Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30199

3 12 U.S.C. 371c.

4The current part I, section G of the policy,

Monitoring, will be designated as section F.

institution by reducing the institution’s

net debit cap or monitoring the

institution’s Fedwire funds transfers

and enhanced net settlement

transactions in real time. The Board

believes that these controls mitigate any

increased credit risk to the Federal

Reserve or systemic risk from

interaffiliate transfers intended to

simulate daylight overdraft cap

consolidation.

The Board also believes that any

institution-specific supervisory

concerns associated with interaffiliate

credit extensions are more appropriately

addressed through the existing

supervisory process, including through

regulatory restrictions on interaffiliate

transactions embodied in sections 23A

and 23B of the Federal Reserve Act.3

Sections 23A and 23B of the Federal

Reserve Act are intended to limit the

risks to an insured depository

institution from transactions with its

affiliates. In May 2001, the Board

published an interim final rule that (1)

requires, under section 23A, that

institutions establish and maintain

policies and procedures to manage the

credit exposure arising from the

institutions’ intraday extensions of

credit to affiliates and (2) clarifies that

intraday extensions of credit by an

insured depository institution to an

affiliate are subject to the market terms

requirement of section 23B (Docket No.

R–1104).

The Board notes that the interim rule

under sections 23A and 23B could

restrict the ability of depository

institutions to consolidate their daylight

overdraft caps. Because of statutory

exemptions, however, the market terms

requirement of section 23B and the

policies and procedures requirement of

the interim rule generally would not

apply to intraday credit extensions

between affiliated insured depository

institutions. Thus, intraday credit

extensions between affiliated depository

institutions, including the consolidating

transfers discussed above, would

generally be permissible under sections

23A and 23B provided they are

conducted in a safe and sound manner.

On the other hand, intraday credit

extensions designed to transfer the

daylight overdraft cap of an insured

depository institution to an affiliate that

is not an insured depository institution,

such as a branch or agency of a foreign

bank affiliate, would be subject to the

market terms requirement of section 23B

and the policies and procedures

requirement of the interim rule.

Because the risks addressed by the

interaffiliate transfer policy are

appropriately addressed through the

existing supervisory process, the Board

is rescinding the interaffiliate transfer

policy, part I, section F of the Policy

Statement on Payments System Risk.4

Upon rescission of the interaffiliate

transfer policy, depository institutions

will no longer be required to submit a

board-of-directors resolution to their

Reserve Banks; however, institutions are

expected to comply with supervisory

and regulatory requirements regarding

affiliate relationships and exposures,

including sections 23A and 23B, as

described in 12 CFR 250.248, 12 CFR

Part 223, and any future rulemaking.

By order of the Board of Governors of the

Federal Reserve System, May 30, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–13977 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–1107]

Policy Statement on Payments System

Risk

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Interim policy statement with

request for comment.

SUMMARY: The Board is issuing and

requesting comment on an interim

policy statement that allows a

depository institution that has a selfassessed net debit cap (average, above

average, or high) to pledge collateral to

its Federal Reserve Bank in order to

access additional daylight overdraft

capacity above its net debit cap level.

The Board may modify the final policy

statement after considering the

comments received.

DATES: The interim policy statement is

effective on May 30, 2001. Comments on

the interim policy must be received by

August 6, 2001.

ADDRESSES: Comments, which should

refer to Docket No. R–1107, may be

mailed to Ms. Jennifer J. Johnson,

Secretary, Board of Governors of the

Federal Reserve System, 20th and C

Streets, NW., Washington, DC 20551 or

mailed electronically to

regs.comments@federalreserve.gov.

Comments addressed to Ms. Johnson

also may be delivered to the Board’s

mailroom between 8:45 a.m. and 5:15

p.m. and to the security control room

outside of those hours. Both the

mailroom and the security control room

are accessible from the courtyard

entrance on 20th Street between

Constitution Avenue and C Street, NW.

Comments may be inspected in Room

MP–500 between 9 a.m. and 5 p.m.

weekdays, pursuant to § 261.12, except

as provided in § 261.14, of the Board’s

Rules Regarding Availability of

Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Paul

Bettge, Associate Director (202/452–

3174) or Stacy Coleman, Manager (202/

452–2934), Division of Reserve Bank

Operations and Payment Systems.

SUPPLEMENTARY INFORMATION: This is

one of five notices regarding payments

system risk that the Board is issuing for

public comment today. Three near-term

proposals concern the net debit cap

calculation for U.S. branches and

agencies of foreign banks (Docket No. R–

1108), modifications to the procedures

for posting electronic check

presentments to depository institutions’

Federal Reserve accounts for purposes

of measuring daylight overdrafts (Docket

No. R–1109), and the book-entry

securities transfer limit (Docket No. R–

1110). In addition, the Board is

requesting comment on the benefits and

drawbacks to several potential longerterm changes to the Board’s payments

system risk (PSR) policy, including

lowering self-assessed net debit caps,

eliminating the two-week average caps,

implementing a two-tiered pricing

system for collateralized and

uncollateralized daylight overdrafts, and

rejecting payments with settlement-day

finality that would cause an institution

to exceed its daylight overdraft capacity

level (Docket No. R–1111). Furthermore,

to reduce burden associated with the

PSR policy, the Board recently

rescinded the interaffiliate transfer

(Docket No. R–1106) and third-party

access policies (Docket No. R–1100).

The Board requests that in filing

comments on these proposals,

commenters prepare separate letters for

each proposal, identifying the

appropriate docket number on each.

