Full text of Federal Reserve Bank of New York Circulars : Regulation Q

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FEDERAL RESERVE BANK
OF NEW YORK

August 16, 1978

R EG U LA TIO N Q
Guidelines for Issuing and Advertising "M on ey Market Certificates"

To

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Since June 1, 1978 member banks have been authorized to issue
"money market certificates" at rates equal to the discount rate on sixmonth Treasury bills. To answer questions on, and provide guidance
for, the offering and advertising of such deposits, the Board of Gov­
ernors of the Federal Reserve System has issued the enclosed statement.
You may wish to keep a copy of the statement with Regulation Q
in your Regulation binder. Questions regarding the statement may be
directed to our Consumer Affairs and Bank Regulations Department
(Tel. No. 212-791-5919).

PAUL




A.

VOLCKER,

Board of Governors of the Federal Reserve System
IN TER EST ON DEPOSITS
S T A T E M E N T R E G A R D IN G N E W

Effective June 1, 1978, the Board amended
section 217.7 of Regulation Q to authorize
member banks to offer to depositors two new
categories of time deposits. The first new cate­
gory permits member banks to pay interest at
a maximum rate of 7 % percent on time de­
posits of $ 1,000 or more with maturities of
eight years or more. The second new category
authorizes member banks to pay interest on
nonnegotiable time deposits of $ 10,000 or more
with maturities of exactly 2 6 weeks at a m a x ­
imum rate equal to the discount rate on the
most recently issued six-month United States
Treasury bills (auction average). Since the
Board's action, questions have been received
by the Board's staff concerning the new 2 6 week instrument. This letter responds to the
most frequently raised questions and provides
general guidelines for advertising the new 2 6 week time deposit.
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The ceiling rate for new 2 6 -week time de­
posits equals the discount rate (auction aver­
age) for United States Treasury bills with
maturities of six months issued on or immedi­
ately prior to the date of deposit. The ceiling
rate is nof established with reference to the
coupon-equivalent or effective yield on Treasury
bills. Should a member bank desire to round
off the
such rate may only be
rounded down. For example, if the discount
rate on Treasury bills is 6 .4 6 3 8 percent, a m em ­
ber bank may round this ceiling rate to 6.463
percent, 6 .46 percent or 6 .4 percent. Interest
may be computed in accordance with any of the
methods authorized by § 2 1 7 .3 ( e ) of Regulation
Q and ^ 3010 of the Board's PitAA-fA^
(1 2 C F R 2 1 7 .1 5 1 ), and, in accord­
ance with § 2 1 7 .3 ( a ) of Regulation Q , in
ascertaining the ceiling rate of interest that
may be paid, the effects o f compounding of
interest may be disregarded. A member bank
may round the OjJfNzw yz^M arrived at by
compounding to the nearest one hundredth of
one percent. For example, an effective yield of
6 .5 6 8 percent may be rounded to 6 .57 percent.
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United States Treasury bills maturing in six
months (2 6 weeks) are auctioned weekly by the

