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Notice2021-11649

Potential Modifications to the Federal Reserve Policy on Payment System Risk To Expand Access to Collateralized Intraday Credit, Clarify Access to Uncollateralized Credit, and Support the Deployment of the FedNow Service

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Published

June 3, 2021

Issuing agencies

Federal Reserve System

Abstract

The Board of Governors of the Federal Reserve System (Board) is requesting comment on proposed changes to part II of the Federal Reserve Policy on Payment System Risk (PSR policy) that would expand access to collateralized intraday credit from the Federal Reserve Banks (Reserve Banks) and clarify the eligibility standards for accessing uncollateralized intraday credit from Reserve Banks. These proposed changes build upon the revisions to the PSR policy adopted in 2008 and implemented in 2011, which the Board designed to improve intraday liquidity management and payment flows for the banking system while helping to mitigate the credit exposures of the Reserve Banks from daylight overdrafts. In addition, the Board is requesting comment on changes to part II of the PSR policy to support the deployment of the FedNowSM Service (FedNow Service). Relatedly, the Board is proposing to incorporate the Federal Reserve Policy on Overnight Overdrafts (Overnight Overdrafts policy) into the PSR policy.

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<title>Federal Register, Volume 86 Issue 105 (Thursday, June 3, 2021)</title>
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[Federal Register Volume 86, Number 105 (Thursday, June 3, 2021)]
[Notices]
[Pages 29776-29787]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-11649]

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FEDERAL RESERVE SYSTEM

[Docket No. OP-1749]

Potential Modifications to the Federal Reserve Policy on Payment
System Risk To Expand Access to Collateralized Intraday Credit, Clarify
Access to Uncollateralized Credit, and Support the Deployment of the
FedNow Service

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; request for comment.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is requesting comment on proposed changes to part II of the Federal
Reserve Policy on Payment System Risk (PSR policy) that would expand
access to collateralized intraday credit from the Federal Reserve Banks
(Reserve Banks) and clarify the eligibility standards for accessing
uncollateralized intraday credit from Reserve Banks. These proposed
changes build upon the revisions to the PSR policy adopted in 2008 and
implemented in 2011, which the Board designed to improve intraday
liquidity management and payment flows for the banking system while
helping to mitigate the credit exposures of the Reserve Banks from
daylight overdrafts. In addition, the Board is requesting comment on
changes to part II of the PSR policy to support the deployment of the
FedNowSM Service (FedNow Service). Relatedly, the Board is
proposing to incorporate the Federal Reserve Policy on Overnight
Overdrafts (Overnight Overdrafts policy) into the PSR policy.

DATES: Comments on the proposed changes must be received on or before
August 2, 2021.

ADDRESSES: You may submit comments, identified by Docket No. OP-1749,
by any of the following methods:
<bullet> Agency Website: <a href="http://www.federalreserve.gov">http://www.federalreserve.gov</a>. Follow the
instructions for submitting comments at <a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a>.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#8af8efedf9a4e9e5e7e7efe4fef9caecefeeeff8ebe6f8eff9eff8fcefa4ede5fc">[email&#160;protected]</a>. Include docket
number in the subject line of the message.
<bullet> Fax: (202) 452-3819 or (202) 452-3102.
<bullet> Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
All public comments are available from the Board's website at
<a href="http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm">www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm</a> as submitted,
unless modified for technical reasons or to remove personally
identifiable information at the commenter's request. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room 146, 1709 New York Avenue NW, Washington, DC 20006,
between 9:00 a.m. and 5:00 p.m. on weekdays. Please make an appointment
to inspect comments by calling (202) 452-3684.

FOR FURTHER INFORMATION CONTACT: Jason Hinkle, Assistant Director (202-
912-7805), Michelle Olivier, Lead Financial Institution Policy Analyst
(202-452-2404), Brajan Kola, Senior Financial Institution Policy
Analyst (202-736-5683) Division of Reserve Bank Operations and Payment
Systems, or Evan Winerman, Senior Counsel (202-872-7578), Legal
Division, Board of Governors of the Federal Reserve System. For users
of Telecommunications Device for the Deaf (TDD) only, please contact
202-263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