This will facilitate the Board’s analysis

of all comments received.

I. Background

Beginning in 1985, the Board adopted

and has subsequently modified a policy

to reduce the risks that payments

systems present to the Federal Reserve

Banks, to the banking system, and to

other sectors of the economy. An

integral component of the current PSR

policy is a program to control

depository institutions’ use of intraday

Federal Reserve credit, commonly

referred to as ‘‘daylight credit’’ or

‘‘daylight overdrafts.’’ The Board’s

30200 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

1Net debit caps are calculated by applying a cap

multiple from one of six cap classes (zero, exempt,

de minimis, average, above average, and high) to a

capital measure. Cap multiples are determined

through either a self-assessment process (for

average, above average, and high cap classes) or a

board-of-directors resolution or assigned by the

Reserve Bank. Requests for a particular cap multiple

are granted at the discretion of the Reserve Bank.

2The policy requires that depository institutions

with ‘‘frequent and material’’ book-entry securities

overdrafts fully collateralize these overdrafts. Bookentry daylight overdrafts become frequent and

material when an account holder exceeds its net

debit cap, because of book-entry securities

transactions, on more than three days in any two

consecutive reserve maintenance periods and by

more than 10 percent of its capacity.

3To facilitate the pricing of daylight overdrafts,

the Federal Reserve also adopted a modified

method of measuring daylight overdrafts that more

closely reflects the timing of actual transactions

affecting an institution’s intraday Federal Reserve

account balance. This measurement method

incorporates specific account posting times for

different types of transactions.

4The Board also stated that collateral is required

for large book-entry overdrafters as an exception

that permits clearing banks and similarly situated

institutions to exceed their caps because of the

difficulty of controlling book-entry securities

overdrafts.

5On an average annual basis since 1995,

overdrafts caused by book-entry securities transfers

have decreased almost 10 percent per year and the

value of book-entry securities transfers has grown

more than 5 percent per year; whereas funds

overdrafts and the value of Fedwire funds transfers

have grown between 15 and 18 percent per year.

The growth in funds overdrafts appears to be

directly related to the growth in large-value funds

transfers.

intention was to address the Federal

Reserve’s risk as well as risks on

private-sector networks, primarily largedollar payments systems. Risk can arise

from transactions on the Federal

Reserve’s wire transfer system

(Fedwire); from other types of

payments, including checks and

automated clearing house (ACH)

transactions; and from transactions on

private large-dollar networks.

The Federal Reserve Banks face direct

risk of loss should depository

institutions be unable to settle their

daylight overdrafts in their Federal

Reserve accounts before the end of the

day. Moreover, systemic risk may occur

if an institution participating on a

private large-dollar payments network

were unable or unwilling to settle its net

debit position. If such a settlement

failure occurred, the institution’s

creditors on that network might also be

unable to settle their commitments.

Serious repercussions could, as a result,

spread to other participants in the

private network, to other depository

institutions not participating in the

network, and to the nonfinancial

economy generally. A Reserve Bank

could be exposed to indirect risk if

Federal Reserve policies did not address

this systemic risk.

The 1985 policy required all

depository institutions incurring

daylight overdrafts in their Federal

Reserve accounts as a result of Fedwire

funds transfers to establish a maximum

limit, or net debit cap, on those

overdrafts (50 FR 21120, May 22,

1985).1 Initially, the Board exempted

book-entry securities overdrafts from

quantitative overdraft controls because

of concerns about the effect that

overdraft restrictions could have on the

U.S. government securities market and

on the Federal Reserve’s ability to

conduct monetary policy through open

market operations. In 1990, however,

the Board announced that a depository

institution’s funds and book-entry

securities overdrafts would be combined

for purposes of determining the

institution’s compliance with its cap (55

FR 22087, May 31, 1990).

The Board recognized that receivers of

book-entry securities generally cannot

control the timing of their book-entry

securities overdrafts, but that intraday

book-entry securities overdrafts, like

funds overdrafts, have the potential to

become overnight overdrafts. Given the

seller-driven nature of the book-entry

system and the Board’s sensitivity to the

markets it supports, the Board

determined that only collateralized

book-entry securities overdrafts would

be exempt from cap limits.2 This aspect

of the policy was designed to protect the

Reserve Banks from the very large

exposures that can result from bookentry transfers without creating serious

disruptions in the market.

In 1989, the Board requested

comment on a proposed change to its

payments system risk reduction

program that would assess a fee of 60

basis points, phased in over three years,

for average daily overdrafts in excess of

a deductible of 10 percent of risk-based

capital (54 FR 26094, June 21, 1989). In

October 1992, the Board approved

charging a fee for daylight overdrafts,

which was to be phased in as 24 basis

points in 1994, 48 basis points in 1995,

and 60 basis points in 1996 (57 FR

47084, October 14, 1992).3 The purpose

of the fee was to induce behavior that

would reduce risk and increase

efficiency in the payments system.

Some depository institutions and

securities dealers commented that they

opposed a fee on book-entry securities

overdrafts that were collateralized.

