REGULATION D) Required to Maintain for the Purpose of Facilitating the Implementation of Sec

is responsible for ensuring that the informa- AUTHORITY: 12 U.S.C. 248(a), 248(c), 461, 601, tion reported on its HMDA/LAR is correct. 611, and 3105. [Reg. C, 67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43227, June 27, 2002; 68 FR 31592, May § 204.1 Authority, purpose and scope. 28, 2003; 68 FR 74833, Dec. 29, 2003; 69 FR 77139, (a) Authority. This part is issued Dec. 27, 2004; 70 FR 75719, Dec. 21, 2005; 71 FR under the authority of section 19 (12 77247, Dec. 26, 2006; 72 FR 72235, Dec. 20, 2007; 73 FR 78616, Dec. 23, 2008; 73 FR 63336, Oct. 24, U.S.C. 461 et seq.) and other provisions 2008; 74 FR 68499, Dec. 28, 2009; 75 FR 80675, of the Federal Reserve Act and of sec- Dec. 23, 2010] tion 7 of the International Banking Act of 1978 (12 U.S.C. 3105). PART 204—RESERVE REQUIREMENTS (b) Purpose. This part relates to re- OF DEPOSITORY INSTITUTIONS serves that depository institutions are (REGULATION D) required to maintain for the purpose of facilitating the implementation of Sec. monetary policy by the Federal Re- 204.1 Authority, purpose and scope. serve System. 204.2 Definitions. (c) Scope. (1) The following depository 204.3 Reporting and location. 204.4 Computation of required services. institutions are required to maintain 204.5 Maintenance of required reserves. reserves in accordance with this part: 204.6 Charges for reserve deficiencies. (i) Any insured bank as defined in 204.7 Supplemental reserve requirement. section 3 of the Federal Deposit Insur- 204.8 International banking facilities. ance Act (12 U.S.C. 1813(h)) or any bank 204.9 Emergency reserve requirement. 204.10 Payment of interest on balances. that is eligible to apply to become an insured bank under section 5 of such INTERPRETATIONS Act (12 U.S.C. 1815); 204.121 Bankers’ banks. (ii) Any savings bank or mutual sav- 204.122 Secondary market activities of ings bank as defined in section 3 of the international banking facilities. Federal Deposit Insurance Act (12 204.123 Sale of Federal funds by investment companies or trusts in which the entire U.S.C. 1813(f), (g)); beneficial interest is held exclusively by (iii) Any insured credit union as de- depository institutions. fined in section 101 of the Federal Cred- 204.124 Repurchase agreement involving it Union Act (12 U.S.C. 1752(7)) or any shares of a money market mutual fund credit union that is eligible to apply to whose portfolio consists wholly of United become an insured credit union under States Treasury and Federal agency securities. section 201 of such Act (12 U.S.C. 1781); 204.125 Foreign, international, and supra- (iv) Any member as defined in sec- national entities referred to in tion 2 of the Federal Home Loan Bank §§ 204.2(c)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5). Act (12 U.S.C. 1422(4)); and 204.126 Depository institution participation in ‘‘Federal funds’’ market. (v) Any insured institution as defined 204.127 Nondepository participation in in section 401 of the National Housing ‘‘Federal funds’’ market. Act (12 U.S.C. 1724(a)) or any institu- 204.128 Deposits at foreign branches guaran- tion which is eligible to apply to be- teed by domestic office of a depository come an insured institution under sec- institution. tion 403 of such Act (12 U.S.C. 1726). 204.130 Eligibility for NOW accounts. 204.131 Participation by a depository insti- (2) Except as may be otherwise pro- tution in the secondary market for its vided by the Board, a foreign bank’s own time deposits. branch or agency located in the United 204.132 Treatment of loan strip participa- States is required to comply with the tions. provisions of this part in the same 204.133 Multiple savings deposits treated as a transaction account. manner and to the same extent as if 204.134 Linked time deposits and trans- the branch or agency were a member action accounts. bank, if its parent foreign bank (i) has 204.135 Shifting funds between depository total worldwide consolidated bank as- institutions to make use of the low re- sets in excess of $1 billion; or (ii) is serve tranche. controlled by a foreign company or by 204.136 Treatment of trust overdrafts for reserve requirement reporting purposes. a group of foreign companies that own

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or control foreign banks that in the ag- ment on subscriptions to United States gregate have total worldwide consoli- government securities, and funds held dated bank assets in excess of $1 bil- to meet its acceptances; lion. In addition, any other foreign (iii) An outstanding teller’s check, or bank’s branch located in the United an outstanding draft, certified check, States that is eligible to apply to be- cashier’s check, money order, or offi- come an insured bank under section 5 cer’s check drawn on the depository in- of the Federal Deposit Insurance Act stitution, issued in the usual course of (12 U.S.C. 1815) is required to maintain business for any purpose, including reserves in accordance with this part payment for services, dividends or pur- as a nonmember depository institution. chases; (3) Except as may be otherwise pro- (iv) Any due bill or other liability or vided by the Board, an Edge Corpora- undertaking on the part of a depository tion (12 U.S.C. 611 et seq.) or an Agree- institution to sell or deliver securities ment Corporation (12 U.S.C. 601 et seq.) to, or purchase securities for the ac- is required to comply with the provi- count of, any customer (including an- sions of this part in the same manner other depository institution), involving and to the same extent as a member either the receipt of funds by the de- bank. pository institution, regardless of the (4) This part does not apply to any fi- use of the proceeds, or a debit to an ac- nancial institution that (i) is organized count of the customer before the secu- solely to do business with other finan- rities are delivered. A deposit arises cial institutions; (ii) is owned pri- thereafter, if after three business days marily by the financial institutions from the date of issuance of the obliga- with which it does business; and (iii) tion, the depository institution does does not do business with the general not deliver the securities purchased or public. does not fully collateralize its obliga- (5) The provisions of this part do not tion with securities similar to the se- apply to any deposit that is payable curities purchased. A security is simi- only at an office located outside the lar if it is of the same type and if it is United States. of comparable maturity to that pur- [45 FR 56018, Aug. 22, 1980] chased by the customer; (v) Any liability of a depository insti- § 204.2 Definitions. tution’s affiliate that is not a deposi- For purposes of this part, the fol- tory institution, on any promissory lowing definitions apply unless other- note, acknowledgment of advance, due wise specified: bill, or similar obligation (written or (a)(1) Deposit means: oral), with a maturity of less than one (i) The unpaid balance of money or and one-half years, to the extent that its equivalent received or held by a de- the proceeds are used to supply or to pository institution in the usual course maintain the availability of funds of business and for which it has given (other than capital) to the depository or is obligated to give credit, either institution, except any such obligation conditionally or unconditionally, to an that, had it been issued directly by the account, including interest credited, or depository institution, would not con- which is evidenced by an instrument on stitute a deposit. If an obligation of an which the depository institution is pri- affiliate of a depository institution is marily liable; regarded as a deposit and is used to (ii) Money received or held by a de- purchase assets from the depository in- pository institution, or the credit stitution, the maturity of the deposit given for money or its equivalent re- is determined by the shorter of the ma- ceived or held by the depository insti- turity of the obligation issued or the tution in the usual course of business remaining maturity of the assets pur- for a special or specific purpose, re- chased. If the proceeds from an affili- gardless of the legal relationships es- ate’s obligation are placed in the de- tablished thereby, including escrow pository institution in the form of a funds, funds held as security for securi- reservable deposit, no reserves need be ties loaned by the depository institu- maintained against the obligation of tion, funds deposited as advance pay- the affiliate since reserves are required

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to be maintained against the deposit (E) Arises from the creation, dis- issued by the depository institution. count and subsequent sale by a deposi- However, the maturity of the deposit tory institution of its bankers’ accept- issued to the affiliate shall be the ance of the type described in paragraph shorter of the maturity of the affili- 7 of section 13 of the Federal Reserve ate’s obligation or the maturity of the Act (12 U.S.C. 372). deposit; (viii) Any liability of a depository in- (vi) Credit balances; stitution that arises from the creation (vii) Any liability of a depository in- after June 20, 1983, of a bankers’ ac- stitution on any promissory note, acceptance that is not of the type de- knowledgment of advance, bankers’ ac- scribed in paragraph 7 of section 13 of ceptance, or similar obligation (writ- the Federal Reserve Act (12 U.S.C. 372) ten or oral), including mortgage- except any such liability held for the backed bonds, that is issued or under- account of an entity specified in taken by a depository institution as a § 204.2(a)(1)(vii)(A); or means of obtaining funds, except any (2) Deposit does not include: such obligation that: (i) Trust funds received or held by (A) Is issued or undertaken and held the depository institution that it keeps for the account of: properly segregated as trust funds and (1) An office located in the United apart from its general assets or which States of another depository institu- it deposits in another institution to tion, foreign bank, Edge or Agreement the credit of itself as trustee or other Corporation, or New York Investment fiduciary. If trust funds are deposited (Article XII) Company; with the commercial department of the (2) The United States government or depository institution or otherwise an agency thereof; or mingled with its general assets, a de- (3) The Export-Import Bank of the posit liability of the institution is cre- United States, Minbanc Capital Cor- ated; poration, the Government Develop- (ii) An obligation that represents a ment Bank for Puerto Rico, a Federal conditional, contingent or endorser’s Reserve Bank, a Federal Home Loan liability; Bank, or the National Credit Union Ad- (iii) Obligations, the proceeds of ministration Central Liquidity Facil- which are not used by the depository ity; institution for purposes of making (B) Arises from a transfer of direct loans, investments, or maintaining liq- obligations of, or obligations that are uid assets such as cash or ‘‘due from’’ fully guaranteed as to principal and in- depository institutions or other similar terest by, the United States Govern- purposes. An obligation issued for the ment or any agency thereof that the purpose of raising funds to purchase depository institution is obligated to business premises, equipment, supplies, repurchase; or similar assets is not a deposit; (C) Is not insured by a Federal agen- (iv) Accounts payable; cy, is subordinated to the claims of de- (v) Hypothecated deposits created by positors, has a weighted average matu- payments on an installment loan where rity of five years or more, and is issued (A) the amounts received are not used by a depository institution with the immediately to reduce the unpaid bal- approval of, or under the rules and reg- ance due on the loan until the sum of ulations of, its primary Federal super- the payments equals the entire amount visor; of loan principal and interest; (B) and (D) Arises from a borrowing by a de- where such amounts are irrevocably as- pository institution from a dealer in signed to the depository institution securities, for one business day, of pro- and cannot be reached by the borrower ceeds of a transfer of deposit credit in or creditors of the borrower; a Federal Reserve Bank or other imme- (vi) Dealer reserve and differential diately available funds (commonly re- accounts that arise from the financing ferred to as Federal funds), received by of dealer installment accounts receiv- such dealer on the date of the loan in able, and which provide that the dealer connection with clearance of securities may not have access to the funds in the transactions; or account until the installment loans are

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repaid, as long as the depository insti- maintained at any of the institution’s tution is not actually (as distinguished United States offices; from contingently) obligated to make (v) Letters of credit sold for cash or credit or funds available to the dealer; its equivalent; (vii) A dividend declared by a deposi- (vi) Withheld taxes, withheld insur- tory institution for the period inter- ance and other withheld funds; vening between the date of the declara- (vii) Time deposits that have ma- tion of the dividend and the date on tured or time deposits upon which the which it is paid; contractually required notice of with- (viii) An obligation representing a drawal as given and the notice period pass through account, as defined in this has expired and which have not been section; renewed (either by action of the deposi- (ix) An obligation arising from the tor or automatically under the terms retention by the depository institution of the deposit agreement); and of no more than a 10 per cent interest (viii) An obligation to pay, on de- in a pool of conventional 1–4 family mand or within six days, a check (or mortgages that are sold to third par- other instrument, device, or arrange- ties; ment for the transfer of funds) drawn (x) An obligation issued to a State or on the depository institution, where municipal housing authority under a the account of the institution’s cus- loan-to-lender program involving the tomer already has been debited. issuance of tax exempt bonds and the (2) The term demand deposit also subsequent lending of the proceeds to means deposits or accounts on which the depository institution for housing the depository institution has reserved finance purposes; the right to require at least seven days’ (xi) Shares of a credit union held by written notice prior to withdrawal or the National Credit Union Administra- transfer of any funds in the account tion or the National Credit Union Ad- and from which the depositor is au- ministration Central Liquidity Facil- thorized to make withdrawals or trans- ity under a statutorily authorized as- fers in excess of the withdrawal or sistance program; and transfer limitations specified in para- (xii) Any liability of a United States graph (d)(2) of this section for such an branch or agency of a foreign bank to account and the account is not a NOW another United States branch or agen- account, or an ATS account or other cy of the same foreign bank, or the li- account that meets the criteria speci- ability of the United States office of an fied in either paragraph (b)(3)(ii) or (iii) Edge Corporation to another United of this section. States office of the same Edge Corpora- (3) Demand deposit does not include: tion. (i) Any account that is a time deposit (b)(1) Demand deposit means a deposit or a savings deposit under this part; that is payable on demand, or a deposit (ii) Any deposit or account on which issued with an original maturity or re- the depository institution has reserved quired notice period of less than seven the right to require at least seven days’ days, or a deposit representing funds written notice prior to withdrawal or for which the depository institution transfer of any funds in the account does not reserve the right to require at and either— least seven days’ written notice of an (A) Is subject to check, draft, nego- intended withdrawal. Demand deposits tiable order of withdrawal, share draft, may be in the form of: or similar item, such as an account au- (i) Checking accounts; thorized by 12 U.S.C. 1832(a) (NOW ac- (ii) Certified, cashier’s, teller’s, and count) and a savings deposit described officer’s checks (including such checks in § 204.2(d)(2), provided that the deposi- issued in payment of dividends); tor is eligible to hold a NOW account; (iii) Traveler’s checks and money or- or ders that are primary obligations of (B) From which the depositor is au- the issuing institution; thorized to make transfers by (iv) Checks or drafts drawn by, or on preauthorized transfer or telephonic behalf of, a non-United States office of (including data transmission) agree- a depository institution on an account ment, order or instruction to another

