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									Office of Thrift Supervision                                            January 12, 2009
Department of the Treasury

Transmittal

TR-428
Federal Register, Vol. 73, No. 248, pp. 79109-79127                       Number TR-428




On December 24, 2008 the Board of Governors of the Federal Reserve System adopted revisions
to part II of its Policy on Payment System Risk (PSR) that are designed to improve intraday
liquidity management and payment flows for the banking system.




Office of Thrift Supervision                                                      Page 1 of 1
                                                                      Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                 79109

                                             holding company and/or to acquire the                     Board of Governors of the Federal Reserve             The interim policy for the deductible
                                             assets or the ownership of, control of, or              System, December 19, 2008.                            and streamlined max cap procedure will
                                             the power to vote shares of a bank or                   Robert deV. Frierson,                                 be effective on March 26, 2009.
                                             bank holding company and all of the                     Deputy Secretary of the Board.
                                                                                                                                                           FOR FURTHER INFORMATION CONTACT:
                                             banks and nonbanking companies                          [FR Doc. E8–30687 Filed 12–23–08; 8:45 am]
                                             owned by the bank holding company,                                                                            Jeffrey Marquardt, Deputy Director
                                                                                                     BILLING CODE 6210–01–S
                                             including the companies listed below.                                                                         (202–452–2360) or Susan Foley,
                                                                                                                                                           Assistant Director (202–452–3596),
                                                The applications listed below, as well
                                             as other related filings required by the                                                                      Division of Reserve Bank Operations
                                                                                                     FEDERAL RESERVE SYSTEM
                                             Board, are available for immediate                                                                            and Payment Systems, Board of
                                             inspection at the Federal Reserve Bank                                                                        Governors of the Federal Reserve
                                                                                                     [Docket No. OP–1345]                                  System; for users of
                                             indicated. The applications also will be
                                             available for inspection at the offices of                                                                    Telecommunications Device for the Deaf
                                                                                                     Policy on Payment System Risk
                                             the Board of Governors. Interested                                                                            (‘‘TDD’’) only, contact (202) 263–4869.
                                             persons may express their views in                      AGENCY: Board of Governors of the
                                                                                                                                                           SUPPLEMENTARY INFORMATION:
                                             writing on the standards enumerated in                  Federal Reserve System.
                                             the BHC Act (12 U.S.C. 1842(c)). If the                 ACTION: Policy statement.                             I. Background
                                             proposal also involves the acquisition of                                                                        On March 7, 2008, the Board
                                             a nonbanking company, the review also                   SUMMARY: The Board of Governors of the
                                                                                                     Federal Reserve System (Board) has                    requested comment on a new approach
                                             includes whether the acquisition of the                                                                       to intraday central bank balances and
                                             nonbanking company complies with the                    adopted revisions to part II of its Policy
                                                                                                     on Payment System Risk (PSR) that are                 credit that formally recognizes the role
                                             standards in section 4 of the BHC Act
                                                                                                     designed to improve intraday liquidity                of the central bank in providing such
                                             (12 U.S.C. 1843). Unless otherwise
                                                                                                     management and payment flows for the                  balances and credit to depository
                                             noted, nonbanking activities will be
                                                                                                     banking system, while also helping to                 institutions and encourages them to
                                             conducted throughout the United States.
                                                                                                     mitigate credit exposures of the Federal              collateralize explicitly their daylight
                                             Additional information on all bank
                                                                                                     Reserve Banks (Reserve Banks) from                    overdrafts.1 The Board proposed a
                                             holding companies may be obtained
                                                                                                     daylight overdrafts. The adopted                      policy of supplying intraday balances to
                                             from the National Information Center
                                                                                                     changes to the PSR policy are                         healthy depository institutions
                                             website at www.ffiec.gov/nic/.
                                                                                                     substantially the same as those                       predominantly through explicitly
                                                Unless otherwise noted, comments
                                                                                                     proposed for comment, including a new                 collateralized daylight overdrafts. Under
                                             regarding each of these applications
                                                                                                     approach that explicitly recognizes the               this proposal, the Board would allow
                                             must be received at the Reserve Bank
                                                                                                     role of the central bank in providing                 depository institutions to pledge
                                             indicated or the offices of the Board of
                                                                                                     intraday balances and credit to healthy               collateral voluntarily to secure daylight
                                             Governors not later than January 19,
                                             2009.                                                   depository institutions, a zero fee for               overdrafts, and collateralized daylight
                                                                                                     collateralized daylight overdrafts, a 50              overdrafts would be charged a zero fee.
                                                A. Federal Reserve Bank of
                                                                                                     basis point (annual rate) charge for                  To further encourage the voluntary use
                                             Richmond (A. Linwood Gill, III, Vice
                                             President) 701 East Byrd Street,                        uncollateralized daylight overdrafts, and             of collateral, the Board would raise the
                                             Richmond, Virginia 23261–4528:                          a biweekly daylight overdraft fee waiver              fee for uncollateralized daylight
                                                                                                     of $150. The implementation of the                    overdrafts to 50 basis points (annual
                                                1. Community Bank Investors of
                                             America, L.P., and FA Capital, LLC,                     changes will take place between the                   rate) from the current 36 basis points.
                                             both of Richmond, Virginia, to retain                   fourth quarter of 2010 and first quarter              The Board also proposed increasing the
                                             control of 5.81 percent, and to acquire                 of 2011. A specific date will be                      biweekly daylight overdraft fee waiver
                                             up to 9.90 percent of the voting shares                 announced by the Board at least 90 days               to $150 from $25 to minimize the effect
                                             of ICB Financial, and thereby indirectly                in advance. The Board also approved for               of the proposed policy changes on
                                             acquire additional voting shares of                     foreign banking organizations (FBO) an                institutions that use small amounts of
                                             Inland Community Bank, National                         interim policy change related to the                  daylight overdrafts. In addition, the
                                             Association, both of Ontario, California.               calculation of the deductible amount                  Board proposed changes to other
                                                2. Community Bank Investors of                       from daylight overdraft fees under the                elements of the PSR policy dealing with
                                             America, L.P., and FA Capital, LLC,                     existing policy and early                             daylight overdrafts, including adjusting
                                             both of Richmond, Virginia, to retain                   implementation of the proposed                        net debit caps, streamlining max cap
                                             control of 6.82 percent, and to acquire                 streamlined procedure for maximum                     procedures for certain FBOs,
                                             up to 7.55 percent of the voting shares                 daylight overdraft capacity (max cap).                eliminating the current deductible for
                                             of Commonwealth Bankshares, Inc, and                    The interim policy change for the                     daylight overdraft fees, and increasing
                                             thereby indirectly acquire additional                   deductible and streamlined max cap                    the penalty daylight overdraft fee for
                                             voting shares of Bank of                                procedure will be effective on March 26,              ineligible institutions to 150 basis
                                             Commonwealth, both of Norfolk,                          2009. In addition, the Board endorsed a               points (annual rate) from the current
                                             Virginia.                                               four-prong strategy, which includes                   136 basis points.
                                                B. Federal Reserve Bank of Atlanta                   these policy changes, through which the                  The Federal Reserve has been
                                             (Steve Foley, Vice President) 1000                      Federal Reserve and industry will                     reviewing for several years the long-
                                             Peachtree Street, N.E., Atlanta, Georgia                address related intraday liquidity,                   term effects of operational, market, and
                                             30309:                                                  operational, and credit risks in the                  policy changes by the industry and the
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                                                1. Security Bancorp, Inc., to become a               wholesale payment system.                             Federal Reserve on intraday liquidity,
                                             bank holding company by acquiring 100                   DATES: Effective Dates: The policy will               operational, and credit risks in the
                                             percent of the voting shares of Security                take effect between the fourth quarter of             payment system, including intraday
                                             Federal Savings Bank of McMinnville,                    2010 and first quarter of 2011 with a                 account overdrafts at the Reserve
                                             both of McMinnville, Tennessee, upon                    specific date announced at least 90 days
                                             its conversion to a state chartered bank.               in advance.                                             1 See   73 FR 12417, March 7, 2008.



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                                             79110                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             Banks.2 The proposed changes reflect                    development of a liquidity-saving                      Comments on Proposed PSR Policy
                                             the culmination of this work, along with                mechanism for the Fedwire Funds                        Changes
                                             companion efforts by the banking                        System.3 The third and fourth efforts                     Several commenters noted that the
                                             industry.                                               involve The Clearing House Interbank                   new approach and specifically the zero
                                                Significant changes to U.S. payment                  Payment System (CHIPS) and                             fee for collateralized overdrafts would
                                             and settlement systems over the past                    Depository Trust & Clearing Corporation                contribute to an increase in intraday
                                             twenty-five years have helped reduce                    identifying opportunities to improve                   liquidity and an overall reduction in
                                             systemic risk. In accord with U.S. and                  transaction processing and liquidity use               operational and credit risks in the
                                             international risk policies and                         in their systems and processes that                    payment system. They also believed that
                                             standards, several of these changes have                relate to large-value funds and securities             the proposed policy would provide an
                                             relied increasingly on the use of central               settlement, respectively.4                             incentive for institutions to reduce
                                             bank money—in this context, balances
                                                                                                     II. Summary of Comments and Analysis                   payments held in internal queues to
                                             that financial institutions and private
                                                                                                                                                            manage liquidity use, and that the
                                             clearing and settlement organizations                      The Board received nineteen                         earlier release of these payments would
                                             hold in accounts at Reserve Banks—to                    comment letters on its proposed policy.                increase the velocity of overall payment
                                             strengthen the management of credit                     The commenters included thirteen                       flows and liquidity circulation. Other
                                             and liquidity risk in private-sector                    commercial banking organizations, four
                                             clearing and settlement arrangements.                                                                          commenters commended the Board for
                                                                                                     trade organizations, one private-sector                recognizing explicitly its role in
                                             Such changes have had the effect of                     clearing and settlement system, and the
                                             increasing significantly the intraday                                                                          providing intraday balances and credit,
                                                                                                     Federal Reserve Bank of New York’s                     for introducing a two-tiered pricing
                                             demand for central bank money and                       Payment Risk Committee.5 Most
                                             hence the demand for daylight                                                                                  system, and for proposing changes that
                                                                                                     commenters (seventeen) supported the                   improve the balance between payment
                                             overdrafts at the Reserve Banks.                        proposed policy changes. One
                                                Overall, however, the combined effect                                                                       system safety and efficiency objectives.
                                                                                                     commenter opposed the proposed                            While commenters acknowledged
                                             of changes at clearing and settlement                   policy because it does not believe fees
                                             organizations, depository institutions’                                                                        areas where the proposed changes
                                                                                                     are necessary to encourage the pledging                would likely achieve positive outcomes,
                                             intraday liquidity management                           of collateral if net debit caps are in place
                                             strategies, and late-day market activity                                                                       such as encouraging the release of more
                                                                                                     to control the Reserve Banks’ risk. One                payments from internal liquidity
                                             has been to shift the sending of larger                 commenter did not indicate support or
                                             Fedwire funds transfers to later in the                                                                        queues, a few commenters indicated
                                                                                                     opposition.                                            that they did not believe the proposed
                                             day. From an operational risk
                                             perspective, waiting to send large                                                                             policy changes would address fully the
                                                                                                        3 The creation of a liquidity-saving mechanism
                                             payments late in the day increases the                                                                         late-day compression of Fedwire funds
                                                                                                     would conserve on account balances or daylight
                                             potential magnitude of liquidity                        overdrafts and would also reduce the amount of         transfers. As of third quarter 2008, 31
                                             dislocation and risk in the financial                   collateral needed to achieve costless daylight         percent of the value of Fedwire
                                             industry if late-in-the-day operational                 overdrafts under the zero fee for collateralized       payments are sent after 5 p.m., a 41
                                                                                                     daylight overdrafts. The liquidity-saving              percent increase from just 10 years ago.6
                                             disruptions occur. An increase in such                  mechanism could involve adding new features to
                                             risk is particularly troublesome in an era              the Fedwire Funds Service that depository              This growth is driven by the largest-
                                             of heightened concern about operational                 institutions could use to coordinate better the        valued payments (the 99th percentile),
                                             disruptions generally.                                  timing and settlement of their payments as well as     which averaged about $1.25 billion
                                                                                                     to economize on the use of intraday central bank       through mid-2008. The compression
                                                To address the combination of                        money, daylight overdrafts, and collateral. The
                                             intraday liquidity, operational, and                    existing real-time gross settlement functionality of   results to a certain extent from
                                             credit risks in the wholesale payment                   Fedwire would be retained.                             payments held in liquidity queues until
                                             system, the Board considered changes to                    4 CHIPS is a real-time final payment system         later in the day but is also importantly
                                                                                                     operated by The Clearing House Payments                driven by processes at clearing and
                                             its PSR policy, which sets out the                      Company. In January 2001, The Clearing House
                                             general public policy objectives of safety              implemented operational and rule changes to allow
                                                                                                                                                            settlement organizations and late-day
                                             and efficiency for payment and                          all transactions settled in CHIPS to be final upon     market activity. For instance, private-
                                             settlement systems. The changes to the                  release from a central queuing system. Depository      sector payment systems have created a
                                                                                                     Trust & Clearing Corporation operates six              structural demand for intraday central
                                             PSR policy, however, are only one effort                subsidiaries that provide clearance, settlement, and
                                             under a four-pronged strategy involving                 information services for many financial
                                                                                                                                                            bank balances and related credit
                                             the Federal Reserve and the financial                   instruments, including equities, corporate and         averaging about $50 billion per day.
                                             industry. The second effort involves the                municipal bonds, government and mortgage-backed        This credit supports these systems’
                                                                                                     securities, money market instruments, and over-the-    routine settlement and risk management
                                             Reserve Banks working with the                          counter derivatives.
                                             industry to investigate the potential                      5 The Payment Risk Committee (PRC) is
                                                                                                                                                            activities, and the associated balances
                                                                                                     sponsored by the Federal Reserve Bank of New           are released late in the day. On peak
                                                2 As part of its review, in June 2006, the Board     York and works to identify and analyze issues of       days, this demand for balances can
                                             published for public comment the Consultation           mutual interest related to risk in payments and        exceed $150 billion. A significant
                                             Paper on Intraday Liquidity Management and the          settlement. The institutions represented on the PRC    proportion of such balances are not
                                             Payments System Risk Policy (71 FR 35679, June 21,      include Bank of America, Bank of New York
                                             2006) seeking information from financial                Mellon, Bank of Tokyo-Mitsubishi UFJ, Citibank,        currently released to depository
                                             institutions and other interested parties on their      Deutsche Bank, HSBC, JPMorgan Chase, State             institutions until after 4:30 p.m. for
                                             experience in managing liquidity, operational, and      Street, UBS, Wachovia, and Wells Fargo. The            general use in the payment system.
                                             credit risks related to Fedwire funds transfers,        Wholesale Customer Advisory Group (WCAG)               Overall, from an operational risk
                                             especially late-day transfers. The paper included a     advises the Wholesale Product Office on business
                                             list of detailed objectives relating to safety and      issues and is composed of depository institutions      perspective, the compression of
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                                             efficiency that the Board has previously used to        that are major users of Fedwire. Institutions          payments, particularly large payments,
                                             conduct payment system risk analysis. An                represented on this group include ABN AMRO,            sent late in the day increases the
                                             important goal of the consultation process was to       Bank of America, Bank of New York Mellon,              potential magnitude of liquidity
                                             identify opportunities to improve the safety/           Citibank, Deutsche Bank, HSBC, JPMorgan Chase,
                                             efficiency trade-offs in the payment system over the    Key Bank, Mellon Financial, State Street, SunTrust,    dislocation and risk in the financial
                                             long run. For a summary of comments on the              UBS, US Bank, US Central Credit Union, Wachovia,
                                             consultation paper, see 73 FR 12417, March 7, 2008.     and Wells Fargo.                                        6 All   times referenced are eastern time.