These depository institutions and

securities dealers argued that pricing

book-entry securities overdrafts was

inequitable because collateral protected

the Federal Reserve against losses and

there are already costs associated with

pledging collateral. For that reason,

these institutions and securities dealers

argued that pricing and requiring

collateral for book-entry securities

overdrafts was unduly burdensome. The

Board stated, however, that allowing

collateral to substitute for daylight

overdraft fees would not provide a

meaningful incentive for depository

institutions or their dealer customers to

change their procedures and reduce

daylight overdrafts.4

In March 1995, the Board decided to

raise the daylight overdraft fee to 36

basis points instead of 48 basis points

(60 FR 12559, March 7, 1995). Because

aggregate daylight overdrafts fell

approximately 40 percent after the

introduction of fees, the Board was

concerned that raising the fee to 48 basis

points could produce undesirable

market effects contrary to the objectives

of the risk-control program. The Board

believed, however, that an increase in

the overdraft fee was needed to provide

additional incentives for institutions to

reduce overdrafts related to funds

transfers. The Board stated it would

evaluate further fee increases two years

after the 1995 fee increase.5

In considering its obligation to

evaluate further fee increases, the Board

recognized that significant changes have

occurred in the banking, payments, and

regulatory environment in the past few

years and, as a result, decided to

conduct a broad review of the Federal

Reserve’s daylight credit policies.

During the course of its review, the

Board evaluated the effectiveness of the

current daylight credit policies and

determined that these policies appear to

be generally effective in controlling risk

to the Federal Reserve and creating

incentives for depository institutions to

manage their intraday credit exposures.

In addition, the Board determined that

the current policy is well understood by

the industry and that private-sector

participants generally have benefited

from the policy’s risk controls. The

Board also recognizes, however, that the

policy has imposed costs on the

industry and is considered burdensome

by some depository institutions.

In conducting its review, the Board

evaluated the impact of past policy

actions on depository institutions’

behavior and on the markets generally.

The Board also took into consideration

the effect of various payment system

initiatives on payments activity and the

demand for daylight credit. While the

Board believes that the current policy is

generally effective, it did identify

growing liquidity pressures among

certain payment system participants.

Specifically, the Board learned that a

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30201

6Current net debit cap levels provide sufficient

liquidity for the majority of depository institutions.

Approximately 97 percent of depository institutions

with positive net debit caps use less than 50 percent

of their daylight overdraft capacity for their average

daily peak overdrafts.

7New CHIPS was implemented on January 22,

2001, CLS is scheduled for implementation in the

fourth quarter of 2001, and ACH credit transactions

will be final on the settlement date beginning in

mid-2001. Settlement-day finality for ACH credit

transactions may exacerbate liquidity pressures for

credit originators on the real-time monitor that must

prefund.

8 Depository institutions that wish to have access

to larger amounts of intraday credit than that

provided by the exempt-from-filing and de minimis

net debit caps must perform a self-assessment of

their creditworthiness, intraday funds management

and control, customer credit policies and controls,

and operating controls and contingency procedures

to support a higher daylight overdraft cap.

9CHIPCo is the affiliate of The New York Clearing

House Association L.L.C. that owns and operates

CHIPS.

10For additional information on payment system

initiatives, refer to the Payments Risk Committee’s

report entitled ‘‘Intraday Liquidity Management in

the Evolving Payment System: A Study of the

Impact of the Euro, CLS Bank, and CHIPS Finality,’’

New York, April 2000. http://www.ny.frb.org/prc/

intraday.html.

small number of financially healthy

institutions regularly find their net debit

caps to be constraining, causing them to

delay sending payments and, in some

cases, to turn away business.6 Payment

system initiatives, such as the Clearing

House Interbank Payments System with

intraday finality (new CHIPS), the

Continuous Linked Settlement (CLS)

system, and the Federal Reserve’s

settlement-day finality for ACH credit

transactions, may exacerbate these

institutions’ liquidity needs at specific

times during the day.7

II. Interim Policy Statement

The Board is adopting an interim

policy statement that allows depository

institutions with net debit caps derived

through a self-assessment to pledge

collateral voluntarily to the Federal

Reserve Banks in order to access

additional daylight overdraft capacity

above their net debit cap levels.8 The

Board’s analysis of overdraft levels,

liquidity patterns, and payment system

developments revealed that while net

debit caps provide sufficient liquidity to

most institutions, some depository

institutions are experiencing liquidity

pressures. The Board recognizes that the

interim policy could increase the public

sector’s credit exposure but believes that

requiring collateral will allow the

Federal Reserve to protect the public

sector from additional credit exposure

while providing extra liquidity to the

few institutions that might otherwise be

constrained. Providing extra liquidity to

constrained institutions should help

prevent liquidity-related market

disruptions. The option to pledge

collateral for additional daylight

overdraft capacity would provide the

private sector with the flexibility that it

has requested to relieve liquidity

pressures that have arisen or may arise

from payment system innovations such

as new CHIPS, CLS, and ACH finality as

well as other payment system

initiatives.

The Board believes it is important to

provide an environment in which

payment systems may function

effectively and efficiently and remove

barriers, as appropriate, to foster riskreducing payment system initiatives.

The Board recognizes that large-dollar

networks are an integral part of clearing

and settlement systems, that it is of

considerable importance to keep the

payments system operating without

significant disruption, and that some

intraday credit may be necessary to keep

the payments system running smoothly

and efficiently. Given these principles,

the Board believes that allowing

depository institutions with selfassessed net debit caps to pledge

collateral for additional daylight

overdraft capacity will continue to

promote the PSR policy’s risk-reduction

efforts while minimizing disruptions to

the payments system. In addition,

daylight overdraft fees will continue to

apply to all overdrafts, collateralized or

uncollateralized, as the fee provides a

meaningful incentive for depository

institutions to manage efficiently their

use of Federal Reserve daylight credit.

