[Federal Register Volume 69, Number 27 (Tuesday, February 10, 2004)]
[Notices]
[Pages 6292-6296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2797]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1182]


Policy Statement on Payments System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice and request for comment.

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SUMMARY: The Board is giving notice that it intends to adopt two 
changes to its Policy Statement on Payments System Risk (PSR policy). 
First, the Board intends to modify the daylight overdraft measurement 
rules (``posting rules'') for interest and redemption payments on 
securities issued by entities for which the Reserve Banks act as fiscal 
agents but whose securities are not obligations of, or guaranteed by, 
the United States--that is, securities issued by government-sponsored 
enterprises (GSEs) and certain international organizations. The planned 
modification would revise the Board's PSR policy to specify that the 
Reserve Banks will release interest and redemption payments on the 
Fedwire[reg]-eligible securities issued by a GSE or international 
organization only when the issuer's Federal Reserve account contains 
funds equal to or in excess of the amount of the interest and 
redemption payments to be made.\1\ The Board requests comment on how 
best to implement this policy change in order to promote a smooth 
market adjustment.
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    \1\ Fedwire is a registered servicemark of the Federal Reserve 
Banks.
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    Second, the Board intends to align the PSR policy's treatment of 
the general corporate account activity (activity other than interest 
and redemption payments) of GSEs and certain international 
organizations with the treatment of account activity of other account 
holders that do not have regular access to the Federal Reserve's 
discount window. Such treatment includes strongly discouraging daylight 
overdrafts and applying a penalty fee to daylight overdrafts that 
nonetheless result from these entities' general corporate payment 
activity.

DATES: Comments must be received by April 16, 2004.

ADDRESSES: Comments should refer to Docket No. OP-1182 and may be 
mailed to Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551. Please consider submitting your comments through 
the Board's Web site at www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm, by e-mail to <a href="/cdn-cgi/l/email-protection#b5c7d0d2c69bd6dad8d8d0dbc1c6f5d3d0d1d0c7d4d9c7d0c6d0c7c3d09bd2dac3"><span class="__cf_email__" data-cfemail="1e6c7b796d307d7173737b706a6d5e787b7a7b6c7f726c7b6d7b6c687b30797168">[email protected]</span></a>, or by 
fax to the Office of the Secretary at 202/452-3819 or 202/452-3102. 
Rules proposed by the Board and other federal agencies may also be 
viewed and commented on at www.regulations.gov.
    All public comments are available from the Board's Web site at 
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
except as necessary for technical reasons. Accordingly, your comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9 a.m. and 5 p.m. on weekdays.

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; for the hearing impaired only: 
Telecommunications Device for the Deaf, Dorothea Thompson (202/452-
3544).

SUPPLEMENTARY INFORMATION: 

I. Background

A. Foundation of the PSR Policy

    In 1985, the Board adopted a policy to reduce the risks that 
payment systems present to the Federal Reserve Banks, to the banking 
system, and to other sectors of the economy (50 FR 21120, May 22, 
1985). An integral component of this PSR policy is managing the Federal 
Reserve's direct credit risk by controlling institutions' use of 
Federal Reserve intraday credit, commonly referred to as ``daylight 
credit'' or ``daylight overdrafts.'' A daylight overdraft occurs when 
an account holder's Federal Reserve account is in a negative position 
during the business day. The PSR policy requires all depository 
institutions incurring daylight overdrafts in their Federal Reserve 
accounts to establish a maximum limit, or net debit cap, on those 
overdrafts. In addition, a Reserve Bank may apply other risk controls 
to an account holder's payment activity if the account holder incurs 
daylight overdrafts in violation of the PSR policy or if the Reserve 
Bank believes that the account holder poses credit risk in excess of 
what the Reserve Bank determines to be prudent. Under these 
circumstances, a Reserve Bank may place real-time controls on the 
account holder's payment activity, so as to reject requested payments, 
or require the account holder to pledge collateral to cover its 
daylight overdrafts as a means of deterring further the use of Federal 
Reserve daylight credit.\2\
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    \2\ The Reserve Banks have the ability to monitor an entity's 
account for certain payment types in real time and reject those 
payments that would create, or increase, a daylight overdraft in the 
entity's account. These payment types include Fedwire funds 
transfers, National Settlement Service transactions, and certain 
automated clearing house transactions.
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    Under the PSR policy, an institution's eligibility to access 
daylight credit is

