30208 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

15Reporting Form FFIEC 002/002S. Report of

Assets and Liabilities of U.S. Branches and

Agencies of Foreign Banks. Schedule RAL—Assets

and Liabilities: Liabilities: item 4—‘‘Liabilities to

nonrelated parties’’ and item 5—‘‘Net due to related

depository institutions.’’ 16SOSA 3-ranked FBOs would not be required to

file FR 2225 because they would not be eligible to

base their U.S. capital equivalency on capital. 17 In 1998, the Board surveyed FBOs that filed FR

2225 to estimate the burden to the public of

completing the form. As a result of the survey, the

Board estimated the annual burden of completing

FR 2225 to be one hour per FBO.

18These assessment procedures are described in

the Board’s policy statement entitled ‘‘The Federal

Reserve in the Payments System’’ (55 FR 11648,

March 29, 1990).

related depository institutions.’’ 15

‘‘Liabilities to nonrelated parties’’ may

increase relative to assets when an

institution becomes financially weaker

and could unduly increase the

institution’s overdraft capacity. ‘‘Net

due to related depository institutions’’

reflects the amounts owed to the parent

by the branch and can be viewed as the

capital investment by the FBO parent in

its U.S. operations. In addition, the

Board notes that this policy change

would not affect any SOSA 3-ranked

FBOs at this time.

C. Capital Reporting

In order to comply with the proposed

policy changes, most U.S. branches and

agencies of foreign banks requesting a

net debit cap will need to complete the

form ‘‘Annual Daylight Overdraft

Capital Report for U.S. Branches and

Agencies of Foreign Banks’’ (form FR

2225) to report capital that is used as the

basis for their caps.16 Given that the

form is short and does not require any

calculations, the Board believes the cost

of completing this form is not

significant or burdensome. Currently,

only five FBOs that have nonzero net

debit caps do not file form FR 2225.

These five FBOs would have to submit

form FR 2225 to comply with the

revised policy.17

IV. Request for Comment

The Board requests comments on all

aspects of the proposed policy changes

outlined above. The Board is also

requesting comments on the following

questions:

1. If the proposed policy changes are

adopted, will the resulting net debit cap

levels combined with the broader use of

collateral outlined in the interim policy

statement also published today for

comment (Docket No. R–1107) provide

a reasonable and prudent level of

daylight overdraft capacity to address

the liquidity needs of FBOs?

2. Recognizing differences in risk

between FBOs and domestic depository

institutions, would the proposed policy

provide FBOs appropriate access to the

U.S. payments system?

3. With regard to calculating U.S.

capital equivalency, is ‘‘net due to

related depository institutions’’ an

appropriate proxy for SOSA 3-ranked

FBOs’ U.S. capital equivalency?

V. Competitive Impact Analysis

Under its competitive equity policy,

the Board assesses the competitive

impact of changes that have a

substantial effect of payments system

participants.18 The Board believes these

modifications to its payments system

risk program will have no adverse effect

on the ability of other service providers

to compete effectively with the Federal

Reserve Banks in providing similar

services.

VI. 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 request for

comments under the authority delegated

to the Board by the Office of

Management and Budget. The collection

of information pursuant to the

Paperwork Reduction Act contained in

the policy statement will not unduly

burden depository institutions.

VII. Federal Reserve Policy Statement

on Payments System Risk

The Board proposes to replace section

I.C.2. of the ‘‘Federal Reserve Policy

Statement on Payments System Risk’’ as

follows:

2. 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)

U.S. capital equivalency.10

• For FBOs that are financial holding

companies (FHCs), U.S. capital

equivalency is equal to 35 percent of

capital.

• For FBOs that are not FHCs and

have a strength of support assessment

ranking (SOSA) of 1, U.S. capital

equivalency is equal to 25 percent of

capital.

• For FBOs that are not FHCs and are

ranked a SOSA 2, U.S. capital

equivalency is equal to 10 percent of

capital.

• For FBOs that are not FHCs and are

ranked a SOSA 3, U.S. capital

equivalency is equal to 5 percent of the

FBO’s ‘‘net due to related depository

institutions.’’

Given the heightened supervisory

concerns associated with SOSA 3-

ranked FBOs, a Reserve Bank may deny

a SOSA 3-ranked FBO access to intraday

credit. In the event a Reserve Bank

grants a net debit cap to a SOSA 3-

ranked FBO, the Reserve Bank may

require the net debit cap to be fully

collateralized.

lll10 The 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.

By order of the Board of Governors of the

Federal Reserve System, May 30, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–13979 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–1111]

Policy Statement on Payments System

Risk; Potential Longer-Term Policy

Direction

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Request for comment on policy.

