View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

l l★K

Federal Reserve Bank
of Dallas

HELEN E. HOLCOMB
DALLAS, TEXAS
75265-5906

FIRST VICE PRESIDENT AND
CHIEF OPERATING OFFICER

January 11, 2002
Notice 02-03

TO: The Chief Operating Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Revision of the Policy Statement on Payments System Risk
DETAILS
The Board of Governors of the Federal Reserve System has revised its Policy Statement on Payments System Risk (PSR policy) to modify the net debit cap calculation for U.S.
branches and agencies of foreign banks, to modify the time electronic check presentments are
posted to depository institutions’ Federal Reserve accounts for purposes of measuring daylight
overdrafts, and to incorporate—with minor modifications—its interim policy that allows certain
depository institutions to pledge collateral to the Federal Reserve in order to access additional
daylight overdraft capacity above their net debit caps.
These changes to the policy should benefit the few financially healthy institutions that
have been constrained by their net debit caps by increasing their daylight overdraft capacity and
should remove a potential impediment to the use of electronic check presentment. The Board has
also removed provisions from the PSR policy that are now addressed in the Reserve Banks’
Automated Clearing House operating circular. Finally, the Board has decided to retain the $50
million limit on the value of book-entry securities transfers.
The revised PSR policy became effective December 10, 2001, with the following
exceptions: (1) revisions to the criteria used to determine the U.S. capital equivalency measure
for foreign banking organizations will take effect February 21, 2002, and (2) the modification to
post electronic check presentments to depository institutions’ Federal Reserve accounts at 1 p.m.
local time will take effect April 1, 2002.

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.

-2-

ATTACHMENT
A copy of the Board’s notice as it appears on pages 64419–33, Vol. 66, No. 240 of the
Federal Register dated December 13, 2001, is attached.
MORE INFORMATION
For more information, please contact this Bank’s Reserve and Risk Management
Division at (214) 922-5584. For additional copies of this Bank’s notice, contact the
Public Affairs Department at (214) 922-5254 or access District Notices on our web site at
http://www.dallasfed.org/banking/notices/index.html.
Sincerely,

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

64419

collateral to the Federal Reserve in order
to access additional daylight overdraft
capacity above their net debit caps.
These changes to the policy should
benefit the few financially healthy
institutions that have been constrained
by their net debit caps by increasing
their daylight overdraft capacity and
should remove a potential impediment
to the use of electronic check
presentment. The Board has also
removed provisions from the PSR policy
that are now addressed in the Reserve
Banks’ Automated Clearing House
operating circular. Finally, the Board
has decided to retain the $50 million
limit on the value of book-entry
securities transfers.
DATES: The revised PSR policy is
effective December 10, 2001 with the
following exceptions: (1) revisions to
the criteria used to determine the U.S.
capital equivalency measure for foreign
banking organizations will take effect on
February 21, 2002 and (2) the
modification to post electronic check
presentments to depository institutions’
Federal Reserve accounts at 1 p.m. local
time will take effect on April 1, 2002.
FOR FURTHER INFORMATION CONTACT: Paul
Bettge, Associate Director (202/452–
3174), Stacy Coleman, Manager (202/
452–2934), or Connie Horsley, Senior
Financial Services Analyst (202/452–
5239), Division of Reserve Bank
Operations and Payment Systems.
SUPPLEMENTARY INFORMATION:

FEDERAL RESERVE SYSTEM
[Docket Nos. R–1107, R–1108, R–1109, and
R–1110]

Policy Statement on Payments System
Risk
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Policy statement.
SUMMARY: The Board has revised its
Policy Statement on Payments System
Risk (PSR policy) to modify the net
debit cap calculation for U.S. branches
and agencies of foreign banks, to modify
the time electronic check presentments
are posted to depository institutions’
Federal Reserve accounts for purposes
of measuring daylight overdrafts, and to
incorporate, with minor modifications,
its interim policy that allows certain
depository institutions to pledge

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

PO 00000

Frm 00023

Fmt 4703

Sfmt 4703

I. Background
The Board recently conducted a
review of its PSR policy to evaluate the
effectiveness of its daylight credit
policies, recognizing that significant
changes have occurred in the banking,
payments, and regulatory environment
in the past few years. The Board’s
daylight credit policies addressed net
debit caps, capital measures, the
daylight overdraft fee, the book-entry
securities transfer limit, interaffiliate
transfers, third-party access to Fedwire,
counseling, ex post and real-time
monitoring, and the posting rules.1 In
addition, the Board evaluated further
changes to the rate charged on average
daily daylight overdrafts in depository
institutions’ Federal Reserve accounts.2
1 As part of its review, the Board rescinded its
policies on Fedwire third-party access effective
April 9, 2001 (66 FR 19165, April 13, 2001) and
interaffiliate transfers effective January 1, 2002 (66
FR 30198, June 5, 2001).
2 In October 1992, the Board approved charging
a fee for daylight overdrafts, which was to be
phased in as 24 basis points in 1994, 48 basis points
in 1995, and 60 basis points in 1996 (57 FR 47084,
October 14, 1992). In March 1995, however, the
Board decided to raise the daylight overdraft fee to

E:\FR\FM\13DEN1.SGM

Continued

pfrm04

PsN: 13DEN1

64420

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

The Board determined that these
policies appear to be generally effective
in controlling risk to the Federal
Reserve and creating incentives for
depository institutions to manage their
intraday credit exposures. Furthermore,
the PSR policy appears to be well
understood by the industry, and privatesector participants have generally
benefited from the policy’s risk controls.
The Board also recognized, however,
that the policy has imposed costs on the
industry and is considered burdensome
by some depository institutions.
In conducting its review, the Board
evaluated the effect of past policy
actions on depository institutions’
behavior and on the markets generally
and also considered the effect of various
payment system initiatives on payments
activity and the demand for daylight
credit. Through its analysis, the Board
identified growing liquidity pressures
among certain payments system
participants. Specifically, the Board
learned that a small number of
financially healthy institutions regularly
find their net debit caps to be
constraining, causing them to delay
sending payments and, in some cases, to
turn away business. To address these
liquidity concerns, the Board adopted
on an interim basis, and requested
comment on, a policy that allows
depository institutions with selfassessed net debit caps (average, above
average, or high) to pledge collateral to
the Federal Reserve in order to access
additional daylight overdraft capacity
above their net debit cap levels (66 FR
30199, June 5, 2001).
The Board also learned through its
policy review that some foreign banking
organizations (FBOs) believe that their
net debit caps constrain their business
activity and place them at a competitive
disadvantage in comparison with U.S.
depository institutions. Some FBOs
assert that certain U.S. depository
institutions hold a significant portion of
their assets in foreign markets but are
able to use 100 percent of their total
risk-based capital in establishing their
36 basis points instead of 48 basis points and stated
it would evaluate further changes to the fee after
two years (60 FR 12559, March 7, 1995). In June
2001, the Board requested comment on the benefits
and drawbacks associated with the following
potential longer-term changes to the PSR policy: (1)
Lowering self-assessed net debit caps and
eliminating the two-week average caps, (2)
implementing a two-tiered pricing regime for
daylight overdrafts in which institutions that pledge
collateral to the Reserve Banks would pay a lower
fee on their collateralized daylight overdrafts than
on their uncollateralized daylight overdrafts, and
(3) rejecting payments with settlement-day finality
that would cause an institution to exceed its
daylight overdraft capacity level (66 FR 30208, June
5, 2001). The Board will continue to evaluate these
policy options.

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

caps, while the PSR policy does not
recognize the FBOs’ worldwide
financial strength. In considering the
concerns raised by FBOs, the Board
assessed the criteria used in
determining their U.S. capital
equivalency measure. In addition, the
Board evaluated trends in FBOs’
daylight credit use, considered
supervisory and legal issues, assessed
the potential impact of new or emerging
payments system initiatives, and held
discussions with FBOs. To address the
liquidity concerns identified by FBOs,
the Board requested comment on
proposed modifications to the criteria
used to determine an FBO’s U.S. capital
equivalency measure (66 FR 30205, June
5, 2001).
The Board also evaluated the
effectiveness of the current daylight
overdraft posting rules and found these
rules to be generally effective and well
understood by the industry. In
reviewing the posting rules, however,
the Board found that the posting times
for electronic check presentment (ECP)
transactions often create a disincentive
for depository institutions to use
Federal Reserve electronic check
services. As a result, the Board
requested comment on changing the
posting time associated with ECP
transactions in an effort to remove any
disincentive created by the posting rules
(66 FR 30195, June 5, 2001).
Finally, the Board considered the
effectiveness of the $50 million limit on
the transaction size of book-entry
securities transfers on Fedwire. The
Board focused on whether the limit was
imposing an undue regulatory burden
on depository institutions and their
securities-dealer customers. Because the
industry bears a significant portion of
the limit’s costs in terms of transaction
fees and receives a benefit in terms of
reduced daylight overdraft fees, the
Board requested comment on the
desirability of retaining the $50 million
limit (66 FR 30193, June 5, 2001).
II. Summary of Comments and Analysis
The Board has updated its PSR policy
to incorporate most aspects of its nearterm proposals. The following section
describes the proposed changes to the
PSR policy, provides a summary and
analysis of the comments received on
the proposals, and highlights the
provisions of the revised PSR policy.
A. Increased Daylight Overdraft
Capacity Through Collateralization
(Docket No. R–1107)
In its review of the PSR policy, the
Board identified growing liquidity
pressures among certain payments
system participants. The Board also

PO 00000

Frm 00024

Fmt 4703

Sfmt 4703

recognized that certain payment system
initiatives, such as the Clearing House
Interbank Payments System with
intraday finality (new CHIPS), the
Continuous Linked Settlement (CLS)
system, and the Federal Reserve’s
settlement-day finality for ACH credit
transactions, may exacerbate these
institutions’ liquidity needs at specific
times during the day. To address these
liquidity concerns, the Board adopted
on an interim basis and requested
comment on a policy that allows a
depository institution with a selfassessed net debit cap to pledge
collateral to its administrative Reserve
Bank to secure daylight overdraft
capacity in excess of its net debit cap
(interim policy).3
In the interim policy, the Board
eliminated the separate treatment of
book-entry securities overdrafts for selfassessed institutions; however, the
Board proposed eliminating the separate
treatment of book-entry securities
overdrafts for all depository institutions
with the adoption of a final policy. By
eliminating the separate treatment of
book-entry securities overdrafts for selfassessed institutions, the Board
abolished its collateralization
requirement for self-assessed
institutions that incurred ‘‘frequent and
material’’ book-entry securities
overdrafts.4 The previous policy
required institutions that met the
frequent and material criteria to
collateralize fully their peak book-entry
securities overdrafts, not just the portion
that exceeded the net debit cap. Under
the interim policy, Reserve Banks could
require self-assessed depository
institutions that frequently exceeded
their caps as a result of transactions
with settlement-day finality to
collateralize the difference between
their peak daylight overdrafts and their
net debit cap levels, rather than the
entire amount of their peak book-entry
securities overdrafts.5
The Board received twenty-five
comment letters on its interim policy
statement. The commenters included
eleven commercial banking
organizations and six of their trade
3 The administrative Reserve Bank is responsible
for the administration of Federal Reserve credit,
reserves, and risk management policies for a given
depository institution or other legal entity.
4 Under the previous policy, an account holder
met the ‘‘frequent and material’’ criteria when it
exceeded its net debit cap, because of book-entry
securities transactions, on more than three days in
any two consecutive reserve-maintenance periods
and by more than 10 percent of its capacity.
5 These transactions include Fedwire funds
transfers, book-entry securities transfers, net
settlement service entries, and ACH credit
originations.