[[Page 6293]]

contingent upon whether the institution is eligible for regular access 
to the Federal Reserve's discount window and whether it is in sound 
financial condition. By statute, regular access to the discount window 
generally is available to institutions that are subject to reserve 
requirements.\3\ If such an institution fails to cover a daylight 
overdraft by the close of the business day, it either obtains a 
discount window loan or incurs an overnight overdraft. The Federal 
Reserve strongly discourages institutions from incurring overnight 
overdrafts by charging a penalty rate, equal to the federal funds rate 
plus four percentage points, on the amount of the overnight overdraft.
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    \3\ Before the passage of the Monetary Control Act of 1980, only 
banks that were members of the Federal Reserve System enjoyed 
regular access to the discount window. The Monetary Control Act 
extended reserve requirements to nonmember institutions and provided 
that any institution holding deposits subject to reserve 
requirements (transaction accounts and nonpersonal time deposits) 
would have the same access to the discount window as member 
institutions (12 U.S.C. 461(b)(7)).
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    The Federal Reserve has long been concerned that an institution 
that does not have regular access to the discount window may 
nevertheless incur a daylight overdraft, which could, in turn, become 
an overnight overdraft. To address the risks arising from such 
overdrafts and to avoid the extension of overnight credit to 
institutions that lack regular access to the discount window, the PSR 
policy does not permit such institutions to adopt a positive net debit 
cap and strongly discourages them from incurring any daylight 
overdrafts. The Board's policy is consistent with Congress's intent in 
the Federal Reserve Act to allow depository institutions access to 
Federal Reserve overnight credit as a quid pro quo for being subject to 
reserve requirements and to impose additional conditions on the Federal 
Reserve's provision of overnight credit to other entities.\4\
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    \4\ Section 13(3) of the Federal Reserve Act empowers the Board, 
by the affirmative vote of not less than five members (or, in 
certain cases, all available members), to authorize any Federal 
Reserve Bank to lend to individuals, partnerships, and corporations 
under ``unusual and exigent circumstances'' (12 U.S.C. 343 and 
248(r)). Section 13(13) allows any Federal Reserve Bank to lend to 
any individual, partnership, or corporation when secured by U.S. 
government securities, subject to such limitations, restrictions, 
and regulations as the Board may prescribe (12 U.S.C. 347c). The 
Board's Regulation A applies the ``unusual and exigent 
circumstances'' requirement to discount window loans to any entity 
without regular discount window access, regardless of the type of 
collateral pledged. Regulation A also requires the Federal Reserve 
Banks to consult with the Board before lending to those entities. 
Lending under these provisions has been extremely rare, and such 
loans have not been extended since the 1930s.
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B. Introduction of Daylight Overdraft Fees