2 6 -W E E K T I M E D E P O S IT S

Treasury Department, normally on Monday,
and normally are issued the following Thurs­
day. Beginning on the date the Treasury bills
are issued, member banks may pay interest on
new time deposits with 26-w eek maturities at
a ceiling rate not to exceed the discount rate
(auction average) established for Treasury
bills and may continue to pay such rate on new
26-week time deposits until the next issue of
six-month Treasury bills. A t that time the
average discount rate on the new issue of sixmonth Treasury bills becomes the ceiling rate
for new time deposits. For example, the ceiling
rate payable on Thursday, A ugust 3, would be
fixed at the discount rate (auction average)
established on M onday, July 31. That ceiling
rate would remain in effect for new time de­
posits through W ednesday, A u gu st 9. O n
Thursday, August 10, the ceiling rate on new
time deposits would change to correspond to
the discount rate (average auction) established
on M onday, A ugust 7.
AfMjf fAp Maturity of fAo certificate &e
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e-ractiy or w ay it &e .yi.y caiewcfar wowtAjf
The maturity of the certificate must be ex ­
actly 26 weeks (1 8 2 days) and not six calendar
months. How ever, where the certificate would
mature on a legal holiday, it may be issued with
an original maturity in excess of 26 weeks
(1 8 2 days) so that it would mature on the next
succeeding business day. This position is con­
sistent with the similar treatment accorded sixmonth Treasury bills that would otherwise
mature on a holiday and is consistent with
^ 3 3 4 9 (1 2 C F R 2 1 7 .1 3 4 ) of the Board's PnA/z'j/tcJ ./M?cr/'rcfa?ioM.y which generally provides
that a member bank may pay interest on a
certificate that matures on a legal holiday until
the next succeeding business day. How ever,
upon renewal, such certificate must be issued
for exactly 26 weeks.
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The 26-w eek certificate is treated like other
time deposits for purposes of the Regulation Q
early withdrawal penalty. In accordance with
§ 2 1 7 .4 ( d ) of Regulation Q (1 2 C F R 217.4
( d ) ) , if the deposit or any portion is paid
before maturity, a member bank may pay inter­
est on the amount withdrawn at a rate not to
exceed that prescribed for a savings deposit

[Enc. A T 8403]
PRINTED IN NEW YORK




(currently five percent) and, in addition, a
forfeiture of three months' interest at such rate
is required. H ow ever, if the amount withdrawn
has been on deposit for three months or less,
the minimum penalty consists of the forfeiture
of all interest for the period of time the funds
were on deposit. A s is the case with other time
deposits, as an alternative to payment before
maturity, member banks are permitted to lend
on the collateral of such time deposit so long
as the rate charged on the loan is at least one
percent higher than the rate paid on the deposit
pledged.
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The $ 1 0 ,0 0 0 requirement is a WMWMMW de­
nomination requirement and a member bank
may issue the certificate in any denomination
of $10,0 0 0 or more. A s with other time deposits,
banks may offer this certificate in discount form
where the face amount of the certificate is re­
ceived by the depositor at maturity, so long as
the bank initially receives at least $ 10,000 from
the depositor and the rate paid on the
amount deposited does not exceed the appli­
cable six-month Treasury bill discount rate.
See
3365 of the Board's PnA/AyA^c?
fahow-r (1 2 C F R 2 1 7 .1 4 9 ).
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The Board's staff has received a number of
questions regarding the appropriate methods
of advertising the rate o f interest that may be
paid on the new 26-week certificate. In par­
ticular, questions have been raised concerning
advertisements that compare a rate or yield on
the certificate with a rate or yield on six-month
Treasury bills.
A member bank's advertising that the rate
of interest paid on its 26-w eek time deposits
"e q u a ls" the Treasury bill rate may confuse
depositors since Treasury bills are sold at a
discount and the effective yield on Treasury
bills is higher than the discount rate. A ccord­
ingly, any general comparison to Treasury bill
rates that conveys the impression that the rate
paid by the bank equals the coupon-equivalent
or effective yield on Treasury bills would be
inappropriate.
In addition, a bank's advertising an annual
effective rate based on compounding for the
entire year may imply an agreement to pay
that rate for the entire year. In fact, such rate
may not be available since the certificate ma­
tures in 26 weeks and can only be renewed at
a rate no more than the ceiling rate in effect
at the time of renewal.




In view of these considerations, the following
advertising guidelines are provided. These
guidelines amplify the specific disclosure and
advertising requirements contained in Regula­
tion Q that are applicable generally to all de­
posits. See § 2 1 7 .6 of Regulation Q (1 2 C F R
2 1 7 .6 ). These guidelines are applicable to every
member bank advertisement, announcement or
solicitation relating to the 26-week certificate.