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
associations, two clearing organizations,
and six Federal Reserve Banks.
Commenters generally supported the
Board’s interim policy statement. Ten of
the commenters explicitly noted that the
potential benefits of allowing depository
institutions with self-assessed net debit
caps to pledge collateral for additional
daylight overdraft capacity outweighed
any potential drawbacks. Several
commenters stated that the interim
policy’s primary benefits were
additional flexibility in managing
intraday liquidity and the potential for
improved efficiency in payments
activity. One commenter believed the
policy’s elimination of the frequent and
material collateralization requirement
for book-entry securities overdrafts
would reduce regulatory burden. Only
one commenter recommended that the
Board not adopt the interim policy
because it believed the policy would
increase its organization’s regulatory
burden.
Three commenters stated that
allowing collateral to support daylight
overdraft capacity above net debit cap
levels would reduce Federal Reserve
credit risk and could more closely align
the Federal Reserve’s policies with
those of other central banks. One
commenter who generally supported the
policy stated that the costs of pledging
additional collateral to the Federal
Reserve might negate the benefits of
acquiring additional daylight overdraft
capacity. Six commenters, however,
noted that under the interim policy,
depository institutions would primarily
use collateral already pledged to a
Reserve Bank. Two commenters
indicated that institutions might pledge
additional collateral once they gain
experience with the policy. Three
commenters stated that some depository
institutions might pledge additional
collateral if certain longer-term policy
proposals were adopted, such as
lowering the single-day net debit cap
level and implementing two-tiered
pricing for collateralized versus
uncollateralized credit.
The Board has adopted the interim
policy’s provision enabling self-assessed
depository institutions to obtain
additional daylight credit by pledging
collateral, which was intended to
provide flexibility in addressing the
liquidity needs of the few financially
healthy institutions that are or may be
constrained by their current net debit
caps. In addition, the revised PSR policy
continues to allow depository
institutions to pledge collateral accepted
today for discount window or PSR
purposes. In conducting its review of
the policy, the Board found that more
than 25 percent of account holders

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

already have collateral pledged to the
Reserve Banks. The Board believes it
would be reasonable for depository
institutions to use collateral already
pledged to a Reserve Bank for discount
window purposes to obtain additional
daylight overdraft capacity when that
collateral is not supporting an
outstanding discount window loan. In
addition, the Board expects that very
few depository institutions will seek to
expand their daylight overdraft capacity
levels by pledging collateral because
approximately 97 percent of all account
holders use less than 50 percent of their
net debit caps for their average peak
overdrafts.
Two commenters expressed concern
about the policy placing limits on the
amount of book-entry securities
overdrafts that institutions could incur
and the potential implications for
government securities market
participants. The interim policy’s
elimination of the separate treatment of
book-entry securities overdrafts for selfassessed institutions may require certain
depository institutions to establish a
maximum daylight overdraft capacity
limit to accommodate their book-entry
securities transactions. The commenters
believed that any limitation on bookentry securities overdrafts might cause
market disruptions and further noted
that as long as these overdrafts were
collateralized, a rigid limit would not be
necessary. One commenter suggested
that if a limit were to be imposed, that
the limit be allowed to vary on a daily
basis depending on the amount of
collateral that the institution had
pledged to its Reserve Bank. Another
commenter recommended limiting the
amount of additional daylight overdraft
capacity to 50 percent of current net
debit cap levels.
Two commenters supported allowing
all book-entry securities overdrafts that
are secured pursuant to the Reserve
Banks’ Operating Circular 10 (Lending)
to be excluded from overdrafts
measured against the cap.6
Alternatively, two commenters
recommended that the policy allow only
those book-entry securities overdrafts in
6 Depository institutions that pledge collateral to
a Reserve Bank must sign an agreement in
Operating Circular 10, which provides the Reserve
Bank with a security interest in all the borrower’s
right, title, and interest in property (wherever
located, now owned or hereafter acquired),
including, but not limited to, accounts, chattel
paper, inventory, equipment, instruments,
investment property, general intangibles, payment
intangibles, documents, deposit accounts,
commercial tort claims, real property, and
intellectual property, and which is (a) identified on
a collateral schedule, (b) identified on the books or
records of a Reserve Bank as pledged to the Bank,
or (c) for which a financing statement has been
filed.

PO 00000

Frm 00025

Fmt 4703

Sfmt 4703

64421

excess of the net debit cap to be secured
pursuant to the Operating Circular 10
and exclude them from overdrafts
measured against the cap.
Seven commenters expressed concern
over the types of collateral accepted
under the interim policy, particularly
with regard to government securities
market participants. Two of these
commenters asked that the revised PSR
policy reflect the continued acceptance
of securities ‘‘in transit’’ to collateralize
book-entry securities overdrafts.7 One
commenter recommended exploring
alternatives to stable pool collateral to
secure daylight overdrafts arising from
particular transactions whose dollar
amounts have the potential to make
stable pool collateral requirements
impracticable. Two commenters
recommended allowing a depository
institution to pledge collateral held for
its benefit at another depository
institution to secure funds overdrafts,
provided the collateral is held in an
account maintained by a Reserve Bank
or is otherwise acceptable to the Reserve
Bank.
The Board has decided to include
book-entry securities overdrafts for
purposes of determining an institution’s
compliance with its cap. Under the
revised PSR policy, the Board requires
that those depository institutions with
self-assessed net debit caps that wish to
expand their daylight overdraft capacity
by pledging collateral consult with their
Reserve Banks to establish a maximum
daylight overdraft capacity limit.8 The
Reserve Banks will consider the
institution’s reasons for requesting
additional daylight overdraft capacity as
well as the institution’s financial and
supervisory information in determining
the appropriate level of collateralized
credit, if any, to grant above the net
debit cap. Depository institutions will
continue to have some flexibility as to
the specific types of collateral they may
pledge to the Reserve Banks; however,
all collateral must be acceptable to the
Reserve Banks.
The Board recognizes that with the
policy’s elimination of the separate
treatment of book-entry securities
overdrafts, some depository institutions
may find their net debit cap levels
insufficient in accommodating their
book-entry securities overdrafts and
may request a maximum daylight
7 Securities in transit refer to book-entry
securities transferred over Fedwire’s National BookEntry System that have been purchased by a
depository institution, but not yet paid for and
owned by the institution’s customers.
8 A depository institution’s ‘‘maximum daylight
overdraft capacity limit’’ is the total amount of
Reserve Bank-approved daylight overdraft capacity,
both uncollateralized and collateralized.

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

64422

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

overdraft capacity limit to expand their
capacity. To address commenters’
concerns related to placing a limit on
the amount of an institution’s bookentry securities overdrafts, the revised
PSR policy will allow the Reserve Banks
to continue to accept securities in
transit on the Fedwire book-entry
securities system as collateral to support
an institution’s maximum daylight
overdraft capacity limit. The Reserve
Banks recognize that by accepting
securities in transit as collateral to
support an institution’s additional
daylight overdraft capacity, the
institution’s daylight overdraft capacity
will vary on a daily basis.9
Two commenters expressed concern
about the interim policy’s provision that
a Reserve Bank could require a
depository institution with a selfassessed net debit cap that frequently
exceeded its daylight overdraft capacity
level to collateralize the difference
between its peak daylight overdraft and
its net debit cap level. These
commenters noted that this requirement
could marginally increase Federal
Reserve credit risk because, unlike the
previous policy that stipulated a
depository institution with book-entry
securities overdrafts that met the
frequency and materiality thresholds
had to collateralize fully those
overdrafts, a depository institution
would need to collateralize only the
portion of its peak book-entry securities
overdraft in excess of its net debit cap.
The Board agrees that this change
could increase the Federal Reserve’s
credit exposure; however, the Board
believes the increase in Federal Reserve
credit risk would be minimal given that
the majority of institutions that
participate in the government-securities
market do not meet the frequent and
material criteria. In addition, for the
past several years, the policy has
allowed the Reserve Banks to protect
themselves from risk when they believe
it is appropriate by requiring
institutions to pledge collateral. The
interim policy allowed Reserve Banks to
require collateral for the portion of an
institution’s daylight overdraft above its
net debit cap level if the institution
9 Depository institutions with self-assessed net
debit caps that receive Reserve Bank approval to
support a maximum daylight overdraft capacity
limit with securities in transit must submit a boardof-directors resolution at least once in each twelvemonth period. The resolution requires the
depository institution’s board of directors to
acknowledge that (1) securities in transit will be
used to collateralize daylight overdraft capacity in
a manner consistent with the reasons and purposes
submitted to the institution’s administrative
Reserve Bank and (2) the value of the securities in
transit pledged to the Reserve Bank will fluctuate
intraday and over time.

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

frequently exceeded its cap as a result
of transactions with settlement-day
finality. In considering the frequency
threshold, the Board determined that its
longstanding policy of allowing Reserve
Banks to exercise discretion in applying
risk controls to their account holders is
more practicable and precludes the need
for the frequency threshold.
Regarding the Board’s proposal to
eliminate the separate treatment of
book-entry securities overdrafts for all
depository institutions, commenters
were generally supportive. The
proposed policy change would require
depository institutions with exemptfrom-filing and de minimis caps to
apply for higher net debit caps if they
frequently exceed their caps because of
book-entry securities transfers.
Commenters did not believe such a
policy change would create any undue
burden. Two commenters noted that
depository institutions frequently
exceeding their net debit caps might be
an indication that the institutions’
payment activities have expanded or
become more complex. They believed
the requirement for such an institution
to apply for a higher net debit cap was
useful and appropriate.
As mentioned previously, the Board
has determined that its existing policies
preclude the need for a frequency
threshold. Under the Board’s policy,
Reserve Banks review the status of
institutions that exceed their net debit
caps during any two-week reservemaintenance period. In addressing
situations where an institution exceeds
its net debit cap level, Reserve Banks
may recommend that the institution
apply for a higher net debit cap. In
addition, if the institution does not
qualify for a higher net debit cap,
Reserve Banks have the discretion to
apply risk controls, including requiring
collateral, imposing clearing balance
requirements, and delaying or rejecting
transactions that would exceed the
institution’s account balance.
Under the revised PSR policy, Reserve
Banks will review the status of an
institution that exceeds its de minimis
cap during a reserve-maintenance
period and decide if the institution’s
cap level should be maintained or if the
institution should be required to
perform a self-assessment for a higher
cap. Similarly, Reserve Banks will
decide if an institution with an exemptfrom-filing cap that incurs overdrafts in
its Federal Reserve account in excess of
the lesser of $10 million or 20 percent
of capital on more than two days in any
two consecutive reserve-maintenance
periods should maintain its exemption
or be required to file for a higher cap.
Finally, Reserve Banks will also review

