[Code of Federal Regulations]
[Title 12, Volume 2]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR204.131]

[Page 150-151]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D)--Table of Contents
 
Sec. 204.131  Participation by a depository institution in the secondary market for its own time deposits.

    (a) Background. In 1982, the Board issued an interpretation 
concerning the effect of a member bank's purchase of its own time 
deposits in the secondary market in order to ensure compliance with 
regulatory restrictions on the payment of interest on time deposits, 
with the prohibition against payment of interest on demand deposits, and 
with regulatory requirements designed to distinguish between time 
deposits and demand deposits for federal reserve requirement purposes 
(47 FR 37878, Aug. 27, 1982). The interpretation was designed to ensure 
that the regulatory early withdrawal penalties in Regulation Q used to 
achieve these three purposes were not evaded through the purchase by a 
member bank or its affiliate of a time deposit of the member bank prior 
to the maturity of the deposit.
    (b) Because the expiration of the Depository Institutions 
Deregulation Act (title II of Pub. L. 96-221) on April 1, 1986, removed 
the authority to set interest rate ceilings on deposits, one of the 
purposes for adopting the interpretation was eliminated. The removal of 
the authority to set interest rate ceilings on deposits required the 
Board to revise the early withdrawal penalties which were also used to 
distinguish between types of deposits for reserve requirement purposes. 
Effective April 1, 1986, the Board amended its Regulation D to 
incorporate early withdrawal penalties applicable to all depository 
institutions for this purpose (51 FR 9629, Mar. 20, 1986). Although the 
new early withdrawal penalties differ from the penalties used to enforce 
interest rate ceilings, secondary market purchases still effectively 
shorten the maturities of deposits and may be used to evade reserve 
requirements. This interpretation replaces the prior interpretation and 
states the application of the new early withdrawal penalties to 
purchases by depository institutions and their affiliates of the 
depository institution's time deposits. The interpretation applies only 
to situations in which the Board's regulatory penalties apply.
    (c) Secondary market purchases under the rule. The Board has 
determined that a depository institution purchasing a time deposit it 
has issued should be regarded as having paid the time deposit prior to 
maturity. The effect of the transaction is that the depository 
institution has cancelled a liability as opposed to having acquired an 
asset for its portfolio. Thus, the depository institution is required to 
impose any early withdrawal penalty required by Regulation D on the 
party from whom it purchases the instrument by deducting the amount of 
the penalty from the purchase price. The Board recognizes, however, that 
secondary market sales of time deposits are often done without regard to 
the

[[Page 151]]

identity of the original owner of the deposit. Such sales typically 
involve a pool of time deposits with the price based on the aggregate 
face value and average rate of return on the deposits. A depository 
institution purchasing time deposits from persons other than the person 
to whom the deposit was originally issued should be aware of the parties 
named on each of the deposits it is purchasing but through failure to 
inspect the deposits prior to the purchase may not be aware at the time 
it purchases a pool of time deposits that it originally issued one or 
more of the deposits in the pool. In such cases, if a purchasing 
depository institution does not wish to assess an applicable early 
withdrawal penalty, the deposit may be sold immediately in the secondary 
market as an alternative to imposing the early withdrawal penalty.
    (d) Purchases by affiliates. On a consolidated basis, if an 
affiliate (as defined in Sec. 204.2(q) of Regulation D) of a depository 
institution purchases a CD issued by the depository institution, the 
purchase does not reduce their consolidated liabilities and could be 
accomplished primarily to assist the depository institution in avoiding 
the requirements of the Board's Regulation D. Because the effect of the 
early withdrawal penalty rule could be easily circumvented by purchases 
of time deposits by affiliates, such purchases are also regarded as an 
early withdrawals of the time deposit, and the purchase should be 
treated as if the depository institution made the purchase directly. 
Thus, the regulatory requirements for early withdrawal penalties apply 
to affiliates of a depository institution as well as to the institution 
itself.
    (e) Depository institution acting as broker. The Board believes that 
it is permissible for a depository institution to facilitate the 
secondary market for its own time deposits by finding a purchaser for a 
time deposit that a customer is trying to sell. In such instances, the 
depository institution will not be paying out any of its own funds, and 
the depositor does not have a guarantee that the depository institution 
will actually be able to find a buyer.
    (f) Third-party market-makers. A depository institution may also 
establish and advertise arrangements whereby an unaffiliated third party 
agrees in advance to purchase time deposits issued by the institution. 
The Board would not regard these transactions as inconsistent with the 
purposes that the early withdrawal penalty is intended to serve unless a 
depository institution pays a fee to the third party purchaser as 
compensation for making the purchases or to remove the risk from 
purchasing the deposits. In this regard, any interim financing provided 
to such a third party by a depository institution in connection with the 
institution's secondary market activity involving the institution's time 
deposits must be made substantially on the same terms, including 
interest rates and collateral, as those prevailing at the same time for 
comparable transactions with other similarly situated persons and may 
not involve more than the normal risk of repayment.
    (g) Reciprocal arrangements. Finally, while a depository institution 
may enter into an arrangement with an unaffiliated third party wherein 
the third party agrees to stand ready to purchase time deposits held by 
the depository institution's customers, the Board will regard a 
reciprocal arrangement with another depository institution for purchase 
of each other's time deposits as a circumvention of the early withdrawal 
penalty rule and the purposes it is designed to serve.

[52 FR 47697, Dec. 16, 1987]