[Federal Register Volume 75, Number 86 (Wednesday, May 5, 2010)]
[Rules and Regulations]
[Pages 24384-24389]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-10483]


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FEDERAL RESERVE SYSTEM

12 CFR Part 204

[Regulation D; Docket No. R-1381]


Reserve Requirements of Depository Institutions Policy on Payment 
System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending Regulation D, Reserve Requirements of 
Depository Institutions, to authorize Reserve Banks to offer term 
deposits. Term deposits are intended to facilitate the conduct of 
monetary policy by providing a tool for managing the aggregate quantity 
of reserve balances. Institutions eligible to receive earnings on their 
balances in accounts at Federal Reserve Banks (``eligible 
institutions'') may hold term deposits and receive earnings at a rate 
that does not exceed the general level of short-term interest rates. 
Term deposits are separate and distinct from balances maintained in an 
institution's master account at a Reserve Bank (``master account'') as 
well as from those maintained in an excess balance account. Term 
deposits do not satisfy an institution's required reserve balance or 
contractual clearing balance and do not constitute excess balances. 
Term deposits are not available to clear payments and may not be used 
to reduce an institution's daylight or overnight overdrafts. The Board 
is also making minor amendments to the posting rules for intraday 
debits and credits to master accounts as set forth in the Board's 
Policy on Payment System Risk to address transactions associated with 
term deposits.

DATES: The amendments are effective on June 4, 2010.

FOR FURTHER INFORMATION CONTACT: Sophia H. Allison, Senior Counsel 
(202) 452-3565, or Dena L. Milligan, Staff Attorney (202) 452-3900), 
Legal Division, or Seth Carpenter, Associate Director (202) 452-2385, 
or Margaret Gillis DeBoer, Assistant Director (202) 452-3139, Division 
of Monetary Affairs; for users of Telecommunications Device for the 
Deaf (TDD) only, contact (202) 263-4869); Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

I. Summary of Proposal

    In order to help the Federal Reserve implement monetary policy, on 
December 31, 2009, the Board requested public comment on a proposal to 
amend Regulation D to authorize Reserve Banks to offer term deposits to 
eligible institutions.\1\ ``Eligible institution'' is defined in 
Regulation D and includes the depository institutions defined in 
section 19(b)(1)(A) of the Act, including banks, savings associations, 
savings banks and credit unions that are federally insured or eligible 
to apply for federal insurance. ``Eligible institution'' also includes 
trust companies, Edge and agreement corporations, and U.S. agencies and 
branches of foreign banks.\2\ Under the proposal, the Reserve Banks 
would accept term deposits subject to such terms and conditions as the 
Board may establish from time to time, including but not limited to 
conditions regarding the maturity of the term deposits being offered, 
maximum and minimum amounts that may be maintained by an eligible 
institution in a term deposit, the interest rate or rates offered and, 
if term deposits are offered through an auction mechanism, the size of 
the offering, and maximum and minimum bid amounts. Term deposits would 
not satisfy required reserve balances or contractual clearing balances 
and would not be available for general payments or other activities.
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    \1\ 74 FR 69301 (Dec. 31, 2009).
    \2\ ``Eligible institution'' does not include all entities for 
which the Reserve Banks hold accounts. For example, the term does 
not include entities for which the Reserve Banks act as fiscal 
agents, such as Federal Home Loan Banks, Fannie Mae, and Freddie 
Mac. 12 CFR 204.2(y).
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    The Board also proposed to amend section 204.10(b)(3) of Regulation 
D to reflect the fact that term deposits would earn interest, and that 
like other balances maintained at Reserve Banks by or on behalf of 
eligible institutions, the interest rate on term deposits could not 
exceed the general level of short-term interest rates, consistent with 
the limitation in the Federal Reserve Act.\3\ For purposes of that 
statutory requirement, the Board proposed to amend section 204.10(b)(3) 
to define the term ``short-term interest rates'' as including ``the 
primary credit rate and rates on obligations with maturities of up to 
one year in which eligible institutions may invest, such as rates on 
term federal funds, term repurchase agreements, commercial paper, term 
Eurodollar deposits, and other similar rates.''
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    \3\ See 12 U.S.C. 461(b)(12).