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account or to a third party, provided A time deposit from which partial that the depositor is eligible to hold a early withdrawals are permitted must NOW account; impose additional early withdrawal (iii) Any deposit or account on which penalties of at least seven days’ simple the depository institution has reserved interest on amounts withdrawn within the right to require at least seven days’ six days after each partial withdrawal. written notice prior to withdrawal or If such additional early withdrawal transfer of any funds in the account penalties are not imposed, the account and from which withdrawals may be ceases to be a time deposit. The ac- made automatically through payment count may become a savings deposit if to the depository institution itself or it meets the requirements for a saving through transfer of credit to a demand deposit; otherwise it becomes a trans- deposit or other account in order to action account. Time deposit includes cover checks or drafts drawn upon the funds— institution or to maintain a specified (A) Payable on a specified date not balance in, or to make periodic trans- less than seven days after the date of fers to such other account, such as ac- deposit; counts authorized by 12 U.S.C. 371a (B) Payable at the expiration of a (automatic transfer account or ATS ac- specified time not less than seven days count), provided that the depositor is after the date of deposit; eligible to hold an ATS account; or (C) Payable only upon written notice (iv) IBF time deposits meeting the that is actually required to be given by requirements of § 204.8(a)(2). the depositor not less than seven days (c)(1) Time deposit means: prior to withdrawal; (i) A deposit that the depositor does (D) Held in club accounts (such as not have a right and is not permitted Christmas club accounts and vacation to make withdrawals from within six club accounts that are not maintained days after the date of deposit unless as savings deposits) that are deposited the deposit is subject to an early with- under written contracts providing that drawal penalty of at least seven days’ no withdrawal shall be made until a simple interest on amounts withdrawn certain number of periodic deposits within the first six days after deposit. 1 have been made during a period of not less than three months even though

1 some of the deposits may be made A time deposit, or a portion thereof, may within six days from the end of the pe- be paid during the period when an early withdrawal penalty would otherwise be re- riod; or quired under this part without imposing an (E) Share certificates and certificates early withdrawal penalty specified by this of indebtedness issued by credit unions, part: and certificate accounts and notice ac- (a) Where the time deposit is maintained counts issued by savings and loan asso- in an individual retirement account estab- ciations; lished in accordance with 26 U.S.C. 408 and is (ii) A savings deposit; paid within seven days after establishment (iii) An IBF time deposit meeting the of the individual retirement account pursuant to 26 CFR 1.408–6(d)(4), where it is main- requirements of § 204.8(a)(2); and tained in a Keogh (H.R. 10) plan, or where it is maintained in a 401(k) plan under 26 U.S.C. eral deposit insurance has been lost as a re- 401(k); Provided that the depositor forfeits an sult of the merger of two or more federally amount at least equal to the simple interest insured banks in which the depositor pre- earned on the amount withdrawn; viously maintained separate time deposits, (b) Where the depository institution pays for a period of one year from the date of the all or a portion of a time deposit rep- merger; resenting funds contributed to an individual (d) Upon the death of any owner of the retirement account or a Keogh (H.R.10) plan time deposit funds; established pursuant to 26 U.S.C. 408 or 26 (e) When any owner of the time deposit is U.S.C. 401 or to a 401(k) plan established pur- determined to be legally incompetent by a suant to 26 U.S.C. 401(k) when the individual court or other administrative body of com- for whose benefit the account is maintained petent jurisdiction; or attains age 591⁄2 or is disabled (as defined in (f) Where a time deposit is withdrawn with- 26 U.S.C. 72(m)(7)) or thereafter; in ten days after a specified maturity date (c) Where the depository institution pays even though the deposit contract provided that portion of a time deposit on which fed- for automatic renewal at the maturity date.

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(iv) Borrowings, regardless of matu- depository institution, the depositor is rity, represented by a promissory note, permitted or authorized to make no an acknowledgment of advance, or more than six transfers and with- similar obligation described in drawals, or a combination of such § 204.2(a)(1)(vii) that is issued to, or any transfers and withdrawals, per calendar bankers’ acceptance (other than the month or statement cycle (or similar type described in 12 U.S.C. 372) of the period) of at least four weeks, to an- depository institution held by— other account (including a transaction (A) Any office located outside the account) of the depositor at the same United States of another depository in- institution or to a third party by stitution or Edge or agreement cor- means of a preauthorized or automatic poration organized under the laws of transfer, or telephonic (including data the United States; transmission) agreement, order or in- (B) Any office located outside the struction, or by check, draft, debit United States of a foreign bank; card, or similar order made by the de- (C) A foreign national government, or positor and payable to third parties. A an agency or instrumentality thereof, 2 preauthorized transfer includes any ar- engaged principally in activities which rangement by the depository institu- are ordinarily performed in the United tion to pay a third party from the ac- States by governmental entities; count of a depositor upon written or (D) An international entity of which oral instruction (including an order re- the United States is a member; or ceived through an automated clearing (E) Any other foreign, international, house (ACH)) or any arrangement by a or supranational entity specifically depository institution to pay a third designated by the Board. 3 party from the account of the depositor (2) A time deposit may be represented at a predetermined time or on a fixed by a transferable or nontransferable, or schedule. Such an account is not a a negotiable or nonnegotiable, certifi- transaction account by virtue of an ar- cate, instrument, passbook, or state- rangement that permits transfers for ment, or by book entry or otherwise. the purpose of repaying loans and asso- (d)(1) Savings deposit means a deposit ciated expenses at the same depository or account with respect to which the institution (as originator or servicer) depositor is not required by the deposit or that permits transfers of funds from contract but may at any time be re- this account to another account of the quired by the depository institution to same depositor at the same institution give written notice of an intended or permits withdrawals (payments di- withdrawal not less than seven days rectly to the depositor) from the ac- before withdrawal is made, and that is count when such transfers or with- not payable on a specified date or at drawals are made by mail, messenger, the expiration of a specified time after automated teller machine, or in person the date of deposit. The term savings or when such withdrawals are made by deposit includes a regular share account telephone (via check mailed to the de- at a credit union and a regular account positor) regardless of the number of at a savings and loan association. such transfers or withdrawals.4 (2) The term ‘‘savings deposit’’ also means: A deposit or account, such as 4 In order to ensure that no more than the an account commonly known as a pass- permitted number of withdrawals or trans- book savings account, a statement sav- fers are made, for an account to come within ings account, or as a money market de- the definition of ‘‘savings deposit,’’ a deposi- posit account (MMDA), that otherwise tory institution must either: meets the requirements of § 204.2(d)(1) (a) Prevent withdrawals or transfers of and from which, under the terms of the funds from this account that are in excess of the limits established by paragraph (d)(2) of deposit contract or by practice of the this section, or (b) Adopt procedures to monitor those 2 Other than states, provinces, municipali- transfers on an ex post basis and contact ties, or other regional or local governmental customers who exceed the established limits units or agencies or instrumentalities there- on more than occasional basis. For cus- of. tomers who continue to violate those limits 3 The designated entities are specified in 12 after they have been contacted by the depos- CFR 204.125. itory institution, the depository institution

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(3) A deposit may continue to be clas- transfer of any funds in the account sified as a savings deposit even if the and from which withdrawals may be depository institution exercises its made automatically through payment right to require notice of withdrawal. to the depository institution itself or (4) Savings deposit does not include through transfer or credit to a demand funds deposited to the credit of the de- deposit or other account in order to pository institution’s own trust depart- cover checks or drafts drawn upon the ment where the funds involved are uti- institution or to maintain a specified lized to cover checks or drafts. Such balance in, or to make periodic trans- funds are transaction accounts. fers to such accounts, except accounts (e) Transaction account means a de- described in paragraph (d)(2) of this posit or account from which the deposi- section, but including accounts author- tor or account holder is permitted to ized by 12 U.S.C. 371a (automatic trans- make transfers or withdrawals by ne- fer accounts or ATS accounts). gotiable or transferable instrument, (4) Deposits or accounts on which the payment order of withdrawal, tele- depository institution has reserved the phone transfer, or other similar device right to require at least seven days’ for the purpose of making payments or written notice prior to withdrawal or transfers to third persons or others or transfer of any funds in the account from which the depositor may make and under the terms of which, or by third party payments at an automated practice of the depository institution, teller machine (ATM) or a remote serv- the depositor is permitted or author- ice unit, or other electronic device, in- ized to make more than six with- cluding by debit card, but the term drawals per month or statement cycle does not include savings deposits or ac- (or similar period) of at least four counts described in paragraph (d)(2) of weeks for the purposes of transferring this section even though such accounts funds to another account of the deposi- permit third party transfers. Trans- tor at the same institution (including action account includes: transaction account) or for making pay- (1) Demand deposits; ment to a third party by means of a (2) Deposits or accounts on which the preauthorized transfer, or telephonic depository institution has reserved the (including data transmission) agree- right to require at least seven days’ ment, order or instruction, except ac- written notice prior to withdrawal or counts described in paragraph (d)(2) of transfer of any funds in the account this section. An account that author- and that are subject to check, draft, izes more than six such withdrawals in negotiable order of withdrawal, share a calendar month, or statement cycle draft, or other similar item, except ac- (or similar period) of at least four counts described in paragraph (d)(2) of weeks, is a transaction account whether this section (savings deposits), but in- or not more than six such transfers are cluding accounts authorized by 12 made during such period. A U.S.C. 1832(a) (NOW accounts). preauthorized transfer includes any ar- (3) Deposits or accounts on which the rangement by the depository institu- depository institution has reserved the tion to pay a third party from the ac- right to require at least seven days’ written notice prior to withdrawal or count of a depositor upon written or oral instruction (including an order received through an automated clearing must either close the account and place the house (ACH)), or any arrangement by a funds in another account that the depositor is eligible to maintain or take away the depository institution to pay a third transfer and draft capacities of the account. party from the account of the depositor An account that authorizes withdrawals or at a predetermined time or on a fixed transfers in excess of the permitted number schedule. Such an account is not a is a transaction account regardless of wheth- transaction account by virtue of an ar- er the authorized number of transactions is rangement that permits transfers for actually made. For accounts described in the purpose of repaying loans and asso- paragraph (d)(2) of this section, the institution at its option may use, on a consistent ciated expenses at the same depository basis, either the date on the check, draft, or institution (as originator or servicer) similar item, or the date the item is paid in or that permits transfers of funds from applying the limits imposed by that section. this account to another account of the

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same depositor at the same institution or a transfer on the books or records of or permits withdrawals (payments di- the institution; and rectly to the depositor) from the ac- (iv) A time deposit represented by a count when such transfers or with- promissory note, an acknowledgment drawals are made by mail, messenger, of advance, or similar obligation de- automated teller machine or in person scribed in paragraph (a)(1)(vii) of this or when such withdrawals are made by section that is issued to, or any bank- telephone (via check mailed to the de- ers’ acceptance (other than the type positor) regardless of the number of described in 12 U.S.C. 372) of the deposi- such transfers or withdrawals. tory institution held by: (5) Deposits or accounts maintained (A) Any office located outside the in connection with an arrangement United States of another depository in- that permits the depositor to obtain stitution or Edge or agreement cor- credit directly or indirectly through poration organized under the laws of the drawing of a negotiable or non- the United States; negotiable check, draft, order or in- (B) Any office located outside the struction or other similar device (in- United States of a foreign bank; cluding telephone or electronic order (C) A foreign national government, or or instruction) on the issuing institu- an agency or instrumentality thereof, 5 tion that can be used for the purpose of engaged principally in activities which making payments or transfers to third are ordinarily performed in the United persons or others or to a deposit ac- States by governmental entities; count of the depositor. (D) An international entity of which (6) All deposits other than time and the United States is a member; or savings accounts, including those ac- (E) Any other foreign, international, counts that are time and savings de- or supranational entity specifically 6 posits in form but that the Board has designated by the Board. determined, by rule or order, to be (2) Nonpersonal time deposit does not transaction accounts. include nontransferable time deposits (f)(1) Nonpersonal time deposit means: to the credit of or in which the entire (i) A time deposit, including an beneficial interest is held by an indi- MMDA or any other savings deposit, vidual pursuant to an individual retire- representing funds in which any bene- ment account or Keogh (H.R. 10) plan under 26 U.S.C. 408, 401, or non-trans- ficial interest is held by a depositor ferable time deposits held by an em- which is not a natural person; ployer as part of an unfunded deferred- (ii) A time deposit, including an compensation plan established pursu- MMDA or any other savings deposit, ant to subtitle D of the Revenue Act of that represents funds deposited to the 1978 (Pub. L. 95–600, 92 Stat. 2763), or a credit of a depositor that is not a nat- 401(k) plan under 26 U.S.C. 401(k). ural person, other than a deposit to the (g) Natural person means an indi- credit of a trustee or other fiduciary if vidual or a sole proprietorship. The the entire beneficial interest in the de- term does not mean a corporation posit is held by one or more natural owned by an individual, a partnership persons; or other association. (iii) A transferable time deposit. A (h) Eurocurrency liabilities means: time deposit is transferable unless it (1) For a depository institution or an contains a specific statement on the Edge or Agreement Corporation orga- certificate, instrument, passbook, nized under the laws of the United statement or other form representing States, the sum, if positive, of the fol- the account that it is not transferable. lowing: A time deposit that contains a specific (i) Net balances due to its non-United statement that it is not transferable is States offices and its international not regarded as transferable even if the following transactions can be effected: 5 a pledge as collateral for a loan, a Other than states, provinces, municipali- ties, or other regional or local governmental transaction that occurs due to cir- units or agencies or instrumentalities there- cumstances arising from death, incom- of. petency, marriage, divorce, attach- 6 The designated entities are specified in 12 ment, or otherwise by operation of law CFR 217.126.

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banking facilities (IBFs) from its ducting an amount equal to 8 per cent United States offices; of the following: the United States (ii)(A) For a depository institution branch’s or agency’s total assets less organized under the laws of the United the sum of (A) cash items in process of States, assets (including participa- collection; (B) unposted debits; (C) de- tions) acquired from its United States mand balances due from depository in- offices and held by its non-United stitutions organized under the laws of States offices, by its IBF, or by non- the United States and from other for- United States offices of an affiliated eign banks; (D) balances due from for- Edge or Agreement Corporation; 7 or eign central banks; and (E) positive net (B) For an Edge or Agreement Cor- balances due from its IBF, its foreign poration, assets (including participa- bank, and the foreign bank’s United tions) acquired from its United States States and non-United States offices; offices and held by its non-United and States offices, by its IBF, by non- (ii) Assets (including participations) United States offices of its U.S. or for- acquired from the United States eign parent institution, or by non- branch or agency (other than assets re- United States offices of an affiliated quired to be sold by Federal or State Edge or Agreement Corporation; and supervisory authorities) and held by its (iii) Credit outstanding from its non- foreign bank (including offices thereof United States offices to United States located outside the United States), by residents (other than assets acquired its parent holding company, by non- and net balances due from its United United States offices or an IBF of an States offices), except credit extended affiliated Edge or Agreement Corpora- (A) from its non-United States offices tion, or by its IBFs. 8 in the aggregate amount of $100,000 or (i)(1) Cash item in process of collection less to any United States resident, (B) means: by a non-United States office that at (i) Checks in the process of collec- no time during the computation period tion, drawn on a bank or other deposi- had credit outstanding to United tory institution that are payable im- States residents exceeding $1 million, mediately upon presentation in the (C) to an international banking facil- United States, including checks for- ity, or (D) to an institution that will be warded to a Federal Reserve Bank in maintaining reserves on such credit process of collection and checks on pursuant to this part. Credit extended hand that will be presented for pay- from non-United States offices or from ment or forwarded for collection on the IBFs to a foreign branch, office, sub- following business day; sidiary, affiliate of other foreign estab- (ii) Government checks drawn on the lishment (foreign affiliate) controlled by Treasury of the United States that are one or more domestic corporations is in the process of collection; and not regarded as credit extended to a (iii) Such other items in the process United States resident if the proceeds of collection, that are payable imme- will be used to finance the operations diately upon presentation in the outside the United States of the bor- United States and that are customarily rower or of other foreign affiliates of cleared or collected by depository in- the controlling domestic corpora- stitutions as cash items, including: tion(s). (A) Drafts payable through another (2) For a United States branch or depository institution; agency of a foreign bank, the sum, if (B) Matured bonds and coupons (in- positive, of the following: cluding bonds and coupons that have (i) Net balances due to its foreign been called and are payable on presen- bank (including offices thereof located tation); outside the United States) and its (C) Food coupons and certificates; international banking facility after de- (D) Postal and other money orders, and traveler’s checks; 7 This paragraph does not apply to assets (E) Amounts credited to deposit ac- that were acquired by an IBF from its establishing entity before the end of the second counts in connection with automated reserve computation period after its establishment. 8 See footnote 7.