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                                                                      Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                          79111

                                             industry if late-in-the-day operational                 requires a substantial amount of                      institutions predominantly through
                                             disruptions should occur.                               liquidity to be transferred to and remain             collateralized intraday overdrafts.
                                                                                                     at DTC until end-of-day settlement                       (3) Reduce over time the reliance of
                                             Comments on Four-Prong Strategy                                                                               the banking industry on
                                                                                                     around 4:30 p.m. when the liquidity is
                                             Involving Federal Reserve and Industry                                                                        uncollateralized daylight credit if this
                                                                                                     released back to DTC’s participants.
                                             Efforts                                                                                                       can be done without significantly
                                                                                                     Several comment letters strongly
                                                Several commenters recognized that                   supported ongoing efforts by CHIPS and                disrupting the operation of the payment
                                             additional efforts are needed to address                DTC. Many of these commenters                         system or causing other unintended
                                             the late-day compression of payments                    stressed the importance of taking further             adverse consequences.
                                             and strongly encouraged continued                       steps to ease end-of-day liquidity                       Commenters generally supported this
                                             work on the three other efforts under the               ‘‘traps.’’                                            new approach and did not recommend
                                             four-prong strategy endorsed by the                        The Board fully supports continued                 changes. Several commenters requested
                                             Board. The three other efforts cover the                progress on the three efforts. The Board              information about how collateral
                                             potential development of a liquidity-                   agrees that the approved changes to the               management and monitoring systems
                                             saving mechanism for the Fedwire                        PSR policy alone are not sufficient to                would be changed in implementing the
                                             Funds Service, improvements in                          address late-day payment compression                  approach. One commenter also noted
                                             payments processing for CHIPS, and                      and liquidity pressures in the payment                that the complexity of collateral
                                             improvements in liquidity usage within                  system. The Board approved the revised                management could introduce a new
                                             the Depository Trust & Clearing                         PSR policy based on the expectation                   type of operational risk that would need
                                             Corporation, particularly its Depository                that the financial industry will continue             to be managed. The Board recognizes
                                             Trust Company (DTC) subsidiary.7                        to pursue the elements of the four-prong              that under the revised policy depository
                                             These initiatives have been a                           strategy to address the combination of                institutions will have an increased need
                                             collaborative effort by the Federal                     related intraday liquidity, operational,              to manage actively their collateral
                                             Reserve and industry and are ongoing.                   and credit risks in the wholesale                     pledged to the Reserve Banks. In the
                                                The Reserve Banks have been                          payment and settlement system. In                     past, depository institutions have
                                             exploring with the industry the                         addition, further efforts may be needed               pledged significant amounts of loans as
                                             possibility of developing a liquidity-                  to review market clearing and                         collateral for discount window and PSR
                                             saving mechanism for the Fedwire                        settlement practices that help push                   purposes, along with smaller amounts of
                                             Funds Service. Such a mechanism                         payments later in the day than may be                 securities. Loan collateral traditionally
                                             would also potentially economize on                     necessary.                                            has had a low opportunity cost. For
                                             the amount of collateral needed to settle                                                                     some institutions and at certain times,
                                             a given value of transactions. For                      Revised PSR policy                                    however, securities can be an important
                                             example, the creation of the mechanism                    As noted in the Board’s Consultation                source of collateral pledged to the
                                             could further encourage the coordinated                 Paper on Intraday Liquidity                           Reserve Banks and could play an
                                             release of payments held in the liquidity               Management and the Payments System                    important role in fine-tuning collateral
                                             queues of depository institutions by                    Risk Policy and in its request for                    positions to meet daily PSR needs. In
                                             reducing the total liquidity (and                       comment on proposed changes to the                    some cases, institutions may also seek to
                                             collateral) used to fund those payments.                PSR policy, the Board conducted a                     pledge securities on an intraday basis
                                             Four comment letters, one of which                      broad policy review.8 A key component                 and not keep them on deposit at a
                                             represented sixteen large depository                    of this review included assessing anew                Reserve Bank overnight. The Reserve
                                             institutions, strongly supported the                    the role of the central bank in the                   Banks will be implementing changes
                                             development of a liquidity-saving                       payment system. Current thinking about                over both the short and long term to
                                             mechanism. One commenter                                the role of central banks in providing                their operational systems and processes
                                             specifically discussed the efficiency                   intraday balances to the payment system               in anticipation of depository
                                             gains of moving payments from                           has evolved significantly over the past               institutions’ changing needs for
                                             individual institution queues to a                      twenty years and now explicitly                       collateral management. These changes
                                             centralized queue that would enable                     recognizes that central banks have an                 are discussed later in the collateral
                                             timely matching and offsetting of                       important role in providing intraday                  section.
                                             payments.                                               (central bank money) balances to foster                  The Board also received one comment
                                                As part of industry efforts, CHIPS,                  the smooth operation and settlement of                letter that supported the
                                             working with its members, has pursued                   payment systems.9                                     collateralization portion of the new
                                             ideas to facilitate faster matching and                   In view of this perspective, the Board              approach but opposed moving to a
                                             offsetting of large-value payments                      proposed adopting a new approach to                   mandatory collateral regime. The move
                                             throughout the day to reduce the                        enhance intraday liquidity and the flow               toward voluntary collateralization under
                                             number of unresolved payments that                      of payments, while controlling risk to                the new approach reflects the Board’s
                                             need to be settled at the end of the                    the Reserve Banks. The approach would                 sensitivity to sudden and disruptive
                                             CHIPS operating day. Similarly, DTC                       (1) Explicitly recognize that the                   changes in policy, the possibility of
                                             has explored possible operational and                   Federal Reserve has an important role in              creating unintended intraday liquidity
                                             technical changes that may reduce                       providing intraday balances and credit                and operational risks for the payment
                                             liquidity used in its systems and                       to foster the smooth operation of the                 system, and the potential burden on the
                                             processes related to securities                         payment system.                                       banking industry. An important aspect
                                             settlement. The money market                              (2) Provide temporary, intraday                     of the new approach is the shift to a
                                             instrument clearing and settlement                      balances to healthy depository                        greater use of collateral in a way that
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                                             processes, in particular, currently                                                                           minimizes the cost and administrative
                                                                                                       8 See 71 FR 35679, June 21, 2006, and 73 FR
                                                                                                                                                           burden of the policy on most users of
                                               7 DTC  provides custody and settlement services       12417, March 7, 2008.
                                                                                                                                                           daylight overdrafts.
                                             for corporate and municipal securities and money          9 See ‘‘The Role of Central Bank Money in the

                                             market instruments. DTC is a member of the Federal      Payment System,’’ Committee on Payment and
                                                                                                                                                              Overall, the Board believes the new
                                             Reserve System and a clearing agency registered         Settlement Systems, August 2003 at http://            approach significantly improves the
                                             with the Securities and Exchange Commission.            www.bis.org/publ/cpss55.pdf.                          tradeoffs between safety and efficiency


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                                             79112                         Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             objectives of the PSR policy for the                                encouraging the transition to a                                      Specific Changes to Revised PSR policy
                                             payment system and its participants. In                             predominantly collateralized daylight
                                             approving this approach, the Board                                  overdraft regime. The Board will also                                  To implement the new approach, the
                                             expects institutions to reduce over time                            continue to monitor developments over                                Board has approved changes to certain
                                             their reliance on uncollateralized                                  time, and at some future date, may                                   terms and fees for providing daylight
                                             daylight credit. If this does not occur,                            evaluate the costs and benefits of                                   overdrafts. The following table
                                             the Board may choose, for example, to                               moving further toward a fully                                        summarizes the specific elements of the
                                             evaluate the effectiveness of the level of                          collateralized structure.                                            current and revised PSR policy.
                                             the fee for uncollateralized overdrafts in

                                                                          TABLE—SUMMARY OF KEY ELEMENTS OF THE CURRENT AND REVISED PSR POLICY *
                                                                                                                      Current policy                                                               Revised policy

                                             Collateral                                Required for problem institutions** and institutions with                             Additional provision that explicitly applies collateral
                                                                                         max caps. Collateral eligibility and margins same as                                  pledged by institutions to daylight overdrafts for pric-
                                                                                         for discount window.                                                                  ing purposes.
                                             Fee for collateralized day-               36 basis points ................................................................      Zero fee.
                                               light overdrafts.
                                             Fee for uncollateralized day-             36 basis points ................................................................      50 basis points.
                                               light overdrafts.
                                             Deductible ............................   10 percent of an institution’s capital measure ................                       Replaced by zero fee for collateralized daylight over-
                                                                                                                                                                               drafts and fee waiver.
                                             Fee waiver ...........................    Up to $25 biweekly .........................................................          $150 biweekly ***.
                                             Net debit cap ........................    Two-week average limit and higher single-day limit. Ex                                Two-week average limit eliminated; single-day limit re-
                                                                                         post counseling if exceed limit.                                                      tained. Flexibility in ex post counseling if fully
                                                                                                                                                                               collateralized.
                                             Max cap ...............................   Additional collateralized capacity above net debit cap                                Streamlined process for certain FBOs up to a limit (ef-
                                                                                         for self-assessed institutions.                                                       fective March 26, 2009). Minor changes apply for all
                                                                                                                                                                               institutions.
                                             Penalty fee for ineligible in-            136 bps ...........................................................................   150 bps.
                                               stitutions.
                                               * Access to daylight credit would continue to be available only to institutions with regular access to the discount window as is the case today.
                                               ** Problem institutions are institutions that are in weak financial condition and should refrain from incurring daylight overdrafts and institutions
                                             that chronically incur daylight overdrafts in excess of their net debit caps in violation of the PSR policy.
                                               *** The proposed $150 waiver would be subtracted from the gross fees (in a two-week reserve-maintenance period) assessed on any deposi-
                                             tory institution eligible to incur daylight overdrafts. This procedure differs from the current policy in which the waiver only eliminates gross fees of
                                             institutions that have charges less than or equal to $25 in a two-week period but includes a deductible.


                                               To assist institutions in                                         window.10 The pledging of in-transit                                 deciding whether to pledge collateral
                                             understanding the effect of the revised                             securities would remain a collateral                                 would depend on the opportunity cost
                                             policy on their daylight overdraft fees,                            option for PSR purposes at Reserve                                   of collateral in relation to the cost of the
                                             the Board has made available a                                      Banks’ discretion.11                                                 daylight overdraft.
                                             simplified fee calculator. The calculator                             The comment letters generally                                        Commenters overall believed there
                                             enables institutions to provide daylight                            supported the application of collateral                              could be a substantial opportunity cost
                                             overdraft and collateral data to estimate                           to daylight overdrafts, specifically with                            to pledge collateral depending on
                                             their daylight overdraft fees under the                             a zero fee. Several commenters noted                                 market conditions and whether the
                                             revised PSR policy. The calculator will                             that, broadly across the industry,                                   lowest-cost collateral has already been
                                             be available until 30 days after the to-                            institutions will likely increase the
                                                                                                                                                                                      pledged for discount window purposes
                                                                                                                 amount of collateral pledged to Reserve
                                             be-announced effective date of the                                                                                                       by a depository institution. One
                                                                                                                 Banks. Several commenters addressed
                                             revised policy and is located on the                                                                                                     commenter estimated the cost of
                                                                                                                 how their individual institutions may
                                             Board’s Web site at https://                                                                                                             collateral at between 26 and 50 basis
                                                                                                                 adjust collateral positions or payments
                                             www.federalreserve.gov/apps/RPFCalc/.                                                                                                    points for collateral that has already
                                                                                                                 activities in response to a zero fee for
                                                                                                                                                                                      been pledged but potentially much
                                             A. Collateral                                                       collateralized overdrafts and higher fee
                                                                                                                                                                                      higher for currently unpledged
                                                                                                                 for uncollateralized overdrafts. Three
                                               The Board proposed supplying                                                                                                           collateral that might be needed to obtain
                                                                                                                 commenters stated they would increase
                                             intraday balances to healthy depository                                                                                                  incremental intraday liquidity. Another
                                                                                                                 collateral pledged with their Reserve
                                                                                                                 Bank. Two commenters stated that they                                commenter estimated the cost of
                                             institutions predominantly through
                                                                                                                 had enough collateral to cover any                                   additional collateral to exceed 50 basis
                                             explicitly collateralized daylight
                                                                                                                 potential daylight overdraft and would                               points. Other commenters discussed the
                                             overdrafts provided by Reserve Banks.
                                                                                                                 not pledge additional collateral. In                                 potential high cost to pledge additional
                                             The Board proposed allowing the use of                                                                                                   collateral but did not provide estimates.
                                             collateral to be voluntary to avoid                                 addition, six commenters noted that
                                                                                                                                                                                      Two commenters noted that the cost of
                                             disrupting the operation of the payment                                                                                                  collateral would be relatively high in a
                                                                                                                    10 See http://www.frbdiscountwindow.org/ for
                                             system and increasing the cost burden
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                                                                                                                 information on the discount window and PSR                           volatile market when demand for
                                             of the policy on a large number of                                  collateral acceptance policy and collateral margins.                 collateral increases and supply is scarce.
                                             smaller users of daylight overdrafts. As                               11 In-transit securities are book-entry securities
                                                                                                                                                                                      Another commenter noted that, in order
                                             part of the proposal, collateral eligibility                        transferred over the Fedwire securities system that
                                                                                                                                                                                      to cover all potential daylight
                                                                                                                 have been purchased by a depository institution but
                                             and margins would remain the same for                               not yet paid for or owned by the institution’s                       overdrafts, the institution would incur a
                                             PSR policy purposes as for the discount                             customers.                                                           high monthly expense to


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                                                                      Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                              79113

                                             overcollateralize its daylight overdraft                border securities. The Board recognizes                 institutions better track when collateral
                                             balance. For many of these institutions,                that enhancements to collateral                         is determined to be pledged to and
                                             the decision to pledge higher-cost                      management systems and processes are                    released by the Reserve Banks.
                                             collateral would depend on the                          an important aspect of implementing                        Following the effective date for the
                                             opportunity cost of pledging a particular               the revised PSR policy, and the Federal                 revised PSR policy, the Reserve Banks
                                             asset relative to the level of the                      Reserve is developing a plan to mitigate                will continue with initiatives to
                                             uncollateralized daylight overdraft fee.                the concerns raised as discussed in the                 improve the pledging and withdrawal
                                                Some commenters also responded to                    next section.                                           process for securities collateral. These
                                             the Board’s question on the potential                      On balance, the Board believes that                  initiatives will largely be similar to
                                             effects of the collateral policy on other               the proposed voluntary collateralization                those in the short-term strategy but
                                             financial market activities. Five                       regime will better meet the needs of the                include enhancements involving
                                             commenters noted that pledging                          Reserve Banks and industry than the                     sufficient complexity and resource
                                             collateral for daylight overdraft                       current policy. The Board also believes                 requirements that completion may not
                                             purposes would reduce the pool for                      that unencumbered collateral pledged to                 be possible before the implementation
                                             funding or investing activities.                        Reserve Banks should be available to                    date of the new policy. Some of these
                                             Conversely, two commenters believed                     support the use of intraday credit.12 In                enhancements may take place relatively
                                             that the policy would not have an effect                addition, the Board believes that it is                 soon—perhaps within six months—after
                                             on market activity because of the wide                  important for consistency to maintain                   the implementation date, while others
                                             range of collateral accepted by Reserve                 for PSR policy purposes the same                        may take somewhat longer. Collectively,
                                             Banks.                                                  collateral eligibility and margins as for               these enhancements should enable
                                                Two commenters requested that                        the discount window.13                                  greater rates of straight-through
                                             collateral pledged for daylight                            Collateral management. The Federal                   processing of securities collateral by the
                                             overdrafts be automatically available to                Reserve is in the process of assessing its              Reserve Banks and quicker withdrawal
                                             cover unforeseen overnight overdrafts,                  collateral-management systems and                       of unencumbered securities, and should
                                             which in effect creates an overnight                    processes. It has identified a number of                provide tools to assist institutions in
                                             discount window loan. Two                               possible improvement opportunities                      monitoring intraday their daylight
                                             commenters wanted the ability to                        and has begun engaging the industry in                  overdraft and collateral positions.
                                             pledge collateral through a central cross-              dialogue about needed and desired                          Over the longer term, the Reserve
                                             border utility accessed by multiple                     functionality and process                               Banks intend to collaborate with the
                                             central banks. The cross-border utility                 improvements.14                                         industry to identify additional
                                             would enable global institutions to                        Based on comment letters and initial                 enhancements that will continue to
                                             manage more effectively collateral held                 industry discussions, the Federal                       improve the efficiency and effectiveness
                                             in different jurisdictions and to take                  Reserve identified a number of changes                  of processes for pledging, withdrawing,
                                             advantage of differences in time zones.                 that it intends to implement prior to the               and monitoring of collateral. The
                                             Finally, one commenter asked that                       effective date of the revised policy. This              Federal Reserve expects that
                                             deadlines to pledge and withdraw                        short-term strategy involves several                    institutions’ needs will evolve and grow
                                             collateral be extended to cover the                     initiatives to improve the pledging and                 as they gain experience with the revised
                                             settlements of DTC and CHIPS and be as                  withdrawal of specific types of                         PSR policy and with the collateral-
                                             late as the close of the Fedwire Funds                  securities. The strategy also includes                  management enhancements the Reserve
                                             Service. Today, the Reserve Banks                       increasing information available                        Banks implement in the short and
                                             accept pledges of some securities up                    intraday and interday on pledged                        medium term.
                                             until 3 p.m. Securities held in the                     collateral through the Reserve Banks’                      Over time, the Federal Reserve will be
                                             Fedwire Securities Service, however,                    Account Management Information                          providing more-specific information to
                                             can be pledged to the Reserve Banks up                  application (AMI).15 In addition, the                   the industry about upcoming
                                             until 7 p.m. (or a half-hour after the                  Federal Reserve will be publishing                      enhancements to collateral and
                                             Fedwire Funds Service closes).                          general timing guidelines for collateral                information systems. This
                                                While commenters raised several                      pledging and withdrawal to help                         communication will help institutions
                                             points for the Board’s consideration,                                                                           understand the forthcoming changes
                                             commenters appeared to have few                            12 Under some circumstances, rules for               and will also help them identify any
                                             significant concerns with the proposed                  determining whether collateral is available may         changes they may need to make to their
                                             voluntary collateralization regime. The                 differ for PSR and discount window purposes. For        systems.
                                             most significant concern, which was                     example, under term lending (announced July 30,
                                             raised by the majority of commenters,                   2008), institutions requesting an advance of more       B. Fees for Collateralized Daylight
                                                                                                     than 28 days will need to hold an additional 33         Overdrafts
                                             related to system and process                           percent of collateral in excess of the collateral
                                             enhancements for collateral                             required for the advance. This additional collateral       The Board proposed lowering the fee
                                             management and monitoring at the                        may not available for discount window purposes          for collateralized daylight overdrafts to
                                             Reserve Banks. For some commenters,                     but would be considered available (unencumbered)        zero and raising the uncollateralized
                                                                                                     for PSR purposes.
                                             support for the proposed policy was                        13 In-transit securities would also remain an        daylight overdraft fee to 50 basis points
                                             contingent on increased efficiency in                   eligible collateral option for PSR policy purposes at   to encourage institutions to pledge
                                             collateral processing and real-time or                  the Reserve Banks’ discretion. Reserve Banks will       collateral and to reduce payments held
                                             near-real-time information on collateral                require detailed information on a minute-by-minute      in liquidity-management queues. The
                                                                                                     basis to be submitted.
                                             pledged. About half the commenters                         14 The Federal Reserve is also in dialogue with
                                                                                                                                                             commenters strongly supported the
                                             expressed strong preferences that the                   depository institutions interested in pledging in-      proposal of a zero fee for collateralized
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                                             Reserve Banks’ collateral management                    transit collateral for pricing purposes to discuss      daylight overdrafts. Most commenters
                                             systems facilitate the pledging and                     new data requirements and processes.                    believed that a zero fee for collateralized
                                                                                                        15 AMI is an online tool offered by the Reserve
                                             withdrawal of securities intraday. Five                                                                         daylight overdrafts will encourage
                                                                                                     Banks that supplies real-time information about an
                                             commenters also made suggestions to                     institution’s Federal Reserve account balance and
                                                                                                                                                             institutions that queue payments for
                                             expand the range of eligible collateral,                provides access to a variety of summary and detail      liquidity purposes to release more of
                                             including additional types of cross-                    reports.                                                those payments earlier in the day.