    Since the PSR policy was first adopted in 1985, the Board has 
modified and expanded it several times. Notably, in 1992, the Board 
approved a policy to charge institutions a fee for their use of Federal 
Reserve daylight credit, beginning in April 1994 (57 FR 47084, October 
14, 1992). The Board's goal in adopting this policy was to induce 
behavior that would reduce risk and increase efficiency in the payment 
system. At that time, the Board also modified how it posted different 
types of transactions to institutions' Federal Reserve accounts to 
reflect more closely the time that transactions were processed (57 FR 
47093, October 14, 1992).\5\ The Board's objectives in designing these 
posting rules included minimizing intraday float, facilitating 
depository institutions' monitoring and control of their account 
balances during the day, and reflecting the legal rights and 
obligations of parties to payments. The Board's objective of minimizing 
intraday float is especially important in light of the daylight 
overdraft fee, which gives intraday credit an explicit value.
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    \5\ Prior to the 1992 posting rule modification, Fedwire funds 
and securities transfers were posted to institutions' Federal 
Reserve accounts as they were processed during the business day (as 
they still are today). The net of all automated clearing house 
transactions was posted as if the transactions occurred at the 
opening of business, regardless of whether the net was a debit or 
credit balance. All other, or ``non-wire,'' activity was netted for 
a business day, and if the net balance was a credit, the credit 
amount was added to the opening balance. If the net balance was a 
debit, the debit amount was deducted from the closing balance. Under 
this method, an institution could use all of its non-wire net 
credits to offset any Fedwire funds or securities debits during the 
day but postpone the need to cover non-wire net debits until the 
close of the day.
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    After the Board approved its policy of charging fees for daylight 
overdrafts and its revised posting rules, it adopted a penalty fee (the 
regular daylight overdraft fee, currently 36 basis points, plus 100 
basis points) for daylight overdrafts incurred by certain institutions 
that, by statute, do not have regular discount window access (59 FR 
8977, February 24, 1994). Because of concerns that a daylight overdraft 
could become an overnight overdraft, the Board determined that such 
account holders should not be permitted the same access to intraday 
credit as depository institutions and should be prohibited from 
incurring daylight overdrafts. Recognizing, however, that these account 
holders may, nonetheless, incur daylight overdrafts, the Board believed 
a penalty fee should be applied to these account holders' daylight 
overdrafts to provide such account holders a strong incentive to avoid 
incurring any, including inadvertent, daylight overdrafts. The Board's 
policy explicitly addressed the account holders that would be subject 
to the penalty fee, which included Edge and agreement corporations, 
limited purpose trust companies, and bankers' banks that do not waive 
their exemption from reserve requirements. At the time, however, the 
Board did not explicitly address whether certain aspects of the policy 
would be applied to GSEs and international organizations for which the 
Reserve Banks act as fiscal agents.\6\<SUP>,</SUP> \7\
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    \6\ In their role as fiscal agents, the Reserve Banks maintain 
securities issued by GSEs and international organizations on the 
Fedwire Securities Service and make interest and redemption payments 
to depository institutions on each issuer's behalf, in addition to 
providing other payment services generally related to these fiscal 
agency services.
    \7\ These entities include the following GSEs: the Federal 
National Mortgage Association (Fannie Mae), the Federal Home Loan 
Mortgage Corporation (Freddie Mac), entities of the Federal Home 
Loan Bank System (FHLBS), the Farm Credit System, the Federal 
Agricultural Mortgage Corporation (Farmer Mac), and the Student Loan 
Marketing Association (Sallie Mae). They also include the following 
international organizations: the International Bank for 
Reconstruction and Development (World Bank), the Inter-American 
Development Bank, the Asian Development Bank, and the African 
Development Bank. The Student Loan Marketing Association 
Reorganization Act of 1996 requires Sallie Mae to be completely 
privatized by 2008; however, Sallie Mae plans to complete 
privatization by September 2006. Upon privatization, Sallie Mae will 
no longer be considered a GSE, and the Reserve Banks will no longer 
add new issuances of Sallie Mae securities to the Fedwire Securities 
Service.
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    In 1994, the Board issued an interpretation of the PSR policy that 
stated GSEs should not incur daylight overdrafts in their accounts and 
would not be allowed to adopt positive net debit caps because they do 
not have regular access to the discount window (59 FR 25060, May 13, 
1994). In its interpretation, the Board granted a temporary exemption 
from fees on daylight overdrafts resulting from the Reserve Banks' 
release of interest and redemption payments on Fedwire-eligible 
securities issued by GSEs prior to the issuers' full funding of such 
payments.\8\ The Board granted this temporary exemption because it was 
uncertain of the effect that daylight overdraft fees would have on 
securities markets and did not want to introduce too much change at one 
time. The Board indicated that it would revisit the temporary exemption 
after market participants adjusted to the effects of daylight overdraft 
fees. In addition, the Board applied the regular daylight overdraft fee 
to the daylight overdrafts

