Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30193

1Copies of the Minutes of the Federal Open

Market Committee meeting of March 20, 2001,

which include the domestic policy directive issued

at that meeting, are available upon request to the

Board of Governors of the Federal Reserve System,

Washington, D.C. 20551. The minutes are published

in the Federal Reserve Bulletin and in the Board’s

annual report.

1Copies of the Minutes of the Federal Open

Market Committee telephone conference meeting of

April 18, 2001, which include the domestic policy

directive issued at that telephone conference

meeting, are available upon request to the Board of

Governors of the Federal Reserve System,

Washington, D.C. 20551. The minutes are published

in the Federal Reserve Bulletin and in the Board’s

annual report.

FEDERAL RESERVE SYSTEM

Federal Open Market Committee;

Domestic Policy Directive of March 20,

2001.

In accordance with § 271.5 of its rules

regarding availability of information (12

CFR part 271), there is set forth below

the domestic policy directive issued by

the Federal Open Market Committee at

its meeting held on March 20, 2001.1

The Federal Open Market Committee

seeks monetary and financial conditions

that will foster price stability and

promote sustainable growth in output.

To further its long-run objectives, the

Committee in the immediate future

seeks conditions in reserve markets

consistent with reducing the federal

funds rate to an average of around 5

percent.

By order of the Federal Open Market

Committee, May 23, 2001.

Donald L. Kohn,

Secretary, Federal Open Market Committee.

[FR Doc. 01–14054 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–S

FEDERAL RESERVE SYSTEM

Federal Open Market Committee;

Domestic Policy Directive of April 18,

2001.

In accordance with § 271.5 of its rules

regarding availability of information (12

CFR part 271), there is set forth below

the domestic policy directive issued by

the Federal Open Market Committee at

its telephone conference meeting held

on April 18, 2001.1

The Federal Open Market Committee

seeks monetary and financial conditions

that will foster price stability and

promote sustainable growth in output.

To further its long-run objectives, the

Committee in the immediate future

seeks conditions in reserve markets

consistent with reducing the federal

funds rate to an average of around 4-1/

2 percent.

By order of the Federal Open Market

Committee, May 23, 2001.

Donald L. Kohn,

Secretary, Federal Open Market Committee.

[FR Doc. 01–14055 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–S

FEDERAL RESERVE SYSTEM

Sunshine Act Meeting

AGENCY HOLDING THE MEETING: Board of

Governors of the Federal Reserve

System.

TIME AND DATE: 10 a.m., Monday, June

11, 2001.

PLACE: Marriner S. Eccles Federal

Reserve Board Building, 20th and C

Streets, NW., Washington, DC 20551.

STATUS: Closed.

MATTERS TO BE CONSIDERED:

1. Personnel actions (appointments,

promotions, assignments,

reassignments, and salary actions)

involving individual Federal Reserve

System employees.

2. Any items carried forward from a

previously announced meeting.

CONTACT PERSON FOR MORE INFORMATION:

Michelle A. Smith, Assistant to the

Board; 202–452–3204.

SUPPLEMENTARY INFORMATION: You may

call 202–452–3206 beginning at

approximately 5 p.m. two business days

before the meeting for a recorded

announcement of bank and bank

holding company applications

scheduled for the meeting; or you may

contact the Board’s Web site at http://

www.federalreserve.gov for an

electronic announcement that not only

lists applications, but also indicates

procedural and other information about

the meeting.

Dated: June 1, 2001.

Robert deV. Frierson,

Associate Secretary of the Board.

[FR Doc. 01–14226 Filed 6–1–01; 12:17 pm]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–1110]

Policy Statement on Payments System

Risk; $50 Million Fedwire Securities

Transfer Limit

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Request for comment on policy.

SUMMARY: The Board is requesting

comment on the desirability of retaining

the current $50 million limit on the

transaction size of book-entry securities

transfers on Fedwire.

EFFECTIVE DATE: Comments must be

received by August 6, 2001.

ADDRESSES: Comments, which should

refer to Docket No. R–1110, 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 9:00 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 Doug Conover, Financial

Services Analyst (202/452–2887),

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. Two near-term

proposals concern the net debit cap

calculation for U.S. branches and

agencies of foreign banks (Docket No. R–

1108) and 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). 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). 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–

30194 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

1The $50 million limit does not apply to original

issue deliveries of book-entry securities from a

Reserve Bank to a depository institution or

transactions sent to or by a Reserve Bank in its

capacity as fiscal agent for the United States or

international organizations.

2The PSA is now known as the Bond Market

Association.