SUMMARY: The Board is requesting

comment on the benefits and drawbacks

of various policy options that it is

evaluating as part of a potential longerterm direction for its payments system

risk (PSR) policy. The longer-term

policy options include the following: (1)

Lowering single-day net debit cap levels

to approximately the current two-week

average cap levels and eliminating the

two-week average net debit cap, (2)

implementing a two-tiered pricing

regime for daylight overdrafts such that

institutions pledging collateral to the

Reserve Banks pay a lower fee on their

collateralized daylight overdrafts than

on their uncollateralized daylight

overdrafts, and (3) monitoring in real

time all payments with settlement-day

finality and rejecting those payments

that would cause an institution to

exceed its net debit cap or daylight

overdraft capacity level.

EFFECTIVE DATE: Comments must be

received by October 1, 2001.

ADDRESSES: Comments, which should

refer to Docket No. R–1111, 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.

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30209

1To facilitate the pricing of daylight overdrafts,

the Federal Reserve 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.

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 9:00 a.m. and 5:00

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), or John Gibbons, Senior

Financial Services Analyst (202/452–

6409), 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). 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

Beginning in 1985, the Board adopted

and subsequently modified 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. An integral component

of the PSR policy was to control

depository institutions’ use of intraday

Federal Reserve credit, commonly

referred to as ‘‘daylight credit’’ or

‘‘daylight overdrafts.’’ The Board

intended to address the Federal

Reserve’s risk as well as risks to various

types of private-sector networks,

primarily large-dollar 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

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 might

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).

In subsequent years, the Federal Reserve

modified and expanded the original PSR

policy by reducing net debit cap levels

and addressing the risk controls for

activities such as book-entry securities

transfers, large-dollar multilateral

netting systems, and certain private

securities clearing and settlement

systems.

In 1986, the Board requested

comment on reducing net debit cap

levels (51 FR 45050, December 15,

1986). At that time, the Board noted that

it purposely set the original net debit

cap levels relatively high so that

institutions and examiners could gain

experience with the caps. In 1987, the

Board announced that it would reduce

cap levels by 25 percent and stated that

it would evaluate further reductions in

the future (52 FR 29255, August 6,

1987). In May 1990, the Board issued a

revised policy statement that

incorporated the exempt-from-filing net

debit cap, changed the existing de

minimis cap, and included book-entry

securities transfers in measuring

institutions’ overdrafts against their

caps (55 FR 22087 and 22092, May 31,

1990).

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).

The fee was to be phased in as 24 basis

points in 1994, 48 basis points in 1995,

and 60 basis points in 1996. The

purpose of the fee was to encourage

behavior that would reduce risk and

increase efficiency in the payments

system. The Board approved the

proposed policy change in 1992 and

began pricing daylight overdrafts in

April 1994 (57 FR 47084, October 14,

1992).1

In March 1995, the Board decided to

raise the daylight overdraft fee to 36

basis points instead of the 48 basis

points originally announced (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.

In considering its commitment 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, is conducting a

broad review of the Federal Reserve’s

daylight credit policies. During the

course of its review, the Board has

evaluated the effectiveness of the

current daylight credit policies and

determined that these policies appear to

be generally effective in reducing risk to

the Federal Reserve and creating

incentives for depository institutions to

control and 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.

30210 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

2The self-assessment requires an institution to

evaluate and rate its creditworthiness, intraday

funds management and controls, customer credit

policies and controls, operating controls, and

contingency procedures to support a higher

daylight overdraft cap.

3The net debit cap for the exempt-from-filing

category is equal to the lesser of $10 million or 20

percent of risk-based capital.

4Approximately 300 depository institutions

currently have self-assessed caps. Of these

depository institutions, approximately 20 percent

use more than 70 percent of their overdraft capacity

for their peak overdrafts. The majority of

institutions using more than 70 percent of their

daylight overdraft capacity for their peak overdrafts

are doing so because of substantial non-Fedwire

payment activity. The current policy provides

‘‘counseling flexibility’’ for depository institutions

with de minimis and self-assessed caps that exceed

their net debit caps as a result of certain nonFedwire payment activity. Most of the institutions

referenced above would fall into this category. The

Federal Reserve, therefore, would not subject

depository institutions that are provided counseling

flexibility to additional counseling for certain nonFedwire related cap breaches and would not require

these institutions to post collateral or adopt a zero

cap.

5Published elsewhere in today’s Federal Register

is the Board’s interim policy statement that allows

depository institutions with self-assessed caps to

pledge collateral above their net debit caps for

additional daylight overdraft capacity.

As part of this review, the Board

refined the objective that would guide

its formulation and evaluation of

daylight credit policies. The Board’s

daylight credit policy objective is to

attain an efficient balance among the

costs and risks associated with the

provision of Federal Reserve intraday

credit, including the comprehensive

costs and risks to the private sector of

managing Federal Reserve account

balances, and the benefits of intraday

liquidity. The Board used certain

criteria to evaluate the effectiveness of

policy options. These criteria include

credit risk to the public sector, Federal

Reserve resource costs of monitoring

and counseling credit usage, privatesector resource costs of monitoring

credit usage, payment delays and

gridlock, and private-sector opportunity

costs.

