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F E D E R A L R E S E R V E BA N K O F N EW YORK r C ircu la r N o . 6 3 5 7 1 Ju n e 27, 1969 J L P R O P O S E D A M E N D M E N T S T O R E G U L A T IO N S D A N D Q C erta in F e d e r a l F u n d s T r a n s a ctio n s as D e p o sits To the Member Banks of the Second Federal Reserve District: F o l lo w in g is th e te x t o f a s ta te m e n t is s u e d t o d a y b y th e B o a r d o f G o v e r n o r s o f th e F ed era l R eserve S y ste m : The B oard o f Governors o f the Federal Reserve System today invited comments within 30 days on a proposal to bring a member ban k’s liability on certain so-called “ Federal fu n d s ” transactions with customers other than banks within the coverage o f Regulations D (Reserves o f Member Banks) and Q (Paym ent of Interest on D eposits). P r in t e d b e lo w is th e te x t o f th e p r o p o s e d a m e n d m e n ts . C o m m e n ts o n th e p r o p o s e d a m e n d m e n ts s h o u ld b e s u b m itte d b y J u ly 28 a n d s h o u ld b e se n t to o u r B a n k E x a m in a t io n s D e p a r tm e n t. A d d it io n a l c o p ie s o f th is c ir c u la r w ill b e fu r n is h e d u p o n re q u e s t. A lfred H ayes, President. [R egs. D, Q] RESERVES O F M EM BER B A N K S; PA Y M E N T O F INTEREST O N DEPOSITS C ertain Fed eral Funds Transactions as Deposits The Board of Governors is considering amending section 204.1 ( / ) and section 217.1 ( / ) in order to bring a member bank’s liability on certain so-called “ F ed eral fu n d s” transactions with customers other than banks within the coverage of Regulations D and Q. A t the present time, all such transactions in non documentary nondeposit form are exempt from the regulations. Recently, some banks have been making the Federal funds market available to their corporate depositors as a means of providing them with interest on short term funds. In the B oa rd ’s judgm ent, there is no justification fo r a ban k’s liability on such transactions to be exempt from rules governing reserve require ments and the legal prohibition against payment of interest on demand deposits. In the B o a rd ’s view there are on ly two types o f Federal funds transactions entered into by banks that may justifiably be exempt from Regulations D and Q. One is where the liability is to another bank acting as principal (and not on behalf of any custom er). The other is where the liability relates to certain trans actions in connection with payment for securities. In the first case, the transactions facilitate implementa tion of monetary p o licy ; in the second, the transac tions are an integral part o f the established market practice o f settling purchases and sales o f securities. Lim iting the scope o f Federal funds transactions that are exempt from Regulations D and Q would be accomplished by amending the general rule set forth in section 204.1 ( / ) and section 217.1 ( / ) , by m odifying the interbank exemption thereto, and by the addition o f a new exemption to cover Federal funds transac tions on securities transaction, as follow s: ( / ) Deposits as including certain prom issory notes and other obligations.— F or the purposes of this Part, the term “ deposits” shall be deemed to include the proceeds o f any promissory note, acknowledgment of advance, due bill, or similar obligation (w ritten or oral) that is issued or undertaken by a member bank principally as a means o f obtaining funds to be used in its banking business, except any such obligation th a t: (1) Is issued to, and held for its own account bv a bank; ’ * * * (4) Arises from a loan, fo r one business day of proceeds of a transfer of deposit credit in a Federal Reserve Bank (o r other immediately available fun ds) commonly referred to as “ Federal fu n d s ,” in connec tion with payment on that day fo r securities.
@FedFRASER