3Fail costs are the costs dealers incur if they fail

to deliver securities to a counterparty on the agreed

settlement day. These costs can be significant

because a dealer that fails to deliver securities may

have to obtain overnight financing as well as forego

any interest that the security accrues between the

agreed and actual settlement days. The purchasing

counterparty that does not receive its securities on

the agreed settlement day benefits because that

party typically receives the accrued interest on

those securities, yet postpones financing the

securities until they are actually delivered.

4Because many government securities dealers

take long and short positions in the same security

among a relatively small group of counterparties, a

dealer could be expected to deliver a security to one

counterparty and receive the same security from

another counterparty.

5Because the limit forced receiving dealers to

accept multiple deliveries for the settlement of one

trade, the receiver could not force the sender to

stockpile securities. For example, if a dealer had an

obligation to deliver $100 million of a certain

security, expected to receive $90 million of the

same issue, and already held $10 million of that

security in its account, delivery of its obligation

would be dependent upon first receiving the

expected $90 million, if a limit were not present.

With the limit in place, the dealer could

immediately forward $50 million of that security as

soon as it was received, rather than waiting for the

entire $90 million. To the extent that a dealer buys

securities from many counterparties and that

deliveries from these counterparties are dependent

on receipt of their own purchases, the limit allows

deliveries to occur earlier than otherwise possible,

reducing the liquidity required to settle the total

amount of transactions.

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’s

intention was to address the Federal

Reserve’s risk as well as risks on various

types of private-sector networks,

primarily large-dollar payments

systems.

As part of modifications to the PSR

policy in 1988, the Board imposed a $50

million limit on the par value of

individual book-entry securities

transfers on the Fedwire system (52 FR

29255, August 6, 1987).1 The purpose of

the $50 million limit was to encourage

government securities dealers to split

large trades into multiple partial

deliveries and, thereby, reduce

subsequent book-entry securities-related

daylight overdrafts. The Board

anticipated that government securities

dealers’ practice of building securities

inventories to meet large trade

obligations would diminish and bookentry securities transfer volume would

be distributed more evenly throughout

the day. The Board recognized,

however, that the effectiveness of the

$50 million limit depended on dealers

accepting multiple deliveries for the

completion of a single trade obligation.

As a result, Federal Reserve staff worked

with the Public Securities Association

(PSA) to develop delivery guidelines

that incorporated necessary changes

related to the $50 million limit.2

Prior to the implementation of the $50

million limit, the PSA’s delivery

guidelines required trade obligations to

be delivered in full. As a result, dealers

often had to accumulate securities in the

full amount of the trade before they

could deliver them. Partial deliveries,

those for less than the full amount of the

trade obligation, were typically returned

to the sending institution. The

incentives to minimize fail-to-deliver

costs and maximize fail-to-receive

benefits strongly influenced dealers’

decisions regarding their settlement of

government securities trades.3 Because

fail costs are proportional to the size of

unfulfilled obligations, dealers typically

organized their deliveries to fulfill their

largest obligations first. In addition, in

order to maximize fail benefits, a dealer

selling and buying the same type of

security could strategically delay its

deliveries of that security until the end

of the day, hoping that counterparties

trying to deliver the same securities

would be unable to settle their

obligations before the close of the

securities transfer system.4 These

incentives often led dealers to stockpile

large amounts of securities until very

near the end of the day.

To stockpile large amounts of

securities until very near the end of the

day in a delivery-versus-payment

environment, dealers often used

daylight credit at their clearing banks.

The clearing banks, in turn, had to hold

positive balances in their Federal

Reserve accounts or use Federal Reserve

daylight credit. As a dealer accumulates

securities and holds them during the

day to deliver on its largest obligations

first, its overdraft becomes larger and

lasts longer. In the absence of charges

for daylight credit, however, the dealers’

had no incentive to economize on

daylight credit but had a strong

incentive to avoid the substantial costs

associated with failing to deliver on

large obligations. In addition, because

securities deliveries were often delayed

until near the close of the Fedwire bookentry security transfer system, the

Federal Reserve frequently extended the

system’s operating hours.

Although the Board intended the $50

million limit to promote the acceptance

of partial deliveries, dealers had limited

incentive to change their delivery

practices. Under the PSA good delivery

guidelines, dealers no longer needed to

stockpile securities. As soon as an

inventory of $50 million in a particular

security was obtained, dealers could

immediately deliver that $50 million to

a different counterparty, receiving funds

to cover any overdraft associated with

the original receipt of that security. In

effect, the transfer limit and the PSA’s

modified delivery guidelines allowed

dealers to accept partial deliveries and

effectively reduced the maximum size of

any required position to $50 million.

Nonetheless, without fees on daylight

overdrafts, dealers could continue to

stockpile securities without incurring

any explicit costs. Most dealers,

therefore, did not change their behavior

significantly, and the limit had very

little impact on the clearing banks’ use

of daylight credit.