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payment arrangements where such positors may make cash withdrawals credits are made one business day prior (an alternate physical location is con- to the scheduled payment date to in- sidered ‘‘reasonably nearby’’ if the de- sure that funds are available on the pository institution that claims the payment date; currency and coin as vault cash can re- (F) Commodity or bill of lading call the currency and coin from the al- drafts payable immediately upon pres- ternate physical location by 10 a.m. entation in the United States; and, relying solely on ground transpor- (G) Returned items and unposted deb- tation, receive the currency and coin its; and not later than 4 p.m. on the same cal- (H) Broker security drafts. endar day at a location of the deposi- (2) Cash item in process of collection tory institution at which its depositors does not include items handled as may make cash withdrawals); and noncash collections and credit card (E) The depository institution claim- sales slips and drafts. ing the currency and coin as vault cash (j) Net transaction accounts means the has in place a written cash delivery total amount of a depository institu- plan and written contractual arrange- tion’s transaction accounts less the de- ments necessary to implement that ductions allowed under the provisions plan that demonstrate that the cur- of § 204.3. rency and coin can be recalled and re- (k)(1) Vault cash means United States ceived in accordance with the require- currency and coin owned and booked as ments of paragraph (k)(2)(ii)(D) of this an asset by a depository institution section at any time. The depository in- that may, at any time, be used to sat- stitution shall provide copies of the isfy claims of that depository institu- written cash delivery plan and written tion’s depositors and that meets the re- contractual arrangements to the Fed- quirements of paragraph (k)(2)(i) or eral Reserve Bank that holds its ac- (k)(2)(ii) of this section. count or to the Board upon request. (2) Vault cash must be either: (3) ‘‘Vault cash’’ includes United (i) Held at a physical location of the States currency and coin in transit to depository institution (including the a Federal Reserve Bank or a cor- depository institution’s proprietary respondent depository institution for ATMs) from which the institution’s de- which the reporting depository institu- positors may make cash withdrawals; tion has not yet received credit, and or United States currency and coin in (ii) Held at an alternate physical lo- transit from a Federal Reserve Bank or cation if— a correspondent depository institution (A) The depository institution claim- when the reporting depository institu- ing the currency and coin as vault cash tion’s account at the Federal Reserve at all times retains full rights of own- or correspondent bank has been ership in and to the currency and coin charged for such shipment. held at the alternate physical location; (4) Silver and gold coin and other (B) The depository institution claim- currency and coin whose numismatic ing the currency and coin as vault cash or bullion value is substantially in ex- at all times books the currency and cess of face value is not vault cash for coin held at the alternate physical lo- purposes of this part. cation as an asset of the depository in- (l) Pass-through account means a bal- stitution; ance maintained by a depository insti- (C) No other depository institution tution with a correspondent institution claims the currency and coin held at under § 204.5(d). the alternate physical location as vault (m)(1) Depository institution means: cash in satisfaction of that other de- (i) Any insured bank as defined in pository institution’s reserve require- section 3 of the Federal Deposit Insur- ments; ance Act (12 U.S.C. 1813(h)) or any bank (D) The currency and coin held at the that is eligible to apply to become an alternate physical location is reason- insured bank under section 5 of such ably nearby a location of the deposi- Act (12 U.S.C. 1815); tory institution claiming the currency (ii) Any savings bank or mutual sav- and coin as vault cash at which its de- ings bank as defined in section 3 of the

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Federal Deposit Insurance Act (12 (3) Of which a majority of its direc- U.S.C. 1813(f), (g)); tors, trustees, or other persons exer- (iii) Any insured credit union as de- cising similar functions are directors fined in section 101 of the Federal Cred- of any one depository institution; or it Union Act (12 U.S.C. 1752(7)) or any (4) Which owns or controls, directly credit union that is eligible to apply to or indirectly, either a majority of the become an insured credit union under shares of capital stock of a depository section 201 of such Act (12 U.S.C. 1781); institution or more than 50 percent of (iv) Any member as defined in sec- the number of shares voted for the tion 2 of the Federal Home Loan Bank election of directors, trustees or other Act (12 U.S.C. 1422(4)); and persons exercising similar functions of (v) Any insured institution as defined a depository institution at the pre- in section 401 of the National Housing ceding election, or controls in any Act (12 U.S.C. 1724(a)) or any institu- manner the election of a majority of tion which is eligible to apply to be- the directors, trustees, or other per- come an insured institution under sec- sons exercising similar functions of a tion 403 of such Act (12 U.S.C. 1726). depository institution, or for the ben- (2) Depository institution does not in- efit of whose shareholders or members clude international organizations such all or substantially all the capital as the World Bank, the Inter-American stock of a depository institution is Development Bank, and the Asian De- held by trustees. velopment Bank. (r) United States means the States of (n) Member bank means a depository the United States and the District of institution that is a member of the Columbia. Federal Reserve System. (s) United States resident means (1) (o) Foreign bank means any bank or any individual residing (at the time of other similar institution organized the transaction) in the United States; under the laws of any country other (2) any corporation, partnership, asso- than the United States or organized ciation or other entity organized in the under the laws of Puerto Rico, Guam, United States (domestic corporation); American Samoa, the Virgin Islands, and (3) any branch or office located in or other territory or possession of the the United States of any entity that is United States. not organized in the United States. (p) [Reserved] (t) Any deposit that is payable only at (q) Affiliate includes any corporation, an office located outside the United States association, or other organization: means (1) a deposit of a United States (1) Of which a depository institution, resident 9 that is in a denomination of directly or indirectly, owns or controls $100,000 or more, and as to which the either a majority of the voting shares depositor is entitled, under the agree- or more than 50 percent of the numbers ment with the institution, to demand of shares voted for the election of its payment only outside the United directors, trustees, or other persons ex- States or (2) a deposit of a person who ercising similar functions at the pre- is not a United States resident 9 as to ceding election, or controls in any which the depositor is entitled, under manner the election of a majority of the agreement with the institution, to its directors, trustees, or other persons demand payment only outside the exercising similar functions; United States. (2) Of which control is held, directly or indirectly, through stock ownership (u) Teller’s check means a check or in any other manner, by the share- drawn by a depository institution on holders of a depository institution who own or control either a majority of the 9 A deposit of a foreign branch, office, sub- shares of such depository institution or sidiary, affiliate or other foreign establish- more than 50 percent of the number of ment (foreign affiliate) controlled by one or shares voted for the election of direc- more domestic corporations is not regarded as a deposit of a United States resident if the tors of such depository institution at funds serve a purpose in connection with its the preceding election, or by trustees foreign or international business or that of for the benefit of the shareholders of other foreign affiliates of the controlling do- any such depository institution; mestic corporation(s).

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another depository institution, a Fed- at a Federal Reserve Bank by or on be- eral Reserve Bank, or a Federal Home half of an institution over a reserve Loan Bank, or payable at or through a maintenance period to satisfy the re- depository institution, a Federal Re- serve requirements of this part. serve Bank, or a Federal Home Loan (cc) Targeted federal funds rate means Bank, and which the drawing deposi- the federal funds rate established from tory institution engages or is obliged time to time by the Federal Open Mar- to pay upon dishonor. ket Committee. (v) Clearing balance means the aver- (dd) Term deposit means those funds age balance held in an account at a of an eligible institution that are Federal Reserve Bank by an institution maintained by that institution for a over a reserve maintenance period to specified maturity at a Federal Re- satisfy its contractual clearing balance serve Bank pursuant to section with a Reserve Bank. 204.10(e) of this part. (w) Clearing balance allowance means the greater of $25,000 or two percent of [Reg. D, 45 FR 56018, Aug. 22, 1980] an institution’s contractual clearing EDITORIAL NOTE: For FEDERAL REGISTER ci- balance. tations affecting § 204.2, see the List of CFR (x) Contractual clearing balance means Sections Affected, which appears in the an amount that an institution agrees Finding Aids section of the printed volume or is required to maintain in its ac- and at www.fdsys.gov. count at a Federal Reserve Bank in ad- § 204.3 Reporting and location. dition to any reserve balance requirement. An institution that has a reserve (a) Every depository institution, U.S. balance requirement of zero may still branch or agency of a foreign bank, and have a contractual clearing balance. Edge or Agreement corporation shall (y) Eligible institution means— file a report of deposits (or any other (1) Any depository institution as de- form or statement that may be re- scribed in § 204.1(c) of this part; quired by the Board or by a Federal Re- (2) Any trust company; serve Bank) with the Federal Reserve (3) Any corporation organized under Bank in the Federal Reserve District in section 25A of the Federal Reserve Act which it is located, regardless of the (12 U.S.C. 611 et seq.) or having an manner in which it chooses to main- agreement with the Board under sec- tain required reserve balances. tion 25 of the Federal Reserve Act (12 (b) A foreign bank’s U.S. branches U.S.C. 601 et seq.); and and agencies and an Edge or Agree- (4) Any branch or agency of a foreign ment corporation’s offices operating bank (as defined in section 1(b) of the within the same State and the same International Banking Act of 1978, 12 Federal Reserve District shall prepare U.S.C. 3101(b)). and file a report of deposits on an ag- (z) Excess balance means the average gregated basis. balance held in an account at a Federal (c) For purposes of this part, the obli- Reserve Bank by or on behalf of an in- gations of a majority-owned (50 percent stitution over a reserve maintenance or more) U.S. subsidiary (except an period that exceeds the sum of the re- Edge or Agreement corporation) of a quired reserve balance and any clearing depository institution shall be re- balance. garded as obligations of the parent de- (aa) Excess balance account means an pository institution. account at a Reserve Bank pursuant to (d) A depository institution, a foreign § 204.10(d) of this part that is estab- bank, or an Edge or Agreement cor- lished by one or more eligible institu- poration shall, if possible, assign the tions through an agent and in which low reserve tranche and reserve re- only excess balances of the partici- quirement exemption prescribed in pating eligible institutions may at any § 204.4(f) to only one office or to a group time be maintained. An excess balance of offices filing a single aggregated re- account is not a ‘‘pass-through ac- port of deposits. The amount of the re- count’’ for purposes of this part. serve requirement exemption allocated (bb) Required reserve balance means to an office or group of offices may not the average balance held in an account exceed the amount of the low reserve

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tranche allocated to such office or of- Federal Reserve Banks to perform fices. If the low reserve tranche or re- their functions under the Federal Re- serve requirement exemption cannot be serve Act, or would impede the ability fully utilized by a single office or by a of the institution to operate effi- group of offices filing a single report of ciently, the Board will determine the deposits, the unused portion of the Federal Reserve District in which the tranche or exemption may be assigned institution is located, after consulta- to other offices or groups of offices of tion with the institution and the rel- the same institution until the amount evant Federal Reserve Banks. The rel- of the tranche (or net transaction ac- evant Federal Reserve Banks are the counts) or exemption (or reservable li- Federal Reserve Bank whose District abilities) is exhausted. The tranche or contains the location specified in para- exemption may be reallocated each graph (g)(1) of this section and the Fed- year concurrent with implementation eral Reserve Bank in whose District of the indexed tranche and exemption, the institution is proposed to be lo- or, if necessary during the course of cated. In making this determination, the year to avoid underutilization of the Board will consider any applicable the tranche or exemption, at the begin- laws, the business needs of the institu- ning of a reserve computation period. tion, the location of the institution’s (e) Computation of transaction ac- head office, the locations where the in- counts. Overdrafts in demand deposit or other transaction accounts are not to stitution performs its business, and the be treated as negative demand deposits locations that would allow the institu- or negative transaction accounts and tion, the Board, and the Federal Re- shall not be netted since overdrafts are serve Banks to perform their functions properly reflected on an institution’s efficiently and effectively. books as assets. However, where a cus- [45 FR 56018, Aug. 22, 1980] tomer maintains multiple transaction accounts with a depository institution, EDITORIAL NOTE: For FEDERAL REGISTER ci- tations affecting § 204.3, see the List of CFR overdrafts in one account pursuant to a Sections Affected, which appears in the bona fide cash management arrange- Finding Aids section of the printed volume ment are permitted to be netted and at www.fdsys.gov. against balances in other related transaction accounts for reserve require- § 204.4 Computation of required re- ment purposes. serves. (f) The Board and the Federal Re- (a) In determining the reserve reserve Banks will not hold a pass- quirement under this part, the amount through correspondent responsible for of cash items in process of collection guaranteeing the accuracy of the re- and balances subject to immediate ports of deposits submitted by its re- withdrawal due from other depository spondents. institutions located in the United (g)(1) For purposes of this section, a depository institution, a U.S. branch or States (including such amounts due agency of a foreign bank, or an Edge or from United States branches and agen- Agreement corporation is located in cies of foreign banks and Edge and the Federal Reserve District that con- Agreement corporations) may be de- tains the location specified in the in- ducted from the amount of gross trans- stitution’s charter, organizing certifi- action accounts. The amount that may cate, license, or articles of incorpora- be deducted may not exceed the tion, or as specified by the institution’s amount of gross transaction accounts. primary regulator, or if no such loca- (b) United States branches and agen- tion is specified, the location of its cies of a foreign bank may not deduct head office, unless otherwise deter- balances due from another United mined by the Board under paragraph States branch or agency of the same (g)(2) of this section. foreign bank, and United States offices (2) If the location specified in para- of an Edge or Agreement Corporation graph (g)(1) of this section, in the may not deduct balances due from an- Board’s judgment, is ambiguous, would other United States office of the same impede the ability of the Board or the Edge or Agreement Corporation.