PO 00000

Frm 00026

Fmt 4703

Sfmt 4703

the status of any zero cap institution
that incurs a daylight overdraft and may
decide to monitor the institution’s
activity in real time and reject or delay
certain transactions. If the institution
qualifies for a positive cap, the Reserve
Bank may suggest that the institution
accept an exempt-from-filing cap or file
for a higher cap if the institution
believes that it will continue to incur
daylight overdrafts.
One commenter stated that the policy
should allow Reserve Banks to have
flexibility in dealing with bankers’
banks because they typically have
limited ability to pledge collateral to
their Reserve Banks but experience large
intraday account fluctuations. While the
Board’s policy allows bankers’ banks to
access Federal Reserve payment
services, bankers’ banks that are exempt
from reserve requirements do not have
regular access to the discount window
and, therefore, may not incur daylight
overdrafts. Bankers’ banks that waive
their reserve requirement exemption
would be free to establish net debit caps
and would be subject to the same PSR
policies as other depository institutions.
Another commenter requested
clarification on the method used to
determine the maximum limit on an
institution’s daylight overdraft capacity
and advocated consistent administration
of the revised PSR policy throughout the
Federal Reserve System. The Board
believes that the revised PSR policy
clarifies the conditions under which a
depository institution may receive
additional daylight overdraft capacity
and notes that, pursuant to the Federal
Reserve Act, the Board exercises general
supervision over the Reserve Banks
(section 11j). The Board expects to
exercise this authority in a manner that
should ensure equitable administration
of the revised PSR policy.
Based upon its analysis of the
comments received, the Board is
adopting all of the provisions of the
interim policy except the frequency
threshold that determined when a
Reserve Bank would require a
depository institution with a selfassessed net debit cap to collateralize
the difference between its peak daylight
overdraft and its net debit cap level. As
mentioned previously, the Board
believes its longstanding policy of
allowing Reserve Banks to exercise
discretion in applying risk controls to
their account holders is more
practicable and precludes the need for
a frequency threshold.
In adopting all of the other provisions
of the interim policy, the Board
recognizes the importance of providing
an environment in which payment
systems may function effectively and

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
efficiently and remove barriers, as
appropriate, to foster risk-reducing
payment system initiatives. Under the
revised PSR policy, certain depository
institutions with self-assessed net debit
caps may pledge collateral to their
administrative Reserve Banks to secure
daylight overdraft capacity in excess of
their net debit caps. The Board believes
that requiring collateral allows the
Federal Reserve to protect the public
sector from additional credit risk while
providing extra liquidity to the few
institutions that might otherwise be
constrained. Providing extra liquidity to
constrained institutions should help
prevent liquidity-related market
disruptions. In addition, the Board’s
decision to eliminate the separate
treatment of book-entry securities
overdrafts for all depository institutions
should simplify administration of and
compliance with the policy.
B. Daylight Overdraft Capacity for
Foreign Banking Organizations (Docket
No. R–1108)
During the Board’s policy review, a
few FBOs indicated that their net debit
caps constrain their business activity
and place them at a competitive
disadvantage to U.S. depository
institutions. These FBOs assert that
certain U.S. depository institutions hold
a significant portion of their assets in
foreign markets but are able to use 100
percent of their total risk-based capital
in establishing their caps, while the PSR
policy does not recognize the FBOs’
worldwide financial strength. The Board
found that during 2000, approximately
35 percent of U.S. branches and
agencies of foreign banks with positive
net debit caps had cap utilization levels
of 75 percent or more.10 In contrast,
during the same time period, less than
5 percent of domestically chartered
institutions used more than 50 percent
of their net debit caps for their average
daily peak daylight overdrafts.
To address the liquidity concerns
identified by FBOs during its review of
the policy, the Board requested
comment on proposed modifications to
the criteria used to determine the U.S.
capital equivalency measure for FBOs.
The Board proposed (1) eliminating the
Basle Capital Accord (BCA) criteria used
in the policy to determine U.S. capital
equivalency measure for FBOs, (2)
replacing the BCA criteria with the
strength of support assessment (SOSA)
rankings and financial holding company
(FHC) status in determining U.S. capital
equivalency measure for FBOs, and (3)
10 Cap utilization is equal to an institution’s
average daily peak daylight overdraft divided by the
institution’s net debit cap.

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

raising the percentage of capital used in
calculating U.S. capital equivalency
measure for certain FBOs. The Board
also proposed replacing ‘‘liabilities to
nonrelated parties’’ with ‘‘net due to
related depository institutions’’ as a
proxy for calculating the U.S. capital
equivalency measure for SOSA 3-ranked
FBOs.11 Specifically, an FBO’s U.S.
capital equivalency measure would be
equal to one of the following:
• 35 percent of capital for FBOs that
are FHCs
• 25 percent of capital for FBOs that
are not FHCs and are ranked a SOSA 1
• 10 percent of capital for FBOs that
are not FHCs and are ranked a SOSA 2
• 5 percent of ‘‘net due to related
depository institutions’’ for FBOs that
are not FHCs and are ranked a SOSA 3.
The Board received ten comment
letters on its proposal regarding daylight
overdraft capacity for FBOs. The
commenters included three commercial
banking organizations and three of their
trade associations, one clearing
organization, and three Federal Reserve
Banks.
All of the commenters supported the
proposed changes to the calculation of
FBOs’ net debit caps. Commenters
generally believed that the proposed net
debit cap structure, combined with the
interim policy that allows depository
institutions with self-assessed net debit
caps to obtain additional daylight
overdraft capacity, reasonably addresses
the liquidity needs of FBOs. One
commenter noted that the proposal
would improve FBOs’ capacity to clear
and settle U.S. dollar payments.
Four commenters supported further
increases in the percentage of capital
used in the calculation of FBOs’ net
debit caps, particularly for institutions
that hold an FHC classification. One
commenter recommended allowing
Reserve Banks to use discretion on a
case-by-case basis when providing
daylight credit to FBOs. In particular,
the commenter stated that the
percentage applied to determine the
U.S. capital equivalency measure for
institutions that are ranked SOSA 1
should be allowed to exceed 25 percent
if the Reserve Bank agrees, presuming
the institution has demonstrated
adequate need for additional liquidity.
With respect to FBOs’ access to the
U.S. payments system, two commenters
stated that the proposed policy changes
provided FBOs with appropriate access.
Four commenters, although in support
11 Reporting Form FFIEC 002/002S. Report of
Assets and Liabilities of U.S. Branches and
Agencies of Foreign Banks. Schedule RAL—Assets
and Liabilities: Liabilities: item 4—‘‘Liabilities to
nonrelated parties’’ and item 5—‘‘Net due to related
depository institutions.’’

PO 00000

Frm 00027

Fmt 4703

Sfmt 4703

64423

of the proposed policy, requested to be
treated more similarly to domesticallychartered institutions in the calculation
of their net debit caps. Two of these
commenters expressed concern that the
proposal leaves FBOs at a competitive
disadvantage in comparison with
domestically-chartered depository
institutions. These commenters
recommended that the Board consider
further actions to address differences in
the net debit cap calculation between
FBOs and domestic institutions. They
maintain that, in many instances, the
supervision of FBOs, particularly for
large and complex banking
organizations, is comparable to, if not
more stringent than, the supervision of
domestically-chartered depository
institutions and that this should offset
concerns outlined in the Board’s
proposal about the risks these
institutions pose. One commenter also
recommended that foreign banks and
domestically-chartered banks be treated
comparably with respect to the real-time
monitor. None of the commenters,
however, addressed the extent to which
the Board should consider the legal
risks, such as differing international
solvency laws, involved in the
evaluation of the net debit cap
calculation for FBOs.
While the Board recognizes
commenters’ concerns regarding the
criteria used to determine the U.S.
capital equivalency measure for FBOs, it
believes that the criteria outlined in the
Board’s proposal are appropriate given
the added supervisory and legal risks
that FBOs present in comparison with
domestically-chartered depository
institutions. Although commenters
contend that the level of supervision
parallels and sometimes surpasses that
of domestically-chartered depository
institutions, the Board believes that the
availability of this information to U.S.
regulators may not be timely or
comparable to similar information used
in the supervision of U.S. depository
institutions. The Board also believes
that FBOs present additional legal risks,
particularly in relation to insolvency
laws. The Board believes that it is not
practicable for the Federal Reserve to
undertake and keep current extensive
analyses of the legal risks presented by
the insolvency law(s) applicable to each
FBO with a Federal Reserve account in
order to quantify precisely the legal risk
that the Federal Reserve incurs by
providing intraday credit to that
institution. The Board believes that
these additional risks warrant
differential treatment of FBOs in
relation to the provision of intraday
liquidity.

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

64424

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

The Board received no comments on
its question regarding the
appropriateness of replacing ‘‘liabilities
to nonrelated parties’’ with ‘‘net due to
related depository institutions’’ as a
proxy for calculating U.S. capital
equivalency for SOSA 3-ranked FBOs.
One commenter recommended
clarifying the policy to refer to
‘‘worldwide capital’’ in relation to the
capital measure for FBOs as opposed to
merely ‘‘capital,’’ to be consistent with
language from the previous policy
statement. The Board believes the
capital of a foreign banking organization
is, by definition, the organization’s
‘‘worldwide capital.’’
Four commenters believed that the
Federal Reserve should play an active
role in an initiative to establish a crossborder collateral pool as an intraday
liquidity service for participating banks.
These commenters mentioned that such
a facility would enable an institution to
receive funds in a foreign central bank
account by earmarking intraday
balances in central bank money with its
home country central bank. The Board
is amenable to discussing this initiative,
but is not addressing it in this notice.
Based upon its analysis and the
comments received, the Board is
adopting the proposed policy changes to
FBOs’ net debit caps. The Board is
replacing the BCA criteria with SOSA
rankings and FHC status in determining
the U.S. capital equivalency measure
and raising the percentage of capital
used in the net debit cap calculation for
certain FBOs. The Board believes that
SOSA rankings provide broader
information about the condition of the
FBO, its supervision, and the home
country, whereas the BCA distinction
provides information only about the
home country treatment of bank capital
adequacy. Furthermore, the BCA
designation reflects the one-time
adoption of BCA standards by a
country’s supervisory authority, while
U.S. bank supervisors update the SOSA
rankings regularly. The Board believes
that, like the SOSA ranking, FHC status
is preferable to the BCA distinction in
determining the risk posed by FBOs to
the U.S. payments system because FHCs
must continue to meet certain capital
and management standards in order to
maintain their status and are subject to
enhanced reporting requirements.
In addition, the Board is replacing
‘‘liabilities to nonrelated parties’’ with
‘‘net due to related depository
institutions’’ as a proxy for calculating
the U.S. capital equivalency measure for
SOSA 3-ranked FBOs. ‘‘Liabilities to
nonrelated parties’’ may increase
relative to assets when an institution
becomes financially weaker and could

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

unduly increase the institution’s
overdraft capacity. ‘‘Net due to related
depository institutions’’ reflects the
amounts owed to the parent by the
branch and can be viewed as the capital
investment by the FBO parent in its U.S.
operations. The Board notes that this
policy change would not affect any
SOSA 3-ranked FBOs at this time.
C. Modifications to Daylight Overdraft
Posting Rules for Electronic Check
Presentments (Docket No. R–1109)
In reviewing the PSR posting rules,
the Board found that the posting times
for electronic check presentment (ECP)
transactions often create a disincentive
for depository institutions to use
Federal Reserve electronic check
services. The Reserve Banks deliver the
majority of electronic check
presentments in the morning, and the
delivery of the ECP files constitutes
legal presentment of the checks under
the terms of the Federal Reserve’s
uniform check Operating Circular 3. In
accordance with the Board’s objectives
in designing the posting rules, the
current posting rules stipulate that
debits to depository institutions’ Federal
Reserve accounts for check
presentments occur on the next clock
hour that is at least one hour after
presentment takes place, beginning at 11
a.m. Eastern Time (ET) and no later than
3 p.m. local time. Because the Reserve
Banks generally deliver electronic check
presentments in the morning, the
corresponding debits occur at 11 a.m.
ET. As a result, for many depository
institutions, the posting times for
electronic check presentments are
earlier than the posting times associated
with their paper check presentments.
The often earlier debit posting times
associated with electronic check
presentments have caused some
depository institutions to incur daylight
overdrafts earlier in the day and, in
many cases, for longer periods of time.
Because the Reserve Banks charge
depository institutions a fee for the
amount and duration of their Federal
Reserve daylight credit use, the daylight
overdraft charges of a few institutions
that have moved to electronic check
services have grown substantially. As a
result, some depository institutions
have asserted that the increases in their
daylight overdraft charges have reduced
or eliminated the benefits of using
Federal Reserve electronic check
services.
To remove barriers that may
discourage depository institutions’ use
of Federal Reserve electronic check
presentment services, the Board
requested comment on proposed
modifications to its daylight overdraft

