8 attempt to “normalize" the
effects of timing delays betw een 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.
W hen 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.
@FedFRASER