A. Payment System Initiatives

CHIPS Real-Time Final Settlement

On January 22, 2001, the Clearing

House Interbank Payments Company

L.L.C. (CHIPCo) converted CHIPS from

an end-of-day multilateral net

settlement system to one that provides

real-time final settlement for all

payment orders as they are released.9

Under an end-of-day system, the delay

between the release of a payment order

and its settlement results in the risk that

the failure of one or more participants

could trigger a failure of the system to

settle. In response to demands of CHIPS

participants to eliminate any possibility

of an unwind, CHIPCo developed a

method to achieve real-time final

settlement of CHIPS payment orders.

Under real-time final settlement, all

CHIPS payment instructions are settled

against a positive current position in the

CHIPS prefunded balance account held

at the Federal Reserve Bank of New

York (FRBNY) or simultaneously offset

by incoming payments or both. As a

result, real-time final settlement

eliminates the complexity and potential

systemic risks of an end-of-day

settlement failure that could lead to a

general unwinding of CHIPS payments.

In addition, the real-time final

settlement of new CHIPS reduces credit

and liquidity risks.

To accomplish real-time final

settlement, each CHIPS participant must

transfer (directly or through another

participant) a predetermined amount

into the CHIPS ‘‘prefunded balance

account’’ on the books of FRBNY. While

new CHIPS settles all of the payment

orders when they are released, some

payment orders remain unreleased at

the end of the day. These payment

orders are netted and set off against one

another on a multilateral basis, with

each participant in a net debit closing

position transferring the amount of its

closing position requirement into the

prefunded balance account. Many

CHIPS participants use Federal Reserve

daylight credit to pay their end-of-day

closing position requirements on CHIPS.

Some of these participants have stated

that making these Fedwire payments

has, on occasion, increased their

demand for intraday credit.

CLS Bank

CLS Bank is being designed as a

multi-currency facility for settling

foreign exchange transactions. Under

the proposed procedures, participating

institutions will be required to make

daily U.S. dollar payments to CLS Bank

over Fedwire during the early hours of

the Fedwire funds transfer operating

day. Because U.S. financial money

markets are not currently active during

those hours, a number of CLS members

assert that they will use Federal Reserve

daylight credit to fund their CLS-related

payment obligations and have requested

that the Federal Reserve grant them

additional intraday credit.10

30202 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

11Federal Reserve systems in place today would

not be effective for monitoring the collateralization

of ACH credit transactions over several days.

12The Board notes that the majority of Federal

Reserve daylight credit extensions are currently

implicitly collateralized because depository

institutions that have pledged collateral must sign

Operating Circular 10, which provides the Reserve

Banks with a secured interest in any collateral

recorded on the Reserve Banks’ books.

13The term ‘‘U.S. capital equivalency’’ is used in

this context to refer to the particular capital

measure used to calculate daylight overdraft net

debit caps and does not necessarily represent an

appropriate capital measure for supervisory or other

purposes.

14Liabilities to nonrelated parties include

acceptances but excludes accrued expenses and

amounts due and other liabilities to offices,

branches, and subsidiaries of the foreign bank.

15The Administrative Reserve Bank is

responsible for managing an institution’s account

relationship with the Federal Reserve.

16Book-entry daylight overdrafts become

‘‘frequent and material’’ when an account holder

exceeds its net debit cap, due to book-entry

securities transactions, by more than 10 percent of

its capacity and on more than three days in any two

consecutive reserve maintenance periods.

17These transactions include Fedwire funds and

book-entry securities transfers, enhanced net

settlement service transactions, and ACH credit

originations (beginning in mid-2001).

ACH Settlement-Day Finality In

November 1999, the Board announced a

decision to make the settlement of ACH

credit transactions processed by the

Federal Reserve final when posted to

the accounts of the receivers, which is

currently 8:30 a.m. ET on the day of

settlement (64 FR 62673, November 17,

1999). The Board noted that, in order to

protect the Federal Reserve from the

credit risk of granting finality to

receiving depository institutions, the

Reserve Banks would require settling

depository institutions that are

monitored in real time to prefund the

total of their ACH credit originations

before the transactions are processed.

Settlement-day finality for ACH credit

transactions reduces risk to receiving

depository institutions and receivers

while the prefunding requirement

permits the Reserve Banks to manage

their settlement risk for ACH credit

transactions as they do for other services

with similar finality features.

When the Board requested comment

on the ACH finality proposal, a number

of depository institutions asked that the

Federal Reserve allow the flexibility of

posting collateral as an alternative to the

prefunding requirement (63 FR 70132,

December 18, 1998). The Board noted

that allowing collateral to cover nonsecurities related overdrafts was not in

accordance with the PSR policy. The

Board, however, also indicated that it

would consider the commenters’ request

in future reviews of its PSR policies.

Under the conditions described in this

interim policy, some depository

institutions submitting ACH credit

transactions on the day of settlement

will be able to secure additional

daylight overdraft capacity.11

B. Collateralized Daylight Overdraft

Capacity

Depository institutions with selfassessed net debit caps that wish to

expand their daylight overdraft capacity

levels by pledging collateral should

consult with their Reserve Banks. In

developing guidelines for approving

maximum limits on collateralized

daylight overdraft capacity beyond net

debit cap levels, the Board and Reserve

Bank staff will consider financial and

supervisory information. The financial

and supervisory information may

include, but is not limited to, potential

daylight credit usage, capital and

liquidity ratios, the composition of

balance sheet assets, CAMELS or other

supervisory ratings and assessments,

and the Strength of Support Assessment

rankings for U.S. branches and agencies

of foreign banks.