PO 00000

Frm 00028

Fmt 4703

Sfmt 4703

posting rules to allow debits associated
with ECP transactions to post to
depository institutions’ Federal Reserve
accounts no earlier than 1 p.m. local
time.
The Board received nineteen
comment letters on its proposal to
modify daylight overdraft posting rules
for ECP transactions. The commenters
included eight commercial banking
organizations and four of their trade
associations, one clearing organization,
and six Federal Reserve Banks.
All of the commenters supported the
proposed change in the posting time for
ECP debits. Commenters generally
believed that the benefits of the Board’s
proposed change in the posting time for
ECP debits outweighed any
disadvantages. In addition, commenters
generally noted that posting ECP debits
at 1 p.m. local time should facilitate
participation in Federal Reserve ECP
services by eliminating any disincentive
created by the current posting rules.
None of the commenters indicated
that the proposed change in the posting
time of ECP debits would provide the
Federal Reserve Banks with an
inappropriate competitive advantage.
One commenter stated that the later
posting time actually improves the
ability of private-sector banks to
compete with Federal Reserve Banks.
Another commenter noted that privatesector banks providing ECP services
have the additional advantage of
negotiating settlement arrangements
with their correspondents. Two
commenters noted that the proposed
posting time does not unduly benefit
paying banks or collecting banks,
because the vast majority of depository
institutions function as both paying and
collecting banks.
One commenter recommended that
the Board evaluate the potentially
negative effect of posting debits and
associated credits later in the day on
bankers’ banks, noting that the policy
might impede their ability to manage
their accounts within net debit cap
levels. The Board believes that because
the Federal Reserve Banks deliver the
majority of electronic check
presentments in the morning, account
holders have adequate time before 1
p.m. local time to manage their accounts
appropriately.
One commenter recommended that
the Board extend the ECP posting time
of 1 p.m. local time to debits and credits
related to paper check transactions,
noting that such a provision would
enable many depository institutions to
more easily monitor and manage their
account activity. The Board notes that
Reserve Banks do not post check debits
to institutions’ accounts prior to

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
presentment. Therefore, a single time for
all check debits and credits would
necessarily be later in the day than
many depository institutions believed
would be appropriate, according to
earlier comments on this issue (57 FR
47084, October 14, 1992).
Based upon its analysis of the
comments received, the Board has
revised the PSR policy to reflect a
modified posting time of 1 p.m. local
time for ECP transactions. Because the
Reserve Banks post the vast majority of
check transactions by 1 p.m. local time,
the Board believes that applying this
posting time to ECP transactions should
minimize any disincentive posed by the
posting rules to move to ECP services.
The Board also believes that the revised
posting time should reduce or eliminate
any potential increase in daylight
overdraft charges created by differences
in posting times for ECP and paper
check transactions.
D. Retention of the $50 Million Fedwire
Securities Transfer Limit (Docket No. R–
1110)
During its review, the Board also
considered the effectiveness of the $50
million limit on the transaction size of
book-entry securities transfers on
Fedwire to determine whether the limit
was imposing an undue regulatory
burden on securities market
participants. To better understand the
limit’s effectiveness, Federal Reserve
staff met with representatives of primary
dealers, clearing banks, and industry
utilities. These representatives
supported retention of the limit, noting
its positive net effect on the government
securities settlement system. To ensure
that it considered the perspectives of all
parties before making a final
determination, the Board requested
comment on the desirability of retaining
the $50 million limit on the transaction
size of book-entry securities transfers on
Fedwire.
The Board received fifteen comment
letters regarding the $50 million limit.
The commenters included seven
commercial banking organizations and
four of their trade associations, two
clearing organizations, and two Federal
Reserve Banks.
All of the commenters supported the
retention of some limit on the size of
book-entry securities transfers on
Fedwire. Twelve commenters supported
retention of the $50 million limit, while
three commenters favored increasing the
transfer limit amount to $100 million or
more. None of the commenters favored
reducing the transfer limit amount.
Ten commenters indicated that
retaining a $50 million limit was
reasonable and cited reduced overdrafts

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

and enforcement of dealers accepting
partial deliveries of large trades as the
policy’s primary benefits. Three
commenters viewed the costs that
institutions would incur to modify their
systems as a reason not to change the
limit, while two commenters
specifically stated that changes to the
limit would not require costly systems
changes for their organizations. Three
commenters stated that increasing the
transfer limit would reduce
administrative burden and would more
appropriately reflect the current trading
environment while not putting smaller
market participants at a competitive
disadvantage. Five commenters stated
that lowering the transfer limit would
increase systems and transactions costs
and could potentially increase the
number of delivery fails.
Following the September 11 terrorist
attacks, one commenter recommended
further evaluation of the transfer limit’s
necessity and of the possibility of lifting
or modifying the limit in times of crisis.
Board staff recently contacted some
commenters who supported the limit to
determine whether their views had
changed because of the financial market
disruptions resulting from the
September 11 attacks. These
commenters indicated that their views
did not change and that they continue
to support the limit’s retention.
Two commenters stated that the
limit’s requirement of multiple
deliveries per trade generally increases
transaction costs and the potential for
trade failures or transaction errors. Ten
commenters viewed the policy’s
provision for multiple deliveries in
order to reduce position building by
dealers as beneficial. One commenter
stated that the limit prevents securities
delivery logjams that may otherwise
occur if larger entities were to regularly
accumulate securities in order to make
larger par value deliveries first. Another
commenter did not believe that the limit
promotes any specific benefits in the
government securities market.
The Board believes the $50 million
limit on book-entry securities transfers
in combination with daylight overdraft
fees has been effective in reducing total
daylight overdrafts. In addition, the
industry bears a significant portion of
the costs and benefits of the limit and
supports retention of the limit. As a
result, the Board has retained the $50
million limit on book-entry securities
transfers on Fedwire.
III. Competitive Impact Analysis
The Board has established procedures
for assessing the competitive impact of
rule or policy changes that have a
substantial impact on payments system

PO 00000

Frm 00029

Fmt 4703

Sfmt 4703

64425

participants.12 Under these procedures,
the Board assesses whether a change
would have a direct and material
adverse effect on the ability of other
service providers to compete effectively
with the Federal Reserve in providing
similar services due to differing legal
powers or constraints, or due to a
dominant market position of the Federal
Reserve deriving from such differences.
If no reasonable modifications would
mitigate the adverse competitive effects,
the Board will determine whether the
expected benefits are significant enough
to proceed with the change despite the
adverse effects. The Board believes the
modifications to its PSR policy will
have no adverse effect on the ability of
other service providers to compete
effectively with the Federal Reserve
Banks in providing similar services.
IV. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR 1320 Appendix A.1), the Board
reviewed the revised PSR policy under
the authority delegated to the Board by
the Office of Management and Budget.
The collections of information
associated with the PSR policy are
found in the Guide to the Federal
Reserve’s Payments System Risk policy.
The information on de minimis and
self-assessed net debit caps requested in
the Board’s PSR policy is currently
collected in the mandatory Report of
Net Debit Cap (FR 2226; OMB No. 7100–
0217). The information on daylight
overdraft capacity for foreign banking
organizations is currently collected in
the Annual Daylight Overdraft Capital
Report for U.S. Branches and Agencies
of Foreign Banks (FR 2225; OMB No.
7100–0216), a voluntary report.
The Board expects to publish a
separate notice issuing changes to the
FR 2226 and FR 2225 reporting
requirements to comply with the revised
PSR policy. The burden associated with
these information collections will be
addressed at that time.
The Board has a continuing interest in
the public’s opinions of our collections
of information. At any time, comments
regarding the burden estimate, or any
other aspect of this collection of
information, including suggestions for
reducing the burden, may be sent to:
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551, or
mailed electronically to
regs.comments@federalreserve.gov, or
12 These procedures are described in the Board’s
policy statement ‘‘The Federal Reserve in the
Payments System,’’ as revised in March 1990 (55 FR
11648, March 29, 1990).

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

64426

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

mailed to the Office of Management and
Budget, Paperwork Reduction Project
(7100–0199), Washington, DC 20503.
V. Federal Reserve Policy Statement on
Payments System Risk
Section I. of the PSR policy is revised,
effective December 10, 2001, to read as
follows:
Introduction
I. Federal Reserve Daylight Credit Policies
A. Daylight overdraft definition and
measurement
B. Pricing
C. Net debit caps
1. Definition
2. Cap categories
a. Self-assessed
b. De minimis
c. Exempt-from-filing
d. Zero
3. Capital
a. U.S.-chartered institutions
b. U.S. branches and agencies of foreign
banks
D. Collateral
E. Special situations
1. Edge and agreement corporations
2. Bankers’ banks
3. Limited-purpose trust companies
4. Problem institutions
F. Monitoring
1. Ex post
2. Real time
3. Multi-District institutions
G. Transfer-size limit on book-entry
securities
II. Policies for private-sector systems
A. Privately operated multilateral
settlement systems
B. Private delivery-against-payment
securities systems
III. Other Policies
A. Rollovers and continuing contracts

Introduction
The Federal Reserve Board has
developed this policy to address the
risks that payment systems present to
the Federal Reserve Banks (Reserve
Banks), to the banking system, and to
other sectors of the economy. This
policy is directed primarily at risks on
large-dollar payment systems, including
Federal Reserve and private-sector
systems. Risk can arise from
transactions on the Federal Reserve’s
real-time gross settlement system
(Fedwire), from transactions processed
in other Federal Reserve payment
systems (for example, the automated
clearinghouse (ACH) system), and from
transactions on private large-dollar
systems.
The Reserve Banks face direct risk of
loss should depository institutions be
unable to settle their intraday or
‘‘daylight’’ overdrafts in their Federal
Reserve accounts before the end of the

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

day.1 Moreover, systemic risk may occur
if an institution participating in a
private large-dollar payment system
were unable to settle its net debit
position. If this were to occur, the
institution’s creditors in that system
might then be unable to settle their
obligations in that system or other
systems. Serious repercussions could
spread to other participants in the
private system, to other depository
institutions not participating in the
system, and to the nonfinancial
economy generally. A Reserve Bank
could be exposed to an indirect risk if
the Federal Reserve’s policies did not
address this systemic risk. Finally,
depository institutions create risk by
permitting their customers, including
other depository institutions, to incur
daylight overdrafts in the depository
institutions’ accounts in anticipation of
receiving covering funds before the end
of the day.
The Board is aware that large-dollar
systems are an integral part of clearing
and settlement systems and that it is
vital to keep the payments mechanism
operating without significant
disruption. Recognizing the importance
of avoiding such disruptions, the Board
continues to seek to reduce the risks of
settlement failures that could cause
these disruptions. The Board is also
aware that some intraday credit may be
necessary to keep the payments
mechanism running smoothly and
efficiently. The reduction and control of
intraday credit risks, although essential,
must be accomplished in a manner that
will minimize disruptions to the
payments mechanism. The Board
expects to reduce and control risks
without unduly disrupting the smooth
operation of the payments mechanism
by establishing guidelines for use by
institutions and relying largely on the
efforts of individual institutions to
identify, control, and reduce their own
exposures.
The Board expects depository
institutions to manage their Federal
Reserve accounts effectively and
minimize their use of Federal Reserve
daylight credit. Although some intraday
credit may be necessary, the Board
expects that, as a result of its policies,
relatively few institutions will
consistently rely on intraday credit
supplied by the Federal Reserve to
conduct their business. The Board also
1 In this policy statement, the terms ‘‘depository
institution’’ or ‘‘institution’’ will be used to refer
not only to institutions defined as ‘‘depository
institutions’’ in 12 U.S.C. 461(b)(1)(A), but also to
U.S. branches and agencies of foreign banking
organizations, Edge and agreement corporations,
and bankers’ banks, unless the context indicates a
different reading.