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[[Page 24385]]

II. Summary of Comments

    The Board's proposal indicated that the Federal Reserve could offer 
term deposits in several ways and outlined a potential structure for 
offering term deposits through auctions. The Board requested comment on 
all aspects of the proposal, and specifically requested comment on 
three topics:
    (1) Whether it is necessary to place any limitations on the maximum 
amount of term deposits that an institution may hold or on the maximum 
portion of a single offering that an institution may win at auction;
    (2) What maturity or maturities would eligible institutions 
recommend as appropriate for term deposits, and whether more than one 
maturity should be offered; and
    (3) Whether basic terms and structures for term deposits other than 
those described in the proposal should be considered.
    The Board received twenty-two comments on the proposal. Comments 
were received from eight individuals, two foreign central banks, four 
bankers' banks, four commercial banks, and four trade associations.
    Many commenters supported term deposits as an additional tool for 
draining excess reserves balances to support the effective 
implementation of monetary policy and stated that offering term 
deposits would not be disruptive to markets. Some commenters believed 
that term deposits would be effective in draining excess reserves 
balances, but questioned the underlying policies of reducing the 
availability of federal funds and putting upward pressure on the cost 
of borrowing. Additionally, a few commenters asked that the Board more 
clearly express the purpose of term deposits. A few other commenters 
questioned the effectiveness and necessity of term deposits as a 
monetary policy tool. Two commenters suggested that if the use of term 
deposits is temporary, the Board's final rule should announce a sunset 
date for the facility.

III. Final Rule

    The Board expects term deposits to be one of several tools that 
could be employed to drain reserve balances and support the effective 
implementation of monetary policy. Term deposits drain reserve balances 
because the funds that pay for the term deposits are removed from the 
accounts of participating institutions for the life of the term 
deposit. Reducing the quantity of reserve balances should tighten the 
link between the interest rate the Federal Reserve pays on excess 
reserve balances and other short-term interest rates, resulting in 
improved control in implementing monetary policy. Authorization of term 
deposits does not, however, preclude the use of other tools to drain 
reserve balances.
    Because of the potential usefulness of term deposits in 
implementing monetary policy, the Board has determined to adopt the 
proposed amendments to Regulation D with some changes to address issues 
raised by commenters and other issues. In doing so, the Board has 
determined not to adopt a sunset provision for these amendments. Actual 
offerings of term deposits, however, will occur as needed based on 
monetary policy objectives. Details about the periods when term 
deposits will be offered will be announced periodically in order to 
allow institutions to adjust their use of this facility.
    The final rule also adjusts the definition of ``short-term interest 
rates'' in two ways. First, it has been amended to clarify that 
interest rates with maturities equal to one year would be ``short 
term.'' Second, it has been changed to allow reference to interest 
rates on instruments with the relevant maturities but that may not be 
eligible for investment by eligible institutions. These changes result 
in a definition of ``short-term interest rates'' that is more 
consistent with market practice and understanding of the term.
    The Board is also revising proposed section 204.10(e)(1) to clarify 
that the Board may from time to time set conditions regarding the early 
withdrawal of term deposits and pledging term deposits as collateral. 
As discussed infra, the Board is not at this time finalizing those 
conditions.
    The Board also is revising proposed section 204.10(e)(3) to clarify 
that term deposits may not be used for general payments or settlement 
activities.