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(c) Balances ‘‘due from other deposi- § 204.5 Maintenance of required re- tory institutions’’ do not include bal- serves. ances due from Federal Reserve Banks, (a)(1) A depository institution, a U.S. pass-through accounts, or balances branch or agency of a foreign bank, and (payable in dollars or otherwise) due an Edge or Agreement corporation from banking offices located outside shall maintain required reserves in the the United States. An institution exer- form of vault cash and, if vault cash cising fiduciary powers may not in- does not fully satisfy the institution’s clude in balances ‘‘due from other de- required reserves, in the form of a bal- pository institutions’’ amounts of trust ance maintained funds deposited with other banks and (i) Directly with the Federal Reserve due to it as a trustee or other fidu- Bank in the Federal Reserve District in ciary. which the institution is located, or (ii) With a pass-through cor- (d) For institutions that file a report respondent in accordance with of deposits weekly, required reserves § 204.5(d). are computed on the basis of the insti- (2) Each individual institution sub- tution’s daily average balances of de- ject to this part is responsible for satis- posits and Eurocurrency liabilities dur- fying its reserve balance requirement, ing a 14-day computation period ending if any, either directly with a Federal every second Monday. Reserve Bank or through a pass- (e) For institutions that file a report through correspondent. of deposits quarterly, required reserves (b)(1) For institutions that file a re- are computed on the basis of the insti- port of deposits weekly, the balances tution’s daily average balances of de- that are required to be maintained posits and Eurocurrency liabilities dur- with the Federal Reserve shall be ing the 7-day computation period that maintained during a 14-day mainte- begins on the third Tuesday of March, nance period that begins on the third June, September, and December. Thursday following the end of a given (f) For all depository institutions, computation period. Edge and Agreement corporations, and (2) For institutions that file a report United States branches and agencies of of deposits quarterly, the balances that are required to be maintained with the foreign banks, required reserves are Federal Reserve shall be maintained computed by applying the reserve re- during each of the 7-day maintenance quirement ratios below to net trans- periods during the interval that begins action accounts, nonpersonal time de- on the fourth Thursday following the posits, and Eurocurrency liabilities of end of the institution’s computation the institution during the computation period and ends on the fourth Wednes- period. day after the close of the institution’s next computation period. Reserve Reservable liability requirement (c) Cash items forwarded to a Federal Reserve Bank for collection and credit Net Transaction Accounts: shall not be counted as part of the re- $0 to reserve requirement exemption 0 percent of amount ($11.5 million). amount. serve balance to be carried with the Over reserve requirement exemption 3 percent of Federal Reserve until the expiration of amount $11.5 million) and up to amount. the time specified in the appropriate low reserve tranche ($71.0 million). time schedule established under Regu- Over low reserve tranche ($71.0 mil- $1,785,000 lation J, ‘‘Collection of Checks and lion). plus 10 percent of Other Items by Federal Reserve Banks amount and Funds Transfers Through Fedwire’’ over $71.0 (12 CFR part 210). If a depository insti- million. tution draws against items before that Nonpersonal time deposits ...... 0 percent. Eurocurrency liabilities ...... 0 percent. time, the charge will be made to its account if the balance is sufficient to pay it; any resulting impairment of reserve [Reg. D, 74 FR 25637, May 29, 2009, as amend- balances will be subject to the pen- ed at 74 FR 52875, Oct. 15, 2009; 75 FR 65564, alties provided by law and to the re- Oct. 26, 2010; 76 FR 68066, Nov. 3, 2011] serve-deficiency charges provided by

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this part. However, the Federal Re- an account at a Reserve Bank are the serve Bank may, at its discretion, property of the correspondent and rep- refuse to permit the withdrawal or resent a liability of the Reserve Bank other use of credit given in an account solely to the correspondent, regardless for any time for which the Federal Re- of whether the funds represent the reserve Bank has not received payment serve balances of another institution in actually and finally collected funds. that have been passed through the cor- (d)(1) A depository institution, a U.S. respondent. branch or agency of a foreign bank, or (4)(i) A pass-through correspondent an Edge or Agreement corporation re- shall be responsible for assuring the quired to maintain reserve balances maintenance of the appropriate aggre- (‘‘respondent’’) may select only one gate level of its respondents’ required pass-through correspondent institution reserve balances. A Federal Reserve to pass through its required reserve Bank will compare the total reserve balances, unless otherwise permitted balance required to be maintained with by the Federal Reserve Bank in whose the total actual reserve balance held in District the respondent is located. Eli- such account for purposes of deter- gible pass-through correspondent insti- mining required-reserve deficiencies, tutions are Federal Home Loan Banks, imposing or waiving charges for defi- the National Credit Union Administra- ciencies in required reserves, and for tion Central Liquidity Facility, deposi- other reserve maintenance purposes. A tory institutions, U.S. branches or charge for a deficiency in the aggre- agencies of foreign banks, and Edge gate level of the required reserve bal- and Agreement corporations that ance will be imposed by the Reserve maintain required reserve balances, Bank on the correspondent maintain- which may be zero, at a Federal Re- ing the account. serve Bank. In addition, the Board re- (ii) Each correspondent is required to serves the right to permit other insti- maintain detailed records for each of tutions, on a case-by-case basis, to its respondents in a manner that per- serve as pass-through correspondents. mits Reserve Banks to determine The correspondent chosen must subse- whether the respondent has provided a quently pass through the required re- sufficient required reserve balance to serve balances of its respondents di- the correspondent. A correspondent rectly to a Federal Reserve Bank. The passing through a respondent’s re- correspondent placing funds with a quired reserve balance shall maintain Federal Reserve Bank on behalf of re- records and make such reports as the spondents will be responsible for ac- Board or Reserve Bank requires in count maintenance as described in order to ensure the correspondent’s paragraph (d)(4) of this section. compliance with its responsibilities for (2) Respondents or correspondents the maintenance of a respondent’s re- may institute, terminate, or change serve balance. Such records shall be pass-through agreements for the main- available to the Reserve Banks as re- tenance of required reserve balances by quired. providing all documentation required (iii) The Federal Reserve Bank may for the establishment of the new agree- terminate any pass-through agreement ment or termination of the existing under which the correspondent is defi- agreement to the Federal Reserve cient in its recordkeeping or other re- Banks involved within the time period sponsibilities. provided for such a change by those Re- (iv) Interest paid on supplemental reserve Banks. serves (if such reserves are required (3) A correspondent that passes under § 204.7) held by a respondent will through required reserve balances of be credited to the account maintained respondents shall maintain such bal- by the correspondent. ances, along with the correspondent’s (e) Any excess or deficiency in an in- own required reserve balances (if any), stitution’s required reserve balance in a single commingled account at the shall be carried over and applied Federal Reserve Bank in whose Dis- against the balance maintained in the trict the correspondent is located. The next maintenance period as specified in balances held by the correspondent in this paragraph. The amount of any

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such excess or deficiency that is car- percentage of the depository institu- ried over shall not exceed the greater tion’s required reserves. If a depository of: institution has demonstrated a lack of (1) The amount obtained by multi- due regard for the proper maintenance plying 0.04 times the sum of depository of required reserves, the Reserve Bank institution’s required reserves and the may decline to exercise the waiver depository institution’s contractual privilege and assess all charges regard- clearing balance, if any, and then sub- less of amount or reason for the defi- tracting from this product the deposi- ciency. tory institution’s clearing balance al- (c) In individual cases, where a Fed- lowance, if any; or eral supervisory authority waives a li- (2) $50,000, minus the depository in- quidity requirement, or waives the pen- stitution’s clearing balance allowance, alty for failing to satisfy a liquidity re- if any. Any carryover not offset during quirement, the Reserve Bank in the the next period may not be carried over District where the involved depository to subsequent periods. institution is located shall waive the [Reg. D, 74 FR 25638, May 29, 2009] reserve requirement imposed under this part for such depository institu- § 204.6 Charges for reserve defi- tion when requested by the Federal su- ciencies. pervisory authority involved. (a) Deficiencies in a depository insti- (d) Violations of this part may be tution’s required reserve balance, after subject to assessment of civil money application of the carryover provided penalties by the Board under authority in § 204.5(e), are subject reserve-defi- of Section 19(1) of the Federal Reserve ciency charges. Federal Reserve Banks Act (12 U.S.C. 505) as implemented in 12 are authorized to assess charges for de- CFR part 263. In addition, the Board ficiencies in required reserves at a rate and any other Federal financial insti- of 1 percentage point per year above tution supervisory authority may en- the primary credit rate, as provided in force this part with respect to deposi- § 201.51(a) of this chapter, in effect for tory institutions subject to their juris- borrowings from the Federal Reserve diction under authority conferred by Bank on the first day of the calendar law to undertake cease and desist pro- month in which the deficiencies oc- ceedings. curred. Charges shall be assessed on the basis of daily average deficiencies [Reg. D, 74 FR 25639, May 29, 2009] during each maintenance period. Re- serve Banks may, as an alternative to § 204.7 Supplemental reserve requirement. levying monetary charges, after con- sideration of the circumstances in- (a) Finding by Board. Upon the affirm- volved, permit a depository institution ative vote of at least five members of to eliminate deficiencies in its required the Board and after consultation with reserve balance by maintaining addi- the Board of Directors of the Federal tional reserves during subsequent re- Deposit Insurance Corporation, the serve maintenance periods. Federal Home Loan Bank Board, and (b) Reserve Banks may waive the the National Credit Union Administra- charges for reserve deficiencies except tion Board, the Board may impose a when the deficiency arises out of a de- supplemental reserve requirement on pository institution’s gross negligence every depository institution of not or conduct that is inconsistent with more than 4 percent of its total trans- the principles and purposes of reserve action accounts. A supplemental re- requirements. Decisions by Reserve serve requirement may be imposed if: Banks to waive charges are based on an (1) The sole purpose of the require- evaluation of the circumstances in ment is to increase the amount of re- each individual case and the depository serves maintained to a level essential institution’s reserve maintenance for the conduct of monetary policy; record. For example, a waiver may be (2) The requirement is not imposed appropriate for a small charge or once for the purpose of reducing the cost during a two-year period for a defi- burdens resulting from the imposition ciency that does not exceed a certain of basic reserve requirements;

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(3) Such requirement is not imposed § 204.8 International banking facilities. for the purpose of increasing the (a) Definitions. For purposes of this amount of balances needed for clearing part, the following definitions apply: purposes; and (4) On the date on which supple- (1) International banking facility or mental reserve requirements are im- IBF means a set of asset and liability posed, the total amount of basic re- accounts segregated on the books and serve requirements is not less than the records of a depository institution, amount of reserves that would be re- United States branch or agency of a quired on transaction accounts and foreign bank, or an Edge or Agreement nonpersonal time deposits under the Corporation that includes only inter- initial reserve ratios established by the national banking facility time deposits Monetary Control Act of 1980 (Pub. L. and international banking facility ex- 96–221) in effect on September 1, 1980. tensions of credit. (b) Term. (1) If a supplemental reserve (2) International banking facility time requirement has been imposed for a pe- deposit or IBF time deposit means a de- riod of one year or more, the Board posit, placement, borrowing or similar shall review and determine the need for obligation represented by a promissory continued maintenance of supple- note, acknowledgment of advance, or mental reserves and shall transmit an- similar instrument that is not issued nual reports to the Congress regarding in negotiable or bearer form, and the need for continuing such require- (i)(A) That must remain on deposit at ment. the IBF at least overnight; and (2) Any supplemental reserve require- (B) That is issued to ment shall terminate at the close of (1) Any office located outside the the first 90-day period after the re- United States of another depository in- quirement is imposed during which the stitution organized under the laws of average amount of supplemental re- the United States or of an Edge or serves required are less than the Agreement Corporation; amount of reserves which would be re- (2) Any office located outside the quired if the ratios in effect on Sep- United States of a foreign bank; tember 1, 1980, were applied. (3) A United States office or a non- (c) Earnings Participation Account. A United States office of the entity es- depository institutions’s supplemental tablishing the IBF; reserve requirement shall be main- (4) Another IBF; or tained by the Federal Reserve Banks in (5) A foreign national government, or an Earnings Participation Account. an agency or instrumentality there- Such balances shall receive earnings to of, 10 engaged principally in activities be paid by the Federal Reserve Banks which are ordinarily performed in the during each calendar quarter at a rate United States by governmental enti- not to exceed the rate earned on the se- ties; an international entity of which curities portfolio of the Federal Re- the United States is a member; or any serve System during the previous cal- other foreign international or supra- endar quarter. Additional rules and national entity specifically designated regulations maybe prescribed by the by the Board;11 or Board concerning the payment of earn- (ii) (A) That is payable ings on Earnings Participation Ac- (1) On a specified date not less than counts by Federal Reserve Banks. two business days after the date of de- (d) Report to Congress. The Board posit; shall transmit promptly to the Con- (2) Upon expiration of a specified pe- gress a report stating the basis for ex- riod of time not less than two business ercising its authority to require a sup- days after the date of deposit; or plemental reserve under this section. (e) Reserve requirements. At present, there are no supplemental reserve re- 10 Other than states, provinces, municipali- quirements imposed under this section. ties, or other regional or local governmental units or agencies or instrumentalities there- [45 FR 56018, Aug. 22, 1980, as amended at 45 of. FR 81537, Dec. 11, 1980. Redesignated at 74 FR 11 The designated entities are specified in 25639, May 29, 2009] 12 CFR 204.125.