PO 00000

Frm 00030

Fmt 4703

Sfmt 4703

expects to continue observing, over
time, a reduction in the volume of
intraday credit at those institutions with
a pattern of substantial reliance on such
credit. The Board will continue to
monitor the effect of its policies on the
payments system.
The general methods used to control
intraday credit exposures are explained
in the policies below. These methods
include limits on daylight overdrafts in
depository institutions’ accounts at
Reserve Banks; collateralization, in
certain situations, of daylight overdrafts
at the Federal Reserve; limits on the
maximum level of credit exposure that
can be produced by each participant on
private large-dollar systems; availability
of backup facilities capable of
completing daily processing
requirements for private large-dollar
systems; and credit and liquidity
safeguards for private delivery-againstpayment systems. To assist depository
institutions in implementing the Board’s
policies, the Federal Reserve has
prepared two documents, the
‘‘Overview of the Federal Reserve’s
Payments System Risk Policy’’ and the
‘‘Guide to the Federal Reserve’s
Payments System Risk Policy,’’ which
are available on line at http://
www.federalreserve.gov/
PaymentSystems/PSR or from any
Reserve Bank. The ‘‘Overview of the
Federal Reserve’s Payments System Risk
Policy’’ summarizes the Board’s policy
on payments system risk, including net
debit caps and daylight overdraft fees.
The overview is intended for use by
institutions that incur only small and
infrequent daylight overdrafts. The
‘‘Guide to the Federal Reserve’s
Payments System Risk Policy’’ explains
in detail how these policies apply to
different institutions and includes
procedures for completing a selfassessment and filing a cap resolution,
as well as information on other aspects
of the policy.
I. Federal Reserve Daylight Credit
Policies
A. Daylight Overdraft Definition and
Measurement
A daylight overdraft occurs when a
depository institution’s Federal Reserve
account is in a negative position during
the business day. The Reserve Banks use
an ex post system to measure daylight
overdrafts in depository institutions’
Federal Reserve accounts. Under this ex
post measurement system, Fedwire
funds transfers, book-entry securities
transfers, and net settlement
transactions are posted as they are
processed during the business day.
Other transactions, including automated

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
clearinghouse and check transactions,
are posted to depository institutions’
accounts according to a defined
schedule. The following table presents
the schedule used by the Federal
Reserve for posting transactions to
institutions’ accounts for purposes of
measuring daylight overdrafts.
Procedures for Measuring Daylight
Overdrafts 2
Opening Balance (Previous Day’s
Closing Balance)
Post Throughout Business Day:
+/¥ Fedwire funds transfers
+/¥ Fedwire book-entry securities
transfers
+/¥ Net settlement entries.
Post at 8:30 a.m. Eastern Time:
+/¥ Government and commercial
ACH credit transactions 3
+ Treasury Electronic Federal Tax
Payment System (EFTPS)
investments from ACH credit
transactions
+ Advance-notice Treasury
investments
+ Treasury checks, postal money
orders, local Federal Reserve Bank
checks, and EZ-Clear savings bond
redemptions in separately sorted
deposits
¥ Penalty assessments for tax
payments from the Treasury
Investment Program (TIP).4
Post at 8:30 a.m. Eastern Time and
Hourly, on the Half-Hour,
Thereafter:
+/¥ Main Account Administrative
Investment or Withdrawals from
2 This schedule of posting rules does not affect
the overdraft restrictions and overdraftmeasurement provisions for nonbank banks
established by the Competitive Equality Banking
Act of 1987 and the Board’s Regulation Y (12 CFR
225.52).
3 Depository institutions that are monitored in
real time must fund the total amount of their
commercial ACH credit originations when the
transactions are processed. If the Federal Reserve
receives commercial ACH credit transactions from
depository institutions monitored in real time after
the scheduled close of the Fedwire funds transfer
system, these transactions will be processed when
the Federal Reserve’s Account Balance Monitoring
System (ABMS) reopens, or by the ACH deposit
deadline, whichever is earlier. The ABMS provides
intraday account information to the Reserve Banks
and depository institutions and is used primarily to
give authorized Reserve Bank personnel a
mechanism to control and monitor account activity
for selected institutions. For more information on
ACH transaction processing, refer to the ACH
Settlement Day Finality Guide available through the
Federal Reserve Financial Services Web site at
http://www.frbservices.org.
4 The Reserve Banks will identify and notify
depository institutions with Treasury-authorized
penalties on Thursdays. In the event that Thursday
is a holiday, the Reserve Banks will identify and
notify depository institutions with Treasuryauthorized penalties on the following business day.
Penalties will then be posted on the business day
following notification.

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

TIP
+/¥ SDI (Special Direct Investment)
Administrative Investment or
Withdrawals from TIP
+ 31 CFR Part 202 Account Deposits
from TIP
¥ Uninvested PATAX Tax Deposits
from TIP
¥ Main Account Balance Limit
Withdrawals from TIP
¥ Collateral Deficiency Withdrawals
from TIP
¥ 31 CFR Part 202 Deficiency
Withdrawals from TIP.
Post at 8:30 a.m., 11:30 a.m., and 6:30
p.m. Eastern Time:
¥ Main Account Treasury
Withdrawals from TIP.5
Post by 9:15 a.m. Eastern Time:
+ U.S. Treasury and government
agency book-entry interest and
redemption payments
+ U.S. Treasury and government
agency matured coupons and
definitive securities received before
the maturity date.
Post Beginning at 9:15 a.m. Eastern
Time:
¥ Original issues of Treasury
securities.6
Post at 9:30 a.m. Eastern Time and
Hourly, on the Half-Hour,
Thereafter:
+ FR–ETA Value Fedwire
Investments from TIP.
Post at 11:00 a.m. Eastern Time:
+/¥ACH debit transactions
+ EFTPS investments from ACH debit
transactions.
Post at 11:00 a.m. Eastern Time and
Hourly Thereafter:
+/¥ Commercial check transactions,
including returned checks 7
+/¥ Check corrections amounting to
$1 million or more
+ Currency and coin deposits
+ Credit adjustments amounting to $1
million or more.
Post at 12:30 p.m. Eastern Time and
Hourly, on the Half-Hour,
Thereafter:
+ Dynamic Investments from TIP.
Post by 1:00 p.m. Eastern Time:
+ Same-day Treasury investments.
Post at 1:00 p.m. Local Time and Hourly
Thereafter (Beginning on April 1,
2002):
¥ Electronic check presentments.8
5 On rare occasions, the Treasury may announce
withdrawals in advance that are based on
depository institutions’ closing balances on the
withdrawal date. The Federal Reserve will post
these withdrawals after the close of Fedwire.
6 Original issues of government agency securities
are delivered as book-entry securities transfers and
will be posted when the securities are delivered to
the purchasing institutions.
7 Electronic check presentments will post at 11:00
a.m. Eastern Time and hourly thereafter until April
1, 2002.
8 The Federal Reserve Banks will post debits to
depository institutions’ accounts for electronic

PO 00000

Frm 00031

Fmt 4703

Sfmt 4703

64427

Post at 5:00 p.m. Eastern Time:
+ Treasury checks, postal money
orders, and EZ-Clear savings bond
redemptions in separately sorted
deposits. These items must be
presented by 4:00 p.m. Eastern
Time.
+ Local Federal Reserve Bank checks.
These items must be presented
before 3:00 p.m. Eastern Time.
+/¥ Same-day ACH transactions.
These transactions include ACH
return items, check-truncation
items, and flexible settlement items.
Post at 6:30 p.m. Eastern Time:9
+ Penalty Abatements from TIP.
Post After the Close of Fedwire Funds
Transfer System:
+/¥ All other transactions. These
transactions include the following:
local Federal Reserve Bank checks
presented after 3:00 p.m. eastern
time but before 3:00 p.m. local time;
noncash collection; credits for U.S.
Treasury and government agency
definitive security interest and
redemption payments if the
coupons or securities are received
on or after the maturity date;
currency and coin shipments;
small-dollar credit adjustments; and
all debit adjustments. Discountwindow loans and repayments are
normally posted after the close of
Fedwire as well; however, in
unusual circumstances a discount
window loan may be posted earlier
in the day with repayment 24 hours
later, or a loan may be repaid before
it would otherwise become due.
Equals:
Closing Balance
B. Pricing
Reserve Banks charge a fee for average
daily daylight overdrafts in Federal
Reserve accounts. Daylight overdraft
fees apply to all daylight overdrafts in
depository institutions’ Federal Reserve
accounts above the level of a deductible;
however, Reserve Banks will waive fees
of $25 or less in any two-week reservemaintenance period.
For each two-week reservemaintenance period, the Reserve Banks
calculate and assess daylight overdraft
fees, which are equal to the sum of any
check presentments made before 12:00 p.m. local
time at 1:00 p.m. local time. The Reserve Banks will
post presentments made after 12:00 p.m. local time
on the next clock hour that is at least one hour after
presentment takes place but no later than 3:00 p.m.
local time.
9 The Federal Reserve Banks will process and
post Treasury-authorized penalty abatements on
Thursdays. In the event that Thursday is a holiday,
the Federal Reserve Banks will process and post
Treasury-authorized penalty abatements on the
following business day.

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

64428

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

daily daylight overdraft charges during
the period. For each day, an institution’s
daylight overdraft charge is equal to the
effective daily rate charged for daylight
overdrafts multiplied by the average
daylight overdraft for the day minus a
deductible valued at the effective daily
rate.
Daylight overdraft fees are calculated
using an annual rate of 36 basis points,
quoted on the basis of a 24-hour day. To
obtain the effective annual rate for the
standard Fedwire operating day, the
quoted 36-basis-point fee is multiplied
by the fraction of a 24-hour day during
which Fedwire is scheduled to operate.
For example, under an 18-hour
scheduled Fedwire operating day, the
effective annual rate used to calculate
daylight overdraft fees equals 27 basis
points (36 basis points multiplied by 18/
24).10 The effective daily rate is
calculated by dividing the effective
annual rate by 360.
An institution’s average daily daylight
overdraft is calculated by dividing the

Reserve account must adopt a net debit
cap, that is, a ceiling on the daylight
overdraft position that it can incur
during a given interval. Alternatively, if
an institution’s daylight overdrafts
generally do not exceed the lesser of $10
million or 20 percent of its capital, the
institution may qualify for the exemptfrom-filing cap. An institution must be
financially healthy and have regular
access to the discount window in order
to adopt a net debit cap greater than
zero or qualify for the filing exemption.
An institution’s cap category and
capital measure determine the size of its
net debit cap. More specifically, the net
debit cap is calculated as an
institution’s cap multiple times its
capital measure:
net debit cap = cap multiple × capital
measure
Cap categories (see section I.C.2.,
‘‘Cap categories’’) and their associated
cap levels, set as multiples of capital,
are listed below:

sum of its negative Federal Reserve
account balances at the end of each
minute of the scheduled Fedwire
operating day (with positive balances
set to zero) by the total number of
minutes in the scheduled Fedwire
operating day.
The daily daylight overdraft charge is
reduced by a deductible, valued at the
effective daily rate for a 10-hour
operating day. The deductible equals 10
percent of a capital measure (see section
I.C.3., ‘‘Capital’’). Because the effective
daily rate applicable to the deductible is
kept constant at the 10-hour-operatingday rate, any changes to the scheduled
Fedwire operating day will not affect
the value of the deductible.
C. Net Debit Caps
1. Definition
To limit the aggregate amount of
daylight credit that the Reserve Banks
extend, each institution incurring
daylight overdrafts in its Federal

NET DEBIT CAP MULTIPLES
Two-week
average

Cap category

Single day

High ................................................................................................................................
Above average ...............................................................................................................
Average ..........................................................................................................................
De minimis .....................................................................................................................
Exempt from filing 11 ......................................................................................................
Zero ................................................................................................................................