A. Intraday Credit in the PSR Policy

The PSR policy is intended to foster the safety and efficiency of
payment and settlement systems.\1\ Part II of the PSR policy governs
the provision of intraday credit (also known as daylight overdrafts) to
depository institutions \2\ (institutions) with accounts at the Reserve
Banks. In particular, part II of the PSR policy outlines the methods
used to provide intraday credit to ensure the smooth functioning of
payment and settlement systems, while controlling credit risk to the
Reserve Banks associated with intraday credit. To be eligible for
intraday credit, the PSR policy requires that an institution be
``financially healthy'' and have regular access to the discount
window.\3\ The PSR policy also establishes limits, or ``net debit
caps,'' on the value of an institution's daylight overdrafts.\4\ The
Reserve Banks use an ex post system to measure daylight overdrafts in
institutions' Federal Reserve accounts. An institution's eligibility
for intraday credit depends on various factors including the
institution's most recent financial and supervisory information. An
institution's supervisory rating, as well as the ratings of its holding
company and affiliate institutions, are key components of the process
for determining an institution's eligibility for intraday credit.\5\
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\1\ See <a href="https://www.federalreserve.gov/paymentsystems/psr_about.htm">https://www.federalreserve.gov/paymentsystems/psr_about.htm</a>.
\2\ Depository institutions include commercial banks, savings
banks, savings and loan associations, and credit unions.
\3\ See section II.D.1 of the PSR policy.
\4\ Id. The size of an institution's net debit cap equals the
institution's ``capital measure'' multiplied by its ``cap
multiple.'' An institution's capital measure is a number derived
from the size of its capital base. An institution's cap multiple is
determined by the institution's cap category. Under section II.D.2
of the PSR policy, an institution's ``cap category'' is one of six
classifications: The three self-assessed categories (``high,''
``above average,'' and ``average''); ``de minimis;'' ``exempt-from-
filing;'' and ``zero.''
\5\ To assist institutions in implementing part II of the PSR
policy, the Federal Reserve has prepared two documents: The Overview
of the Federal Reserve's Payment System Risk Policy on Intraday
Credit (Overview) and the Guide to the Federal Reserve's Payment
System Risk Policy on Intraday Credit (Guide). The Guide contains
detailed eligibility standards for requesting and maintaining
uncollateralized capacity.
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In 2008, the Board approved changes to part II of the PSR policy to
encourage greater collateralization of daylight overdrafts, recognizing
that collateral reduces credit risk to Reserve Banks.\6\ In particular,
the 2008 changes amended the PSR policy to state that ``the Reserve
Banks supply intraday balances and credit predominantly through
explicitly collateralized daylight overdrafts to healthy
institutions.'' \7\ In addition, the Board included explicit language
that emphasized the role of the Reserve Banks in providing intraday
credit to institutions in order to ensure the

[[Page 29777]]