IV. Terms and Conditions of Term Deposit Offerings

    As explained above, the Board requested and received comment on a 
variety of matters related to the structure, amount and method for 
offering term deposits. Final determination of those matters depends 
largely on related monetary policy discussions, including decisions 
regarding the most effective way to drain the appropriate level of 
reserves. As a result, the Board has determined to finalize the parts 
of its proposal that facilitate the authorization of term deposits and 
to reserve to a later date the final decisions regarding the manner in 
which term deposits will be offered (for example, by auction, by open 
offer or by some other method) and the details of those offerings.
    In making those final decisions as to the terms and conditions of 
term deposits, the Board will take into account the comments received 
in this process. In order to aid institutions in preparing for the 
availability of term deposits, the Board is providing its preliminary 
views on several of those matters while reserving final judgment on all 
of these matters in order to adjust the decisions to most effectively 
implement the Federal Reserve's monetary policy objectives. For one of 
these matters (role of correspondents), however, the Board has made a 
final determination in order to allow potential participants to begin 
now to formulate plans and structures for participating in term 
deposits.
    To help eligible institutions to become familiar with the term 
deposit process, the Federal Reserve anticipates that it will conduct 
small-value offerings of term deposits in the coming months. More 
detailed information about these offerings, as well as information 
about how to participate in these offerings and term deposit offerings 
generally, will be provided at a later date.

A. Correspondents

    Some commenters expressed concerns that the proposal would 
disadvantage private-sector correspondents. These commenters argued 
that private-sector correspondent institutions likely would be unable 
to compete with term deposits offered by Reserve Banks and that term 
deposits would thus jeopardize existing correspondent-respondent 
relationships. These commenters indicated that term deposits would 
likely earn a higher interest rate than other similar term investments 
or overnight investments, would carry no risk and would be available to 
pledge as collateral for discount window advances.
    These commenters proposed that, in order to mitigate unintended 
strain on existing correspondent-respondent relationships, 
correspondent institutions be permitted to aggregate their respondents' 
funds and maintain those funds in term deposits on behalf of their 
respondents. Commenters also proposed that correspondents be permitted 
to bid on term deposits as agent for their respondents, even on an 
individual or unaggregated basis. According to these commenters, small 
institutions cannot justify the staff resources required to participate 
actively in the proposed term deposit offerings, and instead could more 
effectively and efficiently participate in those offerings by placing 
funds with a

[[Page 24386]]