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(3) Upon written notice that actually iate or other foreign establishment is required to be given by the depositor (foreign affiliate) controlled by one or not less than two business days prior to more domestic corporations provided the date of withdrawal; that the funds are used only to finance (B) That represents funds deposited the operations outside the United to the credit of a non-United States States of the borrower or of its affili- resident or a foreign branch, office, ates located outside the United States. subsidiary, affiliate, or other foreign (b) Acknowledgment of use of IBF de- establishment (foreign affiliate) con- posits and extensions of credit. An IBF trolled by one or more domestic cor- shall provide written notice to each of porations provided that such funds are its customers (other than those speci- used only to support the operations fied in § 204.8(a)(2)(i)(B) and § 204.8(a)(3) outside the United States of the deposi- (i) through (v)) at the time a deposit tor or of its affiliates located outside relationship or a credit relationship is the United States; and first established that it is the policy of (C) That is maintained under an the Board of Governors of the Federal agreement or arrangement under which Reserve System that deposits received no deposit or withdrawal of less than by international banking facilities $100,000 is permitted, except that a may be used only to support the de- withdrawal of less than $100,000 is per- positor’s operations outside the United mitted if such withdrawal closes an ac- States as specified in § 204.8(a)(2)(ii)(B) count. and that extensions of credit by IBFs (3) International banking facility exten- may be used only to finance operations sion of credit or IBF loan means any outside of the United States as speci- transaction where an IBF supplies fied in § 204.8(a)(3)(vi). In the case of funds by making a loan, or placing loans to or deposits from foreign affili- funds in a deposit account. Such trans- ates of U.S. residents, receipt of such actions may be represented by a prom- notice must be acknowledged in writ- issory note, security, acknowledgment ing whenever a deposit or credit rela- of advance, due bill, repurchase agree- tionship is first established with the ment, or any other form of credit IBF. transaction. Such credit may be ex- (c) Exemption from reserve require- tended only to: ments. An institution that is subject to (i) Any office located outside the the reserve requirements of this part is United States of another depository in- not required to maintain reserves stitution organized under the laws of against its IBF time deposits or IBF the United States or of an Edge or loans. Deposit-taking activities of IBFs Agreement Corporation; are limited to accepting only IBF time (ii) Any office located outside the deposits and lending activities of IBFs United States of a foreign bank; are restricted to making only IBF (iii) A United States or a non-United loans. States office of the institution estab- (d) Establishment of an international lishing the IBF; banking facility. A depository institu- (iv) Another IBF; tion, an Edge or Agreement Corpora- (v) A foreign national government, or tion or a United States branch or agen- an agency or instrumentality there- cy of a foreign bank may establish an of, 12 engaged principally in activities IBF in any location where it is legally which are ordinarily performed in the authorized to engage in IBF business. United States by governmental enti- However, only one IBF may be estab- ties; an international entity of which lished for each reporting entity that is the United States is a member; or any required to submit a Report of Trans- other foreign international or supra- action Accounts, Other Deposits and national entity specifically designated Vault Cash (Form FR 2900). by the Board; 13 or (e) Notification to Federal Reserve. At (vi) A non-United States resident or a least fourteen days prior to the first re- foreign branch, office, subsidiary, affil- serve computation period that an institution intends to establish an IBF it 12 See footnote 10. shall notify the Federal Reserve Bank 13 See footnote 11. of the district in which it is located of

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its intent. Such notification shall in- tion and under such other terms and clude a statement of intention by the conditions as the Board may prescribe. institution that it will comply with the (b) Rate. Except as provided in para- rules of this part concerning IBFs, in- graph (c) of this section, Federal Re- cluding restrictions on sources and serve Banks shall pay interest at the uses of funds, and recordkeeping and following rates— accounting requirements. Failure to (1) For required reserve balances, at comply with the requirements of this 1⁄4 percent; part shall subject the institution to re- (2) For excess balances, at 1⁄4 percent; serve requirements under this part or or result in the revocation of the institu- (3) For required reserve balances, ex- tion’s ability to operate an IBF. cess balances, and term deposits, at (f) Recordkeeping requirements. A de- any other rate or rates as determined pository institution shall segregate on by the Board from time to time, not to its books and records the asset and li- exceed the general level of short-term ability accounts of its IBF and submit interest rates. For purposes of this sub- reports concerning the operations of its section, ‘‘short-term interest rates’’ IBF as required by the Board. are rates on obligations with maturities of no more than one year, such as [46 FR 32429, June 23, 1981, as amended at 51 the primary credit rate and rates on FR 9636, Mar. 20, 1986; 56 FR 15495, Apr. 17, 1991; 61 FR 69025, Dec. 31, 1996] term federal funds, term repurchase agreements, commercial paper, term § 204.9 Emergency reserve require- Eurodollar deposits, and other similar ment. instruments. (a) Finding by Board. The Board may (c) Pass-through balances. A pass- impose, after consulting with the ap- through correspondent that is an eligi- propriate committees of Congress, ad- ble institution may pass back to its re- ditional reserve requirements on depos- spondent interest paid on balances held itory institutions at any ratio on any on behalf of that respondent. In the liability upon a finding by at least five case of balances held by a pass-through members of the Board that extraor- correspondent that is not an eligible dinary circumstances require such ac- institution, a Reserve Bank shall pay tion. interest only on the required reserve balances held on behalf of one or more (b) Term. Any action taken under this section shall be valid for a period not respondents, and the correspondent exceeding 180 days, and may be ex- shall pass back to its respondents intended for further periods of up to 180 terest paid on balances in the cor- days each by affirmative action of at respondent’s account. least five members of the Board for (d) Excess balance accounts. (1) A Re- each extension. serve Bank may establish an excess balance account for eligible institu- (c) Reports to Congress. The Board tions under the provisions of this para- shall transmit promptly to Congress a graph (d). Notwithstanding any other report of any exercise of its authority provisions of this part, the excess bal- under this paragraph and the reasons ances of eligible institutions in an ex- for the exercise of authority. cess balance account represent a liabil- (d) Reserve requirements. At present, ity of the Reserve Bank solely to those there are no emergency reserve re- participating eligible institutions. quirements imposed under this section. (2) The participating eligible institu- [45 FR 56018, Aug. 22, 1980. Redesignated at 74 tions in an excess balance account FR 25638, May 29, 2009] shall authorize another institution to act as agent of the participating insti- § 204.10 Payment of interest on bal- tutions for purposes of general account ances. management, including but not limited (a) Payment of interest. The Federal to transferring the excess balances of Reserve Banks shall pay interest on participating institutions in and out of balances maintained at Federal Re- the excess balance account. An excess serve Banks by or on behalf of an eligi- balance account must be established at ble institution as provided in this sec- the Reserve Bank where the agent

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maintains its master account, unless (3) A term deposit may not be used otherwise determined by the Board. for general payments or settlement ac- The agent may not commingle its own tivities. funds in the excess balance account. [Reg. D, 74 FR 25629, May 29, 2009, as amend- (3) No required reserve balances or ed at 75 FR 24389, May 5, 2010; 76 FR 42019, clearing balances may be maintained July 18, 2011] at any time in an excess balance account, and balances maintained in an INTERPRETATIONS excess balance account will not satisfy any institution’s reserve balance re- § 204.121 Bankers’ banks. quirement or contractual clearing bal- (a)(1) The Federal Reserve Act, as ance. amended by the Monetary Control Act (4) An excess balance account must of 1980 (title I of Pub. L. 96–221), im- be used exclusively for the purpose of poses Federal reserve requirements on maintaining the excess balances of par- depository institutions that maintain ticipants and may not be used for gen- transaction accounts or nonpersonal eral payments or other activities. time deposits. Under section 19(b)(9), (5) Interest shall be paid on excess however, a depository institution is balances of eligible institutions main- not required to maintain reserves if it: tained in an excess balance account in (i) Is organized solely to do business accordance with paragraph (b)(2) or with other financial institutions; (b)(3) of this section. (ii) Is owned primarily by the finan- (6) A Reserve Bank may establish ad- cial institutions with which it does ditional terms and conditions con- business; and sistent with this part with respect to (iii) Does not do business with the the operation of an excess balance ac- general public. count, including, but not limited to, terms of and fees for services, condi- Depository institutions that satisfy all tions under which an institution may of these requirements are regarded as act as agent for an account, restric- bankers’ banks. tions on the agent with respect to ac- (2) In its application of these require- count management, penalties for non- ments to specific institutions, the compliance with this section or any Board will use the following standards: terms and conditions, and account ter- (i) A depository institution may be mination. regarded as organized solely to do busi- (e) Term deposits. (1) A Federal Re- ness with other depository institutions serve Bank may accept term deposits even if, as an incidental part to its ac- from eligible institutions under the tivities, it does business to a limited provisions of this paragraph (e) subject extent with entities other than deposi- to such terms and conditions as the tory institutions. The extent to which Board may establish from time to the institution may do business with time, including but not limited to con- other entities and continue to be re- ditions regarding the maturity of the garded as a bankers’ bank is specified term deposits being offered, maximum in paragraph (a)(2)(iii) of this section. and minimum amounts that may be (ii) A depository institution will be maintained by an eligible institution regarded as being owned primarily by in a term deposit, the interest rate or the institutions with which it does rates offered, early withdrawal of term business if 75 per cent or more of its deposits, pledging term deposits as col- capital is owned by other depository lateral and, if term deposits are offered institutions. The 75 per cent or more through an auction mechanism, the ownership rule applies regardless of the size of the offering, maximum and min- type of depository institution. imum bid amounts, and other relevant (iii) A depository institution will not terms. be regarded as doing business with the (2) A term deposit will not satisfy general public if it meets two condi- any institution’s required reserve bal- tions. First, the range of customers ance or contractual clearing balance.

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with which the institution does busi- that the Board may permit, on a case- ness must be limited to depository in- by-case basis, depository institutions stitutions, including subsidiaries or or- that are not themselves required to ganizations owned by depository insti- maintain reserves (bankers’ banks) to tutions; directors, officers or employ- act as pass-through correspondents if ees of the same or other depository in- certain criteria are satisfied. The stitutions; individuals whose accounts Board has determined that a bankers’ are acquired at the request of the insti- bank may act as a pass-through cor- tution’s supervisory authority due to respondent if it enters into an agree- the actual or impending failure of an- ment with the Federal Reserve to ac- other depository institution; share in- cept responsibility for the maintenance surance funds; depository institution of pass-through reserve accounts in ac- trade associations; and such others as cordance with Regulation D (12 CFR the Board may determine on a case-by- 204.3(i)) and if the Federal Reserve is case basis consistent with the purposes satisfied that the quality of manage- of the Act and the bankers’ bank ex- ment and financial resources of the in- emption. Second, the extent to which stitution are adequate in order to en- the depository institution makes loans able the institution to serve as a pass- to, or investments in, the above enti- through correspondent in accordance ties (other than depository institu- with Regulation D. Satisfaction of tions) cannot exceed 10 per cent of these criteria will assure that pass- total assets, and the extent to which it through arrangements are maintained receives deposits (or shares if the insti- properly without additional financial tution does not receive deposits) from risk to the Federal Reserve. or issues other liabilities to the above (3) In order to determine uniformly entities (other than depository institu- the adequacy of managerial and finan- tions) cannot exceed 10 per cent of cial resources, the Board will consult total liabilities (or net worth if the in- with the Federal supervisor for the stitution does not receive deposits). type of institution under consider- If a depository institution is unable to ation. Because the Board does not pos- meet all of these requirements on a sess direct experience with supervising continuing basis, it will not be re- depository institutions other than garded as a bankers’ bank and will be commerical banks, and does not intend required to satisfy Federal reserve re- to involve itself in the direct super- quirements on all of its transaction ac- vision of such institutions, it will re- counts and nonpersonal time deposits. quest the National Credit Union Ad- (b) (1) Section 19(c)(1) of the Federal ministration to review requests from Reserve Act, as amended by the Mone- credit unions that qualify as bankers’ tary Control Act of 1980 (title I of Pub. banks and the Federal Home Loan L. 96–221) provides that Federal reserve Bank Board to review requests from requirements may be satisfied by the savings and loan associations that maintenance of vault cash or balances qualify as bankers’ banks, regardless of in a Federal Reserve Bank. Depository charter or insurance status. (The institutions that are not members of Board, itself, will consider requests the Federal Reserve System may also from all commercial banks that qualify satisfy reserve requirements by main- as bankers’ banks.) If the Federal su- taining a balance in another depository pervisor does not find the institution’s institution that maintains required re- managerial or financial resources to be serve balances at a Federal Reserve adequate, the Board will not permit Bank, in a Federal Home Loan Bank, the institution to act as a pass-through or in the National Credit Union Admin- correspondent. In order to assure the istration Central Liquidity Facility if continued adequacy of managerial and the balances maintained by such insti- financial resources, it is anticipated tutions are subsequently passed that the appropriate Federal supervisor through to the Federal Reserve Bank. will, on a periodic basis, review and (2) On August 27, 1980, the Board an- evaluate the managerial and financial nounced the procedures that will apply resources of the institution in order to to such pass-through arrangements (45 determine whether it should continue FR 58099). Section 204.3(i)(1) provides to be permitted to act as a pass-

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through correspondent. It is antici- assets 1 from, or sell such assets to, any pated that, with respect to state char- domestic or foreign customer provided tered institutions, the Federal super- that the transactions are at arm’s visor may discuss the request with the length without recourse. However, an institute State supervisor. The Board IBF of a U.S. depository institution believes that this procedure will pro- may not purchase assets from, or sell mote uniformity of treatment for all such assets to, any U.S. affiliate of the types of bankers’ banks, and provide institution establishing the IBF; an consistent advice concerning manage- IBF of an Edge or Agreement corpora- rial ability and financial strength from tion may not purchase assets from, or supervisory authorities that are in a sell assets to, any U.S. affiliate of the Edge or Agreement corporation or to better position to evaluate these cri- U.S. branches of the Edge or Agree- teria for depository institutions that ment corporation or to U.S. branches are not commercial banks. of the Edge or Agreement corporation (4) Requests for a determination as to other than the branch 2 establishing whether a depository institution will the IBF; and an IBF of a U.S. branch or be regarded as a bankers’ bank for pur- agency of a foreign bank may not purposes of the Federal Reserve Act or for chase assets from, or sell assets to any permission to act as a pass-through U.S. affiliates of the foreign bank or to correspondent may be addressed to the any other U.S. branch or agency of the Federal Reserve Bank in whose Dis- same foreign bank. 2 (This would not trict the main office of the depository prevent an IBF from purchasing (or institution is located or to the Sec- selling) assets directly from (or to) any retary, Board of Governors of the Fed- IBF, including an IBF of an affiliate, or eral Reserve System, Washington, DC to the institution establishing the IBF; 20551. The Board will act promptly on such purchases from the institution es- all requests received directly or tablishing the IBF would continue to through Federal Reserve Banks. be subject to Eurocurrency reserve requirements except during the initial [45 FR 69879, Oct. 22, 1980, as amended by four-week transition period.) Since re- Reg. D, 72 FR 16990, Apr. 6, 2007] purchase agreements are regarded as loans, transactions involving repur- § 204.122 Secondary market activities chase agreements are permitted only of international banking facilities. with customers who are otherwise eli- (a) Questions have been raised con- gible to deal with IBFs, as specified in cerning the extent to which inter- Regulation D. national banking facilities may pur- (c) In the case of purchases of assets, chase (or sell) IBF-eligible assets such in order to determine that the Board’s as loans (including loan participa- use-of-proceeds requirement has been tions), securities, CDs, and bankers’ ac- met, it is necessary for the IBF (1) to ceptances from (or to) third parties. ascertain that the applicable IBF no- Under the Board’s regulations, as spec- tices and acknowledgments have been ified in § 204.8 of Regulation D, IBFs are provided, or (2) in the case of loans or limited, with respect to making loans securities, to review the documenta- and accepting deposits, to dealing only tion underlying the loan or security, or with certain customers, such as other accompanying the security (e.g., the IBFs and foreign offices of other orga- prospectus or offering statement), to nizations, and with the entity establishing the IBF. In addition, an IBF 1 In order for an asset to be eligible to be held by an IBF, the obligor or issuer of the may extend credit to a nonbank cus- instrument, or in the case of bankers’ ac- tomer only to finance the borrower’s ceptances, the customer and any endorser or non-U.S. operations and may accept de- acceptor, must be an IBF-eligible customer. posits from a nonbank customer that 2 Branches of Edge or Agreement corpora- are used only to support the depositor’s tions and agencies and branches of foreign non-U.S. business. banks that file a consolidated report for reserve requirements purposes (FR 2900) are (b) Consistent with the Board’s in- considered to be the establishing entity of an tent, IBFs may purchase IBF-eligible IBF.