II. Potential Longer-Term Policy Options

A. Net Debit Cap Levels

The Board is evaluating the benefits

and drawbacks of reducing self-assessed

single-day net debit caps to levels near

those of the current two-week average

caps and eliminating the two-week

average net debit caps. Under the

Board’s PSR policy, the Reserve Banks

establish limits or net debit caps on the

maximum amount of uncollateralized

daylight credit that depository

institutions may incur in their Federal

Reserve accounts. Net debit caps are

calculated by applying a cap multiple

from one of six cap classes to a

depository institution’s capital measure.

(See Cap Multiple Matrix below.) A

Reserve Bank may assign the exemptfrom-filing cap without a depository

institution taking any action. A

depository institution may request a de

minimis cap by submitting a board-ofdirectors resolution to its Reserve Bank,

or the institution may request a selfassessed cap (average, above average,

and high) by completing a selfassessment.2 Reserve Banks may assign

a zero cap in consideration of certain

factors, or a depository institution that

wants to restrict its own use of Federal

Reserve daylight credit may request a

zero cap.

When the Board adopted its net debit

cap framework in 1985, it implemented

two cap multiples for depository

institutions with self-assessed caps: one

for the maximum allowable overdraft on

any day (single-day cap) and one for the

maximum allowable average of the peak

daily overdrafts in a two-week period

(two-week average cap). The Federal

Reserve implemented the higher singleday cap to limit excessive daylight

overdrafts on any day and to ensure that

institutions develop internal controls

that focus on daily exposures. The

purpose of the two-week average cap

was to reduce the overall levels of

overdrafts while allowing for daily

payment fluctuations.

CAP MULTIPLE MATRIX

Cap categories

Cap multiples

Single day Two-week average

Zero ................................................................................................................................ 0 ......................................... 0

Exempt-from-filing 3 ........................................................................................................ $10 million or 0.20 ............. $10 million or 0.20

De minimis ..................................................................................................................... 0.40 .................................... 0.40

Average .......................................................................................................................... 1.125 .................................. 0.75

Above average ............................................................................................................... 1.875 .................................. 1.125

High ................................................................................................................................ 2.25 .................................... 1.50

As 3 part of the Board’s current PSR

policy review and its commitment to

evaluate further cap reductions, the

Board reviewed depository institutions’

use of their daylight overdraft capacity.

The Board found that more than 96

percent of institutions with self-assessed

net debit caps use less than 50 percent

of their daylight overdraft capacity for

their average peak overdrafts.4 To

evaluate further the effects of reducing

the single-day net debit cap to about the

two-week average net debit cap, Board

staff compared depository institutions’

daily peak overdrafts with their

respective two-week average caps.

Compared with the current single-day

net debit cap, an additional 7 percent of

depository institutions with selfassessed caps (approximately twenty)

would regularly exceed their single-day

net debit cap if it were reduced to the

two-week average levels. If depository

institutions that have pledged collateral

with the Reserve Banks were to use their

collateral to increase their daylight

overdraft capacity, less than 4 percent

(approximately twelve) more depository

institutions would regularly exceed

their reduced net debit caps.5 In

addition, some of these institutions

would exceed their reduced net debit

caps because of certain non-Fedwire

activity. These depository institutions

would likely be eligible for counseling

flexibility. Because few account holders

with self-assessed caps would regularly

exceed a net debit cap reduced to the

two-week average levels, it appears that

most depository institutions generally

manage their daily overdraft activity

within the two-week average cap level.

This analysis suggests that current

single-day net debit cap levels may

commit Reserve Banks to potential

credit exposures in excess of what is

needed to facilitate the smooth

operation of the payment system. The

Board believes that in conjunction with

allowing institutions with self-assessed

net debit caps to pledge collateral for

daylight overdraft capacity above their

caps, reducing self-assessed net debit

caps could improve the balance between

the public-sector costs of providing

daylight credit and the net privatesector benefits of using daylight credit.

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30211

6The current daylight overdraft fee is 36 basis

points, quoted as an annual rate on the basis of a

24-hour day. To obtain the daily overdraft fee for

the standard Fedwire operating day, the 36-basispoint fee is multiplied by the fraction of the 24-hour

day during which Fedwire is scheduled to operate.

For example, under the current 18-hour Fedwire

operating day, the daylight overdraft fee equals 27

basis points.