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                                             79114                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             Commenters acknowledged that                            At the same time, institutions that,                  commenter believed that over time
                                             institutions may still hold some                        under the revised policy, have sufficient             certain participants in the government
                                             payments in liquidity queues for                        collateral to cover their daylight                    securities market will revert to pre-1994
                                             reasons including counterparty risk,                    overdrafts may not have a significant                 behavior without the cost incentive
                                             internal comfort with daylight overdraft                incentive to demand the early return of               rooted in daylight overdraft fees to
                                             levels, and uncollateralized daylight                   funds. Overall, it is difficult at this stage         deliver securities early.
                                             overdraft fee management. One                           to predict the net effect on the market                  While it is not possible at this stage
                                             institution noted that it believed the                  for the early return of fed funds loans.              to know how U.S. government securities
                                             zero fee would help change certain                        The Board also requested comment on                 dealers will respond to a zero fee for
                                             depository institutions’ tactical behavior              whether collateralized overdrafts at a                collateralized daylight overdrafts for
                                             of only sending payments when                           zero fee would eliminate incentives for               depository institutions, the Board does
                                             payments are received in order to                       depository institutions and their                     believe that competing business or
                                             reduce daylight overdraft costs. Another                customers to process securities used in               processing incentives, such as managing
                                             commenter believed a zero fee was                       repurchase agreements early in the                    securities inventories, may result in
                                             appropriate because charging for                        morning. The Board was concerned that                 some change in behavior to shift later
                                             collateralized overdrafts would amount                  a zero overdraft fee could remove the                 the delivery of securities. The change
                                             to an unfair tax.                                       incentive for the early processing of                 initially may be limited to certain types
                                                The majority of commenters noted                     securities, which it has viewed as an                 of securities or to specific dealers and
                                             that the zero fee for collateralized                    important operational success by the                  thus would be of minor consequence.
                                             daylight overdrafts would also likely                   banking and securities industry from the              The main concern is that a change will
                                             lead depository institutions to increase                time daylight overdraft fees were first               become pervasive, undoing the
                                             collectively intraday credit use. Five                  implemented. Prior to the introduction                successes achieved under the initial
                                             commenters believed that their                          of daylight overdraft fees in 1994, U.S.              regime of charging for daylight
                                             individual institution’s intraday credit                government securities dealers would                   overdrafts.
                                             use would increase, while three other                   arrange for and deliver securities                       Some mitigating factors may influence
                                             commenters estimated no change to                       designated for repurchase agreements                  the magnitude of behavioral changes.
                                             their institution’s use. The credit risk to             largely after noon, creating a late-day               The market for early deliveries is well
                                             the Reserve Banks from the predicted                    compression of payments and securities                entrenched today and is supported by
                                             increases in daylight overdraft use                     deliveries in the Fedwire Securities                  automation. A significant change in this
                                             would be controlled by traditional                      Service operating day. Consequently, it               market may require institutions to make
                                             banking tools used in providing credit                  was not uncommon for the Fedwire                      systems changes, which could be costly.
                                             (eligibility requirements, collateral,                  Securities Service operating day to be                In addition, the $50 million limit on the
                                             caps, and monitoring). In addition, as                  extended until 4 p.m. or later to address             size of securities transfers over Fedwire
                                             institutions release payments earlier                   the volume of transfers that arrived late             Securities Service reduces the incentive
                                             from liquidity queues, liquidity should                 in the afternoon.16 In anticipation of                to build positions. Securities dealers in
                                             circulate more quickly with a resulting                 being charged daylight overdraft fees,                the past held securities until near the
                                             faster flow of payments and thus on net                 the U.S. government securities dealers                close of the Fedwire Securities Service
                                             mitigate somewhat the predicted                         (and their clearing banks) introduced                 operating day to ensure they could
                                             increase in daylight overdraft use. On                  processes and technology that facilitated             complete the delivery in full and avoid
                                             balance, the Board believes that setting                the arrangement of repurchase                         costly failures to deliver. This practice
                                             the collateralized daylight overdraft fee               agreements and delivery of the                        is said to continue in some cases even
                                             at zero will improve tradeoffs among                    securities early in the morning. By                   today.
                                             liquidity, operational, and credit risks in             arranging trades and delivering                          While the Board continues to be
                                             the payment system.                                     securities early in the morning, dealers              concerned about the possible effect of a
                                                The Board requested comment on two                   gained use of the incoming cash from                  zero fee on the timing of securities
                                             possible changes in market practices as                 their counterparties in the repurchase                transfers, it believes there are significant
                                             a result of the zero fee for collateralized             agreements, reducing the duration of                  benefits in reducing the fee to zero for
                                             daylight overdrafts. One question                       their daylight overdrafts. On the return              collateralized daylight overdrafts. This
                                             covered the possible effect on the                      leg, counterparties to the repurchase                 view is also strongly supported by the
                                             market for early return of fed funds                    agreements also began sending back the                comment letters. The Board believes
                                             loans. Several commenters believed that                 securities to the dealers first thing in the          that a zero fee for collateralized daylight
                                             the practice of returning fed funds loans               morning. This market movement shifted                 overdrafts provides incentives for
                                             earlier would be positively affected, at                the peak in daylight overdrafts                       institutions to release funds transfers
                                             least somewhat, by the proposed two-                    significantly earlier in the morning and              held in internal queues for liquidity
                                             tiered pricing. Specifically, the fee                   reduced dramatically securities-related               reasons, improving liquidity circulation
                                             reduction could increase the incentive                  daylight overdrafts.                                  and reducing operational risk in the
                                             to return fed funds loans earlier for                     Most commenters believed that                       Fedwire Funds Service. A zero fee also
                                             institutions that have sufficient                       practices either would not change or                  creates incentives to pledge additional
                                             collateral to cover any overdraft                       were unsure if practices would change                 collateral to the Reserve Banks,
                                             incurred. One commenter believed a                      because of well-established current                   mitigating their credit risk in providing
                                             change would not happen automatically                   procedures and technology that support                intraday balances. On balance, the
                                             without market intervention to                          the market. One commenter, however,                   Board believes the expected benefits
                                             encourage the early return. Another                     expressed concern that the zero fee for               warrant reducing the fee for
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                                             commenter was unsure of any changes                     collateralized daylight overdrafts may                collateralized daylight overdrafts to
                                             because of uncertain market dynamics                    have unintended consequences on the                   zero.
                                             and the historical resistance to return                 government securities market. The                        The Board, however, will monitor
                                             funds early. Some comments suggest                                                                            delivery practices in the securities
                                             that certain institutions may be more                     16 The Fedwire Securities service operating hours   market to determine if securities
                                             willing to return fed funds loans earlier.              today are 8:30 a.m. to 3:30 p.m.                      transfers shift later in the day. To assist


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                                                                       Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                    79115

                                             in this monitoring, the Board will                        commenters suggested individual                      chartered depository institutions. Under
                                             require government securities clearing                    institutions monitor counterparties,                 the current policy, U.S.-chartered
                                             banks to submit data to the Board before                  while two other commenters                           depository institutions receive a net
                                             and after the implementation of the                       recommended the Federal Reserve                      debit cap and deductible based on their
                                             revised policy to help identify shifts in                 monitor institutions’ activities. Two                worldwide capital, while FBOs receive
                                             behavior by dealers; the data collection                  commenters also suggested that the                   a net debit cap and deductible based on
                                             requirements will be discussed directly                   Federal Reserve devise incentives for                no more than 35 percent of their
                                             with the clearing banks.17 If a                           institutions to release payments queued              worldwide capital. By eliminating the
                                             substantial shift does occur, the Board                   prior to 2 p.m., including time-of-day               deductible for all depository institutions
                                             will take appropriate steps as needed.                    pricing.                                             and providing free collateralized
                                             The Board strongly believes that                             It will be important for the industry             intraday credit to eligible depository
                                             reverting to pre-1994 behavior of late                    and Federal Reserve to monitor changes               institutions, including FBOs, the revised
                                             deliveries of securities poses                            in payment activities over time to                   policy will address the concerns that
                                             unacceptable operational risks to the                     evaluate whether institutions continue               some commenters expressed regarding
                                             payment system.                                           to hold payments for liquidity reasons.              the negative incentive effects of the
                                                                                                       It is not fully clear, however, whether              deductible calculations.
                                             C. Fees for Uncollateralized Daylight                     the fee increase to 50 basis points would               The Board believes it is still
                                             Overdrafts                                                exacerbate this problem for some                     appropriate to provide some amount of
                                                The Board proposed raising the fee to                  institutions and whether institutions                free uncollateralized liquidity to
                                             50 from 36 basis points (annual rate) for                 will queue payments to some degree at                depository institutions to reduce the
                                             uncollateralized daylight overdrafts to                   any positive fee, including at a zero fee,           administrative burden on Reserve Banks
                                             encourage the collateralization of                        for reasons of internal liquidity risk               and on a large number of depository
                                             daylight overdrafts.18                                    management. On balance, the Board                    institutions that incur small amounts of
                                                While acknowledging the intent of                      believes that the increase to 50 basis               uncollateralized daylight overdrafts.
                                             increasing the uncollateralized fee,                      points for uncollateralized daylight                 The Board believes that the $150 fee
                                             some commenters raised concerns that                      overdrafts is appropriate in conjunction             waiver will serve those purposes under
                                             the higher fee may introduce liquidity                    with the fee reduction to zero for                   the revised PSR policy. With the Board
                                             challenges for collateral-constrained                     collateralized daylight overdrafts. The              adopting these changes, institutions
                                             institutions. These commenters                            changes together balance the overall                 should receive ample free liquidity
                                             generally believed that institutions                      tradeoffs between safety and efficiency              through zero-priced collateralized
                                             without sufficient collateral to support                  by providing incentives to pledge                    daylight overdrafts. In addition, most
                                             daylight overdrafts would have an                         collateral, which mitigates the Reserve              small users of uncollateralized intraday
                                             incentive to hold payments for liquidity                  Banks’ risks, and incentives to increase             credit should not observe a change in
                                             purposes to avoid daylight overdraft                      the flow of payments, which increases                their daylight overdraft charges between
                                             charges. Commenters, including an                         liquidity circulation.                               the current and revised PSR policies.
                                             organization representing sixteen large
                                             depository institutions, stated that the                  D. Deductible and Fee Waiver                         E. Net Debit Caps 20
                                             collective benefits from speeding up the                     The Board proposed eliminating the                  The Board proposed eliminating the
                                             flow of payments would only be                            deductible as a source of free intraday              current two-week average cap on
                                             attained if all participants acted for the                credit with the intent of providing such             daylight overdrafts for healthy
                                             collective good rather than minimizing                    credit through collateralized daylight               depository institutions while retaining
                                             individual institutions’ own costs and                    overdrafts charged at a zero fee. The                the higher single-day cap. Under the
                                             risks. These commenters also indicated                    Board also proposed to increase the fee              proposal, the single-day cap would
                                             that they would not continue to release                   waiver to $150 from $25 to reduce the                apply to the total of collateralized and
                                             payments from queues if counterparties                    burden of the PSR policy on institutions             uncollateralized daylight overdrafts.21
                                             did not reciprocate.                                      that use small amounts of daylight                   The Board did not receive specific
                                                To mitigate the risk that institutions                 overdrafts. As proposed, the $150                    comments on the removal of the two-
                                             do not act for the overall benefit of the                 waiver would be subtracted from the                  week net debit cap or retention of the
                                             industry, several commenters discussed                    gross fees (in a two-week reserve-                   single-day net debit cap.
                                             options for monitoring and promoting                      maintenance period) assessed on any                    The Board also proposed providing
                                             bilateral payment flows. Two                              user of daylight overdrafts in contrast to           Reserve Banks additional flexibility in
                                                                                                       the current waiver that only applies to
                                               17 While the Board has access to data indicating
                                                                                                       gross fees of institutions that have                    20 Net debit caps limit the aggregate amount of

                                             the timing of transfers by depository institutions        charges less than or equal to $25 (in a              daylight credit that the Reserve Banks extend. Net
                                             over the Fedwire Funds Service and Fedwire                                                                     debit caps are a function of qualifying capital and
                                             Securities Service, these data do not provide             two-week reserve-maintenance                         a multiplier per cap category. There are four cap
                                             sufficiently detailed information to track effectively    period).19                                           categories: (in ascending order) zero, exempt-from-
                                             when dealers are delivering securities designated            While none of the comment letters                 filing, de minimis, and self assessed (which
                                             for repurchase agreements.                                explicitly addressed the introduction of             includes high, above-average, and average
                                               18 In calculating an institution’s fees, the value of                                                        multipliers).
                                                                                                       a higher fee waiver, two commenters
                                             unencumbered collateral pledged to the Reserve                                                                    21 Under the current policy, net debit caps limit

                                             Banks will be subtracted from negative Federal            strongly supported the elimination of                the amount of uncollateralized daylight overdrafts,
                                             Reserve account balances at the end of each minute        the deductible. These commenters                     while max caps limit the amount of approved
                                             to determine the institution’s uncollateralized           believed this change would remove a                  collateralized capacity in addition to the
                                             negative Federal Reserve account balance. The             competitive disparity they have                      uncollateralized amount allowed under net debit
                                             uncollateralized negative Federal Reserve account                                                              caps. Under the revised policy, the single-day cap
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                                             balance per minute will be summed and divided by          identified between FBOs and U.S.-                    will limit the total of collateralized and
                                             the number of minutes in the Fedwire Funds                                                                     uncollateralized daylight overdrafts within the
                                             Service operating day to arrive at the average daily        19 The waiver would not result in refunds or       predefined net debit cap amount, and any
                                             uncollateralized daylight overdraft, which will be        credits to an institution and cannot be carried to   collateralized portion would not increase the total
                                             assessed a 50 basis point fee (annual rate). The          another reserve maintenance period. The waiver       amount. Institutions needing capacity that exceeds
                                             value of collateral pledged is the same for PSR and       would not apply to institutions subject to the       the net debit cap will still need to apply for a max
                                             discount window purposes.                                 penalty fee.                                         cap.