[[Page 6294]]

arising from the GSEs' general corporate funding activity, but did not 
apply the penalty fee that applies to other institutions that lack 
regular discount window access.\9\ The Board stated it was not, 
however, ruling out the future application of the penalty fee.
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    \8\ The term ``interest and redemption payments'' refers to 
payments of principal and interest on securities maintained on the 
Fedwire Securities Service.
    \9\ To facilitate measurement of overdrafts arising from the 
different activity, the Board required the GSEs and Reserve Banks to 
establish separate GSE accounts for principal and interest activity 
(P&I account) and for general corporate payment activity (general 
account).
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    In March 1995, the Board decided to raise the rate charged on 
daylight overdrafts to 36 basis points (60 FR 12559, March 7, 1995). At 
the time, the Board stated that it would evaluate further fee increases 
in a few years. When the Board began its evaluation of the 
effectiveness of the daylight overdraft fee in 2000, it recognized that 
significant changes had occurred in the banking, payments, and 
regulatory environment since the fee was introduced and, as a result, 
decided to broaden its review to include all aspects of the Federal 
Reserve's daylight credit policies. Based on its review, the Board 
determined that the PSR policy appears to be generally effective in 
controlling risk to the Federal Reserve and creating incentives for 
depository institutions to manage their intraday credit exposures (66 
FR 64419, December 13, 2001).\10\
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    \10\ Through its analysis, the Board identified growing 
liquidity pressures among certain payments system participants and, 
as a result, revised the 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 allow certain depository 
institutions to pledge collateral to the Federal Reserve in order to 
access additional daylight overdraft capacity above their net debit 
caps, subject to Reserve Bank approval. These changes to the policy 
were intended to benefit the few financially healthy institutions 
that had been constrained by their net debit caps by increasing 
their daylight overdraft capacity and to remove a potential 
impediment to the use of electronic check presentment.
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    During its review, the Board also determined that market 
participants appear to have adjusted to daylight overdraft fees, which 
prompted an assessment of the temporary exemption granted to GSEs under 
the Board's 1994 interpretation of the PSR policy. In conducting this 
assessment, the Board evaluated the treatment of interest and 
redemption payments on Fedwire-eligible securities issued by GSEs and 
certain international organizations as well as the treatment of other 
payment services these entities use for their general corporate payment 
activity. As a result of this evaluation, the Board plans to implement 
two modifications to its PSR policy as described below.