7The current policy requires that ‘‘frequent and

material’’ book-entry securities overdrafters fully

collateralize these overdrafts. Book-entry securities

overdrafts become frequent and material when an

account holder exceeds its net debit cap, solely

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. The policy also allows

financially healthy U.S. branches and agencies of

foreign banks for which the home-country

supervisor does not adhere to the Basle Capital

Accord to incur daylight overdrafts above their net

debit caps up to an amount equal to their cap

multiples times 10 percent of their worldwide

capital, provided that any overdrafts above the net

debit caps are collateralized.

8The majority of the collateral pledged to the

Reserve Banks is pledged for discount window

purposes.

The Board believes that, if it were to

reduce single-day net debit caps to

about the same level as the current twoweek average net debit caps, eliminating

the two-week average caps should

simplify the policy. Eliminating the

two-week average cap also should

reduce some of the administrative cost

and burden of complying with the

policy. The Board, however, recognizes

that reducing single-day net debit caps

could impose costs on certain

depository institutions because some

may consider their unused overdraft

capacity as a safeguard to manage

infrequent or unexpected liquidity

needs. Finally, the Board believes that

the current daylight overdraft limits for

depository institutions with exemptfrom-filing and de minimis net debit

caps are adequate and should not be

modified at this time.

The Board seeks comment on the

benefits and drawbacks of reducing selfassessed single-day net debit caps to

levels near those of the current twoweek average net debit caps and

eliminating the two-week average net

debit caps. The Board also requests

comment on the following questions:

1. In conjunction with the policy

change that would allow institutions

with self-assessed net debit caps to

pledge collateral for Federal Reserve

daylight credit above their net debit

caps, would reducing self-assessed net

debit caps improve the balance between

the public-sector costs of providing

daylight credit and the net privatesector benefits of using daylight credit?

2. How would a reduction in the

single-day net debit cap level affect the

way institutions manage their Federal

Reserve accounts with respect to

daylight overdrafts? Do institutions

target a maximum level of daylight

overdrafts that is at or below their twoweek average caps? How much

additional capacity between routine

peak overdrafts and the current singleday net debit cap is prudent or

necessary?

3. Would lowering the single-day net

debit caps for self-assessed institutions

cause depository institutions to delay

sending payments, potentially

increasing overdrafts at other depository

institutions?

4. Should the Board consider a policy

that gradually moves uncollateralized

net debit caps to significantly lower

levels (for example, to the levels

associated with the de minimis net debit

cap) and require all depository

institutions to post collateral for

overdrafts beyond the net debit cap?

B. Two-Tiered Pricing Regime

The Board is also evaluating the

benefits and drawbacks of implementing

a two-tiered pricing regime that would

assess a lower fee on collateralized

daylight overdrafts than on

uncollateralized daylight overdrafts.

The daylight overdraft fee is a critical

component of the PSR policy, and its

modification in 1995 was the impetus

for the Board’s current review of its

daylight credit policies.6 The initial

implementation of a 24-basis-point

daylight overdraft fee in 1994 caused a

40 percent decrease in daylight

overdrafts in Federal Reserve accounts,

mostly related to changes in the timing

of book-entry securities transfers.

Daylight overdrafts caused by Fedwire

funds transfers (funds overdrafts)

declined slightly after the

implementation of fees; however, funds

overdrafts began to rise again even

before the 1995 modified fee increase.

On an average annual basis since 1995,

overdrafts caused by Fedwire bookentry securities transfers (book-entry

securities overdrafts) have decreased

almost 10 percent per year and the value

of Fedwire 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.

Even though funds overdrafts have

grown substantially, the relationship

between average funds overdrafts and

the value of Fedwire funds transfers has

remained relatively constant since the

late 1980s.

In evaluating the level of the daylight

overdraft fee, the Board is considering

policy changes that might result in a

more efficient balance of the costs, risks,

and benefits associated with the

provision of Federal Reserve intraday

credit. The Board believes that daylight

overdraft fees have been effective in

reducing overdrafts from book-entry

securities transfers and provide a strong

incentive for institutions to continue

controlling their overdrafts. From its

inception, the fee was intended to create

economic incentives for the largest

daylight overdrafters to reduce and

allocate more efficiently their use of

daylight credit. The Board notes that

since the Federal Reserve began pricing

daylight overdrafts in 1994, less than 4

percent of account holders pay fees in

a given year and the majority of these

institutions pay less than $1,000 per

year. In addition, the largest users of

daylight credit, in general depository

institutions with assets greater than $10

billion, pay more than 95 percent of

aggregate daylight overdraft fees.