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                                             79116                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             the administration of net debit caps for                uncollateralized daylight overdraft. The              to the periodic review of liquidity plans
                                             fully collateralized daylight overdrafts.               limited number of waivers reflects the                performed with U.S.-chartered
                                             The Reserve Bank may forgo ex post                      fact that collateral may not fully protect            institutions to ensure the institution’s
                                             counseling for two incidents of fully                   a Reserve Bank and that frequent                      intraday liquidity risk is managed
                                             collateralized overdrafts per two                       violations of agreed caps may suggest                 appropriately. Under this proposal,
                                             consecutive reserve-maintenance                         other concerns about a depository                     however, if an FBO requests capacity in
                                             periods (four weeks).22 The additional                  institution.                                          excess of 100 percent of worldwide
                                             flexibility would apply to institutions                   Based on this analysis, the Board                   capital times the self-assessed cap
                                             that have de minimis or self-assessed                   adopted the proposed changes to net                   multiple, it would be subject to the
                                             net debit caps or max caps.23 Exempt-                   debit caps. The elimination of the two-               general max cap procedure applicable to
                                             cap institutions are excluded from this                 week average cap will increase the                    all institutions.
                                             additional flexibility because they                     routine daylight overdraft capacity of                   Four commenters supported the
                                             already are allowed to exceed their cap                 institutions with self-assessed caps                  proposed streamlined max cap
                                             limit twice in two consecutive reserve-                 approximately 50 percent from the                     procedure for FBOs that are financial
                                             maintenance periods. Zero cap                           current policy. The Board also adopted                holding companies or SOSA 1-rated
                                             institutions will not be eligible. The                  the proposed additional flexibility in                institutions. The commenters believed
                                             Board did not receive any comments on                   counseling an institution exceeding its               that the streamlined max cap would
                                             the proposed additional flexibility for ex              cap when its daylight overdrafts are                  facilitate institutions’ managing their
                                             post counseling.                                        fully collateralized.                                 payments activity. Three of these
                                                The Board continues to believe that it                                                                     commenters, however, requested that
                                             is appropriate and prudent to have                      F. Maximum Daylight Overdraft                         the Board reconsider calculating the net
                                             limits on intraday credit even when the                 Capacity                                              debit cap for financial holding company
                                             credit is fully collateralized. Collateral                 During its policy review, the Board                or SOSA 1-rated FBOs on 100 percent
                                             may not always be sufficient to protect                 evaluated potential simplifications to                (rather than up to 35 percent) of their
                                             against credit risks. While haircuts on                 the current process through which                     worldwide capital without requiring
                                             collateral help mitigate the risk that the              institutions may apply for max caps.                  collateral for the additional capacity.
                                             liquidation value of collateral will fall               First, the Board proposed removing the                The commenters stated that the
                                             below the credit exposure, they are not                 requirement that institutions must have               streamlined max cap would continue to
                                             designed to eliminate the risk entirely.                already explored other alternatives to                create a competitive disadvantage for
                                             Thus, limits or caps complement the use                 address their increased liquidity needs               FBOs by not allowing them to decide
                                             of collateral in risk mitigation. Among                 before considering a max cap. A                       whether to pledge collateral to support
                                             other things, caps provide a risk                       depository institution interested in                  daylight overdrafts, while U.S.-
                                             management tool for institutions and                    obtaining a max cap would contact its                 chartered depository institutions can
                                             the Reserve Banks in measuring and                      administrative Reserve Bank, which                    make business decisions regarding how
                                             managing the size of exposures and take                 would work with the institution to                    much, if at all, to collateralize. One
                                             some pressure off the use of haircuts to                determine an appropriate capacity level               commenter believed that a mandatory
                                             address credit risks.                                   based on the business case and would                  collateralized regime would resolve this
                                                The Board also continues to believe                  assess relevant financial and                         disparity by requiring all institutions to
                                             that flexibility may be appropriate in                  supervisory information in making such                collateralize 100 percent of their
                                             counseling an institution if the daylight               a credit decision. None of the comment                overdrafts. Another commenter
                                             overdraft is fully collateralized. This                 letters addressed this proposed change.               representing several FBOs noted that if
                                             flexibility to waive counseling reflects                   Second, the Board proposed a                       all institutions collateralized their
                                             the lower risk of a fully collateralized                streamlined max cap procedure that                    daylight overdrafts as a result of the
                                             daylight overdraft relative to an                       would allow eligible FBOs to acquire                  proposed policy changes, the
                                                                                                     additional capacity that in total would               streamlined max cap procedure would
                                                22 The ex post counseling regime includes a series   provide up to 100 percent of worldwide                make any differences largely moot as a
                                             of actions by the Reserve Bank that are aimed at        capital times the self-assessed cap                   practical matter.
                                             deterring an institution from violating the PSR
                                                                                                     multiple. The streamlined procedure                      The Board continues to view the max
                                             policy by exceeding its net debit cap. These actions                                                          cap as an important tool in helping
                                             may include an assessment of the causes of the          would enable a financial holding
                                             overdrafts, a counseling letter to the institution, a   company or SOSA 1-rated institution to                Reserve Banks and depository
                                             review of the institution’s account-management          request from its administrative Reserve               institutions manage intraday risk in a
                                             practices, and an assessment of whether a higher
                                                                                                     Bank a max cap without documenting a                  manner that supports the payment
                                             net debit cap may be warranted. In situations                                                                 needs of individual institutions and the
                                             involving problem institutions, the Reserve Bank        specific business need for additional
                                             may assign the institution a zero cap and impose        capacity or providing a board of                      payment system as a whole. The Board
                                             other account controls, such as requiring the           directors resolution authorizing the                  believes the proposed changes will
                                             institution to pledge collateral; imposing clearing
                                                                                                     request for a max cap.24 The Reserve                  introduce additional flexibility into this
                                             balance requirements; rejecting Fedwire funds                                                                 program, thereby improving the flow of
                                             transfers, ACH credit originations, or National         Bank would assess the ability of eligible
                                             Settlement Service transactions that would cause or     FBOs to manage the intraday capacity                  payments and liquidity in the payment
                                             increase an institution’s daylight overdraft; or        permitted by the max cap as part of its               system, and will more effectively reflect
                                             requiring the institution to prefund certain
                                                                                                     review of relevant financial and                      the strategic direction of the new policy.
                                             transactions.                                                                                                 The Board also continues to believe the
                                                23 FBOs will continue to be monitored at their cap   supervisory information. The Reserve
                                                                                                     Bank, in consultation with the home                   streamlined max cap procedure
                                             level in real time. If an institution’s account is
                                             monitored in real time, any outgoing Fedwire funds      country supervisor, would engage in                   effectively balances the safety and
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                                             transfer, National Settlement Service transaction, or   initial as well as periodic dialogue with             efficiency objectives of the PSR policy
                                             ACH credit origination that exceeds available funds
                                                                                                     the institution that would be analogous               and improves the position of FBOs. The
                                             is rejected. If an FBO exceeds its cap periodically                                                           procedure provides a more efficient
                                             due to payments, such as securities transactions,
                                             that are not covered under a real-time monitor, the        24 The FBO would still be required to complete     method for FBOs to gain additional
                                             Reserve Bank may waive counseling if the daylight       a self-assessment and provide a board of directors    capacity than current procedures while
                                             overdrafts are fully collateralized.                    resolution for the self-assessed cap.                 helping to resolve the increased risk


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                                                                       Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                      79117

                                             associated with FBOs because of the                     commenters believed that they would                     this issue, the changes will not take
                                             timeliness and scope of available                       only need to make minimal procedural                    effect for more than a year.
                                             supervisory information and other                       or systems changes to be prepared for                      The deductible calculation has
                                             supervisory issues that may arise                       the policy change, although two                         prompted some FBOs to delay payment
                                             because of the cross-border nature of the               commenters noted that the degree of                     flows. Several commenters to the
                                             FBO’s business (for example,                            procedural or systems modifications                     Consultation Paper on Intraday
                                             application of different legal regimes).                would depend on changes the Reserve                     Liquidity Management and the
                                                The Board has adopted the proposed                   Banks make to their collateral-                         Payments System Risk Policy stated that
                                             change to remove the requirements to                    management and collateral-monitoring                    FBOs instituted the process of queuing
                                             pursue first all other options. The Board               systems. One commenter believed that a                  payments for liquidity reasons to
                                             has also approved the proposed                          two-year time frame was appropriate to                  respond to the lower deductible that is
                                             streamlined max cap procedure. In                       provide all institutions sufficient time to             based on up to 35 percent of worldwide
                                             addition, the Board has approved an                     make the necessary modifications to                     capital.26 Commenters discussed
                                             early implementation date for the                       internal processes and systems.                         minimizing fees in some cases by
                                             streamlined max cap procedure on                           The Board recognizes the industry’s                  managing payment flows to the level of
                                             March 26, 2009. The early                               interest in an earlier implementation of                free credit provided by the deductible.
                                             implementation should help FBOs                         the revised policy. Many commenters,                    A deductible based on 100 percent of
                                             manage their payment activity more                      however, requested changes to Reserve                   capital, however, would provide
                                             effectively, particularly when combined                 Banks’ systems and processes for                        additional free credit that should enable
                                             with the deductible changes under the                   enhanced collateral management and                      the release of payments being held in
                                             interim policy (discussed later).                       monitoring. The Reserve Banks’ plan to                  internal liquidity queues.
                                                                                                     make several systems changes,                              The Board considered the concerns
                                             G. Penalty Fees                                         discussed in a previous section, related                raised regarding competitive disparities
                                                The Board proposed to increase the                   to collateral management and                            created by the current deductible
                                             penalty fee for daylight overdrafts to 150              monitoring, and these changes will                      calculation as well as the implications
                                             from 136 basis points. The penalty rate                 require time to implement. Given the                    for holding payments. The Board also
                                             structure has traditionally been the                    importance of these and other systems’                  considered the increased risk associated
                                             regular daylight overdraft fee plus 100                 changes, the Board approved an                          with FBOs related to the timeliness and
                                             basis points. The Board did not receive                 implementation window from the fourth                   scope of available supervisory
                                             any comments related to the increase in                 quarter of 2010 to the first quarter of                 information and other supervisory
                                             fees.                                                   2011 with a specific effective date to be               issues that may arise because of the
                                                The Board continues to believe that it               announced at least 90 days in advance.                  cross-border nature of the FBO’s
                                             is appropriate to maintain a 100 basis                  The implementation window provides                      business (for example, application of
                                             point spread between the regular and                    needed flexibility to the Reserve Banks                 different legal regimes). In weighing
                                             penalty rates for daylight overdrafts and               for systems changes not only to enhance                 these factors, the Board approved an
                                             adopted the proposed penalty fee of 150                 collateral management and monitoring                    interim policy that will use 100 percent
                                             basis points. The penalty rate will                     but also to implement all aspects of this               of worldwide capital for eligible FBOs
                                             continue to be applied to institutions                  policy as well as other important                       rather than up to 35 percent in
                                             that incur daylight overdrafts but do not               policies.                                               calculating the deductible amount.27 An
                                             have regular access to the discount                        In the near term, the Board approved,                eligible FBO must request and receive
                                             window and thus are not eligible under                  effective March 26, 2009, the                           Reserve Bank approval for a streamlined
                                             the PSR policy for intraday credit.                     streamlined max cap procedure that will                 max cap and have collateral pledged at
                                                                                                     allow certain FBOs to obtain more                       all times to its Reserve Bank equal to or
                                             H. Implementation                                                                                               greater than the amount of the
                                                                                                     quickly additional collateralized
                                                Along with the general support for the               capacity up to 100 percent of worldwide                 deductible.28
                                             proposed PSR policy changes, the Board                  capital times the self-assessed cap                        The Board sought to balance
                                             received several requests to shorten the                multiples. Eligible FBOs interested in                  efficiency and safety objectives in its
                                             time until implementation. The Board                    the streamlined max cap should contact                  interim policy. The increased
                                             proposed that the policy changes could                  their administrative Reserve Banks.                     deductible provides eligible institutions
                                             be implemented approximately two                                                                                with an increase from potentially 35
                                             years from the announcement of a final                  III. Interim Policy                                     percent to 100 percent of worldwide
                                             rule. Six commenters requested that the                    In addition to the comments on the                   capital, significantly increasing the
                                             Board implement the proposed policy                     proposed PSR policy changes, two                        amount of free credit provided by the
                                             within one year of publication of the                   commenters requested that the Board                     Reserve Banks to eligible FBOs. At the
                                             final rule so that they may take                        consider an interim policy change to the                same time, the increased deductible is
                                             advantage sooner of the zero fee for                    calculation of the current deductible for               available only to the highest-rated FBOs
                                             collateralized overdrafts. Another                      FBOs to reflect 100 percent of                          that would also be eligible for the
                                             commenter believed that institutions                    worldwide capital rather than the
                                                                                                                                                               26 See   71 FR 35679, June 21, 2006.
                                             should have the ability to take                         current level of up to 35 percent. These
                                                                                                                                                               27 The   deductible calculation involves the
                                             advantage of the proposed policy in six                 commenters indicated that the current                   fraction of eligible worldwide capital times 10
                                             months from the final rule.25 Most                      deductible calculation puts FBOs at a                   percent.
                                                                                                     competitive disadvantage relative to                       28 If an FBO meets the criteria for the streamlined
                                                25 The commenter wanted to implement the
                                                                                                     comparable U.S.-chartered depository                    procedure for max caps but was granted a max cap
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                                             proposed PSR policy changes in tandem with the          institutions, and although the proposed                 before implementation of the streamlined procedure
                                             proposed posting rule changes affecting ACH debit                                                               (effective March 26, 2009) or is approved for a max
                                             transfers. The Board had proposed to shift from 11      elimination of the deductible addresses                 cap under the general procedure because the limit
                                             a.m. to 8:30 a.m., eastern time, the posting time for                                                           being requested is greater than 100 percent of
                                             commercial and government ACH debit transfers           Board issued a separate notice today in the Federal     worldwide capital, the FBO would still qualify for
                                             that are processed by the Reserve Banks’ FedACH         Register with its decision not to pursue at this time   the higher deductible if it also met the
                                             service. See 73 CFR 12443, March 7, 2008. The           the proposed posting rules changes.                     collateralization requirement.



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                                             79118                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             streamlined max cap and those FBOs                      effect on the ability of other service                  1. Edge and Agreement Corporations [No
                                             that hold collateral up to the amount of                providers to compete with the Reserve                      Change]
                                             the deductible. These requirements help                 Banks because private-sector clearing                   2. Bankers’ Banks [No Change]
                                                                                                                                                             3. Limited-Purpose Trust Companies [No
                                             limit the Reserve Banks’ exposure from                  and settlement systems will gain from
                                                                                                                                                                Change]
                                             the greater risk associated with FBOs                   the lower explicit cost of funding net                  4. Government-Sponsored Enterprises and
                                             and the likely increase in daylight                     debit caps and other risk and                              International Organizations [No Change]
                                             overdraft use.                                          operational controls employed by those                  5. Problem Institutions [No Change]
                                                The interim policy will be effective on              systems. Generally, the Board expects                 F. Monitoring [No Change]
                                             March 26, 2009 and will remain in                       that both the Reserve Banks and private-                1. Ex post [No Change]
                                             effect until implementation of the                      sector clearing and settlement systems                  2. Real time [No Change]
                                             revised PSR policy. The effective date is               will benefit to some extent from the                    3. Multi-District Institutions [No Change]
                                                                                                                                                           G. Transfer-Size Limit on Book-Entry
                                             consistent with the early                               reduced costs for collateralized daylight
                                                                                                                                                                Securities [No Change]
                                             implementation of the streamlined max                   overdrafts.
                                             cap procedure.                                                                                                Introduction [No Change]
                                                                                                     V. Paperwork Reduction Act
                                             IV. Competitive Impact Analysis                                                                               Risks in Payment and Settlement
                                                                                                       In accordance with the Paperwork
                                                                                                                                                           Systems [No Change]
                                                The Board has established procedures                 Reduction Act of 1995 (44 U.S.C. 3506;
                                             for assessing the competitive impact of                 5 CFR 1320 Appendix A.1), the Board                   I. Risk Management in Payment and
                                             a rule or policy change that has a                      reviewed the policy statement under the               Settlement Systems [No Change]
                                             substantial effect on payment systems                   authority delegated to the Board by the               II. Federal Reserve Intraday Credit
                                             participants.29 Under these procedures,                 Office of Management and Budget. The                  Policies [II C.3. and II D Revised]
                                             the Board assesses whether a change                     revised policy statement does not
                                             would have a direct and material                        contain any new or revised collection of              A. Daylight Overdraft Definition and
                                             adverse effect on the ability of other                  information pursuant to the Paperwork                 Measurement [No Change]
                                             service providers to compete with the                   Reduction Act.                                        B. Pricing [No Change]
                                             Federal Reserve in providing similar                    VI. Federal Reserve Policy on Payment                 C. Net Debit Caps
                                             services due to differing legal powers or               System Risk (Effective March 26, 2009)
                                             constraints or due to a dominant market                                                                       1. Definition [No Change]
                                             position of the Federal Reserve deriving                  Effective March 26, 2009, the ‘‘Federal
                                                                                                     Reserve Policy on Payment System                      2. Cap Categories [No Change]
                                             from such differences. If no reasonable
                                             modification would mitigate the adverse                 Risk’’ is amended to change all                       3. Capital Measure
                                             competitive effects, the Board will                     references to payments systems or                        As described above, an institution’s
                                             determine whether the expected                          payments system to payment systems or                 cap category and capital measure
                                             benefits are significant enough to                      payment system and make other                         determine the size of its net debit cap.
                                             proceed with the change despite the                     conforming changes. It is also amended                The capital measure used in calculating
                                             adverse effects.                                        as follows.                                           an institution’s net debit cap depends
                                                Intraday balances of central bank                    Introduction [No Change]                              upon its chartering authority and home-
                                             money help ensure the smooth flow of                                                                          country supervisor.
                                                                                                     Risks in Payment and Settlement Sytems [No
                                             payment and settlement in systems                       Change]                                                  a. U.S.-chartered institutions. [No
                                             whether they are operated by the                                                                              change]
                                                                                                     I. Risk Management in Payment and                        b. U.S. branches and agencies of
                                             Reserve Banks or private-sector
                                                                                                           Settlement Systems [No Change]
                                             organizations. The demand for intraday                     A. Scope                                           foreign banks. For U.S. branches and
                                             balances at the Reserve Banks for                          B. General Policy Expectations                     agencies of foreign banks, net debit caps
                                             processing payments for private-sector                     C. Systemically Important Systems                  on daylight overdrafts in Federal
                                             clearing and settlement systems can in                     1. Principles for Systemically Important           Reserve accounts are calculated by
                                             normal market conditions substantially                        Payment Systems                                 applying the cap multiples for each cap
                                             exceed the supply of overnight balances                    2. Minimum Standards for Systemically              category to the FBO’s U.S. capital
                                             in Federal Reserve accounts, making                           Important Securities Settlement Systems         equivalency measure.30 U.S. capital
                                             intraday credit from the Reserve Banks                        and Central Counterparties                      equivalency is equal to the following:
                                                                                                        3. Self-Assessments by Systemically
                                             the key marginal source of intraday                                                                              • 35 percent of capital for FBOs that
                                                                                                           Important Systems
                                             funding for the market and for making                   II. Federal Reserve Intraday Credit Policies [II      are financial holding companies
                                             payments, particularly over the Reserve                       C.3. and II. D Revised]                         (FHCs). 31
                                             Banks’ payment systems. For some large                     A. Daylight Overdraft Definition and
                                                                                                                                                              30 The term ‘‘U.S. capital equivalency’’ is used in
                                             users of intraday credit, the adopted                         Measurement [No Change]
                                                                                                        B. Pricing [No Change]                             this context to refer to the particular capital
                                             PSR policy changes may result in a                                                                            measure used to calculate net debit caps and does
                                             reduction in daylight overdraft fees and                   C. Net Debit Caps
                                                                                                                                                           not necessarily represent an appropriate capital
                                             thus lower explicit costs of using central                 1. Definition [No Change]                          measure for supervisory or other purposes.
                                                                                                        2. Cap Categories [No Change]
                                             bank money to fund payments activity.                      a. Self-Assessed [No Change]
                                                                                                                                                              31 The Gramm-Leach-Bliley Act defines a