When the Board began charging a fee

for daylight overdrafts in 1994, most

clearing banks decided to pass on these

charges to their government securities

dealers. Because government securities

dealers generally relied heavily on

intraday credit to conduct their

transactions, the fee provided a strong

incentive for most major dealers to send

securities earlier in the day while the

limit and the PSA delivery guidelines

allowed dealers to send and required

their counterparties to accept partial

deliveries in $50 million increments. As

dealers began to send securities earlier

in the day, Federal Reserve daylight

overdrafts decreased substantially.5

II. Effectiveness of the $50 Million Limit

As part of a broad review of the

Federal Reserve’s daylight credit

policies, the Board considered the

effectiveness of the $50 million limit

policy, with a focus on whether the

limit imposes an undue regulatory

burden. To understand better the

industry’s view of the limit, Federal

Reserve staff met with representatives of

primary dealers, clearing banks, and

industry utilities. Federal Reserve staff

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30195

6These assessment procedures are described in

the Board’s policy statement entitled ‘‘The Federal

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

March 29, 1990).

1 In the event an electronic check presentment is

delayed past 12:00 p.m. local time, the Reserve

Banks will post the transaction on the next clock

hour that is at least one hour after presentment

takes place but no later than 3:00 p.m. local time.

learned that many government

securities dealers and their clearing

banks support retaining the $50 million

limit. These representatives believe that

removing the limit could increase

position building and securities-related

overdrafts despite the existence of

daylight overdraft fees. In addition, the

representatives stated that removing the

limit would likely require costly system

changes throughout the industry. Given

that the industry bears a significant

portion of the costs and benefits of the

limit, both in terms of transaction fees

and reduced overdraft fees, the support

of the limit voiced by industry

representatives reflects their perception

that the limit has a positive net effect on

the government securities settlement

system.

Industry representatives indicated

that removal of the limit would likely

lead the industry to demand that

securities trades be settled in full and to

reject partial deliveries. While current

delivery guidelines encourage

acceptance of partial deliveries,

industry representatives expressed

concern that there would be no

technical mechanism to enforce these

guidelines. The Board believes the $50

million limit on book-entry securities

transfers in combination with daylight

overdraft fees has been effective in

reducing daylight overdrafts. Because

the limit appears to have a net positive

effect, the Board is disposed to retaining

the limit. The Board, however, would

like to ensure that it considers the

perspectives of all parties before making

a final determination regarding the

retention of this limit.

III. Request for Comment

The Board is proposing to maintain its

current policy limiting the size of

individual book-entry security transfers

on Fedwire to $50 million in par value.

The Board is requesting comment on all

aspects of the $50 million limit as well

as on the following questions:

1. Should the limit be retained?

If yes, is $50 million a reasonable

level for the limit? Do the benefits of the

limit support a reduction of the limit to

$25 million? Or, would a higher limit

reduce transaction costs but maintain

the existing benefits of the limit? Would

changing the limit require costly system

changes?

If no, what would be the effect of

eliminating the $50 million limit on

delivery fails, daylight overdrafts, and

dealer costs? In particular, would

eliminating the limit require costly

system changes?

2. Does the limit impose any

significant costs on dealers or clearing

banks, net of any benefits from reduced

overdrafts?

3. Does the limit promote specific

benefits in the government securities

market other than reduced overdrafts?

IV. 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.6 The Board believes that

retention of the $50 million securities

transfer limit will have no adverse effect

on the ability of other service providers

to compete effectively with the Federal

Reserve Banks in providing similar

transfer services.

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 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.

By order of the Board of Governors of the

Federal Reserve System, May 30, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–13981 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–1109]

Policy Statement on Payments System

Risk; Modifications to Daylight

Overdraft Posting Rules for Electronic

Check Presentments

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Request for comment on policy.

SUMMARY: The Board is requesting

comment on a change to the procedures

for measuring daylight overdrafts in

depository institutions’ Federal Reserve

accounts. The Board proposes to modify

the procedures to allow debits

associated with electronic check

presentment (ECP) transactions to post

at 1:00 p.m. local time.1 The current

posting times for ECP transactions often

create a disincentive for depository

institutions to use Federal Reserve

electronic check presentment services,

and the Board proposes to remove

barriers that may discourage their use.

EFFECTIVE DATE: Comments must be

received by August 6, 2001.

ADDRESSES: Comments, which should

refer to Docket No. R–1109, 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 9:00 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 Jeffrey Yeganeh, Senior

Financial Services Analyst (202/728–

5801), 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. Two near-term

proposals concern the net debit cap

calculation for U.S. branches and

agencies of foreign banks (Docket No. R–

1108) 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 longer-term changes

to the Board’s payments system risk

(PSR) policy, including lowering selfassessed 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