While the Board believes that daylight

overdraft fees have been relatively

effective, it also recognizes that the

daylight overdraft pricing policy has

imposed costs on the industry and that

some depository institutions consider

the policy burdensome. To assess policy

alternatives that might create a more

efficient balance of the costs, risks, and

benefits associated with Federal Reserve

intraday credit, the Board compared

Federal Reserve daylight credit

extensions and private-sector lending

under line-of-credit arrangements. The

most notable distinction between

daylight credit extensions and privatesector lending is that private loans are

often collateralized. Collateralized

lending generally carries a lower

interest rate than uncollateralized

lending because taking collateral lowers

the lender’s risk, allowing for a lower

credit risk premium. In most situations,

the Reserve Banks do not require

collateral when extending daylight

credit to depository institutions.7 When

Reserve Banks require collateral for

daylight credit extensions, however, the

same daylight overdraft fee applies to

both collateralized and uncollateralized

daylight overdrafts. The Board also

notes that the majority of Federal

Reserve daylight credit extensions are

currently implicitly collateralized

because depository institutions that

pledge collateral must sign the

applicable agreements in Operating

Circular 10, which provides the Reserve

Banks with a secured interest in any

collateral recorded on the Reserve

Banks’ books.8

30212 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

9To estimate the spread between collateralized

and uncollateralized lending, the Board sought a

financial market measure of the risk differential

between collateralized and uncollateralized credit

extensions. Because loans of federal funds are

uncollateralized, while loans through repurchase

agreements are collateralized, the spread between

the federal funds rate and the interest rate for

repurchase agreements on general Treasury

collateral provides the closest available

approximation of this risk differential. The federal

funds-repurchase agreement spread averaged 12 to

15 basis points at a 24-hour annualized rate over the

period since the mid-1980s. As much as possible,

this estimate was adjusted for days of unusual

supply pressures in the federal funds-repurchase

market.

10Administrative costs incurred by depository

institutions in identifying, segregating, auditing, or

transporting collateral to conform with Reserve

Bank requirements could affect the relative price of

collateralized to uncollateralized daylight credit.

11Bank for International Settlements, Committee

on the Global Financial System, Collateral in

wholesale financial markets: recent trends, risk

management and market dynamics, March 2001

(Bank for International Settlements, 2001).

12The ABMS provides intraday account

information to the Reserve Banks and depository

institutions. ABMS serves as both an information

source and a monitoring control tool. ABMS is used

primarily to give authorized Reserve Bank

personnel a mechanism to control and monitor

account activity for selected institutions. ABMS

also provides a means for institutions to obtain

information concerning their intraday balances for

managing daylight overdrafts. This information

includes opening balances, a depository

institution’s net debit capacity and collateral limits,

Fedwire funds and book-entry securities transfers,

enhanced Net Settlement Service (NSS)

transactions, and other payment activity from the

Integrated Accounting System.

13The Board likely would not subject book-entry

securities transfers to real-time rejects for

institutions that pledge in-transit collateral. Intransit collateral is securities purchased by a

depository institution but not yet paid for and

owned by its customers.

14ACH credit transactions will have settlementday finality beginning in mid-2001. The Board,

however, recognizes that including ACH credit

transactions under URTM could have implications

for the value dating of ACH transactions, wherein

originators may submit transactions for settlement

on a later, specified date.

15The Reserve Banks monitor in real time

Fedwire funds transfers and NSS transactions for

institutions meeting the established risk parameters.

Currently, the Reserve Banks are monitoring in real

time approximately five percent of account holders;

however, the number of monitored institutions

generally increases as the health of the financial

industry weakens.

The Board is considering the benefits

and drawbacks of implementing a twotiered or differential pricing regime for

daylight overdrafts. The fundamental

argument for a two-tiered pricing regime

is that such a regime might achieve a

better balance between the benefits and

costs of collateralized overdrafts relative

to uncollateralized overdrafts, including

the public sector’s costs and risks as

well as the private sector’s opportunity

costs of pledging collateral. Under a

differential pricing regime, depository

institutions that have pledged collateral

with the Federal Reserve would receive

the collateralized price for intraday

credit used up to the level of collateral.9

In addition, while the interim policy

statement does not permit depository

institutions with exempt or de minimis

caps to increase their daylight overdraft

capacity by pledging collateral to the

Federal Reserve, these institutions

would be allowed to pledge collateral in

order to receive the lower daylight

overdraft fee. A lower fee on

collateralized daylight credit than on

uncollateralized daylight credit might

also provide an extra incentive for the

largest daylight overdrafters to maintain

their current levels of collateral pledged

to the Reserve Banks or to pledge

additional collateral. The relative price

of collateralized to uncollateralized

daylight credit, however, would likely

influence the degree to which

depository institutions would maintain

their collateral levels or pledge

additional collateral.10

While private-sector lenders generally

price collateralized lending cheaper

than uncollateralized lending because it

is typically less risky, the Board is

concerned that differential pricing of

daylight credit could have broader

public policy implications. For

example, the collateralization of

daylight credit could disadvantage

junior creditors in the event that a

depository institution fails in a daylight

overdraft position. It is unclear whether

junior creditors take the Federal

Reserve’s extensions of daylight credit

into account when making their own

loans. Consequently, it may be

appropriate when setting the

collateralized daylight overdraft fee to

include some measure of the additional

risk that junior creditors bear as a result

of collateralized Federal Reserve

daylight credit extensions. If Federal

Reserve daylight credit extensions were

to dilute private-sector creditors’ claims

dollar for dollar, it might be appropriate

to treat collateralized and

uncollateralized Federal Reserve

daylight credit extensions as equally

risky and price them at the same level.