                                             The lower explicit cost of using intraday                                                                     financial holding company as a bank holding
                                                                                                        b. De Minimis [No Change]                          company that meets certain eligibility requirements.
                                             balances of central bank money will                        c. Exempt-From-Filing [No Change]                  In order for a bank holding company to become a
                                             lower the implicit cost of using the                       d. Zero [No Change]                                financial holding company and be eligible to engage
                                             Reserve Banks’ payments services. The                      3. Capital Measure                                 in the new activities authorized under the Gramm-
                                                                                                                                                           Leach-Bliley Act, the Act requires that all
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                                             Board, however, does not believe this                      a. U.S.-Chartered Institutions [No Change]
                                                                                                        b. U.S. Branches and Agencies of Foreign           depository institutions controlled by the bank
                                             lower cost will have an adverse material                                                                      holding company be well capitalized and well
                                                                                                           Banks                                           managed (12 U.S.C. 1841(p)). With regard to a
                                               29 These procedures are described in the Board’s         D. Maximum Daylight Overdraft Capacity             foreign bank that operates a branch or agency or
                                             policy statement ‘‘The Federal Reserve in the              1. General Procedure                               owns or controls a commercial lending company in
                                             Payment System,’’ as revised in March 1990. (55 FR         2. Streamlined Procedure for Certain FBOs          the United States, the Act requires the Board to
                                             11648, March 29, 1990).                                 E. Special Situations [No Change]                     apply comparable capital and management



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                                                                      Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                      79119

                                                • 25 percent of capital for FBOs that                 Board believes it is important to provide                well as its financial and supervisory
                                             are not FHCs and have a strength of                      an environment in which payment                          information. The financial and
                                             support assessment ranking (SOSA) of                     systems may function effectively and                     supervisory information considered may
                                             1.32                                                     efficiently and to remove barriers, as                   include, but is not limited to, capital
                                                • 10 percent of capital for FBOs that                 appropriate, to foster risk-reducing                     and liquidity ratios, the composition of
                                             are not FHCs and are ranked a SOSA 2.                    payment system initiatives.                              balance sheet assets, CAMELS or other
                                                • 5 percent of ‘‘net due to related                   Consequently, certain institutions with                  supervisory ratings and assessments,
                                             depository institutions’’ for FBOs that                  self-assessed net debit caps may pledge                  and SOSA rankings (for U.S. branches
                                             are not FHCs and are ranked a SOSA 3.                    collateral to their administrative Reserve               and agencies of foreign banks). An
                                                An FBO that is a FHC or has a SOSA                    Banks to secure daylight overdraft                       institution approved for a maximum
                                             rating of 1 may be eligible for a                        capacity in excess of their net debit                    daylight overdraft capacity level must
                                             streamlined procedure (see section II.D.)                caps, subject to Reserve Bank                            submit at least once in each twelve-
                                             for obtaining additional collateralized                  approval.35 36 This policy is intended to                month period a board of directors
                                             intraday credit under the maximum                        provide extra liquidity through the use                  resolution indicating its board’s
                                             daylight overdraft capacity provision.                   of unencumbered collateral by the few                    approval of that level.
                                                Granting a net debit cap, or any                      institutions that might otherwise be                       If the Reserve Bank approves an
                                             extension of intraday credit, to an                      constrained from participating in risk-                  institution’s request, the Reserve Bank
                                             institution is at the discretion of the                  reducing payment system initiatives.37                   approves a maximum daylight overdraft
                                             Reserve Bank. In the event a Reserve                     The Board believes that providing extra                  capacity level. The maximum daylight
                                             Bank grants a net debit cap or extends                   liquidity to these few institutions                      overdraft capacity is defined as follows:
                                             intraday credit to a financially healthy                 should help reduce liquidity-related                     maximum daylight overdraft capacity =
                                             SOSA 3-ranked FBO, the Reserve Bank                      market disruptions.                                      net debit cap + collateralized capacity.39
                                             may require such credit to be fully                                                                                 The Reserve Banks will review the
                                                                                                      1. General Procedure                                     status of any institution that exceeds its
                                             collateralized, given the heightened
                                             supervisory concerns with SOSA 3-                           An institution with a self-assessed net               maximum daylight overdraft capacity
                                             ranked FBOs.                                             debit cap that wishes to expand its                      limit during a two-week reserve-
                                                For purposes of calculating the                       daylight overdraft capacity by pledging                  maintenance period and will decide if
                                             deductible for daylight overdraft                        collateral should consult with its                       the maximum daylight overdraft
                                             pricing, eligible FBOs will be granted a                 administrative Reserve Bank.                             capacity should be maintained or if
                                             capital measure of 100 percent of                        Institutions that request daylight                       additional action should be taken (see
                                             capital. Eligible FBOs must have                         overdraft capacity beyond the net debit                  section II.F.).
                                             requested and been approved for a                        cap must have already explored other                       Institutions with exempt-from-filing
                                             streamlined max cap and have                             alternatives to address their increased                  and de minimis net debit caps may not
                                             unencumbered collateral pledged at all                   liquidity needs.38 The Reserve Bank                      obtain additional daylight overdraft
                                             times to their Reserve Bank equal to or                  will work with an institution that                       capacity by pledging additional
                                             greater than the amount of the                           requests additional daylight overdraft                   collateral without first obtaining a self-
                                             deductible.33 34                                         capacity to determine the appropriate                    assessed net debit cap. Likewise,
                                                                                                      maximum daylight overdraft capacity                      institutions that have voluntarily
                                             D. Maximum Daylight Overdraft                            level. In considering the institution’s                  adopted zero net debit caps may not
                                             Capacity                                                 request, the Reserve Bank will evaluate                  obtain additional daylight overdraft
                                                The Board recognizes that while net                   the institution’s rationale for requesting               capacity without first obtaining a self-
                                             debit caps provide sufficient liquidity to               additional daylight overdraft capacity as                assessed net debit cap. Institutions that
                                             most institutions, some institutions may                                                                          have been assigned a zero net debit cap
                                             still experience liquidity pressures. The                   35 The administrative Reserve Bank is responsible     by their administrative Reserve Bank are
                                                                                                      for the administration of Federal Reserve credit,        not eligible to apply for any daylight
                                                                                                      reserves, and risk-management policies for a given
                                             standards that give due regard to the principle of       institution or other legal entity.
                                                                                                                                                               overdraft capacity.
                                             national treatment and equality of competitive              36 All collateral must be acceptable to the Reserve
                                             opportunity (12 U.S.C. 1843(l)).                                                                                  2. Streamlined Procedure for Certain
                                                                                                      Banks. The Reserve Banks may accept securities in
                                                32 The SOSA ranking is composed of four factors,
                                                                                                      transit on the Fedwire book-entry securities system
                                                                                                                                                               FBOs
                                             including the FBO’s financial condition and              as collateral to support the maximum daylight               An FBO that is a FHC or has a SOSA
                                             prospects, the system of supervision in the FBO’s        overdraft capacity level. Securities in transit refer
                                             home country, the record of the home country’s                                                                    rating of 1 and has a self-assessed net
                                                                                                      to book-entry securities transferred over the
                                             government in support of the banking system or           Fedwire Securities Service that have been                debit cap may request from its Reserve
                                             other sources of support for the FBO; and transfer       purchased by an institution but not yet paid for and     Bank a streamlined procedure to obtain
                                             risk concerns. Transfer risk relates to the FBO’s        owned by the institution’s customers. Collateral         a maximum daylight overdraft capacity.
                                             ability to access and transmit U.S. dollars, which       eligibility and margins are the same for PSR policy
                                             is an essential factor in determining whether an         purposes as for the discount window. See http://
                                                                                                                                                               These FBOs are not required to provide
                                             FBO can support its U.S. operations. The SOSA            www.frbdiscountwindow.org/ for information.              documentation of the business need or
                                             ranking is based on a scale of 1 through 3, with 1          37 Institutions may consider applying for a           obtain the board of directors’ resolution
                                             representing the lowest level of supervisory             maximum daylight overdraft capacity level for            for collateralized capacity in an amount
                                             concern.                                                 daylight overdrafts resulting from Fedwire funds
                                                33 If an FBO meets the criteria for the streamlined
                                                                                                                                                               that exceeds its current net debit cap
                                                                                                      transfers, Fedwire book-entry securities transfers,
                                             procedure for max caps but was granted a max cap         National Settlement Service entries, and ACH credit      (which is based on up to 35 percent
                                             before implementation of the streamlined procedure       originations. Institutions incurring daylight            worldwide capital times its cap
                                             (effective March 26, 2009) or is approved for a max      overdrafts as a result of other payment activity may     multiple), as long as the requested total
                                             cap under the general procedure because the limit        be eligible for administrative counseling flexibility
                                             being requested is greater than 100 percent of
                                                                                                                                                               capacity is 100 percent or less of
                                                                                                      (59 FR 54915–18, Nov. 2, 1994).
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                                             worldwide capital, the FBO would still qualify for          38 Some potential alternatives available to an        worldwide capital times a self-assessed
                                             the higher deductible if it also met the                 institution to address increased intraday credit
                                             collateralization requirement.                           needs include shifting funding patterns, delaying          39 Collateralized capacity, on any given day,
                                                34 Under some circumstances, rules for                the origination of funds transfers in a way that does    equals the amount of collateral pledged to the
                                             determining whether collateral is available may          not significantly increase operational risks, or         Reserve Bank, not to exceed the difference between
                                             differ for PSR and discount window purposes. All         transferring some payments processing business to        the institution’s maximum daylight overdraft
                                             collateral must be acceptable to the Reserve Banks.      a correspondent bank.                                    capacity level and its net debit cap.



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                                             79120                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             cap multiple.40 In order to ensure that                   2. Streamlined Procedure for Certain FBOs            overdrafts’’ in accounts at the Reserve
                                             intraday liquidity risk is managed                        F. Special Situations                                Banks and sets out the general methods
                                             appropriately and that the FBO will be                    1. Edge and Agreement Corporations                   used by the Reserve Banks to control
                                                                                                       2. Bankers’ Banks                                    their intraday credit exposures.43 Under
                                             able to repay daylight overdrafts,
                                                                                                       3. Limited-Purpose Trust Companies
                                             eligible FBOs under the streamlined                       4. Government-Sponsored Enterprises and              this part, the Board explicitly recognizes
                                             procedure will be subject to initial and                     International Organizations                       that the Federal Reserve has an
                                             periodic reviews of liquidity plans that                  5. Problem Institutions                              important role in providing intraday
                                             are analogous to the liquidity reviews                    G. Monitoring                                        balances and credit to foster the smooth
                                             undergone by U.S. institutions.41 If an                   1. Ex Post                                           operation of the payment system. The
                                             eligible FBO requests capacity in excess                  2. Real Time                                         Reserve Banks provide intraday
                                             of 100 percent of worldwide capital                       3. Multi-District Institutions                       balances by way of supplying
                                                                                                       H. Transfer-Size Limit on Book-Entry                 temporary, intraday credit to healthy
                                             times the self-assessed cap multiple, it
                                                                                                          Securities [No Change]
                                             would be subject to the general                                                                                depository institutions, predominantly
                                             procedure.                                              Introduction                                           through collateralized intraday
                                                                                                        Payment and settlement systems are                  overdrafts.44 The Board believes that
                                             E. Special Situations [No Change]                                                                              such a strategy enhances intraday
                                                                                                     critical components of the nation’s
                                             F. Monitoring [No change]                               financial system. The smooth                           liquidity, while controlling risk to the
                                             G. Transfer-Size Limit on Book-Entry                                                                           Reserve Banks. Over time, the Board
                                                                                                     functioning of these systems is vital to
                                             Securities [No Change]                                                                                         aims to reduce the reliance of the
                                                                                                     the financial stability of the U.S.
                                                                                                                                                            banking industry on uncollateralized
                                                                                                     economy. Given the importance of these
                                             VII. Federal Reserve Policy on Payment                                                                         intraday credit by providing incentives
                                                                                                     systems, the Board has developed this
                                             System Risk (Effective When                                                                                    to collateralize daylight overdrafts. The
                                                                                                     policy to address the risks that payment
                                             Announced)                                                                                                     Board also aims to limit the burden of
                                                                                                     and settlement activity present to the
                                               The ‘‘Federal Reserve Policy on                                                                              the policy on healthy depository
                                                                                                     financial system and to the Federal
                                             Payment System Risk’’ is amended as                                                                            institutions that use small amounts of
                                                                                                     Reserve Banks (Reserve Banks).
                                             follows when announced in a                                                                                    intraday credit.
                                                                                                        In adopting this policy, the Board’s
                                             subsequent Federal Register notice.                                                                               Through this policy, the Board
                                                                                                     objectives are to foster the safety and
                                                                                                                                                            expects financial system participants,
                                                                                                     efficiency of payment and settlement                   including the Reserve Banks, to reduce
                                             Introduction [Revised]
                                                                                                     systems. These policy objectives are                   and control settlement and systemic
                                             Risks in Payment and Settlement Systems                 consistent with (1) The Board’s long-
                                             [Revised]                                                                                                      risks arising in payment and settlement
                                                                                                     standing objectives to promote the                     systems, consistent with the smooth
                                             I. Risk Management in Payment and                       integrity, efficiency, and accessibility of            operation of the financial system. This
                                                   Settlement Systems [No Change]                    the payment system; (2) industry and
                                                A. Scope                                                                                                    policy is designed to provide intraday
                                                                                                     supervisory methods for risk                           balances and credit while controlling
                                                B. General Policy Expectations                       management; and (3) internationally
                                                C. Systemically Important Systems                                                                           the Reserve Bank risk by (1) Making
                                                1. Principles for Systemically Important             accepted risk-management principles                    financial system participants and
                                                   Payment Systems                                   and minimum standards for                              system operators aware of the types of
                                                2. Minimum Standards for Systemically                systemically important payment and                     basic risks that arise in the settlement
                                                   Important Securities Settlement Systems           settlement systems.42                                  process and the Board’s expectations
                                                   and Central Counterparties                           Part I of this policy sets out the                  with regard to risk management, (2)
                                                3. Self-Assessments by Systemically                  Board’s views, and related principles
                                                   Important Systems                                                                                        setting explicit risk-management
                                                                                                     and minimum standards, regarding the                   expectations for systemically important
                                             II. Federal Reserve Intraday Credit Policies [II        management of risks in payment and
                                                   and II B Through II G Revised]                                                                           systems, and (3) establishing the policy
                                                                                                     settlement systems, including those                    conditions governing the provision of
                                                A. Daylight Overdraft Definition and
                                                   Measurement [No Change]                           operated by the Reserve Banks. In
                                                B. Collateral                                        setting out its views, the Board seeks to                43 To assist depository institutions in

                                                C. Pricing                                           encourage payment and settlement                       implementing this part of the Board’s payment
                                                D. Net Debit Caps                                    systems, and their primary regulators, to              system risk policy, the Federal Reserve has
                                                1. Definition                                        take the principles and minimum                        prepared two documents, the Overview of the
                                                2. Cap Categories                                                                                           Federal Reserve’s Payment System Risk Policy and
                                                                                                     standards in this policy into                          the Guide to the Federal Reserve’s Payment System
                                                a. Self-Assessed                                     consideration in the design, operation,                Risk Policy, which are available on line at http://
                                                b. De Minimis                                        monitoring, and assessing of these                     www.federalreserve.gov/paymentsystems/PSR/
                                                c. Exempt-From-Filing                                                                                       relpol.htm. The Overview of the Federal Reserve’s
                                                d. Zero
                                                                                                     systems. The Board also will be guided
                                                                                                                                                            Payment System Risk Policy summarizes the
                                                3. Capital Measure                                   by this part, in conjunction with                      Board’s policy on the provision of intraday credit,
                                                a. U.S.-Chartered Institutions                       relevant laws and other Federal Reserve                including net debit caps and daylight overdraft fees.
                                                b. U.S. Branches and Agencies of Foreign             policies, when exercising its authority                The overview is intended for use by institutions
                                                   Banks                                             over certain systems or their                          that incur only small amounts of daylight
                                                                                                                                                            overdrafts. The Guide to the Federal Reserve’s
                                                E. Maximum Daylight Overdraft Capacity               participants, when providing payment                   Payment System Risk Policy explains in detail how
                                                1. General Procedure                                 and settlement services to systems, or                 these policies apply to different institutions and
                                                                                                     when providing intraday credit to                      includes procedures for completing a self-
                                                40 For example, a financial holding company is                                                              assessment and filing a cap resolution, as well as
                                                                                                     Federal Reserve account holders.
                                             eligible for uncollateralized capacity of 35 percent                                                           information on other aspects of the policy.
                                             of worldwide capital times the cap multiple. The
                                                                                                        Part II of this policy governs the                    44 The term ‘‘depository institution,’’ as used in
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                                             streamlined max cap procedure would provide such        provision of intraday credit or ‘‘daylight             this policy, refers not only to institutions defined
                                             an institution with additional collateralized                                                                  as ‘‘depository institutions’’ in 12 U.S.C.
                                             capacity of 65 percent of worldwide capital times         42 For the Board’s long-standing objectives in the   461(b)(1)(A), but also to U.S. branches and agencies
                                             the cap multiple.                                       payment system, see ‘‘The Federal Reserve in the       of foreign banking organizations, Edge and
                                                41 The liquidity reviews will be conducted by the    Payments System,’’ September 2001, FRRS 9–1550,        agreement corporations, trust companies, and
                                             administrative Reserve Bank, in consultation with       available at http://www.federalreserve.gov/            bankers’ banks, unless the context indicates a
                                             each FBO’s home-country supervisor.                     paymentsystems/pricing/frpaysys.htm.                   different reading.