2.25 ....................................
1.875 ..................................
1.125 ..................................
0.40 ....................................
$10 million or 0.20 .............
0.0 ......................................

11 The

1.50
1.125
0.75
0.40
$10 million or 0.20
0.0

net debit cap for the exempt-from-filing category is equal to the lesser of $10 million or 0.20 multiplied by a capital measure.

An institution is expected to avoid
incurring daylight overdrafts that, on
average over a two-week period, exceed
its two-week average cap, and, on any
day, exceed its single-day cap. The twoweek average cap provides flexibility, in
recognition that fluctuations in
payments can occur from day to day.
The purpose of the higher single-day
cap is to limit excessive daylight
overdrafts on any day and to ensure that
institutions develop internal controls
that focus on their exposures each day,
as well as over time.
The two-week average cap is
measured against the average, over a
two-week reserve-maintenance period,
of an institution’s daily maximum
daylight overdraft positions in its
Federal Reserve account. In calculating
the two-week average, the Federal
Reserve treats each positive end-ofminute balance in an institution’s
Federal Reserve account as if the
account balance were equal to zero. The
number of days used in calculating the

average is the number of business days
the institution’s Reserve Bank is open
during the reserve-maintenance period.
The Board’s policy on net debit caps
is based on a specific set of guidelines
and some degree of examiner oversight.
Under the Board’s policy, a Reserve
Bank may limit or prohibit an
institution’s use of Federal Reserve
intraday credit if (1) the institution’s use
of daylight credit is deemed by the
institution’s supervisor to be unsafe or
unsound; (2) the institution does not
qualify for a positive net debit cap (see
section I.C.2., ‘‘Cap categories’’); or (3)
the institution poses excessive risk to a
Reserve Bank by incurring chronic
overdrafts in excess of what the Reserve
Bank determines is prudent.
While capital measures differ, the net
debit cap provisions of this policy apply
to foreign banking organizations (FBOs)
to the same extent that they apply to
U.S. institutions. The Reserve Banks
will advise home-country supervisors of
the daylight overdraft capacity of U.S.

branches and agencies of FBOs under
their jurisdiction, as well as of other
pertinent information related to the
FBOs’ caps. The Reserve Banks will also
provide information on the daylight
overdrafts in the Federal Reserve
accounts of FBOs’ U.S. branches and
agencies in response to requests from
home-country supervisors.

10 A change in the length of the scheduled
Fedwire operating day would not change the

amount of fees charged because the effective daily
rate is applied to average daylight overdrafts,

which, in turn, would be adjusted by the change in
the operating day.

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

PO 00000

Frm 00032

Fmt 4703

Sfmt 4703

2. Cap Categories
The policy defines the following six
cap categories, described in more detail
below: zero, exempt-from-filing, de
minimis, average, above average, and
high. The average, above average, and
high cap categories are referred to as
‘‘self-assessed’’ caps.
a. Self-assessed. In order to establish
a net debit cap category of average,
above average, or high, an institution
must perform a self-assessment of its
own creditworthiness, intraday funds
management and control, customer
credit policies and controls, and
operating controls and contingency

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
procedures.12 The assessment of
creditworthiness is based on the
institution’s supervisory rating and
Prompt Corrective Action (PCA)
designation.13 An institution may
perform a full assessment of its
creditworthiness in certain limited
circumstances, for example, if its
condition has changed significantly
since its last examination, or if it
possesses additional substantive
information regarding its financial
condition. An institution performing a
self-assessment must also evaluate its
intraday funds-management procedures
and its procedures for evaluating the
financial condition of and establishing
intraday credit limits for its customers.
Finally, the institution must evaluate its
operating controls and contingency
procedures to determine if they are
sufficient to prevent losses due to fraud
or system failures. The ‘‘Guide to the
Federal Reserve’s Payments System Risk
Policy,’’ available on line at http://
www.federalreserve.gov/
PaymentSystems/PSR or from any
Reserve Bank, includes a detailed
explanation of the self-assessment
process.
Each institution’s board of directors
must review the self-assessment and
determine the appropriate cap category.
The process of self-assessment, with
board-of-directors review, should be
conducted at least once in each twelvemonth period. A cap determination may
be reviewed and approved by the board
of directors of a holding company
parent of a depository institution,
provided that (1) the self-assessment is
performed by each entity incurring
12 This assessment should be done on an
individual-institution basis, treating as separate
entities each commercial bank, each Edge
corporation (and its branches), each thrift
institution, and so on. An exception is made in the
case of U.S. branches and agencies of FBOs.
Because these entities have no existence separate
from the FBO, all the U.S. offices of FBOs
(excluding U.S.-chartered bank subsidiaries and
U.S.-chartered Edge subsidiaries) should be treated
as a consolidated family relying on the FBO’s
capital.
13 Section 131 of the 1991 FDICIA defines five
PCA designations. An insured depository
institution is (1) ‘‘well capitalized’’ if it significantly
exceeds the required minimum level for each
relevant capital measure, (2) ‘‘adequately
capitalized’’ if it meets the required minimum level
for each relevant capital measure, (3)
‘‘undercapitalized’’ if it fails to meet the required
minimum level for any relevant capital measure, (4)
‘‘significantly undercapitalized’’ if it is significantly
below the required minimum level for any relevant
capital measure, or (5) ‘‘critically undercapitalized’’
if it fails to meet any level specified under
subsection (c)(3)(A), which provides that each
appropriate Federal banking agency shall, by
regulation, in consultation with the FDIC, specify
the ratio of tangible equity to total assets at which
an insured depository institution is critically
undercapitalized (Public Law 102–242, title I, Sec.
131(a), December 19, 1991, 105 Stat. 2253).

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

daylight overdrafts, (2) the entity’s cap
is based on the entity’s own capital, and
(3) each entity maintains for its primary
supervisor’s review its own file with
supporting documents for its selfassessment and a record of the parent’s
board-of-directors review.14
In applying these guidelines, each
institution should maintain a file for
examiner review that includes (1)
worksheets and supporting analysis
used in its self-assessment of its own
risk category, (2) copies of seniormanagement reports to the board of
directors of the institution or its parent
(as appropriate) regarding that selfassessment, and (3) copies of the
minutes of the discussion at the
appropriate board-of-directors meeting
concerning the institution’s adoption of
a cap category.15
As part of its normal examination, the
depository institution’s examiners may
review the contents of the selfassessment file.16 The objective of this
review is to ensure that the institution
has applied the guidelines seriously and
diligently, that the underlying analysis
and method were reasonable, and that
the resultant self-assessment was
generally consistent with the
examination findings. Examiner
comments, if any, should be forwarded
to the board of directors of the
institution. The examiner, however,
would generally not require a
modification of the self-assessed cap
category, but rather would inform the
appropriate Reserve Bank of any
concerns. The Reserve Bank would then
decide whether to modify the cap
category. For example, if the
institution’s level of daylight overdrafts
14 An FBO should undergo the same selfassessment process as a domestic bank in
determining a net debit cap for its U.S. branches
and agencies. Many FBOs, however, do not have the
same management structure as U.S. depository
institutions, and adjustments should be made as
appropriate. If an FBO’s board of directors has a
more limited role to play in the bank’s management
than a U.S. board has, the self-assessment and cap
category should be reviewed by senior management
at the FBO’s head office that exercises authority
over the FBO equivalent to the authority exercised
by a board of directors over a U.S. depository
institution. In cases in which the board of directors
exercises authority equivalent to that of a U.S.
board, cap determination should be made by the
board of directors.
15 In addition, for FBOs, the file that is made
available for examiner review by the U.S. offices of
an FBO should contain the report on the selfassessment that the management of U.S. operations
made to the FBO’s senior management and a record
of the appropriate senior management’s response or
the minutes of the meeting of the FBO’s board of
directors or other appropriate management group, at
which the self-assessment was discussed.
16 Between examinations, examiners or Reserve
Bank staff may contact an institution about its cap
if statistical or supervisory reports or ad hoc
information suggest that there may have been a
change in the institution’s financial condition.

PO 00000

Frm 00033

Fmt 4703

Sfmt 4703

64429

constitutes an unsafe or unsound
banking practice, the Reserve Bank
would likely assign the institution a
zero net debit cap and impose
additional risk controls.
The contents of the self-assessment
file will be considered confidential by
the institution’s examiner. Similarly, the
Federal Reserve and the institution’s
examiner will hold the actual cap level
selected by the institution confidential.
Net debit cap information should not be
shared with outside parties or
mentioned in any public documents;
however, net debit cap information will
be shared with the home-country
supervisor of U.S. branches and
agencies of foreign banks.
The Reserve Banks will review the
status of any institution with a selfassessed net debit cap that exceeds its
cap during a two-week reservemaintenance period and will decide if
the cap should be maintained or if
additional action should be taken (see
section I.F., ‘‘Monitoring’’).
b. De minimis. Many depository
institutions incur relatively small
overdrafts and thus pose little risk to the
Federal Reserve. To ease the burden on
these small overdrafters of engaging in
the self-assessment process and to ease
the burden on the Federal Reserve of
administering caps, the Board allows
institutions that meet reasonable safety
standards to incur de minimis amounts
of daylight overdrafts without
performing a self-assessment. A
depository institution may incur
daylight overdrafts up to 40 percent of
its capital if the institution submits a
board-of-directors resolution.
An institution with a de minimis cap
must submit to its Reserve Bank at least
once each year a copy of its board-ofdirectors resolution (or a resolution by
its holding company’s board) approving
the depository institution’s use of
daylight credit up to the de minimis
level. The Reserve Banks will review the
status of a de minimis cap institution
that exceeds its cap during a two-week
reserve-maintenance period and will
decide if the de minimis cap should be
maintained or if the institution will be
required to perform a self-assessment for
a higher cap.
c. Exempt-from-filing. Depository
institutions that only rarely incur
daylight overdrafts in their Federal
Reserve accounts that exceed the lesser
of $10 million or 20 percent of their
capital are excused from performing
self-assessments and filing board-ofdirectors resolutions with their Reserve
Banks. This dual test is designed to
limit the filing exemption to depository
institutions that create only low-dollar
risks to the Reserve Banks and that