1. A n y advertisement, announcement or so­
licitation that states an annual effective yield
based on compounding for a period fw
of 182 days must contain a clear and conspicu­
ous statement that the rate stated is an annual
rate and that this rate is subject to change upon
renewal. Such a statement could be expressed
in the following m anner:
TAAy Ar O aMMMg/ rafp onJ A
M
y
of TTM^WO/.

f< cA3M
?
<7%

It is believed appropriate to impose this re­
quirement on advertisements, announcements
and solicitations relating to the 26-w eek cer­
tificate, but not on other time deposits with
original maturities of less than one year, because
the ceiling rates applicable to such other time
deposits change infrequently and such deposits
are typically renewed by the bank at the same
rate.
2. In any advertisement, announcement or
solicitation, the following guidelines also a pply:
(a ) If a member bank's advertisement,
announcement or solicitation makes awy ref­
erence to U .S . Treasury bills, it must promi­
nently disclose that the rate of interest paid
on Treasury bills is the JAycoMwf rate. Such
advertisement, announcement or solicitation
must also contain a statement that the effec­
tive yield on Treasury bills is higher than the
discount rate.
(b ) If a member bank's advertisement,
announcement or solicitation makes any ref­
erence to U .S . Treasury bills owd expresses
any specific rate (bank's rate or Treasury's
rate), it must prominently disclose the cou­
pon-equivalent or effective yield on U .S .
Treasury bills and the effective yield on its
certificate computed on a comparable basis.
If such disclosures are made, the required
statement in (a ) above that the effective yield
on Treasury bills is higher than the discount
rate need not appear.
1.
If a member bank advertises an
fwe yield based on compounding for a
2 6 -week (1 8 2 day) period and makes awy

reference to Treasury bills, the bank's
yield must be compared with the couponequivalent or effective yield on a six-month
Treasury bill.
2.

If a member bank advertises an
yield based on compounding for a
period in excess of 26 weeks (1 8 2 days)
and makes any reference to Treasury bills,
the bank's yield must be compared with
an effective yield on six-month Treasury

bills that is compounded for a similar time
period.
These guidelines also apply in any advertise­
ment, announcement or solicitation in which a
bank compares the rate it pays on the certificate
with the rates paid on competing instruments
of others. Guidelines 2 ( a ) and 2 ( b ) need not
apply to advertisements, announcements or so­
licitations that contain wo reference to Treasury
bills or other competing instruments.

APPENDIX
This appendix provides information for mem­
ber banks that wish to advertise comparisons
between yields offered on the new 26-w eek cer­
tificate and yields on six-m onth Treasury bills.
1. A s noted in the accompanying letter, if
a member bank advertises an annual effective
yield arrived at by compounding over 26 weeks
(1 8 2 days) or less and refers to Treasury bills,
it should compare this rate to the couponequivalent yield on Treasury bills. The couponequivalent yield on Treasury bills is widely
published and is made available by the Treasury
and the Federal Reserve Banks.
2. If a member bank advertises an annual
effective yield arrived at by compounding over
more than 26 weeks (1 8 2 days) and refers to
Treasury bills, it should compare its rate to
the Treasury bill coupon-equivalent yield ad­
justed to make the yields comparable. For ex­
ample, if a member bank advertises an annual
effective yield arrived at by compounding over
365 days, the appropriate effective yield on
Treasury bills would be calculated as follow s:




Treasury Bill Yield =
(1 +

C E Y ( - ^ - ) ) 3 6 5 /1 8 2 -1

where C E Y is the coupon-equivalent yield for
Treasury bills. For six-month Treasury bills
issued on June 1 (coupon-equivalent yield of
7.532 percent), the adjusted yield on Treasury
bills would be 7.674 percent:
.07674 =

(1 +

.07532 ( ^ - ) )

3 6 5 /1 8 2 - 1

If a member bank advertises an annual effec­
tive yield arrived at by compounding over 360
days rather than 365 days, the comparable
Treasury bill yield must also be adjusted to a
360 day basis. The adjusted effective yield on
Treasury bills would be calculated as follow s:
Treasury Bill Yield =
(1 +
Note that
fraction (
lent yield
basis of a

C E Y ( ^ - ) ) 3 6 0 /1 8 2 -1

no adjustment should be made to the
1 8 2 /3 6 5 ) , since the coupon-equiva­
on Treasury bills is expressed on the
365 day year.