correspondent acting as aggregator or as agent, or both. These 
commenters indicated that allowing correspondents to aggregate the 
funds of smaller institutions in a single term deposit account would 
provide an efficient mechanism for correspondents to invest on behalf 
of their respondents, would allow small institutions to compete for 
term deposits by overcoming a high minimum bid amount and aggressive 
bidding on the rates by larger institutions. The commenters also 
asserted that allowing correspondents to hold term deposits as agents 
would be consistent with the existing provisions of Regulation D 
relating to excess balance accounts. Finally, these commenters asserted 
that the offering of term deposits was a ``service'' in direct 
competition with private-sector deposits and funds management services, 
and therefore the rates paid should be subject to a private-sector 
adjustment factor under section 11A of the Federal Reserve Act.
    The Board has carefully considered these comments and has 
determined not to authorize the aggregation of funds of multiple 
respondents in a single term deposit that is managed by a correspondent 
as agent. However, correspondents will be able to facilitate respondent 
participation in term deposit offerings, such as by submitting a tender 
on behalf of each respondent that authorizes the correspondent to do 
so. Because of operational complexities and other accommodations being 
made to enable the participation by small institutions, the Board will 
not allow a correspondent to submit as agent a single tender for the 
aggregate quantity of term deposits that its respondents wish to hold. 
Correspondents that are eligible institutions would be able to 
participate in term deposit offerings for their own account.
    As noted above, some commenters argued that term deposits were a 
``service'' in direct competition with private-sector correspondent 
institutions, and therefore should be subject to a private-sector 
adjustment factor under section 11A of the Federal Reserve Act.
    Section 11A of the Act was added by the Monetary Control Act of 
1980 (``MCA'') to promote competitive equality between member and 
nonmember banks and to improve the efficiency of the nation's payments 
mechanism by making specific Reserve Bank services, known as ``priced 
services,'' available to all depository institutions at a competitive 
price. Section 11A requires the Board to establish pricing principles 
and a schedule of fees to cover the specified Reserve Bank ``priced 
services'' \4\ in order to enable private-sector service providers to 
compete more effectively with Reserve Banks.\5\ The Federal Reserve's 
governmental-type functions (such as conducting monetary policy) were 
not intended to be included as ``services'' covered by MCA's pricing 
principles.\6\ As stated in the proposal, offering term deposits is a 
tool to drain excess reserves balances and support the effective 
implementation of monetary policy. Accordingly, even though private-
sector correspondents may offer some investments that are similar in 
certain respects to term deposits, the offering of term deposits is not 
a ``service'' that is subject to the pricing principles of Section 11A 
of the Act. Finally, as noted above, rates on term deposits are subject 
to an independent statutory limit: these rates may not exceed the 
general level of short-term interest rates.\7\
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    \4\ Section 11A(b) lists the services which the Board must 
include in its schedule of fees: Currency and coin services; check 
clearing and collection services; wire transfer services; automated 
clearinghouse services; settlement services; securities and 
safekeeping services; Federal Reserve float, and ``[a]ny new 
services which the Federal Reserve System offers, including but not 
limited to payment services to effectuate the electronic transfer of 
funds.'' 12 U.S.C. 248a.
    \5\ See 125 Cong. Rec. 525 (1979) (statement of Sen. Proxmire).
    \6\ Monetary Control and the Membership Problem: Hearing on H.R. 
12706, Before the H. Comm. On Fin. Svcs., 95th Cong. 127 (1978) 
(Federal Reserve Board's Preliminary Proposal).
    \7\ 12 U.S.C. 461(b).
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B. Maturities of Term Deposits

    The Board also requested comment on the appropriate maturity or 
maturities for term deposits, and on whether more than one maturity 
should be offered. The Board's proposal suggested that term deposit 
maturities would not exceed one year and likely would be between one 
and six months. The proposal also suggested that term deposit 
maturities could be aligned with 14-day reserve maintenance periods.
    Commenters generally supported offering term deposits with multiple 
maturities in order to help institutions manage their liquidity 
positions and interest-rate risk, and suggested maturities for term 
deposits ranging from 14 days to one year. Two commenters suggested 
that term deposits of varying maturities could be offered in a single 
offering, and one commenter suggested that term deposits of multiple 
maturities be offered from the first auction. One commenter suggested 
that term deposits with shorter maturities be offered regularly, with 
less frequent offerings of term deposits with six-month maturities. 
Generally, commenters felt that demand would be greatest for term 
deposits with maturities less than six months.
    Several commenters supported maturities that were multiples of 14 
days to coincide with reserve maintenance periods. Many of these 
commenters specifically suggested maturities that mirrored the 
maturities of advances under the Federal Reserve's Term Auction 
Facility (TAF) (those maturities have generally been 28 days and 84 
days), or maturities of U.S. Treasury debt offerings or other 
investments similar to term deposits. Another commenter suggested that 
term deposit maturities not exceed three months (approximately twice 
the time between Federal Open Market Committee meetings), because 
institutions could establish reasonable interest rate expectations over 
a three-month period.
    In recognition of the demand to hold term deposits of varying 
maturities, the Board expects that term deposits of more than one 
maturity will be offered and that maturities of term deposits likely 
will be six months or less. The Board also expects that term deposit 
maturities will be aligned with 14-day reserve maintenance periods. 
Maturities will be announced in advance of a term deposit offering.

