The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL RESERVE BANK
OF NEW YORK
{"Circular No. 6 4 6 5 '1
L Jan u a ry 8, 1970 J
AMENDMENTS TO REGULATIONS D AND Q
Federal Funds Transactions
To the Member B anls of the Second Federal Reserve District:
Following is the text of a statement issued today by the Board of Governors of the Federal
Reserve System:
The B oard of Governors of the F ederal Reserve System today issued amendm ents to its regulations to
narrow the category of “ F ederal fu n d s ” transactions th at are exempt from its rules covering reserves of
member banks (R egulation D) and paym ent of interest on deposits (Regulation Q ). The action is effective
F eb ru ary 12.
A “ F ederal fu n d s ” transaction is one involving the tra n sfe r of member bank deposits at Federal
Reserve Banks (or other im m ediately available funds) for a brief period, usually one business day. The main
effect of the am endm ents will be to bring w ithin the coverage of the regulations such transactions w ith any
person other th an a bank and its subsidiaries, various governm ental institutions, or a securities dealer in
certain cases.
F o r purposes of the exemption, a “ b a n k ” includes a member bank, a nonmember commercial bank, a
savings bank (m utual or stock), a building or savings and loan association or cooperative bank, the ExportIm p o rt B ank of the U nited States, or a foreign bank.
Copies of the amendments are enclosed. The Board of Governors also revised an existing
interpretation of Regulation Q, the text of which is printed below.
A
lfred
H
ayes,
President.
(Reg. Q)
P art
217— INTEREST ON DEPOSITS
Federal Funds Transactions
Effective F eb ru ary 12, 1970, section 217.137 is
amended to read as follows:
SEC T IO N 217.137—M EM B ER BANK P A R T IC I
PA T IO N IN “ F E D E R A L F U N D S ” M A R K ET
(a)
Effective F eb ru a ry 12, 1970, the B oard of Gov
ernors has amended § 217.1 ( /) to narrow the category
of “ F ed eral fu n d s ” transactions entered into by mem
ber banks th a t may be classified as nondeposit borrow
ings ra th e r th an as deposits. One question th a t arose
in connection w ith such am endm ents is the m eaning
of “ b a n k ” as such term is used in the exemption from
Regulation Q for obligations in nondeposit form to
another bank. Such an exemption has been included
in § 217.1 (/) since its adoption in 1966. As used in
such exemption, “ b an k ” includes a member bank, a
nonmember commercial bank, a savings bank (m utual
or stock), a building or savings and loan association
or cooperative bank, the E xport-Im port Bank of the
U nited States, or a foreign bank. I t also includes bank
subsidiaries th a t engage in business in which their
parents are authorized to engage and subsidiaries the
stock of which is by statu te explicitly eligible for p u r
chase by national banks.
(b)
To assure th at the exemption for liabilities to
banks is not used as a means by which nonbanks may
arrange through a bank to “ sell” F ederal funds to
(over)
a m em ber bank th a t are not subject to Regulations D
and Q, obligations w ithin the exemption m ust be issued
to another bank for its own account. In view of this
requirem ent, a member bank th a t “ purchases” F ed
eral fu nds should take such action as m ay be necessary
to ascertain the ch aracter (not necessarily the iden
tity ) of the actual “ seller” in order to ju stify classi
fication of its liability on the transaction as “ F ederal
fu n d s p u rch ased ” ra th e r th a n as a deposit. A ny bank
th a t has given general assurance to a member bank
th a t sales by it of F ederal funds ordinarily will be for
its own account and th ere after executes such tra n s
actions for the account of others, should disclose the
n atu re of the actual lender w ith respect to each such
transaction. I f it fails to do so, the selling bank would
be deemed by the B oard as indirectly violating sec
tion 19 of the F ed eral Reserve A ct and R egulation Q.
(c)
Also to assure the effectiveness of the lim ita
tions on persons who sell F ed eral funds to member
banks, the am ended § 217.1 (/) applies to nondocu
m entary obligations undertaken by a member bank to
obtain fu nds for use in its banking business, as well
as to docum entary obligations. In recent m onths a
num ber of banks have made the F ederal funds m arket
available to business corporations. In some cases this
has been on the basis of book entries, in which no in
stru m en t is involved. U nder the am endm ent, a b a n k ’s
liability u n d er inform al arrangem ents as well as those
form ally embodied in a document are w ithin the cov
erage of § 217.1 ( /) .
(d ) The expansion of § 217.1 (/) to nondocum entary
obligations does not mean th a t every bank liability on
a transaction th a t results in the bank obtaining funds
is a deposit. A n in d o rser’s or conditional liability such
as arises when a bank sells a loan w ith recourse need
not be classified as a deposit liability. Also, a b a n k ’s
liability on a n acceptance th a t it sells in the m arket is
not a deposit liability under the amendment.