In addition, a marginal increase in

collateralized Federal Reserve overdrafts

could potentially exacerbate any

scarcity of available collateral to support

financial market activities.11

The Board plans to continue

evaluating the benefits and drawbacks

of a two-tiered pricing regime for

daylight overdrafts. To assess better the

impact of such a policy change, the

Board requests comment on all aspects

of differential pricing. The Board is also

requesting comment on the following

questions:

1. What are the major drawbacks and

benefits of a two-tiered pricing regime

for collateralized and uncollateralized

daylight overdrafts in Federal Reserve

accounts?

2. If Reserve Banks would accept the

same types of collateral currently

accepted for discount window purposes,

how might two-tiered pricing affect the

industry, especially with respect to the

availability of collateral for other

financial market activity? How might

two-tiered pricing affect creditors and

other participants?

3. Would a two-tiered daylight

overdraft pricing regime cause

institutions to pledge additional

collateral to the Federal Reserve or

would they primarily use collateral

already pledged to a Reserve Bank?

4. If collateralized daylight overdrafts

were subject to a fee lower than the

current 36-basis-point fee, would

institutions’ daylight credit usage

change from current levels?

5. Currently, Federal Reserve daylight

credit is generally provided only to

financially healthy depository

institutions that have regular access to

the discount window and are subject to

supervisory examination. Does taking

collateral from these depository

institutions provide the Federal Reserve

a sufficient reduction in risk to warrant

a lower fee?

C. Monitoring in Real Time All

Institutions’ Payments With SettlementDay Finality

The Board is also evaluating the

benefits and drawbacks of universal

real-time monitoring (URTM), which is

defined as using the Reserve Banks’

Account Balance Monitoring System

(ABMS) to reject any payment with

settlement-day finality that would cause

any account holder’s overdrafts to

exceed its net debit cap.12 Payments

with settlement-day finality include

Fedwire funds and book-entry securities

transfers, enhanced net settlement

service (NSS) transactions, automated

clearing house (ACH) credit

transactions, and cash withdrawals.13 14

Reserve Banks can monitor any

account holder’s balance and its

payment activities in real time using the

ABMS. The Reserve Banks currently

reject, for specific depository

institutions falling within established

parameters, certain final payments that

would cause overdrafts to exceed these

account holders’ available account

balances or net debit cap.15 As a result,

Reserve Banks are able to control their

credit exposure from certain higher-risk

institutions by restricting those

institutions’ access to Federal Reserve

intraday credit to specified levels

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30213

16The account activity of an institution that is not

monitored in real time is monitored for compliance

with the daylight overdraft posting rules on an

after-the-fact or ex post basis.

17The Federal Reserve System extensively tested

and used these protocols and procedures to prepare

for and manage the Y2K rollover period.

through real-time monitoring of their

account balances.16

Real-time enforcement of depository

institutions’ daylight overdraft capacity

levels through URTM could allow the

Reserve Banks to manage better the

small, yet important, risk that a

depository institution could

unexpectedly fail with a significant

daylight overdraft position that far

exceeds its net debit cap. URTM also

could assist Reserve Banks and

depository institutions in managing

Federal Reserve accounts by preventing

depository institutions from exceeding

their net debit caps with payments that

have settlement-day finality. As a result,

URTM would likely reduce costs

associated with the Reserve Banks’

administration of the policy.

The Board is considering URTM for

payments with settlement-day finality

because they represent greater credit

risk to the Federal Reserve than

payments without settlement-day

finality. Payments with settlement-day

finality also represent the majority of

the dollar value of payments that the

Federal Reserve processes. Because

Reserve Banks may return or reverse

payments that do not have settlementday finality, such as checks and ACH

debit transactions, these payments pose

less risk to the Federal Reserve if the

payor institution defaults.

While URTM provides advantages by

monitoring all accounts in real time, the

Board has concerns about potential

negative consequences of URTM.

Specifically, the Board is concerned

about possible adverse effects on the

government-securities market from

rejecting book-entry securities transfers.

The Board also is concerned about

URTM creating disruptions for net

settlement arrangements and ACH

participants. Finally, URTM raises

significant policy issues related to

payment delays or gridlock.

To evaluate the potential adverse

effects of URTM, the Board reviewed

depository institutions’ daylight credit

use over the past several years and

found that the majority of depository

institutions generally do not fully use

their daylight overdraft capacity.