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determine that the proceeds are being open-ended management investment used only to finance the obligor’s oper- companies provided the funds’ invest- ations outside the U.S., or (3) in the ment portfolios are limited to the case of loans, to obtain a statement types of investments that a Federal from either the seller or borrower that savings and loan association could hold the proceeds are being used only to fi- without limit as to percentage of as- nance operations outside the U.S., or in sets (12 U.S.C. 1464(c)(1)(Q)). Such in- the case of securities, to obtain such a vestments include mortgages, U.S. statement from the obligor, or (4) in Government and agency securities, se- the case of bankers’ acceptances, to re- curities of states and political subdivi- view the underlying documentation to sions, sales of Federal funds and depos- determine that the proceeds are being its held at banks insured by the Fed- used only to finance the parties’ oper- eral Deposit Insurance Corporation. ations outside the United States. The Federal Credit Union Act author- (d) Under the Board’s regulations, izes Federal credit unions to aggregate IBFs are not permitted to issue nego- their funds in trusts provided the trust tiable Euro-CDs, bankers’ acceptances, is limited to such investments that or similar instruments. Accordingly, Federal credit unions could otherwise consistent with the Board’s intent in make. Such investments include loans this area, IBFs may sell such instru- to credit union members, obligations of ments issued by third parties that the U.S. government or secured by the qualify as IBF-eligible assets provided U.S. government, loans to other credit that the IBF, its establishing institu- unions, shares or accounts held at sav- tion and any affiliate of the institution ings and loan associations or mutual establishing the IBF do not endorse, savings banks insured by FSLIC or accept, or otherwise guarantee the in- FDIC, sales of Federal funds and shares strument. of any central credit union whose investments are specifically authorized [46 FR 62812, Dec. 29, 1981, as amended at 52 FR 47694, Dec. 16, 1987] by the board of directors of the Federal credit union making the investment (12 § 204.123 Sale of Federal funds by in- U.S.C. 1757(7)). vestment companies or trusts in (c) The Board has considered whether which the entire beneficial interest an investment company or trust whose is held exclusively by depository in- entire beneficial interest is held by de- stitutions. pository institutions, as defined in (a) The Federal Reserve Act, as Regulation D, would be eligible for the amended by the Monetary Control Act Federal funds exemption from Reserve of 1980 (Title I of Pub. L. 96–221) im- requirements and interest rate limita- poses Federal Reserve requirements on tions. The Board has determined that transaction accounts and nonpersonnel such investment companies or trusts time deposits held by depository insti- are eligible to participate in the Fed- tutions. The Board is empowered under eral funds market because, in effect, the Act to determine what types of ob- they act as mere conduits for the hold- ligations shall be deemed a deposit. ers of their beneficial interest. To be Regulation D—Reserve Requirements regarded by the Board as acting as a of Depository Institutions exempts conduit and, thus, be eligible for par- from the definition of deposit those ob- ticipation in the Federal funds market, ligations of a depository institution an investment company or trust must that are issued or undertaken and held meet each of the following conditions: for the account of a domestic office of (1) The entire beneficial interest in another depository institution (12 CFR the investment company or trust must 204.2(a)(1)(vii)(A)(1)). These exemptions be held by depository institutions, as from the definition of deposit are defined in Regulation D. These institu- known collectively as the Federal funds tions presently may participate di- or interbank exemption. rectly in the Federal funds market. If (b) Title IV of the Depository Institu- the entire beneficial interest in the in- tions Deregulation and Monetary Con- vestment company or trust is held only trol Act of 1980 authorizes Federal sav- by depository institutions, the Board ings and loan associations to invest in will regard the investment company or

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trust as a mere conduit for the holders those obligations of a depository insti- of its beneficial interest. tution that arise from a transfer of di- (2) The assets of the investment com- rect obligations of, or obligations that pany or trust must be limited to in- are fully guaranteed as to principal and vestments that all of the holders of the interest by, the United States govern- beneficial interest could make directly ment or any agency thereof that the without limit. depository institution is obligated to (3) Holders of the beneficial interest repurchase (12 CFR 204.2(a)(1)(vii)(B)). in the investment company or trust (b) The National Bank Act provides must not be allowed to make third that a national bank may purchase for party payments from their accounts its own account investment securities with the investment company or trust. under limitations and restrictions as The Board does not regard an invest- the Comptroller may prescribe (12 ment company or trust that offers U.S.C. 24, ¶ 7). The statute defines in- third party payment capabilities or vestment securities to mean market- other similar services which actively able obligations evidencing indebted- transform the nature of the funds pass- ness of any person in the form of bonds, ing between the holders of the bene- notes, and debentures. The Act further ficial interest and the Federal funds limits a national bank’s holdings of market as mere conduits. any one security to no more than an The Board expects that the above con- amount equal to 10 percent of the ditions will be included in materials bank’s capital stock and surplus. How- filed by an investment company or ever, these limitations do not apply to trust with the appropriate regulatory obligations issued by the United agencies. States, general obligations of any state (d) The Board believes that permit- and certain obligations of Federal ting sales of Federal funds by invest- agencies. In addition, generally a na- ment companies or trusts whose bene- tional bank is not permitted to pur- ficial interests are held exclusively by chase for its own account stock of any depository institutions, that invest corporation. These restrictions also solely in assets that the holders of apply to state member banks (12 U.S.C. their beneficial interests can otherwise 335). invest in without limit, and do not pro- (c) The Comptroller of the Currency vide third party payment capabilities has permitted national banks to pur- offer the potential for an increased chase for their own accounts shares of yield for thrifts. This is consistent open-end investment companies that with Congressional intent to provide are purchased and sold at par (i.e., thrifts with convenient liquidity vehi- money market mutual funds) provided cles. the portfolios of such companies consist solely of securities that a national [47 FR 8987, Mar. 3, 1982, as amended at 52 FR 47695, Dec. 16, 1987] bank may purchase directly (Banking Bulletin B–83–58). The Board of Gov- § 204.124 Repurchase agreement in- ernors has permitted state member volving shares of a money market banks to purchase, to the extent per- mutual fund whose portfolio con- mitted under applicable state law, sists wholly of United States Treas- shares of money market mutual funds ury and Federal agency securities. (MMMF) whose portfolios consist sole- (a) The Federal Reserve Act, as ly of securities that the state member amended by the Monetary Control Act bank may purchase directly (12 CFR of 1980 (title I of Pub. L. 96–221) imposes 208.123). Federal reserve requirements on trans- (d) The Board has determined that an action accounts and nonpersonal time obligation arising from a repurchase deposits held by depository institu- agreement involving shares of a tions. The Board is empowered under MMMF whose portfolio consists wholly the Act to determine what types of ob- of securities of the United States gov- ligations shall be deemed a deposit (12 ernment or any agency thereof 1 would U.S.C. 461). Regulation D—Reserve Re- quirements of Depository Institutions 1 The term United States government or any exempts from the definition of deposit agency thereof as used herein shall have the

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not be a deposit for purposes of Regula- The Central American Institute for Indus- tions D and Q. The Board believes that trial Research and Technology. a repurchase agreement involving Central American Monetary Stabilization shares of such a MMMF is the func- Fund. East Caribbean Common Market. tional equivalent of a repurchase Latin American Free Trade Association. agreement directly involving United Organization for Central American States. States government or agency obliga- Permanent Secretariat of the Central Amer- tions. A purchaser of shares of a ican General Treaty of Economic Integra- MMMF obtains an interest in a pro rata tion. portion of the assets that comprise the River Plate Basin Commission. MMMF’s portfolio. Accordingly, re- AFRICA gardless of whether the repurchase agreement involves United States gov- African Development Bank. ernment or agency obligations directly Banque Centrale des Etats de l’Afrique Equa- or shares in a MMMF whose portfolio torial et du Cameroun. consists entirely of United States gov- Banque Centrale des Etats d’Afrique del’Ouest. ernment or agency obligations, an eq- Conseil de l’Entente. uitable and undivided interest in East African Community. United States and agency government Organisation Commune Africaine et obligations is being transferred. More- Malagache. over, the Board believes that this in- Organization of African Unity. terpretation will further the purpose of Union des Etats de l’Afrique Centrale. the exemption in Regulations D and Q Union Douaniere et Economique de l’Afrique for repurchase agreements involving Centrale. United States government or Federal Union Douaniere des Etats de l’Afrique de l’Ouest. obligations by enhancing the market for such obligations. ASIA [50 FR 13011, Apr. 2, 1985, as amended at 52 Asia and Pacific Council. FR 47695, Dec. 16, 1987] Association of Southeast Asian Nations. Bank of Taiwan. § 204.125 Foreign, international, and Korea Exchange Bank. supranational entities referred to in §§ 204.2(c)(1)(iv)(E) and MIDDLE EAST 204.8(a)(2)(i)(B)(5). Central Treaty Organization. The entities referred to in Regional Cooperation for Development. §§ 204.2(c)(1)(iv)(E) and [Reg. D, 52 FR 47695, Dec. 16, 1987, as amend- 204.8(a)(2)(i)(B)(5) are: ed at 56 FR 15495, Apr. 17, 1991; 65 FR 12917, Mar. 10, 2000] EUROPE Bank for International Settlements. § 204.126 Depository institution par- European Atomic Energy Community. ticipation in ‘‘Federal funds’’ mar- European Central Bank. ket. European Coal and Steel Community. (a) Under § 204.2(a)(1)(vii)(A), there is The European Communities. European Development Fund. an exemption from Regulation D for European Economic Community. member bank obligations in nondeposit European Free Trade Association. form to another bank. To assure the ef- European Fund. fectiveness of the limitations on per- European Investment Bank. sons who sell Federal funds to deposi-

LATIN AMERICA tory institutions, Regulation D applies to nondocumentary obligations under- Andean Development Corporation. taken by a depository institution to Andean Subregional Group. obtain funds for use in its banking Caribbean Development Bank. Caribbean Free Trade Association business, as well as to documentary ob- Caribbean Regional Development Agency. ligations. Under § 204.2(a)(1)(vii) of Reg- Central American Bank for Economic Inte- ulation D, a depository institution’s li- gration. ability under informal arrangements as well as those formally embodied in a same meaning as in § 204.2(a)(1)(vii)(B) of document are within the coverage of Regulation D, 12 CFR 204.2(a)(1)(vii)(B). Regulation D.

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(b) The exemption in funds transactions, comes within the § 204.2(a)(1)(vii)(A) applies to obliga- exemption from deposit classification tions owed by a depository institution for certain obligations owed by a de- to a domestic office of any entity listed pository institution to an institution in that section (the exempt institutions). exempt in § 204.2(a)(1)(vii)(A) of Regula- The exempt institutions explicitly in- tion D. An IDLP transaction is one clude another depository institution, through which an institution that has foreign bank, Edge or agreement cor- sold Federal funds to a depository in- poration, New York Investment (arti- stitution, subsequently sells or partici- cle XII) Company, the Export-Import pates out that obligation to a non- Bank of the United States, Minbanc depository third party without noti- Capital Corp., and certain other credit fying the obligated institution. sources. The term exempt institutions (b) The Board’s interpretation re- also includes subsidiaries of depository garding Federal funds transactions (12 institutions: CFR 204.126) clarified that a depository (1) That engage in businesses in institutions’s liability must be issued which their parents are authorized to to an exempt institution described in engage; or § 204.2(a)(1)(vii)(A) of Regulation D for (2) The stock of which by statute is its own account in order to come with- explicitly eligible for purchase by na- in the nondeposit exemption for inter- tional banks. depository liabilities. The Board re- (c) To assure that this exemption for gards transactions which result in liabilities to exempt institutions is not third parties gaining access to the Fed- used as a means by which nondeposi- eral funds market as contrary to the tory institutions may arrange through exemption contained in an exempt institution to sell Federal § 204.2(a)(1)(vii)(A) of Regulation D re- funds to a depository institution, obli- gardless of whether the nondepository gations within the exemption must be institution third party is a party to the issued to an exempt institution for its initial transaction or thereafter be- own account. In view of this require- comes a participant in the transaction ment, a depository institution that through purchase of all or part of the purchases Federal funds should ascer- obligation held by the selling deposi- tain the character (not necessarily the tory institution. identity) of the actual seller in order to (c) The Board regards the notice re- justify classification of its liability on quirements set out in 12 CFR 204.126 as the transaction as Federal funds pur- applicable to IDLP-type transactions chased rather than as a deposit. Any as described herein so that a depository exempt institution that has given gen- institution selling Federal funds must eral assurance to the purchasing depos- provide to the purchaser— itory institution that sales by it of (1) Notice of its intention, at the Federal funds ordinarily will be for its time of the initial transaction, to sell own account and thereafter executes or participate out its loan contract to such transactions for the account of a nondepository third party, and others, should disclose the nature of (2) Full and prompt notice whenever the actual lender with respect to each it (the selling depository institution) such transaction. If it fails to do so, subsequently sells or participates out the depository institution would be its loan contract to a non-depository deemed by the Board as indirectly vio- third party. lating section 19 of the Federal Reserve Act and Regulation D. [52 FR 47695, Dec. 16, 1987] [52 FR 47695, Dec. 16, 1987] § 204.128 Deposits at foreign branches guaranteed by domestic office of a § 204.127 Nondepository participation depository institution. in ‘‘Federal funds’’ market. (a) In accepting deposits at branches (a) The Board has considered whether abroad, some depository institutions the use of interdepository institution loan may enter into agreements from time participations (IDLPs) which involve to time with depositors that in effect participation by third parties other guarantee payment of such deposits in than depository institutions in Federal the United States if the foreign branch