II. Discussion of Planned Policy Changes

A. Modification of Posting Rules for Interest and Redemption Payments

    In the course of the Board's assessment of its 1994 interpretation 
of the PSR policy, the Board found that the dollar volume of interest 
and redemption payments on Fedwire-eligible securities issued by GSEs 
and international organizations that are credited to the receiving 
depository institutions' Federal Reserve accounts prior to such 
payments being fully funded by the issuer has grown significantly over 
the past ten years. In large part this increase owes to the rapid 
growth in Fedwire-eligible securities issued by GSEs. In addition, for 
some issuers, the lag between the time the Reserve Banks credit 
depository institutions' accounts for the interest and redemption 
payments and the time the issuer covers the payments extends, at times, 
until shortly before the close of the Fedwire Funds Service.\11\
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    \11\ Fedwire Funds messages other than settlement payment orders 
may be sent until 6 p.m. ET (settlement payment orders may be sent 
until 6:30 p.m. ET). Under the Reserve Banks' Operating Circular 6, 
a settlement payment order is a payment order in which the 
originator and the beneficiary are each either (i) a bank subject to 
reserve requirements (whether or not it actually maintains 
reserves), or (ii) a participant in a net settlement arrangement 
approved by a Reserve Bank as an eligible originator or beneficiary 
of a settlement payment order sent during the settlement period.
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    The Board's current daylight overdraft measurement rules specify 
that U.S. Treasury and government agency interest and redemption 
payments are posted, that is, debited from the issuers' accounts and 
credited to the receivers' accounts, by 9:15 a.m. Eastern Time (ET) and 
that original issues of securities are posted on a flow basis, as they 
are issued, but no earlier than 9:15 a.m. ET.\12\ These posting rules 
were designed primarily to grant depository institutions the benefit of 
receiving interest and redemption payments on U.S. Treasury or 
government agency securities prior to debits being made to their 
accounts for the purchase of new issues.
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    \12\ While transactions for various payment types are processed 
throughout the business day, daylight overdrafts in an entity's 
Federal Reserve account are calculated on an ex post basis according 
to the daylight overdraft posting rules.
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    For operational ease, the Reserve Banks have applied the same 
posting rules to interest and redemption payments on Fedwire-eligible 
securities issued by GSEs and international organizations. However, the 
practice of releasing such payments before they are fully funded by the 
issuer is neither necessary to achieve the Federal Reserve's statutory 
mission nor appropriate risk management policy for the central bank. 
Furthermore, this practice is inconsistent with that of private issuing 
and paying agents for their customers' securities. In general, these 
issuing and paying agents do not allow payments to be made for a 
securities issuer before the issuer has fully funded its payments. The 
Board, therefore, intends to revise its policy to specify that the 
Reserve Banks will release interest and redemption payments on Fedwire-
eligible securities issued by a GSE or an international organization 
only when the issuer's Federal Reserve account contains funds equal to 
or in excess of the amount of the issuer's interest and redemption 
payments to be made.
    Under the revised policy, a cut-off hour by which the issuers must 
fund their respective interest and redemption payments would be 
established on the Fedwire Securities Service in order to avoid 
disruptions to end-of-day processing for this and related systems. The 
latest this cut-off hour could be is 4 p.m. ET in order to allow the 
Reserve Banks to close other elements of the Fedwire Securities and 
Funds Services on time.\13\ \14\ In the event that an issuer did not 
fund its interest and redemption payments by the established cut-off 
hour, its payments would not be processed on that day. Requests by an 
issuer for extensions of the 4 p.m. ET funding deadline would not be 
granted.
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    \13\ Participants on the Fedwire Securities Service can 
reposition securities held in their own accounts against payment 
until 4:30 p.m. ET (repositioning securities without payment is 
permitted until 7 p.m. ET). Because interest and redemption payments 
on Fedwire-eligible securities are processed through the Fedwire 
Securities Service as funds-only transactions, they cannot be 
processed after 4:30 p.m. ET. A cut-off hour of 4 p.m. ET for 
issuers to fund these interest and redemption payments would provide 
the Reserve Banks a 30-minute window in which to complete the 
requisite processing for funds-related transactions in order to 
close the Fedwire Securities Service on time.
    \14\ The 4 p.m. ET cut-off hour would apply specifically to the 
interest and redemption on Fedwire-eligible securities issued by 
GSEs and international organizations and would be independent of any 
other established operating hours of the Fedwire Securities Service 
as published in the Reserve Banks' Operating Circular 7.
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    The planned posting rule modification is intended to address the 
intraday credit that results from the current manner in which the 
Reserve Banks process and post interest and redemption payments on 
securities issued by GSEs and international organizations to the 
receiving depository institutions' Federal Reserve accounts prior to 
such payments being fully funded by the issuer. The Board recognizes 
that the removal of Federal

[[Page 6295]]

Reserve intraday credit that is currently extended between the time the 
Reserve Banks disburse interest and redemption payments and the time 
the Reserve Banks receive funding for such payments may require 
alternate sources of private funding. This is similar to the hour-by-
hour funding that depository institutions arrange in the ordinary 
course of business for other types of transactions. When depository 
institutions have difficulty with intraday funding sources, they may be 
required to obtain alternative financing in the money and capital 
markets to facilitate their intraday operations. The Board is confident 
that payment practices and markets will adjust to the planned policy 
changes, and, in an effort to promote a smooth market adjustment and 
minimize market participants' adjustment costs, the Board requests 
comment on whether to implement the policy change through full 
implementation on a specified date or through a phased approach.
    If implementing the planned policy change without a phase-in period 
would better promote a smooth market adjustment, the Reserve Banks 
would, beginning in July 2006, release interest and redemption payments 
on Fedwire-eligible securities issued by a GSE or an international 
organization only when the issuer's Federal Reserve account contains 
funds equal to or in excess of the amount of the issuer's interest and 
redemption payments to be made. Alternatively, if market participants 
believe that a phased approach would better facilitate implementation 
of the planned change, the Board requests comment on the specific 
structure and objectives of any suggested phased approach and the 
rationale for why such an approach is considered preferable to one of 
full implementation in terms of promoting a smooth market 
adjustment.\15\
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    \15\ Under any phased approach, each issuer would be required to 
fund the amount of its interest and redemption payments to be made 
on a given day by the close of business, as is the case today. 
Regardless of the approach the Board ultimately adopts, at full 
implementation, each issuer would be required to fund the amount of 
its interest and redemption payments to be made on a given day by 
the established cut-off hour before the Reserve Bank would release 
the issuer's interest and redemption payments.
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B. Uniform Policy Treatment of Account Holders That Lack Regular Access 
to the Discount Window