C. Early Withdrawal

    Some commenters requested that the Board reconsider its proposal to 
prohibit early withdrawal of term deposits. Two commenters suggested 
that institutions be permitted to make early withdrawals of term 
deposits for a fee; one of these commenters suggested that early 
withdrawals be limited to term deposits with maturities of 28 days or 
more. Both commenters cited the ability to maintain flexibility in the 
event of changing financial circumstances.
    The Board believes that, as stated in the proposal, early 
withdrawal of term deposits would weaken the ability of term deposits 
to serve as an effective tool for draining reserve balances, and 
therefore would undermine the effective implementation of monetary 
policy. Accordingly, the Board expects that early withdrawals from term 
deposits will not be permitted.

D. Offering Mechanism

    The Board's proposal described a potential auction mechanism for 
offering term deposits. The Board received several comments (discussed 
below) related specifically to offering term deposits through an 
auction, none of which opposed using an auction mechanism. The Board 
expects that an auction mechanism may be the most

[[Page 24387]]

effective way to allocate term deposits in a manner that effectively 
achieves the Federal Reserve's monetary policy objectives. Based on 
monetary policy considerations and experience with the auction 
mechanism, the Board may consider offering term deposits through 
different mechanisms.
    As stated above, the Board is not at this time setting forth 
definitive terms and conditions of term deposit offerings (e.g., the 
maximum interest rate for an offering). The Board will take the 
comments received into consideration when determining the terms and 
conditions. Many commenters expressed a desire for the Federal Reserve 
to communicate in advance the terms and conditions of the offerings, as 
well as the purpose and desired outcome of the program. The Board 
anticipates announcing the terms and conditions of any auction in 
advance, including the quantity of term deposits offered and their 
maturity, any minimum and maximum bid amounts, and a maximum-allowable 
bid interest rate.
    One commenter suggested that the Board provide notice and an 
opportunity to comment prior to changing the terms and conditions of 
term deposit offerings. The amendments to Regulation D adopted by the 
Board were designed to be sufficiently flexible to support various 
approaches to term deposit offerings, including auctions or posted-rate 
term deposit offerings, and offerings of varying amounts, maturities, 
and interest rates. This flexibility is necessary to enable the Board 
to adjust the terms and conditions based on evolving market conditions 
and monetary policy needs. The Board does not expect to seek comment in 
advance of changing the terms and conditions of term deposit offerings 
unless those changes require amendments to Regulation D.
    One commenter suggested that each institution be permitted to 
submit multiple bids and proposed a maximum of two bids per institution 
at each auction. The Board is considering permitting multiple bids per 
institution for term deposits and anticipates that, if multiple bids 
are permitted, there will likely be some limit on the number of bids an 
institution may submit.

E. Interest Rate or Rates Offered

    The Board received a number of comments on term deposit interest 
rates. Some commenters supported structuring auction bids as fixed-rate 
bids, and others suggested that bids be in the form of a spread over a 
reference rate, resulting in a floating rate. Commenters supporting a 
floating rate suggested specific reference rates such as the target 
federal funds rate, the rate paid on required reserves, the rate paid 
on excess reserves, and the overnight indexed swap rate.
    In addition, the Board received several comments related to setting 
the maximum interest rate on term deposits. One commenter supported 
maintaining flexibility as to the benchmark rates considered when 
setting the maximum interest rate. One commenter stated that for term 
deposits of longer maturities, the primary credit rate was not 
necessarily an appropriate maximum rate; rather, this commenter 
suggested that auctions of term deposits of longer maturities have a 
higher maximum rate, where the increase relative to the rates on term 
deposits with shorter maturities is consistent with the steepness of 
the yield curve.
    The Board did not receive any comments related to determining the 
``general level'' of short-term interest rates. In identifying the 
``general level'' of short-term interest rates, the Board could look to 
a specific short-term interest rate, or to a range of such rates. The 
``general level'' of short-term interest rates could include both fixed 
and floating rates and will vary over time in accordance with movements 
in short-term interest rates. As short-term interest rates may move 
within the maturity period of a term deposit, the Board will consider 
the applicable ``general level'' for any particular term deposit 
offering to be the general level of short-term interest rates at the 
time the rate for that particular offering is established.
    In accordance with statutory requirements, the maximum interest 
rate for each offering will not exceed the general level of short-term 
interest rates. The maximum interest rate for a given offering will be 
announced in advance of that offering. The Board expects that interest 
rates on term deposits initially will be fixed, although the Board may 
consider floating-rate term deposits based on future experience with 
term deposit offerings.