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is precluded from making payment. Regulation D the same as if the deposit The question has arisen whether such had been made in the domestic office. deposits are subject to Regulation D, This interpretation is not designed in and this interpretation is intended as any respect to prevent the head office clarification. of a U.S. bank from repaying bor- (b) Section 19 of the Federal Reserve rowings from, making advances to, or Act which establishes reserve require- supplying capital funds to its foreign ments does not apply to deposits of a branches, subject to Eurocurrency li- depository institution ‘‘payable only at ability reserve requirements. an office thereof located outside of the [52 FR 47696, Dec. 16, 1987] States of the United States and the District of Columbia’’ (12 U.S.C. 371a; § 204.130 Eligibility for NOW accounts. 12 CFR 204.1(c)(5)). The Board rule in (a) Summary. In response to many re- 1918 that the requirements of section 19 quests for rulings, the Board has deter- as to reserves to be carried by member mined to clarify the types of entities banks do not apply to foreign branches that may maintain NOW accounts at (1918 Fed. Res. Bull. 1123). The Board member banks. has also defined the phrase Any deposit (b) Individuals. (1) Any individual that is payable only at an office located may maintain a NOW account regard- outside the United States, in § 204.2(t) of less of the purposes that the funds will Regulation D, 12 CFR 204.2(t). serve. Thus, deposits of an individual (c) The Board believes that this ex- used in his or her business including a emption from reserve requirements sole proprietor or an individual doing should be limited to deposits in foreign business under a trade name is eligible branches as to which the depositor is to maintain a NOW account in the indi- entitled, under his agreement with the vidual’s name or in the ‘‘DBA’’ name. depository institution, to demand pay- However, other entities organized or ment only outside the United States, operated to make a profit such as cor- regardless of special circumstances. porations, partnerships, associations, The exemption is intended principally business trusts, or other organizations to enable foreign branches of U.S. de- may not maintain NOW accounts. pository institutions to compete on a (2) Pension funds, escrow accounts, more nearly equal basis with banks in security deposits, and other funds held foreign countries in accordance with under various agency agreements may the laws and regulations of those coun- also be classified as NOW accounts if tries. A customer who makes a deposit the entire beneficial interest is held by that is payable solely at a foreign individuals or other entities eligible to branch of the depository institution as- maintain NOW accounts directly. The sumes whatever risk may exist that Board believes that these accounts are the foreign country in which a branch similar in nature to trust accounts and is located might impose restrictions on should be accorded identical treat- withdrawals. When payment of a de- ment. Therefore, such funds may be re- posit in a foreign branch is guaranteed garded as eligible for classification as by a promise of payment at an office in NOW accounts. the United States if not paid at the for- (c) Nonprofit organizations. (1) A non- eign office, the depositor no longer as- profit organization that is operated sumes this risk but enjoys substan- primarily for religious, philanthropic, tially the same rights as if the deposit charitable, educational, political or had been made in a U.S. office of the other similar purposes may maintain a depository institution. To assure the NOW account. The Board regards the effectiveness of Regulation D and to following kinds of organizations as eli- prevent evasions thereof, the Board gible for NOW accounts under this considers that such guaranteed foreign- standard if they are not operated for branch deposits must be subject to that profit: regulation. (i) Organizations described in section (d) Accordingly, a deposit in a foreign 501(c)(3) through (13), and (19) of the In- branch of a depository institution that ternal Revenue Code (26 U.S.C. (I.R.C. is guaranteed by a domestic office is 1954) section 501(c)(3) through (13) and subject to the reserve requirements of (19));

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(ii) Political organizations described trustee in bankruptcy), including those in section 527 of the Internal Revenue awaiting distribution or investment, Code (26 U.S.C. (I.R.C. 1954) section may be held in the form of NOW ac- 527); and counts if all of the beneficiaries are (iii) Homeowners and condominium otherwise eligible to maintain NOW ac- owners associations described in sec- counts. The Board believes that such a tion 528 of the Internal Revenue Code classification should continue since fi- (26 U.S.C. (I.R.C. 1954) section 528), in- duciaries are required to invest even cluding housing cooperative associa- temporarily idle balances to the great- tions that perform similar functions. est extent feasible in order to respon- (2) All organizations that are oper- sibly carry out their fiduciary duties. ated for profit are not eligible to main- The availability of NOW accounts pro- tain NOW accounts at depository insti- vides a convenient vehicle for pro- tutions. viding a short-term return on tempo- (3) The following types of organiza- rarily idle trust funds of beneficiaries tions described in the cited provisions eligible to maintain accounts in their of the Internal Revenue Code are own names. among those not eligible to maintain (f) Grandfather provision. In order to NOW accounts: avoid unduly disrupting account rela- (i) Credit unions and other mutual tionships, a NOW account established depository institutions described in at a member bank on or before August section 501(c)(14) of the Internal Rev- 31, 1981, that represents funds of a non- enue Code (26 U.S.C. (I.R.C. 1954) sec- qualifying entity that previously quali- tion 501(c)(14)); fied to maintain a NOW account may (ii) Mutual insurance companies de- continue to be maintained in a NOW scribed in section 501(c)(15) of the In- account. ternal Revenue Code (26 U.S.C. (I.R.C. [52 FR 47697, Dec. 16, 1987] 1954) section 501(c)(15)); (iii) Crop financing organizations de- § 204.131 Participation by a depository scribed in section 501(c)(16) of the In- institution in the secondary market ternal Revenue Code (26 U.S.C. (I.R.C. for its own time deposits. 1954) section 501(c)(16)); (a) Background. In 1982, the Board (iv) Organizations created to function issued an interpretation concerning the as part of a qualified group legal serv- effect of a member bank’s purchase of ices plan described in section 501(c)(20) its own time deposits in the secondary of the Internal Revenue Code (26 U.S.C. market in order to ensure compliance (I.R.C. 1954) section 501(c)(20)); or with regulatory restrictions on the (v) Farmers’ cooperatives described payment of interest on time deposits, in section 521 of the Internal Revenue with the prohibition against payment Code (26 U.S.C. (I.R.C. 1954) section of interest on demand deposits, and 521). with regulatory requirements designed (d) Governmental units. Governmental to distinguish between time deposits units are generally eligible to maintain and demand deposits for federal reserve NOW accounts at member banks. NOW requirement purposes (47 FR 37878, accounts may consist of funds in which Aug. 27, 1982). The interpretation was the entire beneficial interest is held by designed to ensure that the regulatory the United States, any State of the early withdrawal penalties in Regula- United States, county, municipality, or tion Q used to achieve these three pur- political subdivision thereof, the Dis- poses were not evaded through the pur- trict of Columbia, the Commonwealth chase by a member bank or its affiliate of Puerto Rico, American Samoa, of a time deposit of the member bank Guam, any territory or possession of prior to the maturity of the deposit. the United States, or any political sub- (b) Because the expiration of the De- division thereof. pository Institutions Deregulation Act (e) Funds held by a fiduciary. Under (title II of Pub. L. 96–221) on April 1, current provisions, funds held in a fidu- 1986, removed the authority to set in- ciary capacity (either by an individual terest rate ceilings on deposits, one of fiduciary or by a corporate fiduciary the purposes for adopting the interpre- such as a bank trust department or a tation was eliminated. The removal of

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the authority to set interest rate ceil- deposits in the pool. In such cases, if a ings on deposits required the Board to purchasing depository institution does revise the early withdrawal penalties not wish to assess an applicable early which were also used to distinguish be- withdrawal penalty, the deposit may be tween types of deposits for reserve re- sold immediately in the secondary quirement purposes. Effective April 1, market as an alternative to imposing 1986, the Board amended its Regulation the early withdrawal penalty. D to incorporate early withdrawal pen- (d) Purchases by affiliates. On a con- alties applicable to all depository insti- solidated basis, if an affiliate (as de- tutions for this purpose (51 FR 9629, fined in § 204.2(q) of Regulation D) of a Mar. 20, 1986). Although the new early depository institution purchases a CD withdrawal penalties differ from the issued by the depository institution, penalties used to enforce interest rate ceilings, secondary market purchases the purchase does not reduce their con- still effectively shorten the maturities solidated liabilities and could be ac- of deposits and may be used to evade complished primarily to assist the de- reserve requirements. This interpreta- pository institution in avoiding the re- tion replaces the prior interpretation quirements of the Board’s Regulation and states the application of the new D. Because the effect of the early with- early withdrawal penalties to pur- drawal penalty rule could be easily cir- chases by depository institutions and cumvented by purchases of time depos- their affiliates of the depository insti- its by affiliates, such purchases are tution’s time deposits. The interpreta- also regarded as an early withdrawals tion applies only to situations in which of the time deposit, and the purchase the Board’s regulatory penalties apply. should be treated as if the depository (c) Secondary market purchases under institution made the purchase directly. the rule. The Board has determined Thus, the regulatory requirements for that a depository institution pur- early withdrawal penalties apply to af- chasing a time deposit it has issued filiates of a depository institution as should be regarded as having paid the well as to the institution itself. time deposit prior to maturity. The ef- (e) Depository institution acting as fect of the transaction is that the de- broker. The Board believes that it is pository institution has cancelled a li- permissible for a depository institution ability as opposed to having acquired to facilitate the secondary market for an asset for its portfolio. Thus, the de- its own time deposits by finding a pur- pository institution is required to impose any early withdrawal penalty re- chaser for a time deposit that a cus- quired by Regulation D on the party tomer is trying to sell. In such in- from whom it purchases the instru- stances, the depository institution will ment by deducting the amount of the not be paying out any of its own funds, penalty from the purchase price. The and the depositor does not have a guar- Board recognizes, however, that sec- antee that the depository institution ondary market sales of time deposits will actually be able to find a buyer. are often done without regard to the (f) Third-party market-makers. A de- identity of the original owner of the pository institution may also establish deposit. Such sales typically involve a and advertise arrangements whereby pool of time deposits with the price an unaffiliated third party agrees in based on the aggregate face value and advance to purchase time deposits average rate of return on the deposits. issued by the institution. The Board A depository institution purchasing would not regard these transactions as time deposits from persons other than inconsistent with the purposes that the the person to whom the deposit was early withdrawal penalty is intended to originally issued should be aware of the serve unless a depository institution parties named on each of the deposits pays a fee to the third party purchaser it is purchasing but through failure to as compensation for making the pur- inspect the deposits prior to the purchases or to remove the risk from purchase may not be aware at the time it chasing the deposits. In this regard, purchases a pool of time deposits that it originally issued one or more of the any interim financing provided to such

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a third party by a depository institu- period) in the event the original partic- tion in connection with the institu- ipant does not wish to renew the cred- tion’s secondary market activity in- it. Since, under these arrangements, volving the institution’s time deposits the depository institution is obligated must be made substantially on the to make another loan at the end of 90 same terms, including interest rates days (absent any event of default on and collateral, as those prevailing at the part of the borrower), the deposi- the same time for comparable trans- tory institution selling the loan or par- actions with other similarly situated ticipation in effect must buy back the persons and may not involve more than loan or participation at the maturity the normal risk of repayment. (g) Reciprocal arrangements. Finally, of the 90-day loan sold to or funded by while a depository institution may the purchaser at the option of the pur- enter into an arrangement with an un- chaser. Accordingly, these transactions affiliated third party wherein the third bear the essential characteristics of a party agrees to stand ready to pur- repurchase agreement and, therefore, chase time deposits held by the deposi- are reportable and reservable under tory institution’s customers, the Board Regulation D. will regard a reciprocal arrangement (c) Because many of these trans- with another depository institution for actions give rise to deposit liabilities purchase of each other’s time deposits in the form of promissory notes, ac- as a circumvention of the early with- knowledgments of advance or similar drawal penalty rule and the purposes it obligations (written or oral) as de- is designed to serve. scribed in § 204.2(a)(1)(vii) of Regulation [52 FR 47697, Dec. 16, 1987] D, the exemptions from the definition of deposit incorporated in that section § 204.132 Treatment of loan strip par- may apply to the liability incurred by ticipations. a depository institution when it offers (a) Effective March 31, 1988, the glos- or originates a loan strip facility. sary section of the instructions for the Thus, for example, loan strips sold to Report of Condition and Income domestic offices of other depository in- (FFIEC 031–034; OMB control number stitutions are exempt from Regulation 7100–0036; available from a depository D under § 204.2(a)(1)(vii)(A)(1) because institution’s primary federal regulator) they are obligations issued or under- (Call Report) was amended to clarify taken and held for the account of a that certain short-term loan participa- U.S. office of another depository insti- tion arrangements (sometimes known or styled as loan strips or strip participa- tution. Similarly, some of these trans- tions) are regarded as borrowings rath- actions result in Eurocurrency liabil- er than sales for Call Report purposes ities and are reportable and reservable in certain circumstances. Through this as such. interpretation, the Board is clarifying [53 FR 24931, July 1, 1988] that such transactions should be treated as deposits for purposes of Regula- § 204.133 Multiple savings deposits tion D. treated as a transaction account. (b) These transactions involve the (a) Authority. Under section 19(a) of sale (or placement) of a short-term the Federal Reserve Act, the Board is loan by a depository institution that has been made under a long-term com- authorized to define the terms used in mitment of the depository institution section 19, and to prescribe regulations to advance funds. For example, a 90- to implement and prevent evasions of day loan made under a five-year re- the requirements of that section. Sec- volving line of credit may be sold to or tion 19(b) establishes general reserve placed with a third party by the deposi- requirements on transaction accounts tory institution originating the loan. and nonpersonal time deposits. Under The depository institution originating section 19(b)(1)(F), the Board also is au- the loan is obligated to renew the 90- thorized to determine, by regulation or day note itself (by advancing funds to order, that an account or deposit is a its customer at the end of the 90-day transaction account if such account is

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used directly or indirectly for the pur- purpose, other than increasing the pose of making payments to third per- number of transfers or withdrawals, for sons or others. This interpretation is opening more than one savings deposit. adopted under these authorities. (d) Examples. The distinction between (b) Background. Under Regulation D, appropriate and inappropriate uses of 12 CFR 204.2(d)(2), the term ‘‘savings multiple accounts is illustrated by the deposit’’ includes a deposit or an ac- following examples: count that meets the requirements of § 204.2(d)(1) and from which, under the Example 1. (i) X wishes to open an account terms of the deposit contract or by that maximizes his interest earnings but also permits X to draw up to ten checks a practice of the depository institution, month against the account. X’s Bank sug- the depositor is permitted or author- gests an arrangement under which X estab- ized to make up to six transfers or lishes four savings deposits at Bank. Under withdrawals per month or statement the arrangement, X deposits funds in the cycle of at least four weeks. The depos- first account and then draws three checks itory institution may authorize up to against that account. X then instructs Bank three of these six transfers to be made to transfer all funds in excess of the amount by check, draft, debit card, or similar of the three checks to the second account order drawn by the depositor and pay- and draws an additional three checks. Funds are continually shifted between accounts able to third parties. If more than six when additional checks are drawn so that no transfers (or more than three third more than three checks are drawn against party transfers by check, etc.) are per- each account each month. mitted or authorized per month or (ii) Suggesting the use of four savings ac- statement cycle, the depository insti- counts in the name of X in this example is tution may not classify the account as designed solely to permit the customer to ex- a savings deposit. If the depositor, dur- ceed the transfer limitations on savings ac- ing the period, makes more than six counts. Accordingly, the savings accounts transfers or withdrawals (or more than should be classified as transaction accounts. Example 2. (i) X is trustee of separate trusts three third party transfers by check, for each of his four children. X’s Bank sug- etc.), the depository institution may, gests that X, as trustee, open a savings de- depending upon the facts and cir- posit in a depository institution for each of cumstances, be required by Regulation his four children in order to ensure an inde- D (Footnote 5 at § 204.2(d)(2)) to reclas- pendent accounting of the funds held by each sify or close the account. trust. (c) Use of multiple savings deposits. De- (ii) X’s Bank’s suggestion to use four sav- pository institutions have asked for ings deposits in the name of X in this exam- guidance as to when a depositor may ple is appropriate, and the third party transfers from one account should not be consid- maintain more than one savings de- ered in determining whether the transfer and posit and be permitted to make all the withdrawal limit was exceeded on any other transfers or withdrawals authorized for account. X established a legitimate purpose, savings deposits under Regulation D the segregation of the trust assets, for each from each savings deposit. The Board account separate from the need to make has determined that, if a depository in- third party transfers. Furthermore, there is stitution suggests or otherwise pro- no indication, such as by the direct or indi- motes the establishment of or oper- rect transfer of funds from one account to another, that the accounts are being used for ation of multiple savings accounts with any purpose other than to make transfers to transfer capabilities in order to permit the appropriate trust. transfers and withdrawals in excess of Example 3. (i) X opens four savings ac- those permitted by Regulation D for an counts with Bank. X regularly draws up to individual savings account, the ac- three checks against each account and trans- counts generally should be considered fers funds between the accounts in order to to be transaction accounts. This deter- ensure that the checks on the separate ac- mination applies regardless of whether counts are covered. X’s Bank did not suggest the deposits have entirely separate ac- or otherwise promote the arrangement. count numbers or are subsidiary ac- (ii) X’s Bank may treat the multiple accounts as savings deposits for Regulation D counts of a master deposit account. purposes, even if it discovers that X is using Multiple savings accounts, however, the accounts to increase the transfer limits should not be considered to be trans- applicable to savings accounts because X’s action accounts if there is a legitimate Bank did not suggest or otherwise promote