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

64430

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

incur small overdrafts relative to their
capital.
The Reserve Banks will review the
status of an exempt depository
institution that incurs overdrafts in its
Federal Reserve account in excess of
$10 million or 20 percent of capital on
more than two days in any two
consecutive two-week reservemaintenance periods. The Reserve Bank
will decide if the exemption should be
maintained or if the institution will be
required to file for a cap. Any
exemptions for depository institutions
that meet the size and frequency
standards are granted at the discretion
of the Reserve Bank.
d. Zero. Some financially healthy
depository institutions that could obtain
positive net debit caps choose to have
zero caps. Often these institutions have
very conservative internal policies
regarding the use of Federal Reserve
daylight credit or simply want to ensure
that they do not incur daylight
overdrafts to avoid any daylight
overdraft fees. If a depository institution
that has adopted a zero cap incurs a
daylight overdraft, the Reserve Bank
counsels the institution and may
monitor the institution’s activity in real
time and reject or delay certain
transactions that would cause an
overdraft. In addition, if the institution
qualifies for a positive cap, the Reserve
Bank may suggest that the institution
adopt an exempt-from-filing cap or file
for a higher cap if the institution
believes that it will continue to incur
daylight overdrafts.
In addition, a Reserve Bank may
assign a depository institution a zero net
debit cap. Institutions that may pose
special risks to the Reserve Banks, such
as those without regular access to the
discount window, those incurring
daylight overdrafts in violation of this
policy, or those in weak financial
condition, are generally assigned a zero
cap (see section I.E.4., ‘‘Problem
institutions’’). Recently-chartered
institutions may also be assigned a zero
net debit cap.
3. Capital
As described above, an institution’s
cap category and capital measure
determine the size of its net debit cap.
The capital measure used in calculating
an institution’s net debit cap depends
upon its chartering authority and homecountry supervisor.
a. U.S.-chartered institutions. For
depository institutions chartered in the
United States, net debit caps are
multiples of ‘‘qualifying’’ or similar
capital measures that consist of those
capital instruments that can be used to
satisfy risk-based capital standards, as

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

set forth in the capital adequacy
guidelines of the federal financial
regulatory agencies. All of the federal
financial regulatory agencies collect, as
part of their required reports, data on
the amount of capital that can be used
for risk-based purposes—‘‘risk-based’’
capital for commercial and savings
banks and savings associations and total
regulatory reserves for credit unions.
Other U.S.-chartered entities that incur
daylight overdrafts in their Federal
Reserve accounts should provide similar
data to their Reserve Banks.
b. U.S. branches and agencies of
foreign banks. The following policy on
U.S. branches and agencies of foreign
banks’ net debit caps is effective
through February 20, 2002.
For U.S. agencies and branches of
foreign banks, net debit caps on daylight
overdrafts in Federal Reserve accounts
are calculated by applying the cap
multiples for each cap category to a
consolidated U.S. capital equivalency
measure.17
For a foreign bank whose homecountry supervisor adheres to the Basle
Capital Accord, U.S. capital equivalency
is equal to the greater of 10 percent of
worldwide capital or 5 percent of the
total liabilities of each agency or branch,
including acceptances, but excluding
accrued expenses and amounts due and
other liabilities to offices, branches, and
subsidiaries of the foreign bank. In the
absence of contrary information, the
Reserve Banks presume that all banks
chartered in G–10 countries meet the
acceptable prudential capital and
supervisory standards and will consider
any bank chartered in any other nation
that adopts the Basle Capital Accord (or
requires capital at least as great and in
the same form as called for by the
accord) eligible for the Reserve Banks’
review for meeting acceptable
prudential capital and supervisory
standards.
For all other foreign banks, U.S.
capital equivalency is measured as the
greater of (1) the sum of the amount of
capital (but not surplus) that would be
required of a national bank being
organized at each agency or branch
location, or (2) the sum of 5 percent of
the total liabilities of each agency or
branch, including acceptances, but
excluding accrued expenses and
amounts due and other liabilities to
offices, branches, and subsidiaries of the
foreign bank.
The following policy replaces the
above policy on U.S. branches and
17 The term ‘‘U.S. capital equivalency’’ is used in
this context to refer to the particular capital
measure used to calculate net debit caps and does
not necessarily represent an appropriate capital
measure for supervisory or other purposes.

PO 00000

Frm 00034

Fmt 4703

Sfmt 4703

agencies of foreign banks’ net debit caps
beginning on February 21, 2002.
For U.S. branches and agencies of
foreign banks, net debit caps on daylight
overdrafts in Federal Reserve accounts
are calculated by applying the cap
multiples for each cap category to the
FBO’s U.S. capital equivalency
measure.18 U.S. capital equivalency is
equal to the following:
• 35 percent of capital for FBOs that
are financial holding companies
(FHCs) 19
• 25 percent of capital for FBOs that
are not FHCs and have a strength of
support assessment ranking (SOSA) of
1 20
• 10 percent of capital for FBOs that
are not FHCs and are ranked a SOSA 2
• 5 percent of ‘‘net due to related
depository institutions’’ for FBOs that
are not FHCs and are ranked a SOSA 3.
Granting a net debit cap, or any
extension of intraday credit, to a
depository institution is at the
discretion of the Reserve Bank. In the
event a Reserve Bank grants a net debit
cap or extends intraday credit to a
financially healthy SOSA 3-ranked FBO,
the Reserve Bank may require such
credit to be fully collateralized, given
the heightened supervisory concerns
with SOSA 3-ranked FBOs.
D. Collateral
The Board recognizes that while net
debit caps provide sufficient liquidity to
most institutions, some depository
institutions may still experience
liquidity pressures. The Board believes
it is important to provide an
environment in which payment systems
may function effectively and efficiently
18 See

footnote 17.
Gramm-Leach-Bliley Act (Public Law 106–
102, 113 Stat. 1338 (1999)) defines a financial
holding company as a bank holding company that
meets certain eligibility requirements. In order for
a bank holding company to become a financial
holding company and be eligible to engage in the
new activities authorized under the Gramm-LeachBliley Act, the Act requires that all depository
institutions controlled by the bank holding
company be well capitalized and well managed.
With regard to a foreign bank that operates a branch
or agency or owns or controls a commercial lending
company in the United States, the Act requires the
Board to apply comparable capital and management
standards that give due regard to the principle of
national treatment and equality of competitive
opportunity.
20 The SOSA ranking is composed of four factors,
including the FBO’s financial condition and
prospects, the system of supervision in the FBO’s
home country, the record of the home country’s
government in support of the banking system or
other sources of support for the FBO; and transfer
risk concerns. Transfer risk relates to the FBO’s
ability to access and transmit U.S. dollars, which
is an essential factor in determining whether an
FBO can support its U.S. operations. The SOSA
ranking is based on a scale of 1 through 3, with 1
representing the lowest level of supervisory
concern.
19 The

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
and remove barriers, as appropriate, to
foster risk-reducing payment system
initiatives. Consequently, certain
depository institutions with selfassessed net debit caps may pledge
collateral to their administrative Reserve
Banks to secure daylight overdraft
capacity in excess of their net debit
caps, subject to Reserve Bank
approval.21 The Board believes that
requiring collateral allows the Federal
Reserve to protect the public sector from
additional credit risk while providing
extra liquidity to the few institutions
that might otherwise be constrained.
Providing extra liquidity to constrained
institutions should help prevent
liquidity-related market disruptions.
A depository institution with a selfassessed net debit cap that wishes to
expand its daylight overdraft capacity
by pledging collateral should consult
with its administrative Reserve Bank.
The Reserve Bank will consider the
institution’s reasons for requesting
additional daylight overdraft capacity as
well as its financial and supervisory
information in determining the
appropriate level of collateralized
credit, if any, to grant above the net
debit cap. The financial and supervisory
information considered may include,
but is not limited to, capital and
liquidity ratios, the composition of
balance sheet assets, CAMELS or other
supervisory ratings and assessments,
and SOSA rankings (for U.S. branches
and agencies of foreign banks).
The Reserve Banks will work with a
depository institution that requests
additional daylight overdraft capacity to
decide on the appropriate maximum
daylight overdraft capacity level. If the
Reserve Bank approves the request for
additional daylight overdraft capacity,
the depository institution must submit a
board-of-directors resolution at least
once in each twelve-month period. An
institution’s maximum daylight
overdraft capacity is defined as follows:
maximum daylight overdraft capacity =
net debit cap + Reserve Bank-approved
collateralized credit
This policy is intended to provide
some additional liquidity to the few
institutions that might otherwise be
constrained from participating in riskreducing payment system initiatives.
Depository institutions that request
daylight overdraft capacity beyond the
net debit cap must have already
explored other alternatives to address
21 The administrative Reserve Bank is responsible
for the administration of Federal Reserve credit,
reserves, and risk management policies for a given
depository institution or other legal entity.

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

their increased liquidity needs.22 In
addition, depository institutions have
some flexibility as to the specific types
of collateral they may pledge to the
Reserve Banks; however, all collateral
must be acceptable to the Reserve
Banks.23
Depository institutions with exemptfrom-filing and de minimis net debit
caps may not obtain additional daylight
overdraft capacity by pledging
collateral. These depository institutions
must first file for a higher net debit cap
to obtain additional daylight overdraft
capacity.
Similarly, depository institutions with
zero net debit caps may not obtain
additional daylight overdraft capacity
by pledging collateral. If an institution
has voluntarily adopted a zero net debit
cap, but qualifies for a positive net debit
cap, it must file for a positive net debit
cap to obtain daylight overdraft
capacity. Depository institutions that
have been assigned a zero net debit cap
by their administrative Reserve Bank are
not eligible to apply for any daylight
overdraft capacity.
A self-assessed institution that has
been approved for additional daylight
overdraft capacity should avoid
incurring daylight overdrafts that, on
average over a two-week period, exceed
its two-week average limit, and, on any
day, exceed its single-day limit. The
two-week average limit is equal to the
two-week average cap plus the amount
of applicable Reserve Bank-approved
collateral, averaged over a two-week
reserve-maintenance period. The singleday limit is equal to an institution’s net
22 Some potential alternatives available to a
depository institution to address increased intraday
credit needs include (1) filing for a higher net debit
cap, (2) shifting funding patterns or delaying the
origination of funds transfers, or (3) transferring
some payments processing business to a
correspondent bank. Furthermore, the Board’s
policies on Federal Reserve daylight credit
extensions are intended to address intraday risk to
the Federal Reserve arising from daylight
overdrafts. Most transactions that lack settlementday finality, however, pose primarily interday,
rather than intraday, risk. Escalated counseling,
requiring collateral, or applying for a maximum
daylight overdraft capacity limit for daylight
overdrafts caused by these transactions may be of
limited use in reducing or managing the associated
overdrafts. Under administrative counseling
flexibility, the Reserve Banks work with affected
institutions on means of avoiding daylight
overdrafts, but generally do not subject these
institutions to escalated levels of counseling,
require collateral, or assign a zero cap.
23 The Reserve Banks may accept securities in
transit on the Fedwire book-entry securities system
as collateral to support a maximum daylight
overdraft capacity level. Securities in transit refer
to book-entry securities transferred over Fedwire’s
National Book-Entry System that have been
purchased by a depository institution but not yet
paid for and owned by the institution’s customers.