F. Noncompetitive Tenders

    One commenter suggested allowing small institutions to make 
noncompetitive tenders, similar to auctions for Treasury securities. 
The Board will consider including a noncompetitive tender feature 
whereby small institutions could submit a tender outside the 
competitive bidding process for the quantity of term deposits they wish 
to hold and receive the rate established by the competitive auction.

G. Individual Limits on Maximum Amount of Deposit

    The Board specifically requested comment on whether limitations on 
the amount an eligible institution may maintain as term deposits were 
necessary. Many commenters suggested placing some limitation on the 
amount of term deposits that a single institution can hold. The 
limitations on an institution's term deposit holdings suggested by 
various commenters included restrictions based on (1) A percentage of 
an institution's capital; (2) an institution's average daily balance in 
its master account over the prior three months, and (3) 10 percent of 
total term deposits outstanding.
    Some of these commenters asserted that limiting the amount of a 
single offering that any institution can be awarded would ensure that 
small depository institutions effectively have access to term deposits, 
foster greater participation in the program, and curb the ability of a 
few large institutions to dominate term deposit offerings. Proposals 
suggested by these commenters included de minimis minimum bid amounts, 
and limits based on auction size (e.g., limiting any one institution to 
between 5 percent and 25 percent of a single auction). Another 
commenter suggested imposing such limitations only on the twenty 
largest institutions.
    The Board expects to implement the term deposit program in a way 
that promotes equitable access to term deposits for institutions of all 
sizes, while most effectively meeting the Federal Reserve's monetary 
policy objectives. Eligible institutions would not be required to 
maintain required reserve balances at Reserve Banks in order to hold 
term deposits, nor would they need to maintain a master account at a 
Reserve Bank in order to participate in term deposit offerings. The 
Board also expects to set minimum bid amounts for term deposit 
offerings low enough so as to not be a barrier to participation by 
smaller institutions.

H. Use as Collateral

    Several commenters raised concerns related to the potential 
availability of term deposits to satisfy unexpected liquidity needs of 
the depositor. In addition, two commenters suggested that term deposits 
be available to pledge as collateral for advances by Federal Home Loan 
Banks so that institutions would be able to meet liquidity needs 
through mechanisms other than the discount window. One of these 
commenters suggested that term

[[Page 24388]]

deposits be available to pledge as collateral for any interbank loan.
    The potential complexity of administering pledges (and re-pledges) 
of term deposits as collateral to third parties throughout the term of 
the deposit could be substantial. The Board expects that institutions 
will be permitted to use their term deposits as collateral for discount 
window advances in order to manage unanticipated funding needs. This 
would allow institutions to obtain liquidity from the Federal Reserve 
by pledging term deposits or to obtain liquidity from other sources by 
substituting term deposits for other types of collateral pledged to the 
discount window that could then be pledged as collateral to secure 
advances from Federal Home Loan Banks and other third parties. 
Accordingly, the Board does not expect to permit pledges of term 
deposits to third parties.
    In 2008, the Board announced revisions to its Policy on Payment 
System Risk (``Revised PSR Policy'').\8\ Under the Revised PSR Policy, 
collateralized daylight overdrafts would incur no fee.\9\ The Board 
received many comments supporting the availability of term deposits to 
collateralize daylight overdrafts. The Board expects that term deposits 
will be available to collateralize daylight overdrafts under the 
Revised PSR Policy.\10\
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    \8\ 73 FR 79109 (Dec. 24, 2008).
    \9\ 73 FR 79109, 79114 (Dec. 24, 2008).
    \10\ The Board anticipates implementing the Revised PSR Policy 
in late 2010 or early 2011. The Board will announce the specific 
date at least 90 days in advance of the implementation date. 74 FR. 
79117 (Dec. 24, 2008).
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V. Final Amendments to PSR Policy Posting Rules