Approximately 97 percent of all account

holders use less than 50 percent of their

net debit caps for their average peak

overdrafts. Even if net debit caps were

reduced to the two-week average level,

as described previously in the first

policy option, most institutions should

not experience rejected payments under

URTM. In addition, the Board’s interim

policy statement that allows depository

institutions to pledge collateral for

additional daylight overdraft capacity

should alleviate potential payment

disruptions over the long term as

depository institutions adjust their

behavior.

While the Board does not believe that

URTM would disrupt the payments

system over the long term, URTM could

cause payments gridlock under

circumstances of severe financial market

stress or significant liquidity shortages.

In the event of gridlock, the Federal

Reserve has systems and procedures to

detect, evaluate, and address payments

gridlock. The Federal Reserve’s

communication protocols and problem

escalation procedures are well

established and designed to manage any

critical payments system problem

quickly and effectively.17

While several payment types, such as

book-entry securities transfers or NSS

transactions, raise issues related to

implementing URTM, monitoring ACH

credit originations for all account

holders presents a number of additional

issues. The most significant concern is

that URTM could compromise ACH

value dating. Value dating allows

depository institutions to originate

credit transactions one or two days in

advance of the settlement date. When

the Board approved settlement-day

finality for ACH credit transactions, it

required all institutions monitored in

reject mode to prefund their originations

at the time the files are processed (64 FR

62673, November 17, 1999). Prefunding

was required so that risk controls for

ACH credit transactions were similar to

those of other payment services with

similar finality characteristics, such as

Fedwire funds transfers. In the current

monitoring environment, only a subset

of credit originators are required to

prefund. Under a URTM environment,

all ACH credit originators would have to

prefund. As a result, depository

institutions that send files one or two

days in advance could perceive

prefunding as costly. To avoid

prefunding one or two days in advance,

many depository institutions might

originate their ACH files in the early

morning hours of the settlement day,

thereby eliminating certain benefits of

ACH value dating.

Value dating ACH transactions allows

originating and receiving depository

institutions to process large numbers of

transactions in advance of the

settlement date and time. Processing

ACH transactions in advance of the

settlement date and time often allows

institutions to resolve operational

problems with minimal effects on ACH

participants and to post the transactions

to their customers’ accounts in a timely

manner. In addition, advanced

knowledge of the transactions that will

settle over the next several days allows

institutions to manage their account

positions better and to handle incorrect

or erroneous transactions before

settlement occurs.

A policy change that potentially

discourages value dating or encourages

originating depository institutions to

submit files later than they do today

could fundamentally change the nature

of the ACH service and disrupt

established and effective business

practices for ACH participants. For

example, an operational problem or

funding problem might cause an

originating depository institution to

miss the close of the ACH processing

cycle. By missing the close of the

processing cycle, the ACH payments

intended for settlement that same day

would not settle on a timely basis.

Missed settlements could impose undue

costs on receiving institutions and their

customers and undermine the perceived

reliability of ACH. Applying URTM to

ACH could, therefore, increase costs to

some unknown extent for most ACH

participants, including originating

institutions, receiving institutions, and

their customers.

To alleviate the prefunding issue,

some respondents to the request for

comment on ACH settlement-day

finality proposed collateral as an

alternative to prefunding (63 FR 70132,

December 18, 1998). Because of the

value-dating nature of ACH, the Federal

Reserve systems in place today would

not be effective for monitoring the

collateralization of ACH credit

transactions over several days. The

ABMS and other systems would have to

be modified significantly to substitute

collateral for prefunding if the

transactions are not submitted on the

same day as the intended settlement

day; the Board is uncertain of the cost

or timing of systems modifications that

would be necessary to implement this

functionality. Under the conditions

described in the interim policy

statement, some depository institutions

submitting ACH credit transactions on

the day of settlement will be able to

secure additional daylight overdraft

capacity.

The Board plans to continue

evaluating the benefits and drawbacks

of URTM, including the benefits and

drawbacks of implementing URTM for

all payments with settlement-day

30214 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

18Competitive issues might be raised if the

Reserve Banks were to monitor in real time all

Fedwire funds transfers and NSS transactions but

not all ACH credit transactions. Private-sector ACH

operators that use the Federal Reserve’s Fedwirebased or enhanced net settlement service might

have some participants that experience rejected

settlement payments under URTM while most

Federal Reserve ACH credit transactions would not

be subject to real-time monitoring. Depository

institutions that are concerned about settlement

disruptions through private-sector ACH operators

might find the Federal Reserve’s ACH service more

attractive; however, these institutions might find

that certain benefits from using private-sector ACH

services sufficiently offset concerns about

settlement disruptions. In addition, under any

monitoring environment, depository institutions

meeting certain risk parameters would be required

to prefund their Federal Reserve ACH credit

transactions. For those institutions, the Federal

Reserve’s ACH service might not be more attractive

than private-sector ACH services.