PO 00000

Frm 00035

Fmt 4703

Sfmt 4703

64431

debit cap plus the amount of applicable
Reserve Bank-approved collateral.24
The Reserve Banks will review the
status of any institution that exceeds its
maximum daylight overdraft capacity
during a two-week reserve-maintenance
period and will decide if this limit
should be maintained or if additional
action should be taken (see section I.F.,
‘‘Monitoring’’).
E. Special Situations
Special risks are presented by the
participation on Fedwire of Edge and
agreement corporations, bankers’ banks
that are not subject to reserve
requirements, limited-purpose trust
companies, and institutions that have
been assigned a zero cap by their
Reserve Banks. Most of these
institutions lack regular discountwindow access. In developing its policy
for these institutions, the Board has
sought to balance the goal of reducing
and managing risk in the payments
system, including risk to the Federal
Reserve, with that of minimizing the
adverse effects on the payments
operations of these institutions.
Regular access to the Federal Reserve
discount window generally is available
to institutions that are subject to reserve
requirements. If an institution that is not
subject to reserve requirements and thus
does not have regular discount-window
access were to incur a daylight
overdraft, the Federal Reserve might end
up extending overnight credit to that
institution if the daylight overdraft were
not covered by the end of the business
day. Such a credit extension would be
contrary to the quid pro quo of reserves
for regular discount-window access as
reflected in the Federal Reserve Act and
in Board regulations. Thus, institutions
that do not have regular access to the
discount window should not incur
daylight overdrafts in their Federal
Reserve accounts.
Certain institutions are subject to a
daylight-overdraft penalty fee levied
against the average daily daylight
overdraft incurred by the institution.
These include Edge and agreement
corporations, bankers’ banks that are not
subject to reserve requirements, and
limited-purpose trust companies. The
annual rate used to determine the
daylight-overdraft penalty fee is equal to
the annual rate applicable to the
24 A depository institution with a self-assessed
cap that has been approved for additional daylight
overdraft capacity may, at any time, pledge more or
less collateral than its Reserve Bank-approved
collateral limit. Applicable collateral to be used in
the calculation of an institution’s single-day and
two-week average limit must be less than or equal
to the amount of collateral approved by the Reserve
Bank.

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

64432

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices

daylight overdrafts of other depository
institutions (36 basis points) plus 100
basis points multiplied by the fraction
of a 24-hour day during which Fedwire
is scheduled to operate (18/24). The
daily daylight-overdraft penalty rate is
calculated by dividing the annual
penalty rate by 360.
The daylight-overdraft penalty rate
applies to the institution’s average daily
daylight overdraft in its Federal Reserve
account. The daylight-overdraft penalty
rate is charged in lieu of, not in addition
to, the rate used to calculate daylight
overdraft fees for depository institutions
described in section I.B. While daylight
overdraft fees are calculated differently
for these institutions than for depository
institutions, overnight overdrafts at
these institutions are generally priced
the same as overnight overdrafts at other
depository institutions.
1. Edge and Agreement Corporations
Edge 25 and agreement corporations
should refrain from incurring daylight
overdrafts in their Federal Reserve
accounts. In the event that any daylight
overdrafts occur, the Edge or agreement
corporation must post collateral to cover
the overdrafts. In addition to posting
collateral, the Edge or agreement
corporation would be subject to the
daylight-overdraft penalty rate levied
against the average daily daylight
overdrafts incurred by the institution, as
described above.
This policy reflects the Board’s
concerns that these institutions lack
regular access to the discount window
and the possibility that the parent
company may be unable or unwilling to
cover its subsidiary’s overdraft on a
timely basis. The Board notes that the
parent of an Edge or agreement
corporation could fund its subsidiary
during the day over Fedwire or the
parent could substitute itself for its
subsidiary on private systems. Such an
approach by the parent could both
reduce systemic risk exposure and
permit the Edge or agreement
corporation to continue to service its
customers. Edge and agreement
corporation subsidiaries of foreign
banking organizations are treated in the
same manner as their domestically
owned counterparts.
2. Bankers’ Banks
Bankers banks 26 are exempt from
reserve requirements and do not have
25 These institutions are organized under section
25A of the Federal Reserve Act (12 U.S.C. 611–631)
or have an agreement or undertaking with the Board
under section 25 of the Federal Reserve Act (12
U.S.C. 601–604a).
26 For the purposes of this policy statement, a
bankers’ bank is a depository institution that is not

VerDate 11<MAY>2000

15:17 Dec 12, 2001

Jkt 197001

regular access to the discount window.
They do, however, have access to
Federal Reserve payment services. The
Board’s policy provides that bankers’
banks should refrain from incurring
daylight overdrafts and post collateral to
cover any overdrafts they do incur. In
addition to posting collateral, a bankers’
bank would be subject to the daylightoverdraft penalty fee levied against the
average daily daylight overdrafts
incurred by the institution, as described
above.
The Board’s policy for bankers’ banks
reflects the Reserve Banks’ need to
protect themselves from potential losses
resulting from daylight overdrafts
incurred by bankers’ banks. The policy
also considers the fact that some
bankers’ banks do not incur the costs of
maintaining reserves as do other
depository institutions and do not have
regular access to the discount window.
Bankers’ banks may voluntarily waive
their exemption from reserve
requirements, thus gaining access to the
discount window. Such bankers’ banks
are free to establish net debit caps and
would be subject to the same policy as
other depository institutions. The policy
set out in this section applies only to
those bankers’ banks that have not
waived their exemption from reserve
requirements.
3. Limited-Purpose Trust Companies 27
The Federal Reserve Act permits the
Board to grant Federal Reserve
membership to limited-purpose trust
companies subject to conditions the
Board may prescribe pursuant to the
Act. As a general matter, member
limited-purpose trust companies do not
accept reservable deposits, do not have
regular discount-window access, and
may not incur daylight overdrafts.
Limited-purpose trust companies are
subject to the same daylight-overdraft
penalty rate as other institutions that do
not maintain reserves and do not have
regular discount-window access.
Limited-purpose trust companies
should refrain from incurring overdrafts
and should post collateral to cover any
overdrafts they do incur.
required to maintain reserves under the Board’s
Regulation D (12 CFR 204) because it is organized
solely to do business with other financial
institutions, is owned primarily by the financial
institutions with which it does business, and does
not do business with the general public. Such
bankers’ banks also generally are not eligible for
Federal Reserve Bank credit under the Board’s
Regulation A (12 CFR 201.2(c)(2)).
27 For the purposes of this policy statement, a
limited-purpose trust company is a trust company
that is a member of the Federal Reserve System but
that does not meet the definition of ‘‘depository
institution’’ in section 19(b)(1)(A) of the Federal
Reserve Act (12 U.S.C. 461(b)(1)(A)).

PO 00000

Frm 00036

Fmt 4703

Sfmt 4703

4. Problem Institutions
For depository institutions that are in
weak financial condition, the Reserve
Banks will impose a zero cap. The
Reserve Bank will also monitor the
institution’s activity in real time and
reject or delay certain transactions that
would create an overdraft. Problem
institutions should refrain from
incurring daylight overdrafts and must
post collateral to cover any daylight
overdrafts they do incur.
F. Monitoring
1. Ex Post
Under the ex post monitoring
procedures, an institution with a
daylight overdraft in excess of its
maximum daylight overdraft capacity or
net debit cap may be contacted by its
Reserve Bank.28 The Reserve Bank may
counsel the institution, discussing ways
to reduce its excessive use of intraday
credit. Each Reserve Bank retains the
right to protect its risk exposure from
individual institutions by unilaterally
reducing net debit caps, imposing
collateralization or clearing-balance
requirements, rejecting or delaying
certain transactions during the day until
the institution has collected balances in
its Federal Reserve account, or, in
extreme cases, taking the institution off
line or prohibiting it from using
Fedwire.
2. Real Time
A Reserve Bank will apply real-time
monitoring to an individual institution’s
position when the Reserve Bank
believes that it faces excessive risk
exposure, for example, from problem
banks or institutions with chronic
overdrafts in excess of what the Reserve
Bank determines is prudent. In such a
case, the Reserve Bank will control its
risk exposure by monitoring the
institution’s position in real-time,
rejecting or delaying certain transactions
that would exceed the institution’s
maximum daylight overdraft capacity or
net debit cap, and taking other
prudential actions, including requiring
collateral.29
28 Even if the institution is not a state member
bank, the Reserve Bank can make this contact when
an overdraft occurs in a Federal Reserve account or
when the institution is in a net debit position on
a system that settles on the books of the Federal
Reserve.
29 Depository institutions that are monitored in
real time must fund the total amount of their ACH
credit originations when the transactions are
processed by the Federal Reserve, even if those
transactions are processed one or two days before
settlement.

E:\FR\FM\13DEN1.SGM

pfrm04

PsN: 13DEN1

Federal Register / Vol. 66, No. 240 / Thursday, December 13, 2001 / Notices
3. Multi-District Institutions
Depository institutions, such as those
maintaining merger-transition accounts
and U.S. branches and agencies of a
foreign bank, that access Fedwire
through accounts in more than one
Federal Reserve District are expected to
manage their accounts so that the total
daylight overdraft position across all
accounts does not exceed their net debit
caps. One Reserve Bank will act as the
administrative Reserve Bank and will
have overall risk-management
responsibilities for institutions
maintaining accounts in more than one
Federal Reserve District. In the case of
families of U.S. branches and agencies
of the same foreign banking
organization, net debit cap compliance
will be monitored by the Reserve Bank
that exercises the Federal Reserve’s
oversight responsibilities under the
International Banking Act.30 The
administrative Reserve Bank may
determine, in consultation with Reserve
Banks in whose territory other U.S.
agencies or branches of the same foreign
bank are located and with the
management of the foreign bank’s U.S.
operations, that branches and agencies
outside its District either will not be
permitted to incur overdrafts in Federal
Reserve accounts or will be required to
allocate part or all of the foreign family’s
net debit cap (and the responsibility for
administering part or all of the collateral
requirement) to a Reserve Bank in
whose District one or more of the
foreign offices operate.31 For domestic
depository institutions that have
branches in multiple Federal Reserve
Districts, the administrative Reserve
Bank generally will be the Reserve Bank
where the head office of the bank is
located.
30 2

USC 3101–3108.
in the case of Edge and agreement
corporations and their branches, with the approval
of the designated administrative Reserve Bank, a
second Reserve Bank may assume the responsibility
of managing and monitoring the net debit cap of
particular foreign branch and agency families. This
would often be the case when the payments activity
and national administrative office of the foreign
branch and agency family is located in one District,
while the oversight responsibility under the
International Banking Act is in another District. If
a second Reserve Bank assumes management
responsibility, monitoring data will be forwarded to
the designated administrator for use in the
supervisory process.
31 As

G. Transfer-Size Limit on Book-Entry
Securities
Secondary-market book-entry
securities transfers on Fedwire are
limited to a transfer size of $50 million
par value. This limit is intended to
encourage partial deliveries of large
trades in order to reduce position
building by dealers, a major cause of
book-entry securities overdrafts before
the introduction of the transfer-size
limit and daylight overdraft fees. This
limitation does not apply to either of the
following:
a. Original issue deliveries of bookentry securities from a Reserve Bank to
a depository institution.
b. Transactions sent to or by a Reserve
Bank in its capacity as fiscal agent of the
United States, government agencies, or
international organizations.
Thus, requests to strip or reconstitute
Treasury securities or to convert bearer
or registered securities to or from bookentry form are exempt from this
limitation. Also exempt are pledges of
securities to a Reserve Bank as principal
(for example, discount-window
collateral) or as agent (for example,
Treasury Tax and Loan collateral).
By order of the Board of Governors of the
Federal Reserve System, December 10, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01–30811 Filed 12–12–01; 8:45 am]
BILLING CODE 6210–01–P

64433