Depository institutions may pledge

the same types of collateral they do

today for discount window or PSR

purposes. In addition, the Board

believes that it would be reasonable for

depository institutions to use collateral

pledged to the discount window for

additional daylight overdraft capacity

and notes that more than 25 percent of

account holders already have collateral

pledged to the Reserve Banks.12 While

several hundred depository institutions

have collateral pledged to the Federal

Reserve, the Board expects that very few

depository institutions will seek to

expand their daylight overdraft capacity

levels by pledging collateral because

approximately 97 percent of all account

holders use less than 50 percent of their

net debit caps for their average peak

overdrafts. This modification of the PSR

policy, allowing depository institutions

with self-assessed net debit caps to

pledge collateral for extra daylight

overdraft capacity, affects other areas of

the policy, including the policy’s

treatment of U.S. branches and agencies

of foreign banks, book-entry securities

transfers, and account monitoring

procedures.

U.S. Branches and Agencies of Foreign

Banks

For U.S. branches and agencies of

foreign banks, net debit caps on daylight

overdrafts in Federal Reserve accounts

are calculated by applying the cap

multiples for each cap category to a

foreign banking organization’s (FBO’s)

consolidated ‘‘U.S. capital

equivalency.’’13 U.S. capital

equivalency is calculated in one of

several ways. In the case of FBOs whose

home-country supervisors adhere to the

Basle Capital Accord, U.S. capital

equivalency is equal to the greater of 10

percent of worldwide capital or 5

percent of the liabilities to nonrelated

parties of each agency or branch.14 For

FBOs whose home-country supervisors

do not adhere to the Basle Capital

Accord, U.S. capital equivalency is

measured as the greater of (1) the sum

of the amount of capital (but not

surplus) that would be required of a

national bank being organized at each

agency or branch location, or (2) the

sum of 5 percent of the liabilities to

nonrelated parties of each agency or

branch.

The current policy allows U.S.

branches and agencies of FBOs whose

home-country supervisors do not adhere

to the Basle Capital Accord to incur

daylight overdrafts above their net debit

caps up to a maximum amount equal to

their cap multiples times 10 percent of

their FBOs’ capital, provided that any

overdrafts above the net debit caps are

collateralized. The interim policy offers

all foreign banks, under terms that

reasonably limit Reserve Bank risk, a

level of overdrafts based on the same

proportion of worldwide capital. Under

the interim policy statement, the above

distinction is no longer pertinent

because any U.S. branch or agency of a

foreign bank that has a self-assessed net

debit cap and that would like to access

daylight credit above its net debit cap

level may consult with its

Administrative Reserve Bank to discuss

an appropriate daylight overdraft

capacity level.15 In addition, a notice

published elsewhere in today’s Federal

Register requests comment on the net

debit cap calculation for U.S. branches

and agencies of foreign banks (Docket

No. R–1108).

Book-Entry Securities Transactions

The current policy stipulates that

depository institutions with book-entry

securities overdrafts that meet the

frequency and materiality thresholds

must fully collateralize these overdrafts,

not only the overdraft amount that

exceeds the net debit cap level.16 Under

the interim policy statement, the Board

is eliminating the frequent and material

collateralization requirement for selfassessed depository institutions’ bookentry securities overdrafts. Instead, the

policy statement will allow Reserve

Banks to require collateral from selfassessed depository institutions that

frequently exceed their caps as a result

of transactions with settlement-day

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30203

18Under the interim policy, ‘‘frequently’’ will

continue to mean more than three days in any two

consecutive reserve maintenance periods. In the

vast majority of cases where depository institutions’

overdrafts exceed their net debit cap levels, the

materiality threshold is met. The Board, therefore,

is eliminating the ‘‘materiality’’ criteria entirely

from the policy because it has little practical

purpose.

19Currently there are no depository institutions

with exempt-from-filing or de minimis caps that are

required to pledge collateral for book-entry

securities overdrafts as a result of meeting the

frequency and materiality criteria.

19Currently there are no depository institutions

with exempt-from-filing or de minimis caps that are

required to pledge collateral for book-entry

securities overdrafts as a result of meeting the

frequency and materiality criteria.

20 In October 1994, the Board approved

administrative counseling flexibility for institutions

that continue to exceed their net debit caps due to

the posting of non-Fedwire transactions (59 FR

27122, November 2, 1994).

21These procedures are described in the Board’s

policy statement ‘‘The Federal Reserve in the

Payments System,’’ as revised in March 1990. (55

FR 11648, March 29, 1990).

finality.17 18 While the interim policy

statement requires collateralization of

overdrafts only above net debit cap

levels, which could increase the Federal

Reserve’s credit exposure, the Board

believes an increase in Federal Reserve

credit risk would be minimal given that

very few institutions that participate in

the government-securities market meet

the frequent and material criteria. The

Board also believes that eliminating the

frequent and material collateralization

requirement for book-entry securities

overdrafts specifically and developing

guidelines that require collateralization

of overdrafts above net debit cap levels

regardless of the cause would simplify

administration of and compliance with

the policy.

The changes described above do not

apply to institutions with exempt-fromfiling or de minimis net debit caps.

Under the interim policy, the Board

plans to continue to allow depository

institutions with exempt-from-filing or

de minimis caps to collateralize

voluntarily all or part of their bookentry securities overdrafts. The Board

also intends to continue:

• Requiring depository institutions

with exempt-from-filing or de minimis

caps that frequently exceed their caps,

even if only partly because of bookentry securities transactions, to

collateralize all of their book-entry

securities overdrafts.