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the establishment of or operation of the ar- by the depositor or indirectly through rangement. a trust or other arrangement. The indi- [57 FR 38427, Aug. 25, 1992] vidual depositor’s interest in time deposits may be identifiable, with an § 204.134 Linked time deposits and agreement by the depositors that bal- transaction accounts. ances held in the arrangement may be (a) Authority. Under section 19(a) of used to pay checks drawn by other de- the Federal Reserve Act (12 U.S.C. positors participating in the arrange- 461(a)), the Board is authorized to de- ment, or the depositor may have an un- fine the terms used in section 19, and divided interest in a series of time de- to prescribe regulations to implement posits. and prevent evasions of the require- (2) Each day funds from the maturing ments of that section. Section 19(b)(2) time deposits are available to pay establishes general reserve require- checks or other charges to the deposi- ments on transaction accounts and tor’s transaction account. The deposi- nonpersonal time deposits. Under sec- tory institution’s decision concerning tion 19(b)(1)(F), the Board also is authorized to determine, by regulation or whether to pay checks drawn on an in- order, that an account or deposit is a dividual depositor’s transaction ac- transaction account if such account is count is based on the aggregate used directly or indirectly for the pur- amount of funds that the depositor has pose of making payments to third per- invested in the arrangement, including sons or others. This interpretation is any amount that may be invested in adopted under these authorities. unmatured time deposits. Only if (b) Linked time deposits and trans- checks drawn by all participants in the action accounts. Some depository insti- arrangement exceed the total balance tutions are offering or proposing to of funds available that day (i.e. funds offer account arrangements under from the time deposit that has ma- which a group of participating deposi- tured that day as well as any deposits tors maintain transaction accounts made to participating accounts during and time deposits with a depository in- the day) is a time deposit withdrawn stitution in an arrangement under prior to maturity so as to incur an which each depositor may draw checks early withdrawal penalty. The arrange- up to the aggregate amount held by ment may be marketed as providing that depositor in these accounts. Under the customer unlimited access to its this account arrangement, at the end funds with a high rate of interest. of the day funds over a specified bal- (c) Determination. In these arrange- ance in each depositor’s transaction ac- ments, the aggregate deposit balances count are swept from the transaction of all participants generally vary by a account into a commingled time de- comparatively small amount, allowing posit. A separate time deposit is the time deposits maturing on any day opened on each business day with the safely to cover any charges to the de- balance of deposits received that day, positors’ transaction accounts and as well as the proceeds of any time de- avoiding any early withdrawal pen- posit that has matured that day that alties. Thus, this arrangement sub- are not used to pay checks or withdrawals from the transaction accounts. stitutes time deposit balances for The time deposits, which generally transaction accounts balances with no have maturities of seven days, are practical restrictions on the deposi- staggered so that one or more time de- tors’ access to their funds, and serves posits mature each business day. Funds no business purpose other than to are apportioned among the various allow the payment of higher interest time deposits in a manner calculated through the avoidance of reserve re- to minimize the possibility that the quirements. As the time deposits may funds available on any given day would be used to provide funds indirectly for be insufficient to pay all items pre- the purposes of making payments or sented. transfers to third persons, the Board (1) The time deposits involved in such has determined that the time deposits an arrangement may be held directly should be considered to be transaction

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accounts for the purposes of Regula- amount are in the ‘‘low reserve tion D. tranche.’’ Currently the low reserve tranche runs up to $42.2 million. Under [57 FR 38428, Aug. 25, 1992] section 19(b)(11) of the Federal Reserve § 204.135 Shifting funds between de- Act (12 U.S.C. 461(b)(11)) the Board is pository institutions to make use of also required to impose reserves of zero the low reserve tranche. percent on reservable liabilities at or (a) Authority. Under section 19(a) of below an amount determined under a the Federal Reserve Act (12 U.S.C. formula. Currently that amount is $3.6 461(a)) the Board is authorized to define million. terms used in section 19, and to pre- (c) Shifting funds between depository scribe regulations to implement and to institutions. The Board is aware that prevent evasions of the requirements of certain depository institutions with that section. Section 19(b)(2) estab- transaction account balances in an lishes general reserve requirements on amount greater than the low reserve transaction accounts and nonpersonal tranche have entered into transactions time deposits. In addition to its au- with affiliated depository institutions thority to define terms under section that have transaction account balances 19(a), section 19(g) of the Federal Re- below the maximum low reserve serve Act also give the Board the spe- tranche amount. These transactions cific authority to define terms relating are intended to lower the transaction to deductions allowed in reserve com- reserves of the larger depository insti- putation, including ‘‘balances due from tution and leave the economic position other banks.’’ This interpretation is of the smaller depository institutions adopted under these authorities. unaffected, and have no apparent pur- (b) Background. (1) Currently, the pose other than to reduce required re- Board requires reserves of zero, three, serves of the larger institution. The or ten percent on transaction accounts, larger depository institution places depending upon the amount of trans- funds in a demand deposit at a small action deposits in the depository insti- domestic depository institution. The tution, and of zero percent on nonper- larger depository institution considers sonal time deposits. In determining its those funds to be subject to the ‘‘due reserve balance under Regulation D, a from’’ deduction, and accordingly re- depository institution may deduct the duces its transaction reserves in the balances it maintains in another depos- amount of the demand deposit. The itory institution located in the United larger depository institution then re- States if those balances are subject to duces its transaction account reserves immediate withdrawal by the depos- by 10 percent of the deposited amount. iting depository institution (§ 204.3(f)). The small depository institution, be- This deduction is commonly known as cause it is within the low reserve the ‘‘due from’’ deduction. In addition, tranche, must maintain transaction ac- Regulation D at § 204.2(a)(1)(vii)(A) ex- count reserves of 3 percent on the funds empts from the definition of ‘‘deposit’’ deposited by the larger depository in- any liability of a depository institution stitution. The small depository institu- on a promissory note or similar obligation then transfers all but 3 percent of tion that is issued or undertaken and the funds deposited by the larger de- held for the account of an office lo- pository institution back to the larger cated in the United States of another depository institution in a transaction depository institution. Transactions that qualifies as a ‘‘fed funds’’ trans- falling within this exemption from the action. The 3 percent not transferred to definition of ‘‘deposit’’ include federal the larger depository institution is the funds or ‘‘fed funds’’ transactions. amount of the larger depository insti- (2) Under section 19(b)(2) of the Fed- tution’s deposit that the small deposi- eral Reserve Act (12 U.S.C. 461(b)(2)), tory institution must maintain as the Board is required to impose re- transaction account reserves. Because serves of three percent on total trans- the larger depository institution books action deposits at or below an amount this second part of the transaction as a determined under a formula. Trans- ‘‘fed funds’’ transaction, the larger de- action deposits falling within this pository institution does not maintain

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reserves on the funds that it receives for the account of the trust department back from the small depository institu- of the institution. In some cases, de- tion. As a consequence, the larger depository institutions carry the aggre- pository institution has available for gate of the positive balances in the in- its use 97 percent of the amount trans- dividual trust accounts as the balance ferred to the small depository institu- on which reserves are computed for the tion. Had the larger depository institu- commingled account. In other cases de- tion not entered into the transaction, pository institutions net positive bal- it would have maintained transaction ances in some trust accounts against account reserves of 10 percent on that negative balances in other trust ac- amount, and would have had only 90 counts, thus reducing the balance in percent of that amount for use in its the commingled account and lowering business. the reserve requirements. Except in (d) Determination. The Board believes limited circumstances, negative bal- that the practice described above gen- ances in individual trust accounts erally is a device to evade the reserves should not be netted against positive imposed by Regulation D. Con- balances in other trust accounts when sequently, the Board has determined determining the balance in a trust de- that, in the circumstances described partment’s commingled transaction ac- above, the larger depository institution count maintained in a depository insti- depositing funds in the smaller institu- tution’s commercial department. The tion may not take a ‘‘due from’’ deduc- netting of positive and negative bal- tion on account of the funds in the de- ances has the effect of reducing the ag- mand deposit account if, and to the ex- gregate of a commingled transaction tent that, funds flow back to the larger account reported by the depository in- depository institution from the small stitution to the Federal Reserve and depository institution by means of a reduces the reserves the institution transaction that is exempt from trans- must hold against transaction ac- action account reserve requirements. counts under Regulation D. Unless the [57 FR 38429, Aug. 25, 1992] governing trust agreement or state law authorizes the depository institution, § 204.136 Treatment of trust overdrafts as trustee, to lend money in one trust for reserve requirement reporting to another trust, the negative balances purposes. in effect, for purposes of Regulation D, (a) Authority. Under section 19(a) of represent a loan from the depository the Federal Reserve Act (12 U.S.C. institution. Consequently, negative 461(a)), the Board is authorized to de- balances in individual trust accounts fine the terms used in section 19, and should not be netted against positive to prescribe regulations to implement balances in other individual trust ac- and prevent evasions of the require- counts, and the balance in any trans- ments of that section. Section 19(b) es- action account containing commingled tablishes general reserve requirements trust balances should reflect positive on transaction accounts and nonper- or zero balances for each individual sonal time deposits. Under section trust. 19(b)(1)(F), the Board also is authorized (2) For example, where a trust de- to determine, by regulation or order, partment engages in securities lending that an account or deposit is a trans- activities for trust accounts, overdrafts action account if such account is used might occur because of the trust de- directly or indirectly for the purpose of partment’s attempt to ‘‘normalize’’ the making payments to third persons or effects of timing delays between the others. This interpretation is adopted depository institution’s receipt of the under these authorities. cash collateral from the broker and the (b) Netting of trust account balances. trust department’s posting of the (1) Not all depository institutions have transaction to the lending trust ac- treated overdrafts in trust accounts ad- count. When securities are lent from a ministered by a trust department in trust customer to a broker that pledges the same manner when calculating the cash as collateral, the broker usually balance in a commingled transaction transfers the cash collateral to the de- account in the depository institution pository institution on the day that

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the securities are made available. 205.7 Initial disclosures. While the institution has the use of the 205.8 Change in terms notice; error resolu- funds from the time of the transfer, the tion notice. trust department’s normal posting pro- 205.9 Receipts at electronic terminals; peri- cedures may not reflect receipt of the odic statements. 205.10 Preauthorized transfers. cash collateral by the individual ac- 205.11 Procedures for resolving errors. count until the next day. On the day 205.12 Relation to other laws. that the loan is terminated, the broker 205.13 Administrative enforcement; record returns the securities to the lending retention. trust account and the trust customer’s 205.14 Electronic fund transfer service pro- account is debited for the amount of vider not holding consumer’s account. the cash collateral that is returned by 205.15 Electronic fund transfer of govern- the depository institution to the ment benefits. broker. The trust department, how- 205.16 Disclosures at automated teller ma- ever, often does not liquidate the in- chines. vestment made with the cash collateral 205.17 Requirements for overdraft services. until the day after the loan terminates, 205.18 Requirements for financial institutions offering payroll card accounts. a delay that normally causes a one day 205.20 Requirements for gift cards and gift overdraft in the trust account. Regula- certificates. tion D requires that, on the day the APPENDIX A TO PART 205—MODEL DISCLOSURE loan is terminated, the depository in- CLAUSES AND FORMS stitution regard the negative balance APPENDIX B TO PART 205—FEDERAL ENFORCE- in the customer’s account as zero for MENT AGENCIES reserve requirement reporting purposes APPENDIX C TO PART 205—ISSUANCE OF STAFF and not net the overdraft against posi- INTERPRETATIONS tive balances in other accounts. SUPPLEMENT I TO PART 205—OFFICIAL STAFF (c) Procedures. In order to meet the INTERPRETATIONS requirements of Regulation D, a depos- AUTHORITY: 15 U.S.C. 1693b. itory institution must have procedures to determine the aggregate of trust de- SOURCE: Reg. E, 61 FR 19669, May 2, 1996, partment transaction account balances unless otherwise noted. for Regulation D on a daily basis. The § 205.1 Authority and purpose. procedures must consider only the positive balances in individual trust (a) Authority. The regulation in this accounts without netting negative bal- part, known as Regulation E, is issued ances except in those limited cir- by the Board of Governors of the Fed- cumstances where loans are legally eral Reserve System pursuant to the permitted from one trust to another, or Electronic Fund Transfer Act (15 where offsetting is permitted pursuant U.S.C. 1693 et seq.). The information- to trust law or written agreement, or collection requirements have been ap- where the amount that caused the proved by the Office of Management overdraft is still available in a settle- and Budget under 44 U.S.C. 3501 et seq. ment, suspense or other trust account and have been assigned OMB No. 7100– within the trust department and may 0200. be used to offset the overdraft. (b) Purpose. This part carries out the purposes of the Electronic Fund Trans- [57 FR 38429, Aug. 25, 1992] fer Act, which establishes the basic rights, liabilities, and responsibilities PART 205—ELECTRONIC FUND of consumers who use electronic fund TRANSFERS (REGULATION E) transfer services and of financial institutions that offer these services. The Sec. primary objective of the act and this 205.1 Authority and purpose. part is the protection of individual con- 205.2 Definitions. sumers engaging in electronic fund 205.3 Coverage. transfers. 205.4 General disclosure requirements; jointly offered services. § 205.2 Definitions. 205.5 Issuance of access devices. 205.6 Liability of consumer for unauthorized For purposes of this part, the fol- transfers. lowing definitions apply:

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