    As part of the Board's assessment of its 1994 interpretation of the 
PSR policy, the Board also evaluated the treatment of other payment 
services used by GSEs and international organizations for their general 
corporate payment activity, that is, payment activity unrelated to 
interest and redemption payments. While most of these entities only 
infrequently incur daylight overdrafts as a result of their general 
corporate payment activity, a few of these entities incur such daylight 
overdrafts on an almost daily basis.
    The Board has determined that GSEs and international organizations 
for which the Reserve Banks act as fiscal agents should not be 
permitted the same access to intraday credit as depository institutions 
because, by statute, they do not have regular access to the discount 
window. Therefore, to provide uniform treatment of account holders that 
do not have regular access to the discount window, the Board intends to 
apply the penalty fee to daylight overdrafts that result from GSEs' and 
international organizations' general corporate payment activity. The 
Board plans to implement the penalty fee concurrent with the posting 
rule change for interest and redemption payments, either upon full 
implementation of that policy change or at the start of a phased 
implementation. This planned policy change would supersede the Board's 
1994 temporary exemption pertaining to government-sponsored 
enterprises. As a result, the Board would rescind its 1994 
interpretation upon implementation of the planned policy change.

III. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
ch. 3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the policy 
statement under the authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the policy statement.

IV. Federal Reserve Policy Statement on Payments System Risk

    The Board plans to amend the ``Federal Reserve Policy Statement on 
Payments System Risk.'' Section I.A., under the heading ``Daylight 
overdraft definition and measurement'' would be amended as follows with 
changes identified in italics:

Procedures for Measuring Daylight Overdrafts \2\
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    \2\ This schedule of posting rules does not affect the overdraft 
restrictions and overdraft-measurement provisions for nonbank banks 
established by the Competitive Equality Banking Act of 1987 and the 
Board's Regulation Y (12 CFR 225.52).
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Opening Balance (Previous Day's Closing Balance)

    Post Throughout Business Day:

<plus-minus<ls-thn-eq> Fedwire funds transfers
<plus-minus<ls-thn-eq> Fedwire book-entry securities transfers
+ Fedwire book-entry interest and redemption payments on securities 
that are not obligations of, or guaranteed by, the United States \3\ 
\4\
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    \3\ The Reserve Banks act as fiscal agents for certain entities, 
such as government-sponsored enterprises (GSEs) and international 
organizations, whose securities are Fedwire-eligible but are not 
obligations of, or guaranteed by, the United States. These entities 
include the following GSEs: the Federal National Mortgage 
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation 
(Freddie Mac), entities of the Federal Home Loan Bank System 
(FHLBS), the Farm Credit System, the Federal Agricultural Mortgage 
Corporation (Farmer Mac), and the Student Loan Marketing Association 
(Sallie Mae). These entities also include the following 
international organizations: the International Bank for 
Reconstruction and Development (World Bank), the Inter-American 
Development Bank, the Asian Development Bank, and the African 
Development Bank. The Student Loan Marketing Association 
Reorganization Act of 1996 requires Sallie Mae to be completely 
privatized by 2008; however, Sallie Mae plans to complete 
privatization by September 2006. Upon privatization, Sallie Mae will 
no longer be considered a GSE, and the Reserve Banks will no longer 
add new issuances of Sallie Mae securities to the Fedwire Securities 
Services.
    \4\ The Reserve Banks will post these transactions, as directed 
by the issuer, provided that the issuer's Federal Reserve account 
contains funds equal to or in excess of the amount of the interest 
and redemption payments to be made. If a Reserve Banks does not 
receive funding from an issuer for the issuer's interest and 
redemption payments by the established cut-off hour of 4 p.m. ET, 
the issuer's payments will not be processed on that day.
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<plus-minus<ls-thn-eq> Net settlement entries.
    Post by 9:15 a.m. Eastern Time:

+ U.S. Treasury and government agency book-entry interest and 
redemption payments \5\

    \5\ For purposes of this policy, government agencies are those 
entities (other than the U.S. Treasury) for which the Reserve Banks 
act as fiscal agents and whose securities are obligations of, or 
guaranteed by, the United States.
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    Post Beginning at 9:15 a.m. Eastern Time:

- Original issues of Treasury securities.\6\

    \6\ Original issues of government agency GSE, or international 
organization securities are delivered as book-entry securities 
transfers and will be posted when the securities are delivered to 
the purchasing institutions.
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    Section I.E. under the heading ``Special situations,'' would be 
amended as follows with changes identified in italics:

E. Special Situations

    Under the Board's policy, certain account holders warrant special 
treatment primarily because of their charter types. As mentioned 
previously, an institution must have regular access to the discount 
window and be in sound financial condition in order to adopt a net 
debit cap greater than zero. Account holders that do not have regular 
access

[[Page 6296]]

to the discount window include Edge and agreement corporations, 
bankers' banks that are not subject to reserve requirements, limited-
purpose trust companies, government-sponsored enterprises (GSEs), and 
international organizations. Depository institutions that have been 
assigned a zero cap by their Reserve Banks are also subject to special 
considerations under this policy based on the risks they pose. In 
developing its policy for these account holders, 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 account 
holders.
    Regular access to the Federal Reserve discount window generally is 
available to institutions that are subject to reserve requirements. If 
an account holder 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 account holder 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, 
account holders that do not have regular access to the discount window 
should not incur daylight overdrafts in their Federal Reserve accounts.
    Certain account holders are subject to a daylight-overdraft penalty 
fee levied against the average daily daylight overdraft incurred by the 
account holder. These include Edge and agreement corporations, bankers' 
banks that are not subject to reserve requirements, limited-purpose 
trust companies, GSEs, and international organizations. The annual rate 
used to determine the daylight-overdraft penalty fee is equal to the 
annual rate applicable to the 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 
(currently 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 account holder'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 account holders than for 
depository institutions, overnight overdrafts at Edge and agreement 
corporations, bankers' banks that are not subject to reserve 
requirements, limited-purpose trust companies, GSEs, and international 
organizations are priced the same as overnight overdrafts at depository 
institutions that have regular access to the discount window.
    A new heading ``Government-sponsored enterprises and international 
organizations'' and text would be added to read as follows in Section 
I.E.4.:
    4. Government-sponsored enterprises and international organizations
    The Reserve Banks act as fiscal agents for certain GSEs and 
international organizations in accordance with federal statutes. These 
entities generally have Federal Reserve accounts and issue securities 
over the Fedwire Securities Service. The securities of these account 
holders are not obligations of, or guaranteed by, the United States. 
Furthermore, these account holders are not subject to reserve 
requirements, do not have regular discount-window access, and should 
refrain from incurring daylight overdrafts and post collateral to cover 
any daylight overdrafts they do incur. GSEs and international 
organizations are subject to the same daylight-overdraft penalty rate 
as other entities that do not maintain reserves and do not have regular 
discount-window access.
    Section I.E.4., under the heading ``Problem institutions,'' would 
be renumbered as ``I.E.5.''

    By order of the Board of Governors of the Federal Reserve 
System, February 4, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-2797 Filed 2-9-04; 8:45 am]
BILLING CODE 6210-01-P


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