19To analyze more fully the potential for payment

disruptions, Board staff developed a simulation of

URTM for Fedwire funds transfers, book-entry

securities transfers, and NSS transactions. The

URTM simulation for Fedwire funds, book-entry

securities, and NSS activity showed that under

current net debit cap levels, ABMS would delay

approximately 40 payments out of almost 500,000

per day. In addition, the average value of a delayed

payment was about $3.2 million and the average

delay was around an hour. Using the two-week

average net debit cap levels, the simulation showed

that ABMS would delay approximately 50

payments out of almost 500,000 per day and the

average value of a delayed payment was about $11.4

million with an average delay of about an hour.

20While the URTM simulation did not

demonstrate significant NSS transaction delays, the

Board notes that given the nature of the net

settlement service, the delay of any payment into

a net settlement arrangement would hold up

settlement for the entire arrangement.

21Under any monitoring environment, depository

institutions meeting certain risk parameters would

be required to prefund ACH credit transactions.

22These 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 and implementing URTM for

only a subset of those payments. One of

the Board’s primary concerns with

implementing URTM for only a subset

of payments, for example for Fedwire

funds transfers and NSS transactions, is

whether this would create an incentive

for liquidity constrained depository

institutions to move payments from

Fedwire and NSS to the ACH to avoid

the real-time monitor. Another concern

is whether implementing URTM for

only a subset of payments creates a

competitive advantage for the Federal

Reserve’s ACH service.18 To assess

better the effect of such policy changes,

the Board requests comment on all

aspects of URTM. The Board also

requests comment on the following

questions:

1. What would be the benefits and

drawbacks of URTM?

2. If the Federal Reserve were to

implement URTM, should it do so for

all payments with settlement-day

finality? If not, which payments should

the Federal Reserve include under

URTM? 19 20

3. If the Federal Reserve implemented

URTM for only Fedwire funds transfers

and NSS transactions, would this action

increase risk of large-dollar payments

moving from Fedwire or NSS to the

ACH? 21 Would this provide the Federal

Reserve with a competitive advantage in

providing ACH services?

4. What are the most significant

benefits and drawbacks of implementing

URTM for only Fedwire funds transfers

and NSS transactions initially and

continuing to evaluate moving other

payments to URTM as the Federal

Reserve and the industry gain more

experience with URTM?

5. What disruptions in the

government-securities market, if any,

could occur if the Federal Reserve were

to implement URTM for Fedwire bookentry securities transfers?

6. What disruptions in settlement

arrangements, if any, could occur if the

Federal Reserve were to implement

URTM for NSS transactions?

7. Would URTM lead to significantly

greater payment delays, or would there

be little effect?

III. Request for Comment

The Board requests comment on all

aspects of the potential policy options

outlined above, and on the benefits and

drawbacks of implementing these

options together or separately.

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.22 Under these procedures,

the Board will assess 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

anticipated benefits are significant

enough to proceed with the change

despite the adverse effects.

The Board does not believe that the

policy options outlined above would

have a direct and material impact on the

ability of other service providers to

compete effectively with the Reserve

Banks’ payments services. The Board

believes that two of the daylight credit

policies outlined above, lowering singleday net debit caps and universal realtime monitoring, are generally more

restrictive than the current policies. The

Board plans to evaluate further whether

implementing URTM for only a subset

of payments creates a competitive

advantage for the Federal Reserve’s

financial services. More restrictive

Federal Reserve credit policies,

however, could encourage some

depository institutions to seek other

payment service providers, thereby

encouraging competition with the

Reserve Banks. While the two-tiered

pricing regime is generally more

consistent with private-sector practices,

the policy cannot be viewed as being

more restrictive or liberal until a more

definitive set of fees is recommended.

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.

By order of the Board of Governors of the

Federal Reserve System, May 30, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–13982 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RETIREMENT THRIFT

INVESTMENT BOARD

Sunshine Act Meeting

TIME AND DATE: 10:00 a.m. (EDT), June

11, 2001.

PLACE: 4th Floor, Conference Room

4506, 1250 H Street, N.W., Washington,

D.C.

STATUS: Open.

MATTERS TO BE CONSIDERED:

1. Approval of the minutes of the May

14, 2001, Board member meeting.

2. Thrift Savings Plan activity report

by the Executive Director.

CONTACT PERSON FOR MORE INFORMATION:

Thomas J. Trabucco, Director, Office of

External Affairs, (202) 942–1640.

Elizabeth S. Woodruff,

Secretary to the Board, Federal Retirement

Thrift Investment Board.

[FR Doc. 01–14178 Filed 6–1–01; 10:07 am]

BILLING CODE 6760–01–M