• Prohibiting depository institutions

with exempt-from-filing or de minimis

caps to pledge collateral to increase

their daylight overdraft capacity for

funds overdrafts.

• Requiring depository institutions

with zero caps that have access to the

discount window to collateralize fully

all book-entry securities overdrafts.

With the adoption of a final policy

statement, the Board intends to

eliminate the current policy’s separate

treatment of book-entry securities

overdrafts. The policy will require any

depository institution with an exemptfrom-filing or de minimis cap to apply

for a higher net debit cap if the

institution frequently exceeds its cap

because of transactions with settlementday finality. The Board believes that

such a change would simplify

administration and compliance with the

policy. Furthermore, the Board notes

that very few depository institutions

(currently there are six) with exemptfrom-filing or de minimis caps

voluntarily hold collateral to cover their

book-entry securities overdrafts and

would not be adversely affected by the

proposed policy change.19

Account Monitoring

Currently, a depository institution’s

funds and book-entry securities

overdrafts are combined for purposes of

determining the institution’s

compliance with its cap. Under the ex

post monitoring procedures, the Reserve

Banks contact and counsel institutions

with net debit positions in excess of

their caps, discussing ways to reduce

their excessive use of intraday credit.

Each Reserve Bank retains the right to

protect its risk exposure from individual

institutions by unilaterally reducing net

debit cap levels, imposing

collateralization or clearing-balance

requirements, holding or rejecting

Fedwire transfers or enhanced net

settlement service transactions during

the day until the institution has

collected balances in its Federal Reserve

account, or, in extreme cases,

prohibiting it from using Fedwire.

The Board does not intend to modify

significantly the Federal Reserve’s ex

post monitoring procedures. The Board

notes, however, that three aspects of the

ex post monitoring procedures warrant

clarification with implementation of the

interim policy. First, the Reserve Banks

will monitor the net debit positions of

depository institutions with selfassessed caps that choose to pledge

collateral voluntarily for additional

overdraft capacity against these

institutions’ daylight overdraft capacity

levels and not their net debit cap levels.

Second, Reserve Banks may require

depository institutions with selfassessed net debit caps that frequently

exceed their daylight overdraft capacity

levels to collateralize the difference

between their peak daylight overdrafts

and their net debit cap levels.

Depository institutions have some

flexibility as to the specific types of

collateral they may pledge to the

Reserve Banks; all collateral, however,

must be acceptable to the Reserve

Banks.

Finally, the policy will continue to

allow administrative counseling

flexibility for institutions that frequently

exceed their net debit caps due to the

posting of transactions that do not have

settlement-day finality, such as checks

and ACH debit originations.20 Escalated

counseling or requiring collateral for

daylight overdrafts caused by these

transactions may be of limited use in

reducing associated overdrafts.

III. Request for Comment

The Board requests comment on all

aspects of the interim policy statement.

The Board is also requesting specific

comments on the following questions:

1. What are the benefits and

drawbacks of allowing depository

institutions with self-assessed net debit

caps to pledge collateral for additional

daylight overdraft capacity?

2. Would a policy change that

requires depository institutions with

exempt-from-filing and de minimis caps

to apply for higher net debit caps if they

frequently exceed their caps because of

book-entry securities transfers simplify

the policy or create an undue burden?

3. Would the interim policy cause

institutions to pledge additional

collateral to the Federal Reserve or

would they primarily use collateral

already pledged to a Reserve Bank?

IV. Competitive Impact Analysis

The Board has established procedures

for assessing the competitive impact of

rule or policy changes that have a

substantial impact on payments system

participants.21 Under these procedures,

the Board assesses whether a change

would have a direct and material

adverse effect on the ability of other

service providers to compete effectively

with the Federal Reserve in providing

similar services due to differing legal

powers or constraints, or due to a

dominant market position of the Federal

Reserve deriving from such differences.

If no reasonable modifications would

mitigate the adverse competitive effects,

the Board will determine whether the

expected benefits are significant enough

to proceed with the change despite the

adverse effects.

The Board does not believe that the

broader use of collateral for daylight

overdraft purposes will have a direct

and material effect on the ability of

other service providers to compete with

the Reserve Banks’ payments services.

The Board notes that the interim policy

30204 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

18Funds overdrafts refer to overdrafts caused by

funds transfers as well as NSS, TIP, cash, ACH, and

check transactions.

statement is intended to facilitate the

smooth functioning of private-sector

payment systems.

V. 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.

VI. Federal Reserve Policy Statement

on Payments System Risk

The ‘‘Federal Reserve Policy

Statement on Payments System Risk,’’

section I is amended, effective DATE, as

follows with changes identified by

italics:

I. FEDERAL RESERVE POLICY

A. Daylight overdraft definition

B. Pricing

C. Capital

1. U.S.-chartered institutions

2. U.S. agencies and branches of

foreign banks

D. Net debit caps

1. Cap set through self-assessment

2. De minimis cap

3. Exemption from filing

4. Special situations

a. Edge and agreement corporations

b. Bankers’ banks

c. Limited-purpose trust companies

d. Zero-cap depository institutions

E. Collateral

F. Book-entry securities transactions

1. Collateralization

2. Transfer-size limit

G. Monitoring

1. Ex post

2. Real time

3. Multi-District institutions

4. ACH controls

The last paragraph in section I.C.2.,

under the heading ‘‘U.S. agencies and

branches of foreign banks,’’ has been

deleted, effective DATE.