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                                                                       Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                     79121

                                             Federal Reserve intraday credit to                         shift, concentrate, or otherwise                    I. Risk Management in Payment and
                                             account holders. The Board’s adoption                      transform risks in unanticipated ways.              Settlement Systems [No Change]
                                             of this policy in no way diminishes the                    These systems also may pose systemic                II. Federal Reserve Intraday Credit
                                             primary responsibilities of financial                      risk to the financial system where the              Policies [II and II B Through II G
                                             system participants generally and                          inability of a system participant to meet           Revised]
                                             settlement system operators,                               its obligations when due may cause
                                             participants, and Federal Reserve                                                                                 This part outlines the methods used
                                                                                                        other participants to be unable to meet             to provide intraday credit to ensure the
                                             account holders more specifically, to                      their obligations when due. The failure
                                             address the risks that may arise through                                                                       smooth functioning of payment and
                                                                                                        of one or more participants to settle               settlement systems, while controlling
                                             their operation of, or participation in,                   their payments or other financial
                                             payment and settlement systems.                                                                                credit risk to the Reserve Banks
                                                                                                        transactions, in turn, could create credit          associated with such intraday credit.
                                             Risks in Payment and Settlement                            or liquidity problems for other                     These methods include voluntary
                                             Systems                                                    participants, the system operator, or               collateralization of intraday credit, a
                                                The basic risks in payment and                          depository institutions. Systemic risk              limit on total daylight overdrafts in
                                             settlement systems are credit risk,                        might lead ultimately to a disruption in            institutions’ Federal Reserve accounts,
                                             liquidity risk, operational risk, and legal                the financial system more broadly or                and a fee for uncollateralized daylight
                                             risk. In the context of this policy, these                 undermine public confidence in the                  overdrafts. This part also provides a fee
                                             risks are defined as follows.45                            nation’s financial infrastructure.                  waiver to limit the impact of
                                                Credit Risk. The risk that a                               These risks stem, in part, from the              collateralization on depository
                                             counterparty will not settle an                            multilateral and time-sensitive credit              institutions that use relatively small
                                             obligation for full value either when due                  and liquidity interdependencies among               amounts of intraday credit.
                                             or anytime thereafter.                                                                                            To assist institutions in implementing
                                                                                                        financial institutions. These
                                                Liquidity Risk. The risk that a                                                                             this part of the policy, the Federal
                                                                                                        interdependencies often create complex              Reserve has prepared two documents:
                                             counterparty will not settle an                            transaction flows that, in combination
                                             obligation for full value when due.                                                                            the Overview of the Federal Reserve’s
                                                                                                        with a system’s design, can lead to                 Payment System Risk Policy on Intraday
                                                Operational Risk. The risk of loss                      significant demands for intraday credit,
                                             resulting from inadequate or failed                                                                            Credit (Overview) and the Guide to the
                                                                                                        either on a regular or extraordinary                Federal Reserve’s Payment System Risk
                                             internal processes, people, and systems,
                                                                                                        basis. The Board explicitly recognizes              Policy on Intraday Credit (Guide).48 The
                                             or from external events. This type of risk
                                                                                                        that the Federal Reserve has an                     Overview summarizes the Board’s
                                             includes various physical and
                                                                                                        important role in providing intraday                policy on the provision of intraday
                                             information security risks.
                                                Legal Risk. The risk of loss because of                 balances and credit to foster the smooth            credit, including net debit caps, daylight
                                             the unexpected application of a law or                     operation of the payment system. To the             overdraft fees, and the fee waiver. This
                                             regulation or because a contract cannot                    extent that financial institutions or the           document is intended for use by
                                             be enforced.                                               Reserve Banks are the direct or indirect            institutions that incur only small
                                                These risks arise between financial                     source of intraday credit, they may face            amounts of daylight overdrafts. The
                                             institutions as they settle payments and                   a direct risk of loss if daylight overdrafts        Guide explains in detail how these
                                             other financial transactions and must be                   are not extinguished as planned. In                 policies apply to different institutions
                                             managed by institutions, both                              addition, measures taken by Reserve                 and includes procedures for completing
                                             individually and collectively.46 47                        Banks to limit their intraday credit                a self-assessment and filing a cap
                                             Multilateral payment and settlement                        exposures may shift some or all of the              resolution, as well as information on
                                             systems, in particular, may increase,                      associated risks to private-sector                  other aspects of the policy.
                                                                                                        systems.                                            A. Daylight Overdraft Definition and
                                               45 These  definitions of credit risk, liquidity risk,
                                                                                                           The smooth functioning of payment                Measurement [No Change]
                                             and legal risk are based upon those presented in the
                                             Core Principles for Systemically Important Payment         and settlement systems is also critical to          B. Collateral
                                             Systems (Core Principles) and the                          certain public policy objectives in the               To help meet institutions’ demand for
                                             Recommendations for Securities Settlement
                                             Systems (Recommendations for SSS). The
                                                                                                        areas of monetary policy and banking                intraday balances while mitigating
                                             definition of operational risk is based on the Basel       supervision. The effective                          Reserve Bank credit risk, the Board sets
                                             Committee on Banking Supervision’s ‘‘Sound                 implementation of monetary policy, for              forth this policy whereby the Reserve
                                             Practices for the Management and Supervision of            example, depends on both the orderly
                                             Operational Risk,’’ available at http://www.bis.org/                                                           Banks supply intraday balances and
                                             publ/bcbs96.htm. Each of these definitions is              settlement of open market operations                credit predominantly through explicitly
                                             largely consistent with those included in the              and the efficient distribution of reserve           collateralized daylight overdrafts to
                                             Recommendations for Central Counterparties                 balances throughout the banking system
                                             (Recommendations for CCP).
                                                                                                                                                            healthy depository institutions.49 This
                                               46 The term ‘‘financial institution,’’ as used in this
                                                                                                        via the money market and payment                    policy offers pricing incentives to
                                             policy, includes a broad array of types of                 system. Likewise, supervisory objectives            encourage greater collateralization (see
                                             organizations that engage in financial activity,           regarding the safety and soundness of               section II.C.). To avoid disrupting the
                                             including depository institutions and securities           depository institutions must take into              operation of the payment system and
                                             dealers.
                                               47 Several existing regulatory and bank                  account the risks payment and                       increasing the cost burden on a large
                                             supervision guidelines and policies also are               settlement systems pose to depository
                                                                                                                                                               48 Available at http://www.federalreserve.gov/
                                             directed at institutions’ management of the risks          institutions that participate directly or
                                             posed by interbank payment and settlement                                                                      paymentsystems/PSR/relpol.htm.
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                                                                                                        indirectly in, or provide settlement,
                                             activity. For example, Federal Reserve Regulation F                                                               49 Collateral is also used to manage risk posed by

                                             (12 CFR 206) directs insured depository institutions       custody, or credit services to, such                daylight overdrafts of problem institutions
                                             to establish policies and procedures to avoid              systems.                                            (institutions in a weak or deteriorating financial
                                             excessive exposures to any other depository                                                                    condition), entities not eligible for Federal Reserve
                                             institutions, including exposures that may be                                                                  intraday credit (see section II.F.), and institutions
                                             generated through the clearing and settlement of                                                               that have obtained maximum daylight overdraft
                                             payments.                                                                                                      capacity (see section II.E.).



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                                             79122                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             number of institutions using small                      effective daily rate is calculated by                    on the total daylight overdraft position
                                             amounts of daylight overdrafts, the use                 dividing the effective annual rate by                    that it can incur during any given day.
                                             of collateral is generally voluntary.50                 360.55 An institution’s daily daylight                   An institution must be financially
                                                Collateral eligibility and margins                   overdraft charge is equal to the effective               healthy and have regular access to the
                                             remain the same for PSR policy                          daily rate multiplied by the institution’s               discount window in order to adopt a net
                                             purposes as for the discount window.51                  average daily uncollateralized daylight                  debit cap greater than zero. Granting a
                                             Unencumbered collateral can be used to                  overdraft.                                               net debit cap, or any extension of
                                             collateralize daylight overdrafts.52 In-                   An institution’s average daily                        intraday credit, to an institution is at the
                                             transit securities are eligible collateral to           uncollateralized daylight overdraft is                   discretion of the Reserve Bank.
                                             pledge for PSR purposes at Reserve                      calculated by dividing the sum of its                      An institution’s cap category and
                                             Banks’ discretion.53 All collateral must                negative uncollateralized Federal                        capital measure determine the size of its
                                             be acceptable to the Reserve Banks.                     Reserve account balances at the end of                   net debit cap. More specifically, the net
                                                                                                     each minute of the scheduled Fedwire                     debit cap is calculated as an
                                             C. Pricing
                                                                                                     operating day by the total number of                     institution’s cap multiple times its
                                                Under the voluntary collateralization                minutes in the scheduled Fedwire                         capital measure: Net debit cap = cap
                                             regime, the fee for collateralized                      operating day. A negative                                multiple × capital measure.
                                             overdrafts is zero, while the fee for                   uncollateralized Federal Reserve                           Cap categories (see section II.D.2.) and
                                             uncollateralized overdrafts is 50 basis                 account balance is calculated by                         their associated cap levels, set as
                                             points. The two-tiered fee for                          subtracting the unencumbered, net                        multiples of capital measure, are listed
                                             collateralized and uncollateralized                     lendable value of collateral pledged                     below:
                                             overdrafts is intended to provide a                     from the total negative Federal Reserve
                                             strong incentive for a depository                       account balance at the end of each                                 NET DEBIT CAP MULTIPLES
                                             institution to pledge collateral to its
                                                                                                     minute. Each positive end-of-minute
                                             Reserve Bank to reduce or eliminate the                                                                                  Cap category                      Cap multiple
                                                                                                     balance in an institution’s Federal
                                             institution’s uncollateralized daylight
                                                                                                     Reserve account is set to equal zero.                    High ...............................   2.25
                                             overdrafts and associated charges for its
                                                                                                     Fully collateralized end-of-minute                       Above average ..............           1.875
                                             use of intraday credit.
                                                Reserve Banks charge institutions for                negative balances are similarly set to                   Average .........................      1.125
                                                                                                     zero.                                                    De minimis ....................        0.4
                                             daylight overdrafts incurred in their                                                                            Exempt-from-filing 58 .....            $10 million or 0.20
                                             Federal Reserve accounts. For each two-                    The daily daylight overdraft charge is
                                                                                                     reduced by a fee waiver of $150, which                   Zero ...............................   0
                                             week reserve-maintenance period, the
                                             Reserve Banks calculate and assess                      is primarily intended to minimize the
                                                                                                                                                                 The cap is applied to the total of
                                             daylight overdraft fees, which are equal                burden of the PSR policy on institutions
                                                                                                                                                              collateralized and uncollateralized
                                             to the sum of any daily uncollateralized                that use small amounts of intraday
                                                                                                                                                              daylight overdrafts.59 For the treatment
                                             daylight overdraft charges during the                   credit. The waiver is subtracted from
                                                                                                                                                              of overdrafts that exceed the cap, see
                                             period.                                                 gross fees in a two-week reserve-
                                                                                                                                                              section II.G.
                                                Daylight overdraft fees for                          maintenance period.56                                       The Board’s policy on net debit caps
                                             uncollateralized overdrafts (or the                        Certain institutions are subject to a                 is based on a specific set of guidelines
                                             uncollateralized portion of a partially                 penalty fee and modified daylight                        and some degree of examiner oversight.
                                             collateralized overdraft) are calculated                overdraft fee calculation as described in                Under the Board’s policy, a Reserve
                                             using an annual rate of 50 basis points,                section II.F. The fee waiver is not                      Bank may further limit or prohibit an
                                             quoted on the basis of a 24-hour day and                available to these institutions.57                       institution’s use of Federal Reserve
                                             a 360-day year. To obtain the effective                 D. Net Debit Caps                                        intraday credit if (1) The institution’s
                                             annual rate for the standard Fedwire                                                                             supervisor determines that the
                                             operating day, the 50-basis-point annual                1. Definition                                            institution is unsafe or unsound; (2) the
                                             rate is multiplied by the fraction of a 24-               In accord with sound risk-                             institution does not qualify for a
                                             hour day during which Fedwire is                        management practices, to limit the                       positive net debit cap (see section
                                             scheduled to operate. For example,                      amount of intraday credit that a Reserve                 II.D.2.); or (3) the Reserve Bank
                                             under a 21.5-hour scheduled Fedwire                     Bank extends to an individual                            determines that the institution poses
                                             operating day, the effective annual rate                institution and the associated risk, each                excessive risk.
                                             used to calculate daylight overdraft fees               institution incurring daylight overdrafts                   While capital measures differ, the net
                                             equals 44.79 basis points (50 basis                     in its Federal Reserve account must                      debit cap provisions of this policy apply
                                             points multiplied by 21.5/24).54 The                    adopt a net debit cap, that is, a ceiling                similarly to foreign banking
                                                                                                                                                              organizations (FBOs) as to U.S.
                                                50 The Reserve Banks may require collateral in
                                                                                                     overdrafts, whose calculation would also reflect the     institutions. Consistent with practices
                                             certain circumstances, such as when institutions        change in the operating day.                             for U.S.-chartered depository
                                             breach their net debit caps.                              55 Under the current 21.5-hour Fedwire operating
                                                51 See http://www.frbdiscountwindow.org/ for                                                                  institutions, the Reserve Banks will
                                                                                                     day, the effective daily daylight-overdraft rate is
                                             information on the discount window and PSR              truncated to 0.0000124.                                  advise home-country supervisors of the
                                             collateral acceptance policy and collateral margins.      56 The waiver shall not result in refunds or credits   daylight overdraft capacity of U.S.
                                                52 Under some circumstances, rules for
                                                                                                     to an institution and cannot be carried to another       branches and agencies of FBOs under
                                             determining whether collateral is available may         reserve maintenance period.                              their jurisdiction, as well as of other
                                             differ for PSR and discount window purposes.              57 The fee waiver is not available to Edge and
                                                53 In-transit securities are book-entry securities                                                            pertinent information related to the
                                                                                                     agreement corporations, bankers’ banks that have
                                             transferred over the Fedwire Securities Service that    not waived their exemption from reserve
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                                             have been purchased by a depository institution but     requirements, limited-purpose trust companies, and         58 The net debit cap for the exempt-from-filing

                                             not yet paid for or owned by the institution’s          government-sponsored enterprises and                     category is equal to the lesser of $10 million or 0.20
                                             customers.                                              international organizations. These types of              multiplied by the capital measure.
                                                54 A change in the length of the scheduled           institutions do not have regular access to the             59 Collateral will not increase the net debit cap

                                             Fedwire operating day should not significantly          discount window and, therefore, are expected not         limit. Institutions seeking capacity that exceeds the
                                             change the amount of fees charged because the           to incur daylight overdrafts in their Federal Reserve    net debit cap need to apply for the maximum
                                             effective daily rate is applied to average daylight     accounts.                                                daylight overdraft capacity (see section II. E).



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                                                                       Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                  79123