(e) I t should also be noted th a t when a member
bank issues an obligation principally fo r a purpose
other th an as a m eans of obtaining funds to be used
in its banking business—such as usually would be the
case w ith respect to a due bill issued to evidence the
b an k ’s liability to deliver securities or foreign ex
change sold—it need not classify its liability thereon
as a deposit. However, the circum stances surrounding
an obligation issued ostensibly fo r a purpose other
than obtaining funds for use in the ordinary course
of business m ay cause an obligation to become subject
to R egulation Q—for example, if the b a n k ’s liability
on a due bill extended beyond a period exceeding th a t
necessary to complete the securities sale, or if the bank
paid interest to the custom er in excess of the amount
th a t accrued on the securities sold during the delay
in delivery. (12 U.S.C. 248 (i). In te rp re ts and applies
12 U.S.C. 371b and 461.)
B
oard o f
G overnors
of th e
F
ederal
R eserv e S y stem
RESERVES OF MEMBER BANKS
A M END M ENTS TO R EG U LA TIO N D
1. Effective F eb ru a ry 12, 1970, section 204.1 (/) is am ended to
read as follow s:
SEC T IO N 204.1—D E F IN IT IO N S
•
#
#
(/) Deposits as including certain prom issory notes and other obli
gations.— F o r the purposes of this P a rt, the term “ deposits” also
includes a member b an k ’s liability on any prom issory note, acknowl
edgement of advance, due bill, or sim ilar obligation (w ritten or oral)
th a t is issued or undertaken by a member bank principally as a means
of obtaining fu nds to be used in its banking business, except any such
obligation th a t:
(1) Is issued to (or undertaken w ith respect to) and held for
the account of (i) a domestic banking office5* of another bank
or (ii) an agency of the U nited States or the Government
Development B ank for P uerto Rico;
(2) Evidences an indebtedness arising from a tran sfer of di
rect obligations of, or obligations th a t are fully guaranteed as to
prin cip al and interest by, the U nited States or any agency
thereof th a t the bank is obligated to rep u rch a se;
(3) H as an original m atu rity of more th an two years, is u n
secured, and states expressly th a t it is subordinated to the
claims of depositors; or
(4) Arises from a borrowing by a member bank from a dealer
in securities, for one business day, of proceeds of a tran sfer of
deposit credit in a F ederal Reserve B ank (or other immedi
ately available fu n d s), commonly referred to as “ F ederal
fu n d s,” received by such dealer on the date of the loan in con
nection w ith clearance of securities transactions.
This p arag rap h shall not, however, affect (i) any instrum ent
issued before Ju n e 27, 1966, (ii) any instrum ent th a t evidences an
indebtedness arising from a tran sfer of assets under repurchase agree
m ent issued before Ju ly 25, 1969, or (iii) any instrum ent issued to a
foreign office of another bank before Ju n e 27, 1969.
2. Effective F eb ru a ry 12, 1970, section 204.5(c) (Supplem ent
R egulation D) is amended by inserting after “ to foreign offices
other banks8” the following: “ ,or institutions the time deposits
which are exempt from the rate lim itations of R egulation Q
§217.3(0) th ereo f,” .
to
of
of
in
5a Any banking office in any State of the United States or the D istrict of Columbia of a
bank organized under domestic or foreign law.
PR IN TE D IN NEW YORK
B
oard o f
G overnors
of t h e
F
ederal
R eserv e S y stem
INTEREST ON DEPOSITS
AM END M ENT TO R EG U LA TIO N Q
Effective
as follow s:
F ebruary
12, 1970, Section 217.1 (/) is am ended to read
SE C T IO N 217.1—D E F IN IT IO N S
*
*
#
( /) Deposits as including certain prom issory notes and other obli
gations.— F o r the purposes of this P art, the term “ deposits” also
includes a member b an k ’s liability on any prom issory note, acknowl
edgement of advance, due bill, or sim ilar obligation (w ritten or oral)
th a t is issued or undertaken by a member bank principally as a means
of obtaining fu nds to be used in its banking business, except any such
obligation th a t:
(1) Is issued to (or undertaken w ith respect to) an d held for
the account of (i) a bank or an institution the tim e deposits of
which are exempt from § 217.7 p u rsu a n t to § 217.3(g), or (ii)
an agency of the U nited States or the Governm ent Development
B ank for P uerto Rico;
(2) Evidences an indebtedness arising from a tran sfer of di
rect obligations of, or obligations th a t are fully guaranteed as to
p rincipal and interest by, the U nited States or any agency
thereof th a t the bank is obligated to rep u rch a se;
(3) H as an original m atu rity of more th an two years, is u n
secured, and states expressly th a t it is subordinated to the
claims of depositors; or
(4) Arises from a borrowing by a member bank from a dealer
in securities, for one business day, of proceeds of a tran sfer of
deposit credit in a F ederal Reserve B ank (or other immedi
ately available fu n d s), commonly referred to as “ F ederal
fu n d s,” received by such dealer on the date of the loan in con
nection w ith clearance of securities transactions.
This p arag rap h shall not, however, affect (i) any instrum ent issued
before Ju n e 27, 1966, or (ii) any instrum ent th a t evidences an in
debtedness arising from a tran sfer of assets under repurchase agree
m ent issued before J u ly 25, 1969.
P R IN T E D IN N EW YORK
@FedFRASER