    The Reserve Banks measure depository institutions' intraday account 
balances according to a set of posting rules outlined in the Board's 
Policy on Payment System Risk (PSR Policy).\11\ To reflect the 
settlement of term deposits in the posting rules, the Board is amending 
section II.A. of the PSR Policy under the heading ``Procedures for 
Measuring Daylight Overdrafts'' as follows (changes identified by 
italics):
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    \11\ Available at http://www.federalreserve.gov/paymentsystems/psr_policy.htm.
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Procedures for Measuring Daylight Overdrafts

    Opening Balance (Previous Day's Closing Balance)
    Post at 8:30 a.m. Eastern Time:
    + Term deposit maturities and accrued interest
    Post After the Close of Fedwire Funds Service:
    +/- All other transactions. These transactions include the 
following: Local Federal Reserve Bank checks presented after 3 p.m. 
Eastern Time but before 3 p.m. local time; noncash collection; currency 
and coin shipments; small-dollar credit adjustments; term deposit 
settlements; and all debit adjustments.
    The Board received no comments on the proposed amendments to the 
PSR Policy and is adopting them as proposed. These amendments to the 
PSR Policy will be effective at the same time as the amendments to 
Regulation D.\12\
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    \12\ See n. 10, supra, and accompanying text regarding the 
effective date of other amendments to the PSR Policy relating to the 
ability of term deposits to serve as collateral for daylight 
overdrafts.
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VI. Solicitation of Comments Regarding use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 (12 U.S.C. 4809) 
requires the Board to use ``plain language'' in all final rules 
published after January 1, 2000. The Board has sought to present this 
final rule in a simple and straightforward manner. The Board received 
no comments on whether the proposed rule was clearly stated and 
effectively organized, or on how the Board might make the text of the 
rule easier to understand.

VII. Regulatory Flexibility Act

    An initial regulatory flexibility analysis (IRFA) was included in 
the Board's proposed rule in accordance with the Regulatory Flexibility 
Act (5 U.S.C. 601 et. seq.). In the IRFA, the Board specifically 
solicited comment on significant alternatives that would minimize the 
impact of the proposal on small entities. The Board's final regulatory 
flexibility analysis is set forth below. For purposes of this analysis, 
banks and other depository institutions are considered ``small'' if 
they have less than $175 million in assets. For the reasons stated 
below, the Board expects that the final rule will not have a 
significant economic impact on small entities.

1. Statement of the Need for and the Objectives of the Final Rule

    The Board is publishing final amendments to Regulation D to 
authorize Reserve Banks to offer interest-bearing deposits of specified 
maturities to eligible institutions. Term deposits are intended to 
facilitate the conduct of monetary policy by providing a tool for 
managing the aggregate quantity of reserve balances. Additional 
discussion of the need for and objectives of the final rule is 
contained in the SUPPLEMENTARY INFORMATION above.

2. Summary of Significant Issues Raised by the Public Comments in 
Response to the Initial Regulatory Flexibility Analysis

    Although the Board received no comments that were specifically in 
response to the IRFA, the Board received comments regarding the 
proposal's impact on small entities. As discussed in the SUPPLEMENTARY 
INFORMATION above, some commenters expressed concern about small 
institutions' ability to participate in term deposit offerings and to 
compete with larger institutions in the offerings, particularly if an 
auction mechanism were used. To address these concerns, commenters 
suggested that minimum bid amounts for auctions be set sufficiently low 
to allow smaller institutions to participate and suggested that 
noncompetitive tenders be offered alongside competitive auctions. Some 
commenters also suggested that there be limits on the portions of 
offerings a single institution could be awarded so as to prevent larger 
institutions from being awarded an entire offering.
    As discussed above, the Board expects to implement term deposits in 
a way that promotes the access of small entities to term deposits.