                                             FBOs’ caps. The Reserve Banks will also                    sufficient to prevent losses due to fraud                 guidelines appropriately and diligently,
                                             provide information on the daylight                        or system failures. The Guide includes                    that the underlying analysis and method
                                             overdrafts in the Federal Reserve                          a detailed explanation of the self-                       were reasonable, and that the resultant
                                             accounts of FBOs’ U.S. branches and                        assessment process.                                       self-assessment was generally consistent
                                             agencies in response to requests from                        Each institution’s board of directors                   with the examination findings.
                                             home-country supervisors.                                  must review that institution’s self-                      Examiner comments, if any, should be
                                                                                                        assessment and recommended cap                            forwarded to the board of directors of
                                             2. Cap Categories                                          category. The process of self-assessment,                 the institution. If an examiner has
                                                The policy defines the following six                    with the board of directors review,                       concerns, the Reserve Bank would
                                             cap categories, described in more detail                   should be conducted at least once in                      decide whether to modify the cap
                                             below: High, above average, average, de                    each twelve-month period. A cap                           category. For example, if the
                                             minimis, exempt-from-filing, and zero.                     determination may be reviewed and                         institution’s level of daylight overdrafts
                                             The high, above average, and average                       approved by the board of directors of a                   constitutes an unsafe or unsound
                                             cap categories are referred to as ‘‘self-                  holding company parent of an                              banking practice, the Reserve Bank
                                             assessed’’ caps.                                           institution, provided that (1) The self-                  would likely assign the institution a
                                                a. Self-assessed. In order to establish                 assessment is performed by each entity                    zero net debit cap and impose
                                             a net debit cap category of high, above                    incurring daylight overdrafts, (2) the                    additional risk controls.
                                             average, or average, an institution must                   entity’s cap is based on the measure of                      The contents of the self-assessment
                                             perform a self-assessment of its own                       the entity’s own capital, and (3) each                    file will be considered confidential by
                                             creditworthiness, intraday funds                           entity maintains for its primary                          the institution’s examiner. Similarly, the
                                             management and control, customer                           supervisor’s review its own file with                     Federal Reserve and the institution’s
                                             credit policies and controls, and                          supporting documents for its self-                        examiner will hold the actual cap level
                                             operating controls and contingency                         assessment and a record of the parent’s                   selected by the institution confidential.
                                             procedures.60 The assessment of                            board of directors review.62                              Net debit cap information should not be
                                             creditworthiness is based on the                             In applying these guidelines, each                      shared with outside parties or
                                             institution’s supervisory rating and                       institution should maintain a file for                    mentioned in any public documents;
                                             Prompt Corrective Action (PCA)                             examiner review that includes (1)                         however, net debit cap information will
                                             designation.61 An institution may                          Worksheets and supporting analysis                        be shared with the home-country
                                             perform a full assessment of its                           used in its self-assessment of its own                    supervisor of U.S. branches and
                                             creditworthiness in certain limited                        cap category, (2) copies of senior-                       agencies of foreign banks.
                                             circumstances, for example, if its                         management reports to the board of                           The Reserve Banks will review the
                                             condition has changed significantly                        directors of the institution or its parent                status of any institution with a self-
                                             since its last examination or if it                        (as appropriate) regarding that self-                     assessed net debit cap that exceeds its
                                             possesses additional substantive                           assessment, and (3) copies of the                         net debit cap during a two-week reserve-
                                             information regarding its financial                        minutes of the discussion at the                          maintenance period and will decide if
                                             condition. An institution performing a                     appropriate board of directors meeting                    additional action should be taken (see
                                             self-assessment must also evaluate its                     concerning the institution’s adoption of                  section II.G.).
                                             intraday funds-management procedures                       a cap category.63                                            b. De minimis. Many institutions
                                             and its procedures for evaluating the                        As part of its normal examination, the                  incur relatively small overdrafts and
                                             financial condition of and establishing                    institution’s examiners may review the                    thus pose little risk to the Federal
                                             intraday credit limits for its customers.                  contents of the self-assessment file.64                   Reserve. To ease the burden on these
                                             Finally, the institution must evaluate its                 The objective of this review is to ensure                 small overdrafters of engaging in the
                                             operating controls and contingency                         that the institution has applied the                      self-assessment process and to ease the
                                             procedures to determine if they are                                                                                  burden on the Federal Reserve of
                                                                                                           62 An FBO should undergo the same self-
                                                                                                                                                                  administering caps, the Board allows
                                                                                                        assessment process as a U.S.-chartered institution        institutions that meet reasonable safety
                                               60 This assessment should be done on an
                                                                                                        in determining a net debit cap for its U.S. branches
                                             individual-institution basis, treating as separate         and agencies. Many FBOs, however, do not have the         and soundness standards to incur de
                                             entities each commercial bank, each Edge                   same management structure as U.S. institutions,           minimis amounts of daylight overdrafts
                                             corporation (and its branches), each thrift                and adjustments should be made as appropriate. If         without performing a self-assessment.
                                             institution, and so on. An exception is made in the        an FBO’s board of directors has a more limited role
                                             case of U.S. branches and agencies of FBOs.                                                                          An institution may incur daylight
                                                                                                        to play in the bank’s management than a U.S. board
                                             Because these entities have no existence separate          has, the self-assessment and cap category should be       overdrafts of up to 40 percent of its
                                             from the FBO, all the U.S. offices of FBOs                 reviewed by senior management at the FBO’s head           capital measure if the institution
                                             (excluding U.S.-chartered bank subsidiaries and            office that exercises authority over the FBO              submits a board of directors resolution.
                                             U.S.-chartered Edge subsidiaries) should be treated        equivalent to the authority exercised by a board of
                                             as a consolidated family relying on the FBO’s
                                                                                                                                                                     An institution with a de minimis cap
                                                                                                        directors over a U.S. institution. In cases in which
                                             capital.                                                   the board of directors exercises authority equivalent     must submit to its Reserve Bank at least
                                               61 An insured depository institution is (1) ‘‘Well       to that of a U.S. board, cap determination should         once in each 12-month period a copy of
                                             capitalized’’ if it significantly exceeds the required     be made by the board of directors.                        its board of directors resolution (or a
                                             minimum level for each relevant capital measure,              63 In addition, for FBOs, the file that is made
                                                                                                                                                                  resolution by its holding company’s
                                             (2) ‘‘adequately capitalized’’ if it meets the required    available for examiner review by the U.S. offices of
                                             minimum level for each relevant capital measure,           an FBO should contain the report on the self-             board) approving the institution’s use of
                                             (3) ‘‘undercapitalized’’ if it fails to meet the           assessment that the management of U.S. operations         intraday credit up to the de minimis
                                             required minimum level for any relevant capital            made to the FBO’s senior management and a record          level. The Reserve Banks will review the
                                             measure, (4) ‘‘significantly undercapitalized’’ if it is   of the appropriate senior management’s response or        status of any institution with a de
                                             significantly below the required minimum level for         the minutes of the meeting of the FBO’s board of
                                             any relevant capital measure, or (5) ‘‘critically          directors or other appropriate management group, at       minimis net debit cap that exceeds its
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                                             undercapitalized’’ if it fails to meet any leverage        which the self-assessment was discussed.                  net debit cap during a two-week reserve-
                                             limit (the ratio of tangible equity to total assets)          64 Between examinations, examiners or Reserve          maintenance period and will decide if
                                             specified by the appropriate federal banking agency,       Bank staff may contact an institution about its cap       additional action should be taken (see
                                             in consultation with the FDIC, or any other relevant       if there is other relevant information, such as
                                             capital measure established by the agency to               statistical or supervisory reports, that suggests there   section II.G.).
                                             determine when an institution is critically                may have been a change in the institution’s                  c. Exempt-from-filing. Institutions that
                                             undercapitalized (12 U.S.C. 1831o).                        financial condition.                                      only rarely incur daylight overdrafts in


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                                             79124                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             their Federal Reserve accounts that                     States, net debit caps are multiples of                     An FBO that is an FHC or has a SOSA
                                             exceed the lesser of $10 million or 20                  ‘‘qualifying’’ or similar capital measures               rating of 1 may be eligible for a
                                             percent of their capital measure are                    that consist of those capital instruments                streamlined procedure (see section II.E.)
                                             excused from performing self-                           that can be used to satisfy risk-based                   for obtaining additional collateralized
                                             assessments and filing board of directors               capital standards, as set forth in the                   intraday credit under the maximum
                                             resolutions with their Reserve Banks.                   capital adequacy guidelines of the                       daylight overdraft capacity provision.
                                             This dual test of dollar amount and                     federal financial regulatory agencies. All                  In the event a Reserve Bank grants a
                                             percent of capital measure is designed                  of the federal financial regulatory                      net debit cap or extends intraday credit
                                             to limit the filing exemption to                        agencies collect, as part of their required              to a financially healthy SOSA 3-ranked
                                             institutions that create only low-dollar                reports, data on the amount of capital                   FBO, the Reserve Bank may require
                                             risks to the Reserve Banks and that                     that can be used for risk-based                          such credit to be fully collateralized,
                                             incur small overdrafts relative to their                purposes—‘‘risk-based’’ capital for                      given the heightened supervisory
                                             capital measure.                                        commercial banks, savings banks, and                     concerns with SOSA 3-ranked FBOs.
                                                The Reserve Banks will review the                    savings associations and total regulatory                E. Maximum Daylight Overdraft
                                             status of an exempt institution that                    reserves for credit unions. Other U.S.-                  Capacity
                                             incurs overdrafts in its Federal Reserve                chartered entities that incur daylight
                                             account in excess of $10 million or 20                  overdrafts in their Federal Reserve                         The Board recognizes that while net
                                             percent of its capital measure on more                  accounts should provide similar data to                  debit caps provide sufficient liquidity to
                                             than two days in any two consecutive                    their Reserve Banks.                                     most institutions, some institutions may
                                             two-week reserve-maintenance periods.                      b. U.S. branches and agencies of                      still experience liquidity pressures. The
                                             The Reserve Bank will decide whether                    foreign banks. For U.S. branches and                     Board believes it is important to provide
                                             the exemption should be maintained,                     agencies of foreign banks, net debit caps                an environment in which payment
                                             the institution should be required to file              on daylight overdrafts in Federal                        systems may function effectively and
                                             for a cap, or counseling should be                      Reserve accounts are calculated by                       efficiently and to remove barriers, as
                                             performed (see section II.G.). The                      applying the cap multiples for each cap                  appropriate, to foster risk-reducing
                                             Reserve Bank will assign the exempt-                    category to the FBO’s U.S. capital                       payment system initiatives.
                                             from-filing net debit cap.                              equivalency measure.65 U.S. capital                      Consequently, certain institutions with
                                                d. Zero. Some financially healthy                    equivalency is equal to the following:                   self-assessed net debit caps may pledge
                                             institutions that could obtain positive                    • 35 percent of capital for FBOs that                 collateral to their administrative Reserve
                                             net debit caps choose to have zero caps.                are financial holding companies                          Banks to secure daylight overdraft
                                             Often these institutions have very                      (FHCs).66                                                capacity in excess of their net debit
                                             conservative internal policies regarding                   • 25 percent of capital for FBOs that                 caps, subject to Reserve Bank
                                             the use of Federal Reserve intraday                     are not FHCs and have a strength of                      approval.68 69 This policy is intended to
                                             credit. If an institution that has adopted              support assessment ranking (SOSA) of                     provide extra liquidity through the
                                             a zero cap incurs a daylight overdraft,                 1.67                                                     pledge of collateral to the few
                                             the Reserve Bank counsels the                              • 10 percent of capital for FBOs that                 institutions that might otherwise be
                                             institution and may monitor the                         are not FHCs and are ranked a SOSA 2.                    constrained from participating in risk-
                                             institution’s activity in real time and                    • 5 percent of ‘‘net due to related                   reducing payment system initiatives.70
                                             reject or delay certain transactions that               depository institutions’’ for FBOs that                  The Board believes that providing extra
                                             would cause an overdraft. If the                        are not FHCs and are ranked a SOSA 3.                    liquidity to these few institutions
                                             institution qualifies for a positive cap,                                                                        should help reduce liquidity-related
                                                                                                        65 The term ‘‘U.S. capital equivalency’’ is used in
                                             the Reserve Bank may suggest that the                                                                            market disruptions.
                                                                                                     this context to refer to the particular capital
                                             institution adopt an exempt-from-filing                 measure used to calculate net debit caps and does        1. General Procedure
                                             cap or file for a higher cap if the                     not necessarily represent an appropriate capital
                                             institution believes that it will continue              measure for supervisory or other purposes.                  An institution with a self-assessed net
                                             to incur daylight overdrafts.
                                                                                                        66 The Gramm-Leach-Bliley Act defines a               debit cap that wishes to expand its
                                                                                                     financial holding company as a bank holding              daylight overdraft capacity by pledging
                                                In addition, a Reserve Bank may                      company that meets certain eligibility requirements.
                                             assign an institution a zero net debit                  In order for a bank holding company to become a
                                                                                                                                                              collateral should consult with its
                                             cap. Institutions that may pose special                 financial holding company and be eligible to engage      administrative Reserve Bank. The
                                             risks to the Reserve Banks, such as those               in the new activities authorized under the Gramm-        Reserve Bank will work with an
                                                                                                     Leach-Bliley Act, the Act requires that all              institution that requests additional
                                             without regular access to the discount                  depository institutions controlled by the bank
                                             window, those incurring daylight                        holding company be well capitalized and well                68 The administrative Reserve Bank is responsible
                                             overdrafts in violation of this policy, or              managed (12 U.S.C. 1841(p)). With regard to a
                                                                                                     foreign bank that operates a branch or agency or         for the administration of Federal Reserve credit,
                                             those in weak financial condition, are                  owns or controls a commercial lending company in         reserves, and risk-management policies for a given
                                             generally assigned a zero cap (see                      the United States, the Act requires the Board to         institution or other legal entity.
                                                                                                                                                                 69 All collateral must be acceptable to the Reserve
                                             section II.F.). Recently chartered                      apply comparable capital and management
                                                                                                     standards that give due regard to the principle of       Banks. The Reserve Banks may accept securities in
                                             institutions may also be assigned a zero                                                                         transit on the Fedwire Securities Service as
                                                                                                     national treatment and equality of competitive
                                             net debit cap.                                          opportunity (12 U.S.C. 1843(l)).                         collateral to support the maximum daylight
                                                                                                        67 The SOSA ranking is composed of four factors,      overdraft capacity level. Collateral eligibility and
                                             3. Capital Measure                                                                                               margins are the same for PSR policy purposes as for
                                                                                                     including the FBO’s financial condition and
                                                As described above, an institution’s                 prospects, the system of supervision in the FBO’s        the discount window. See http://
                                                                                                     home country, the record of the home country’s           www.frbdiscountwindow.org/ for information.
                                             cap category and capital measure                                                                                    70 Institutions may consider applying for a
                                                                                                     government in support of the banking system or
                                             determine the size of its net debit cap.                other sources of support for the FBO; and transfer       maximum daylight overdraft capacity level for
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                                             The capital measure used in calculating                 risk concerns. Transfer risk relates to the FBO’s        daylight overdrafts resulting from Fedwire funds
                                             an institution’s net debit cap depends                  ability to access and transmit U.S. dollars, which       transfers, Fedwire book-entry securities transfers,
                                             upon its chartering authority and home-                 is an essential factor in determining whether an         National Settlement Service entries, and ACH credit
                                                                                                     FBO can support its U.S. operations. The SOSA            originations. Institutions incurring daylight
                                             country supervisor.                                     ranking is based on a scale of 1 through 3, with 1       overdrafts as a result of other payment activity may
                                                a. U.S.-chartered institutions. For                  representing the lowest level of supervisory             be eligible for administrative counseling flexibility
                                             institutions chartered in the United                    concern.                                                 (59 FR 54915–18, Nov. 2, 1994).



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                                                                      Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                   79125

                                             daylight overdraft capacity to determine                resolution for collateralized capacity in              institution if the daylight overdraft were
                                             the appropriate maximum daylight                        an amount that exceeds its current net                 not covered by the end of the business
                                             overdraft capacity level. In considering                debit cap (which is based on up to 35                  day. Such a credit extension would be
                                             the institution’s request, the Reserve                  percent worldwide capital times its cap                contrary to the quid pro quo of reserves
                                             Bank will evaluate the institution’s                    multiple), as long as the requested total              for regular discount-window access as
                                             rationale for requesting additional                     capacity is 100 percent or less of                     reflected in the Federal Reserve Act and
                                             daylight overdraft capacity as well as its              worldwide capital times a self-assessed                in Board regulations. Thus, institutions
                                             financial and supervisory information.                  cap multiple.72 In order to ensure that                that do not have regular access to the
                                             The financial and supervisory                           intraday liquidity risk is managed                     discount window should not incur
                                             information considered may include,                     appropriately and that the FBO will be                 daylight overdrafts in their Federal
                                             but is not limited to, capital and                      able to repay daylight overdrafts,                     Reserve accounts.
                                             liquidity ratios, the composition of                    eligible FBOs under the streamlined                       Certain institutions are subject to a
                                             balance sheet assets, CAMELS or other                   procedure will be subject to initial and               daylight-overdraft penalty fee levied
                                             supervisory ratings and assessments,                    periodic reviews of liquidity plans that               against the average daily daylight
                                             and SOSA rankings (for U.S. branches                    are analogous to the liquidity reviews                 overdraft incurred by the institution.
                                             and agencies of foreign banks). An                      undergone by U.S. institutions.73 If an                These include Edge and agreement
                                             institution approved for a maximum                      eligible FBO requests capacity in excess               corporations, bankers’ banks that are not
                                             daylight overdraft capacity level must                  of 100 percent of worldwide capital                    subject to reserve requirements, and
                                             submit at least once in each twelve-                    times the self-assessed cap multiple, it               limited-purpose trust companies. The
                                             month period a board of directors                       would be subject to the general                        annual rate used to determine the
                                             resolution indicating its board’s                       procedure.                                             daylight-overdraft penalty fee is equal to
                                             approval of that level.                                                                                        the annual rate applicable to the
                                                If the Reserve Bank approves an                      F. Special Situations
                                                                                                                                                            daylight overdrafts of other institutions
                                             institution’s request, the Reserve Bank                    Under the Board’s policy, certain                   (50 basis points) plus 100 basis points
                                             approves a maximum daylight overdraft                   institutions warrant special treatment                 multiplied by the fraction of a 24-hour
                                             capacity level. The maximum daylight                    primarily because of their charter types.              day during which Fedwire is scheduled
                                             overdraft capacity is defined as follows:               As mentioned previously, an institution                to operate (currently 21.5⁄24). The daily
                                             Maximum daylight overdraft capacity =                   must have regular access to the discount               daylight-overdraft penalty rate is
                                             net debit cap + collateralized capacity.71              window and be in sound financial                       calculated by dividing the annual
                                                The Reserve Banks will review the                    condition in order to adopt a net debit                penalty rate by 360.74 The daylight-
                                             status of any institution that exceeds its              cap greater than zero. Institutions that               overdraft penalty rate applies to the
                                             maximum daylight overdraft capacity                     do not have regular access to the                      institution’s daily average daylight
                                             limit during a two-week reserve-                        discount window include Edge and                       overdraft in its Federal Reserve account.
                                             maintenance period and will decide if                   agreement corporations, bankers’ banks                 The daylight-overdraft penalty rate is
                                             the maximum daylight overdraft                          that are not subject to reserve                        charged in lieu of, not in addition to, the
                                             capacity should be maintained or if                     requirements, limited-purpose trust                    rate used to calculate daylight overdraft
                                             additional action should be taken (see                  companies, government-sponsored                        fees for institutions described in this
                                             section II.G.).                                         enterprises (GSEs), and certain                        section.
                                                Institutions with exempt-from-filing                 international organizations. Institutions                 Institutions that are subject to the
                                             and de minimis net debit caps may not                   that have been assigned a zero cap by                  daylight-overdraft penalty fee are not
                                             obtain additional daylight overdraft                    their Reserve Banks are also subject to                eligible for the $150 fee waiver and are
                                             capacity by pledging additional                         special considerations under this policy               subject to a minimum fee of $25 on any
                                             collateral without first obtaining a self-              based on the risks they pose. In                       daylight overdrafts incurred in their
                                             assessed net debit cap. Likewise,                       developing its policy for these                        Federal Reserve accounts. While such
                                             institutions that have voluntarily                      institutions, the Board has sought to                  institutions may be required to post
                                             adopted zero net debit caps may not                     balance the goal of reducing and                       collateral, they are not eligible for the
                                             obtain additional daylight overdraft                    managing risk in the payment system,                   zero fee associated with collateralized
                                             capacity without first obtaining a self-                including risk to the Federal Reserve,                 daylight overdrafts.
                                             assessed net debit cap. Institutions that               with that of minimizing the adverse
                                             have been assigned a zero net debit cap                 effects on the payment operations of                   1. Edge and Agreement Corporations 75
                                             by their administrative Reserve Bank are                these institutions.                                       Edge and agreement corporations
                                             not eligible to apply for any daylight                     Regular access to the Federal Reserve               should refrain from incurring daylight
                                             overdraft capacity.                                     discount window generally is available                 overdrafts in their Federal Reserve
                                                                                                     to institutions that are subject to reserve            accounts. In the event that any daylight
                                             2. Streamlined Procedure for Certain
                                                                                                     requirements. If an institution that is not            overdrafts occur, the Edge or agreement
                                             FBOs
                                                                                                     subject to reserve requirements and thus               corporation must post collateral to cover
                                                An FBO that is an FHC or has an                      does not have regular discount-window                  the overdrafts. In addition to posting
                                             SOSA rating of 1 and has a self-assessed                access were to incur a daylight                        collateral, the Edge or agreement
                                             net debit cap may request from its                      overdraft, the Federal Reserve might end               corporation would be subject to the
                                             Reserve Bank a streamlined procedure                    up extending overnight credit to that                  daylight-overdraft penalty rate levied
                                             to obtain a maximum daylight overdraft
                                                                                                                                                            against the average daily daylight
                                             capacity. These FBOs are not required to                   72 For example, a financial holding company is

                                             provide documentation of the business                   eligible for uncollateralized capacity of 35 percent
                                                                                                                                                              74 Under the current 21.5-hour Fedwire operating
                                                                                                     of worldwide capital times the cap multiple. The
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                                             need or obtain the board of directors’                  streamlined max cap procedure would provide such       day, the effective daily daylight-overdraft penalty
                                                                                                     an institution with additional collateralized          rate is truncated to 0.0000373.
                                               71 Collateralized capacity, on any given day,         capacity of 65 percent of worldwide capital times        75 These institutions are organized under section

                                             equals the amount of collateral pledged to the          the cap multiple.                                      25A of the Federal Reserve Act (12 U.S.C. 611–631)
                                             Reserve Bank, not to exceed the difference between         73 The liquidity reviews will be conducted by the   or have an agreement or undertaking with the Board
                                             the institution’s maximum daylight overdraft            administrative Reserve Bank, in consultation with      under section 25 of the Federal Reserve Act (12
                                             capacity level and its net debit cap.                   each FBO’s home country supervisor.                    U.S.C. 601–604(a)).



