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F E D E R A L R E S E R V E B AN K OF NEW YORK r Circular No. 6 3 7 3 L July 24, 1969 ~1 J AMENDMENTS TO REGULATIONS D AND Q To the Member Banks of the Second Federal Reserve District: Following are the texts of two statements issued today by the Board of Governors of the Federal Reserve System: The Board o f Governors of the Federal Reserve System today amended its rules governing member bank reserves (Regulation D ) to limit certain transactions involving member banks and foreign branches that have resulted in what the B oard considers an unwarranted reduction in required reserves. The action, the outgrowth o f further con sideration o f a proposal published M ay 29, w ill become effective J u ly 31, 1969. The amended rules will require member banks to include in deposits used to compute reserve requirements all so-called “ London checks” and “ bills payable checks” used in settling transactions involving foreign branches. Such checks have 'been used to effect repayments o f E uro-dollar borrowings and to settle transactions among foreign branches o f different member banks. A number o f banks have issued such checks without including them in gross demand deposits, as is required fo r officers’ (e.g., cashiers’ ) checks. A t the same time, banks receiving such checks are allowed to deduct the amount from demand deposits used to compute reserve requirements. Use o f these “ check” devices has resulted in reduced reserves for the one day the check is in the collection process, and afforded some member banks special advantage in using Euro-dollars fo r adjustm ent to domestic credit restraint. * * * The Board of Governors o f the Federal Reserve System adopted today an earlier pub lished proposal to limit the types of prom issory notes which are exempt from rules govern ing member bank reserves (Regulation D ) and the payment o f interest on deposits (Regulation Q ). The action amends those regulations to narrow the scope o f a member ban k ’s liabilities under repurchase agreements (those involving sales o f instruments with an agreement for subsequent repurchase) which are exempt from Regulations D and Q. Presently, the exemption from those regulations permits a member bank to exclude from deposits any indebtedness arising from a transfer o f any assets under a repurchase agreement. U nder the amendment adopted today the follow ing changes will be made in what constitutes a deposit: (1 ) Beginning A ugust 28, 1969, every bank liability on a repurchase agreement entered into on or after July 25, 1969, with a person other than a bank, involving any assets other than direct obligations o f the United States or its agencies (and obligations fu lly guaran teed by them) will be a deposit liability subject to Regulations D and Q ; and (2 ) Beginning August 28, 1969, every bank liability on a repurchase agreement entered into on or after J u ly 25, 1969, with a person, other than a bank, with respect to a part interest in any obligation or obligations (in clu din g U. S. Government obligations) w ill be a deposit liability subject to Regulations D and Q. Liabilities on any repurchase agreement with a bank will remain exempt from classifi cation as a deposit. ( o ver ) The Board said limiting the exemption appears necessary because of recent and con templated use by some banks of repurchase agreements to avoid reserve requirements and the rules governing payment o f interest on deposits. Governor Mitchell dissented on the grounds that repurchase agreements entered into by banks to achieve liquidity in a period of monetary restraint were no more inappropriate to monetary objectives than a sale of bank assets. In either case, in his opinion, restraint is not dissipated but merely shifted in part from the bank and bank customers to market participants. Moreover, in his view, to add this action to the other amendment to Regulation D announced today would run the risk of unduly severe pressures on some sectors of the banking system. Enclosed are copies of the amendments; additional copies will be furnished upon request. A lfred H a y e s , President. B oard of Governors of th e F ederal R eserve S y st e m RESERVES OF M EM BER BAN KS A M E N D M E N T S TO R E G U L A T IO N D 1. Effective July 25, 1969, section 204.1 ( / ) is amended to read as follow s: S E C T IO N 204.1— D E F IN IT IO N S # # # (/) Deposits as including certain promissory notes and other obligations.— F or the purposes o f this Part, the term “ deposits” shall be deemed to include any prom issory note, acknowledgment o f ad vance, due bill, or similar instrument that is issued by a member bank principally as a means o f obtaining funds to be used in its banking business, except any such instrument (1) that is issued to another bank, (2 ) that evidences an indebtedness arising from a transfer of direct obligations of, or obligations that are fu lly guaranteed as to principal and interest by, the United States or any agency thereof (othw than a part itticrcat-m-suoh obligations-) that the bank is obli gated to repurchase, or (3 ) that has an original maturity o f more than 2 years and states expressly that it is subordinated to the claims o f depositors. This paragraph shall not, however, affect (i) any instrument issued before June 27, 1966, or (ii) any instrument that evidences an indebtedness arising from a transfer o f assets under repurchase agreement issued before July 25, 1969, or (iii) until August 28, 1969, any instrument that evidences an indebtedness arising from a transfer o f assets under repurchase agreement issued, renewed, or extended on or after J u ly 25, 1969. 2. Effective July 31, 1969, Section 204.1 (g) is amended to read as fo llo w s : (g) Gross demand deposits.— The term “ gross demand deposits” means the sum o f all demand deposits, including demand deposits to the credit o f other banks, the United States, States, counties, school districts, and other governmental subdivisions and municipalities, and all outstanding certified and officers’ checks (including checks issued by the bank in payment of dividends and checks or drafts drawn by or on behalf o f a foreign branch o f a member bank on an account maintained by such a branch with a domestic office o f the parent bank), and letters o f credit and travelers’ checks sold fo r cash. B oard of G o vern ors of t h e F ederal R eserve S y s t e m PAYMENT OF INTEREST ON DEPOSITS A M E N D M E N T TO R E G U L A T IO N Q Effective July 25, 1969, Section 217.1 ( / ) is amended to read as fo llo w s : S E C T IO N 217.1— D E F IN IT IO N S # # # ( /) Deposits as including certain promissory notes and other obligations.— F or the purposes o f this Part, the term “ deposits” shall be deemed to include any prom issory note, acknowledgment o f ad vance, due bill, or similar instrument that is issued by a member bank p rincipally as a means o f obtaining funds to be used in its banking business, except any such instrument (1 ) that is issued to another bank, (2 ) that evidences an indebtedness arising from a transfer o f direct obligations of, or obligations that are fu lly guaranteed as to principal and interest by, the United States or any agency thereof (other than a part interest in such obligations) that the bank is obli gated to repurchase, or (3 ) that has an original m aturity o f more than 2 years and states expressly that it is subordinated to the claims o f depositors. This paragraph shall not, however, affect (i) any instrument issued before June 27, 1966, or (ii) any instrument that evidences an indebtedness arising from a transfer o f assets under repurchase agreement issued before J uly 25, 1969, or (iii) until August 28, 1969, any instrument that evidences an indebtedness arising from a transfer o f assets under repurchase agreement issued, renewed, or extended on or after J u ly 25, 1969. P R IN T E D IN N E W Y ORK
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