3. Small Entities Affected by the Final Rule

    Participation in term deposit offerings would be optional for 
eligible institutions of all sizes. The Board estimates that 
approximately 16,010 would be eligible to hold term deposits, of which 
approximately 12,267 would be considered ``small'' for purposes of the 
RFA (entities with assets of $175 million or less). The impact on 
eligible institutions choosing to hold term deposits would be positive, 
because term deposits would expand the range of investment 
opportunities available to those institutions.

4. Description of Projected Reporting, Recordkeeping and Other 
Compliance Requirements of the Final Rule

    The final rule does not impose any new reporting, recordkeeping or 
compliance requirements.

5. Significant Alternatives to the Revisions of the Final Rule

    The Board received no comments suggesting significant alternatives 
to the proposed rule that would minimize the impact of the rule on 
small institutions. The final rule, like the proposed rule, provides 
the Board with significant

[[Page 24389]]

flexibility to structure the terms and conditions for term deposit 
offerings to minimize any adverse effects on small institutions. The 
Board will set terms and conditions of term deposit offerings that 
promote the access of small institutions to term deposits while still 
maintaining the effectiveness of term deposits as a tool to implement 
monetary policy. These steps could include those suggested by 
commenters, such as low minimum bid amounts, aggregate limits, and 
noncompetitive tenders.

VIII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final 
rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). The final rule contains no collections of 
information subject to the PRA.

List of Subjects in 12 CFR Part 204

    Banks, banking, Reporting and recordkeeping requirements.

Authority and Issuance

0
For the reasons set forth in the preamble, the Board is proposing to 
amend 12 CFR part 204 as follows:

PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS 
(REGULATION D)

0
1. The authority citation for Part 204 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and 
6105.


0
2. Amend Sec.  204.2 by adding paragraph (dd) to read as follows:


Sec.  204.2  Definitions.

* * * * *
    (dd) Term deposit means those funds of an eligible institution that 
are maintained by that institution for a specified maturity at a 
Federal Reserve Bank pursuant to section 204.10(e) of this part.
0
3. Section 204.10 is amended by revising paragraph (b)(3) and by adding 
a new paragraph (e) to read as follows:


Sec.  204.10  Payment of interest on balances.

* * * * *
    (b) * * *
    (3) For required reserve balances, excess balances, and term 
deposits, at any other rate or rates as determined by the Board from 
time to time, not to exceed the general level of short-term interest 
rates. For purposes of this subsection, ``short-term interest rates'' 
are rates on obligations with maturities of no more than one year, such 
as the primary credit rate and rates on term federal funds, term 
repurchase agreements, commercial paper, term Eurodollar deposits, and 
other similar instruments.
* * * * *
    (e) Term deposits. (1) A Federal Reserve Bank may accept term 
deposits from eligible institutions under the provisions of this 
paragraph (e) subject to such terms and conditions as the Board may 
establish from time to time, including but not limited to conditions 
regarding the maturity of the term deposits being offered, maximum and 
minimum amounts that may be maintained by an eligible institution in a 
term deposit, the interest rate or rates offered, early withdrawal of 
term deposits, pledging term deposits as collateral and, if term 
deposits are offered through an auction mechanism, the size of the 
offering, maximum and minimum bid amounts, and other relevant terms.
    (2) A term deposit will not satisfy any institution's required 
reserve balance or contractual clearing balance.
    (3) A term deposit may not be used for general payments or 
settlement activities.

    By order of the Board of Governors of the Federal Reserve 
System, April 29, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-10483 Filed 5-4-10; 8:45 am]
BILLING CODE 6210-01-P