A new heading ‘‘Collateral’’ and text

have been added to read as follows in

section I.E., effective DATE:

E. Collateral

Depository institutions with selfassessed net debit caps may pledge

collateral to their Administrative

Reserve Banks to secure daylight

overdraft capacity in excess of their net

debit caps. The Reserve Banks will work

with self-assessed depository

institutions that request additional

daylight overdraft capacity to decide on

the appropriate maximum daylight

overdraft capacity levels, that is, net

debit cap levels plus allowable

collateralized credit. Depository

institutions have some flexibility as to

the specific types of collateral they may

pledge to the Reserve Banks; all

collateral, however, must be acceptable

to the Reserve Banks. Depository

institutions with exempt-from-filing and

de minimis net debit caps may not

obtain additional capacity by pledging

collateral. These depository institutions

must perform a self-assessment of their

creditworthiness, intraday funds

management and control, customer

credit policies and controls, and

operating controls and contingency

procedures to support a higher daylight

overdraft cap.

In addition, Reserve Banks may

require depository institutions with selfassessed net debit caps that frequently

exceed their caps due to transactions

with settlement-day finality to

collateralize the difference between

their peak daylight overdrafts and their

net debit cap levels. For the purposes of

this policy, ‘‘frequently’’ means more

than three occasions in two consecutive

reserve-maintenance periods.

The policy allows administrative

counseling flexibility for most

institutions that frequently exceed their

net debit caps because of the posting of

transactions that lack settlement-day

finality, such as checks and ACH debit

originations. The Board’s policy on net

debit caps is intended to address

intraday risk to the Federal Reserve

arising from daylight overdrafts. Most

transactions that lack settlement-day

finality, however, pose primarily

interday, rather than intraday, risk.

Escalated counseling or requiring

collateral for daylight overdrafts caused

by these transactions may be of limited

use in reducing associated overdrafts.

Under administrative counseling

flexibility, the Reserve Banks work with

affected institutions on means of

avoiding daylight overdrafts, but

generally do not subject these

institutions to escalated levels of

counseling, require collateral, or assign

a zero cap.

Section I.F.1., under the heading

‘‘Collateralization’’ is replaced, effective

DATE, to read as follows:

F. Book-Entry Securities Transactions

1. Collateralization

A depository institution’s funds and

book-entry securities overdrafts are

combined for purposes of determining

an institution’s compliance with its

cap.18 The policy requires depository

institutions with exempt-from-filing or

de minimis caps that frequently exceed

their caps, even if only partly because

of book-entry securities transactions, to

collateralize all of their book-entry

securities overdrafts. For the purposes

of this policy, ‘‘frequently’’ means on

more than three occasions in two

consecutive reserve-maintenance

periods. To determine whether an

institution exceeds its net debit cap

because of book-entry securities

transactions, the Reserve Bank

determines what activity in an

institution’s Federal Reserve account is

attributable to funds transfers and other

payment transactions and what activity

is attributable to book-entry securities

transactions. A book-entry securities

overdraft occurs when an institution’s

book-entry securities balance, less any

credit in its funds balance, is a net debit.

In addition, all depository institutions

with exempt-from-filing or de minimis

caps may collateralize all or part of their

book-entry securities overdrafts. Such

secured overdrafts shall not be included

with those overdrafts measured against

their caps. For example, a depository

institution with a de minimis cap of $50

million and a $30 million overdraft—

$15 million due to funds transfers and

$15 million due to book-entry securities

transfers—would ordinarily have excess

capacity of $20 million. Such an

institution may increase its excess

capacity by $15 million by

collateralizing all of its book-entry

securities overdrafts (or may increase its

excess capacity by less than $15 million

by collateralizing some portion of its

book-entry securities overdrafts). Such

an institution may not increase its cap

of $50 million by over-collateralizing its

book-entry securities overdrafts or by

collateralizing any part of its funds

overdrafts.

Section I.G.1., under the heading ‘‘Ex

Post’’ is amended, effective DATE, as

follows with changes identified by

italics:

G. Monitoring

1. Ex Post

Under the ex post monitoring

procedure, an institution with a net

debit position in excess of its cap or

daylight overdraft capacity level will be

contacted by its Reserve Bank. The

Reserve Bank will counsel the

institution, discussing ways to reduce

its excessive use of intraday credit. Each

Reserve Bank retains the right to protect

its risk exposure from individual

institutions by unilaterally reducing

Fedwire caps, imposing collateralization

or clearing-balance requirements,

holding or rejecting Fedwire transfers

during the day until the institution has

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30205

1U.S. branches and agencies of foreign banks are

entities contained within and controlled by a

foreign banking organization. For the definition of

‘‘branch’’ and ‘‘agency’’, refer to 12 U.S.C. 3101 and

12 CFR.

2The net debit cap classes and their associated

single-day multiples are a zero cap (0), an exemptfrom-filing cap (equal to the lesser of $10 million

or 0.2 times a capital measure), a de minimis cap

(0.4); and three self-assessed caps, average (1.125),

above average (1.875), and high (2.25). A net debit

cap is calculated for the FBO and then distributed

among its U.S. branches and agencies at the

discretion of the FBO and the Administrative

Reserve Bank.

3The Administrative Reserve Bank is responsible

for managing an institution’s account relationship

with the Federal Reserve.

4The BCA was developed by the Basel Committee

on Banking Supervision and endorsed by the

central bank governors of the Group of Ten

countries. The BCA provides a framework for

assessing the capital adequacy of a depository

institution by risk weighting its assets and offbalance sheet exposures primarily based on credit

risk.