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                                             79126                    Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices

                                             overdrafts incurred by the institution, as              3. Limited-Purpose Trust Companies 77                     overdraft. Problem institutions should
                                             described above.                                           The Federal Reserve Act permits the                    refrain from incurring daylight
                                                This policy reflects the Board’s                     Board to grant Federal Reserve                            overdrafts and must post collateral to
                                             concerns that these institutions lack                   membership to limited-purpose trust                       cover any daylight overdrafts they do
                                             regular access to the discount window                   companies subject to conditions the                       incur.
                                             and that the parent company may be                      Board may prescribe pursuant to the                       G. Monitoring
                                             unable or unwilling to cover its                        Act. As a general matter, member
                                             subsidiary’s overdraft on a timely basis.               limited-purpose trust companies do not                    1. Ex Post
                                             The Board notes that the parent of an                   accept reservable deposits and do not                        Under the Federal Reserve’s ex post
                                             Edge or agreement corporation could                     have regular discount-window access.                      monitoring procedures, an institution
                                             fund its subsidiary during the day over                 Limited-purpose trust companies                           with a daylight overdraft in excess of its
                                             Fedwire or the parent could substitute                  should refrain from incurring daylight                    maximum daylight overdraft capacity or
                                             itself for its subsidiary on private                    overdrafts and must post collateral to                    net debit cap may be contacted by its
                                             systems. Such an approach by the                        cover any overdrafts they do incur. In                    Reserve Bank. Overdrafts above the cap
                                             parent could both reduce systemic risk                  addition to posting collateral, limited-                  for institutions with de minimis, self-
                                             exposure and permit the Edge or                         purpose trust companies would be                          assessed, and max caps may be treated
                                             agreement corporation to continue to                    subject to the same daylight-overdraft                    differently, depending on whether the
                                             service its customers. Edge and                         penalty rate as other institutions that do                overdraft is collateralized.79 If the
                                             agreement corporation subsidiaries of                   not have regular access to the discount                   overdraft is fully collateralized, the
                                             FBOs are treated in the same manner as                  window.                                                   Reserve Bank may choose not to contact
                                             their domestically owned counterparts.                                                                            the institution for up to two incidents
                                                                                                     4. Government-Sponsored Enterprises                       per two consecutive two-week reserve-
                                             2. Bankers’ Banks 76                                    and International Organizations 78                        maintenance periods (the total of four
                                               Bankers’ banks are exempt from                           The Reserve Banks act as fiscal agents                 weeks).
                                                                                                     for certain GSEs and international                           Each Reserve Bank retains the right to
                                             reserve requirements and do not have
                                                                                                     organizations in accordance with federal                  protect its risk exposure from individual
                                             regular access to the discount window.
                                                                                                     statutes. These institutions, however,                    institutions by unilaterally reducing net
                                             Bankers’ banks should refrain from
                                                                                                     are not subject to reserve requirements                   debit caps, imposing (additional)
                                             incurring daylight overdrafts and must
                                                                                                     and do not have regular access to the                     collateralization or clearing-balance
                                             post collateral to cover any overdrafts
                                                                                                     discount window. GSEs and                                 requirements, rejecting or delaying
                                             they do incur. In addition to posting
                                                                                                     international organizations should                        certain transactions as described below,
                                             collateral, a bankers’ bank would be                                                                              or, in extreme cases, taking the
                                             subject to the daylight-overdraft penalty               refrain from incurring daylight
                                                                                                     overdrafts and must post collateral to                    institution offline or prohibiting it from
                                             fee levied against the average daily                                                                              using Fedwire.
                                             daylight overdrafts incurred by the                     cover any daylight overdrafts they do
                                             institution, as described above.                        incur. In addition to posting collateral,                 2. Real Time
                                                                                                     these institutions would be subject to
                                               The Board’s policy for bankers’ banks                 the same daylight-overdraft penalty rate                     A Reserve Bank will apply real-time
                                             reflects the Reserve Banks’ need to                     as other institutions that do not have                    monitoring to an individual institution’s
                                             protect themselves from potential losses                regular access to the discount window.                    position when the Reserve Bank
                                             resulting from daylight overdrafts                                                                                believes that it faces excessive risk
                                             incurred by bankers’ banks. The policy                  5. Problem Institutions                                   exposure, for example, from problem
                                             also considers the fact that some                          For institutions that are in weak                      banks or institutions with chronic
                                             bankers’ banks do not incur the costs of                financial condition, the Reserve Banks                    overdrafts in excess of what the Reserve
                                             maintaining reserves as some other                      will impose a zero cap. The Reserve                       Bank determines is prudent. In such a
                                             institutions and do not have regular                    Bank will also monitor the institution’s                  case, the Reserve Bank will control its
                                             access to the discount window.                          activity in real time and reject or delay                 risk exposure by monitoring the
                                                                                                     certain transactions that would create an                 institution’s position in real time,
                                               Bankers’ banks may voluntarily waive
                                                                                                                                                               rejecting or delaying certain transactions
                                             their exemption from reserve
                                                                                                       77 For the purposes of this policy, a limited-          that would exceed the institution’s
                                             requirements, thus gaining access to the
                                                                                                     purpose trust company is a trust company that is          maximum daylight overdraft capacity or
                                             discount window. Such bankers’ banks                    a member of the Federal Reserve System but that           net debit cap, and taking other
                                             are free to establish net debit caps and                does not meet the definition of ‘‘depository              prudential actions, including requiring
                                             would be subject to the same policy as                  institution’’ in section 19(b)(1)(A) of the Federal
                                                                                                     Reserve Act (12 U.S.C. 461(b)(1)(A)).                     (additional) collateral.80
                                             other institutions that are eligible to
                                                                                                       78 The GSEs include Federal National Mortgage
                                             incur daylight overdrafts. The policy set                                                                         3. Multi-District Institutions
                                                                                                     Association (Fannie Mae), the Federal Home Loan
                                             out in this section applies only to those               Mortgage Corporation (Freddie Mac), entities of the          Institutions, such as those
                                             bankers’ banks that have not waived                     Federal Home Loan Bank System (FHLBS), the                maintaining merger-transition accounts
                                             their exemption from reserve                            Farm Credit System, the Federal Agricultural
                                                                                                                                                               and U.S. branches and agencies of a
                                             requirements.                                           Mortgage Corporation (Farmer Mac), the Student
                                                                                                     Loan Marketing Association (Sallie Mae), the
                                                                                                                                                                 79 For monitoring exempt institutions, overdrafts
                                                                                                     Financing Corporation, and the Resolution Funding
                                               76 For the purposes of this policy, a bankers’ bank   Corporation. The international organizations              above the exempt cap limit, regardless of whether
                                             is a depository institution that is not required to     include the World Bank, the Inter-American                such overdrafts are collateralized or
                                             maintain reserves under the Board’s Regulation D        Development Bank, the Asian Development Bank,             uncollateralized, should occur no more than twice
                                             (12 CFR 204) because it is organized solely to do       and the African Development Bank. The Student             in two consecutive two-week reserve-maintenance
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                                             business with other financial institutions, is owned    Loan Marketing Association Reorganization Act of          periods (the total of four weeks).
                                             primarily by the financial institutions with which      1996 requires Sallie Mae to be completely                   80 Institutions that are monitored in real time

                                             it does business, and does not do business with the     privatized by 2008; however, Sallie Mae completed         must fund the total amount of their ACH credit
                                             general public. Such bankers’ banks also generally      privatization at the end of 2004. The Reserve Banks       originations through the Reserve Banks in order for
                                             are not eligible for Federal Reserve Bank credit        no longer act as fiscal agents for new issues of Sallie   the transactions to be processed by the Federal
                                             under the Board’s Regulation A (12 CFR                  Mae securities, and Sallie Mae is not considered a        Reserve, even if those transactions are processed
                                             § 201.2(c)(2)).                                         GSE.                                                      one or two days before settlement.



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                                                                      Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Notices                                                      79127

                                             foreign bank, that access Fedwire                       FEDERAL RESERVE SYSTEM                                 time for ACH debit transfers. First, for
                                             through accounts in more than one                                                                              institutions that originate large values of
                                             Federal Reserve District are expected to                [Docket No. OP–1346]                                   ACH debit transfers, the liquidity
                                             manage their accounts so that the total                                                                        needed to fund the settlement of ACH
                                                                                                     Policy on Payment System Risk;
                                             daylight overdraft position across all                                                                         credit originations at 8:30 a.m. could be
                                                                                                     Daylight Overdraft Posting Rules
                                             accounts does not exceed their net debit                                                                       largely or entirely offset by the receipt
                                             caps. One Reserve Bank will act as the                  AGENCY: Board of Governors of the                      of funds from the settlement of ACH
                                             administrative Reserve Bank and will                    Federal Reserve System.                                debit transfers also at 8:30 a.m.2 Second,
                                             have overall risk-management                            ACTION: Notice.                                        the change could increase liquidity for
                                             responsibilities for institutions                                                                              institutions that originate ACH debit
                                             maintaining accounts in more than one                   SUMMARY: The Board has decided not to                  transfers over the Electronic Payments
                                             Federal Reserve District. For domestic                  pursue at this time its proposal to                    Network (EPN), the other ACH operator,
                                             institutions that have branches in                      change the posting time to 8:30 a.m. for               but have transfers delivered to receiving
                                             multiple Federal Reserve Districts, the                 commercial and government automated                    depository institutions over the FedACH
                                             administrative Reserve Bank generally                   clearinghouse (ACH) debit transfers that               network (inter-operator transactions).3
                                             will be the Reserve Bank where the head                 are processed by the Federal Reserve                   All ACH debit transfers would settle at
                                             office of the bank is located.                          Banks’ (Reserve Banks) FedACH service.                 8:30 a.m. (with all ACH credit transfers)
                                               In the case of families of U.S.                       (All times are eastern time.) The                      regardless of the operator through which
                                             branches and agencies of the same FBO,                  proposal would have aligned the                        the transfer is originated. Third, moving
                                             the administrative Reserve Bank                         posting time for ACH debit transfers                   the posting time for ACH debit transfers
                                             generally is the Reserve Bank that                      with the posting time for ACH credit                   to 8:30 a.m. would align the Reserve
                                             exercises the Federal Reserve’s oversight               transfers, which are currently posted at               Banks’ FedACH settlement times with
                                             responsibilities under the International                8:30 a.m. on the settlement date.                      those of EPN. The Reserve Banks’ Retail
                                             Banking Act.81 The administrative                       Commercial and government ACH debit                    Payments Office, which has primary
                                             Reserve Bank, in consultation with the                  transfers processed by the Reserve                     responsibility for FedACH, believed that
                                             management of the foreign bank’s U.S.                   Banks’ FedACH service will continue to                 this change would remove competitive
                                             operations and with Reserve Banks in                    be posted at 11 a.m., while commercial                 disparities between the two ACH
                                             whose territory other U.S. agencies or                  and government ACH credit transfers                    operators and their participants that
                                             branches of the same foreign bank are                   will continue to be posted at 8:30 a.m.                arise from different settlement times for
                                             located, may determine that these                       The credit and debit accounting entries                ACH debit transfers. Fourth, the change
                                             agencies and branches will not be                       associated with ACH credit transfers                   would conform more closely to the
                                             permitted to incur overdrafts in Federal                and ACH debit transfers are posted                     Board’s guidelines for measuring
                                             Reserve accounts. Alternatively, the                    simultaneously at the appointed posting                daylight overdrafts, specifically the
                                             administrative Reserve Bank, after                      time. In line with this decision, the                  principle that encourages posting times
                                             similar consultation, may allocate all or               Board will not move the posting time for               to be as close as possible to the delivery
                                             part of the foreign family’s net debit cap              Treasury Tax and Loan (TT&L)                           of payments to the receiving institution.
                                             to the Federal Reserve accounts of                      investments associated with Electronic                 Because FedACH payments are
                                             agencies or branches that are located                   Federal Tax Payment System (EFTPS)                     processed in the early morning hours,
                                             outside of the administrative Reserve                   ACH debit transfers. These transactions                usually between 2 a.m. and 4 a.m., and
                                             Bank’s District; in this case, the Reserve              will continue to be posted at 11 a.m.                  payment advices are sent to depository
                                             Bank in whose Districts those agencies                  The Board will reconsider the proposal                 institutions generally by 6 a.m., posting
                                             or branches are located will be                         in the future.                                         ACH debit transfers at 8:30 a.m. would
                                             responsible for administering all or part                                                                      shift the settlement time closer to the
                                                                                                     FOR FURTHER INFORMATION CONTACT:
                                             of this policy.82                                                                                              payment delivery time.
                                                                                                     Jeffrey Marquardt, Deputy Director                        In its proposal, the Board also
                                             H. Transfer-Size Limit on Book-Entry                    (202–452–2360) or Susan Foley,                         recognized that the simultaneous
                                             Securities [No Change]                                  Assistant Director (202–452–3596),                     posting of ACH debit and credit
                                                                                                     Division of Reserve Bank Operations                    transfers would reduce, on average, the
                                               By order of the Board of Governors of the             and Payment Systems, Board of                          available balances between 8:30 a.m.
                                             Federal Reserve System, dated: December 18,             Governors of the Federal Reserve
                                             2008.                                                                                                          and 10:59 a.m. for the majority of
                                                                                                     System; for users of                                   FedACH participants (approximately 95
                                             Jennifer J. Johnson,                                    Telecommunications Device for the Deaf                 percent). The majority of FedACH
                                             Secretary of the Board.                                 (‘‘TDD’’) only, contact (202) 263–4869.                participants currently gain balances
                                             [FR Doc. E8–30627 Filed 12–23–08; 8:45 am]              SUPPLEMENTARY INFORMATION:                             from the posting of ACH credit transfers
                                             BILLING CODE 6210–01–P                                                                                         at 8:30 a.m. If ACH debit transfers are
                                                                                                     I. Background
                                                                                                                                                            also posted at 8:30 a.m., the gain in
                                               81 12  U.S.C. 3101–3108.                                On March 7, 2008, the Board                          balances for these institutions will
                                                82 As in the case of Edge and agreement
                                                                                                     requested comment on changing the                      either diminish or be eliminated. Many
                                             corporations and their branches, with the approval
                                             of the designated administrative Reserve Bank, a        posting time for commercial and                        institutions would need to fund their
                                             second Reserve Bank may assume the responsibility       government ACH debit transfers that are                Federal Reserve accounts through
                                             of managing and monitoring the net debit cap of         processed by the Reserve Banks’                        daylight overdrafts or other funding
                                             particular foreign branch and agency families. This     FedACH service to 8:30 a.m. (from 11
                                             would often be the case when the payments activity
                                                                                                                                                            sources. The vast majority of
                                             and national administrative office of the foreign       a.m.) on the settlement date to coincide
mstockstill on PROD1PC66 with NOTICES




                                             branch and agency family is located in one District,    with the posting time for commercial                     2 Liquidity refers to balances and intraday credit

                                             while the oversight responsibility under the            and government ACH credit transfers.1                  available in Federal Reserve accounts to make
                                             International Banking Act is in another District. If                                                           payments.
                                                                                                     The Board outlined four potential
                                             a second Reserve Bank assumes management                                                                         3 Inter-operator transactions are posted to the

                                             responsibility, monitoring data will be forwarded to    benefits from shifting earlier the posting             Federal Reserve accounts of the originating and
                                             the designated administrator for use in the                                                                    receiving institutions according to the Board’s
                                             supervisory process.                                      1 See   73 FR 12443, March 7, 2008.                  posting rules for the underlying ACH transfers.



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