5Liabilities to nonrelated parties include

acceptances, but exclude accrued expenses and

mounts due and other liabilities to offices,

branches, and subsidiaries of the foreign bank of

each agency or branch.

collected balances in its Federal Reserve

account, or, in extreme cases, taking the

institution off-line or prohibiting it from

using Fedwire.

By order of the Board of Governors of the

Federal Reserve System, May 30, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–13978 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–1108]

Policy Statement on Payments System

Risk; Daylight Overdraft Capacity for

Foreign Banking Organizations

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Request for comment on policy.

SUMMARY: The Board is requesting

comment on proposed changes to its

payments system risk (PSR) policy. The

proposal would modify the criteria used

to determine the U.S. capital

equivalency for foreign banking

organizations (FBOs). Specifically, the

proposed policy would (1) eliminate the

Basel Capital Accord (BCA) criteria used

in the current policy to determine U.S.

capital equivalency for FBOs, (2) replace

the BCA criteria with the strength of

support assessment (SOSA) rankings

and financial holding company (FHC)

status in determining U.S. capital

equivalency for FBOs, and (3) raise the

percentage of capital used in calculating

U.S. capital equivalency for certain

FBOs.

EFFECTIVE DATE: Comments must be

received by August 6, 2001.

ADDRESSES: Comments, which should

refer to Docket No. R–1108, may be

mailed to Ms. Jennifer J. Johnson,

Secretary, Board of Governors of the

Federal Reserve System, 20th and C

Streets, NW, Washington, DC 20551 or

mailed electronically to

regs.comments@federalreserve.gov.

Comments addressed to Ms. Johnson

also may be delivered to the Board’s

mailroom between 8:45 a.m. and 5:15

p.m. and to the security control room

outside of those hours. Both the

mailroom and the security control room

are accessible from the courtyard

entrance on 20th Street between

Constitution Avenue and C Street, NW.

Comments may be inspected in Room

MP–500 between 9 a.m. and 5 p.m.

weekdays, pursuant to § 261.12, except

as provided in § 261.14, of the Board’s

Rules Regarding Availability of

Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Paul

Bettge, Associate Director (202/452–

3174), Stacy Coleman, Manager (202/

452–2934), Myriam Payne, Project

Leader (202/452–3219), or Adam

Minehardt, Financial Services Analyst

(202/452–2796), Division of Reserve

Bank Operations and Payment Systems,

Board of Governors of the Federal

Reserve System.

SUPPLEMENTARY INFORMATION: This is

one of five notices regarding payments

system risk that the Board is issuing for

public comment today. Two near-term

proposals concern modifications to the

procedures for posting electronic check

presentments to depository institutions’

Federal Reserve accounts for purposes

of measuring daylight overdrafts (Docket

No. R–1109) and the book-entry

securities transfer limit (Docket No. R–

1110). In addition, the Board is

requesting comment on the benefits and

drawbacks to several potential longerterm changes to the Board’s policy,

including lowering self-assessed net

debit caps, eliminating the two-week

average caps, implementing a two-tiered

pricing system for collateralized and

uncollateralized daylight overdrafts, and

rejecting payments with settlement-day

finality that would cause an institution

to exceed its daylight overdraft capacity

level (Docket No. R–1111). The Board is

also issuing today an interim policy

statement and requesting comment on

the broader use of collateral for daylight

overdraft purposes (Docket No. R–1107).

Furthermore, to reduce burden

associated with the PSR policy, the

Board recently rescinded the

interaffiliate transfer (Docket No. R–

1106) and third-party access policies

(Docket No. R–1100).

The Board requests that in filing

comments on these proposals,

commenters prepare separate letters for

each proposal, identifying the

appropriate docket number on each.

This will facilitate the Board’s analysis

of all comments received.

I. Background

In April 1985, the Board adopted a

policy to reduce risk on large-dollar

payments systems (50 FR 21120, May

22, 1985). This policy established

maximum amounts of uncollateralized

daylight credit, or net debit caps, that

depository institutions are permitted to

incur in their Federal Reserve accounts.

Net debit caps for U.S. branches and

agencies of foreign banks are calculated

in the same manner as for domestic

banks, by applying cap multiples from

one of the six cap classes to a capital

measure.1 2 A depository institution’s

cap class and associated cap multiple

either are determined through a selfassessment or a board-of-directors

resolution or are assigned by the

Administrative Reserve Bank.3 All net

debit caps, including those requested by

an institution’s board of directors, are

granted at the discretion of the Federal

Reserve. Under the current policy, the

Federal Reserve Banks apply the cap

multiple to 100 percent of domestic

depository institutions’ risk-based (or

equivalent) capital. The capital measure

used for an FBO, known as the U.S.

capital equivalency, however, is

substantially less than the FBO’s total

capital.

In 1987, the Board considered and

decided against changing the original

definition of U.S. capital equivalency

(52 FR 29255, August 6, 1987). At the

request of several FBOs, however, the

Board requested comment again in June

1989 on alternatives for determining

FBOs’ U.S. capital equivalency used in

calculating net debit caps for U.S.

branches and agencies of foreign banks

(54 FR 26108, June 21, 1989). After

further analysis, in 1991, the Board

adopted the current policy based on the

BCA distinction (55 FR 22095, May 31,

1990).4

FBOs from countries that adhere to

the BCA are currently eligible to use as

their U.S. capital equivalency the

greater of 10 percent of their capital or

5 percent of their liabilities to

nonrelated parties.5 FBOs from

countries that do not adhere to the BCA

may use as their U.S. capital

equivalency the greater of 5 percent of