efficient and effective functioning of the payment system. The Board
also adopted a dual-pricing framework intended to provide a financial
incentive to institutions to collateralize their daylight overdrafts.
Under the dual-pricing framework, Reserve Banks charge no fee for
collateralized daylight overdrafts, but charge a fee of 50 basis points
for uncollateralized daylight overdrafts.\8\
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\6\ See 73 FR 79109 (December 24, 2008). These changes were not
fully implemented until 2011.
\7\ See section II.B of the PSR policy.
\8\ See section II.C of the PSR policy. Collateral eligibility
and margins are the same for PSR policy purposes as for the discount
window. See <a href="http://www.frbdiscountwindow.org/">http://www.frbdiscountwindow.org/</a> for information on the
discount window and PSR collateral acceptance policy and collateral
margins.
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In addition to incentivizing institutions to collateralize their
daylight overdrafts, the PSR policy allows institutions that might
otherwise be constrained by their uncollateralized net debit caps to
request collateralized capacity under the ``maximum daylight overdraft
capacity'' (max cap) program.\9\ Under the program, an institution's
max cap equals its uncollateralized net debit cap plus its additional
collateralized capacity.\10\
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\9\ Section II.E of the PSR policy notes that max caps are
``intended to provide extra liquidity through the pledge of
collateral by the few institutions that might otherwise be
constrained from participating in risk-reducing payment system
initiatives.''
\10\ See section II.E of the PSR policy. When the Board
initially adopted the max cap program in 2001, it recognized that
collateral helps reduce risk to Reserve Banks and the public sector.
See 66 FR 64419, 64423 (December 13, 2001) (``The Board believes
that requiring collateral allows the Federal Reserve to protect the
public sector from additional credit risk while providing extra
liquidity to the few institutions that might otherwise be
constrained.'').
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Although the PSR policy's dual-pricing framework encourages
institutions to collateralize their daylight overdrafts, collateralized
capacity under the max cap program is not currently an option for
institutions with lower levels of intraday capacity. Institutions that
select the ``exempt'' or ``de minimis'' net debit cap categories (which
do not require a self-assessment) are ineligible to request
collateralized capacity under the max cap program. Likewise,
institutions with a voluntary zero net debit cap, and institutions that
the Reserve Banks have assigned a zero net debit cap because of their
account management or financial condition, cannot request
collateralized capacity under the max cap program.
Further, obtaining collateralized capacity under the max cap
program requires certain administrative steps from and analysis by
requesting institutions. First, institutions must provide a business
case outlining their need for collateralized capacity, and must submit
a board of directors resolution approving the collateralized capacity
at least annually and whenever the institution modifies the amount of
requested collateralized capacity.\11\ Second, the max cap program is
limited to institutions that have already adopted a self-assessed net
debit cap, which requires an institution to perform a self-assessment
of its creditworthiness, intraday funds management and control,
customer credit policies and controls, and operating controls and
contingency procedures.\12\
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\11\ Section II.E.2 of the PSR policy allows U.S. branches or
agencies of foreign banking organizations (FBOs) to use a
streamlined procedure for requesting a max cap. An FBO that uses the
streamlined procedure is not required to provide a business case for
a max cap, nor is it required to obtain a board of directors
resolution authorizing a max cap, so long as (a) the FBO has an FBO
PSR capital category of ``highly capitalized,'' and (b) the
requested total capacity is 100 percent or less of the FBO's
worldwide capital times the self-assessed cap multiple. See section
II.D.2 and n. 63 of the PSR policy for a discussion of FBO PSR
capital categories.
\12\ See section II.D.a of the PSR policy and n. 4, supra, which
discuss cap categories. The high, above average, and average cap
categories require a self-assessment.
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In proposing the changes discussed below, the Board recognizes that
the extension of intraday credit to institutions on a collateralized
basis generally poses less risk to the Reserve Banks and the payment
system than the extension of intraday credit on an uncollateralized
basis. As such, the removal of some restrictions on access to
collateralized intraday credit could improve the effectiveness of
Reserve Bank intraday credit as a liquidity tool without a significant
increase in credit risk to the Reserve Banks and the payment system.

B. FedNow Service and the PSR Policy

In 2020, the Board approved the FedNow Service, a new 24x7x365
real-time gross settlement service with clearing functionality to
support end-to-end instant retail payments in the United States.\13\
The FedNow Service will settle funds transfers between FedNow Service
participants \14\ through debit and credit entries to balances in
master accounts held at the Reserve Banks. The new service will provide
an infrastructure to promote ubiquitous, safe, and efficient instant
retail payments in the United States. The FedNow Service will enable
credit transfers that support a range of different types of payments
for individuals and businesses, and will support the transfer of
supplemental information, such as invoices, related to a payment.
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\13\ See ``Service Details on Federal Reserve Actions to Support
Interbank Settlement of Instant Payments,'' 85 FR 48522 (August 11,
2020), available at <a href="https://www.federalregister.gov/documents/2020/08/11/2020-17539/service-details-on-federal-reserve-actions-to-support-interbank-settlement-of-instant-payments">https://www.federalregister.gov/documents/2020/08/11/2020-17539/service-details-on-federal-reserve-actions-to-support-interbank-settlement-of-instant-payments</a>. The FedNow Service
will be available to customers in 2023 and further details on the
timeframe for launch will be announced through established Reserve
Bank channels once additional work is completed. See also ``Federal
Reserve updates FedNowSM Service launch to 2023,''
(February 2, 2021), available at <a href="https://frbservices.org/news/press-releases/020221-federal-reserve-updates-fednow-service-launch-to-2023.html">https://frbservices.org/news/press-releases/020221-federal-reserve-updates-fednow-service-launch-to-2023.html</a>.
\14\ The term ``FedNow Service participants'' encompasses those
participating institutions that use the FedNow Service to send
instant payments involving end users as well as institutions that
may only use the FedNow LMT (described below) to make funds
transfers for liquidity management purposes to other FedNow Service
participants. The term ``end users'' encompasses individuals and
businesses.
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The PSR policy currently aligns the calculation of daylight
overdrafts and the ``business day'' with the scheduled operating day
for the Fedwire Funds Service.\15\ The FedNow Service will have a 24-
hour business day, each day of the week, including weekends and
holidays. The close of the FedNow Service will align on all calendar
days with the close of the Fedwire Funds Service.\16\ If the close of
the Fedwire Funds Service is extended on any given day, the close of
the FedNow Service will also be extended to maintain alignment. Given
the continuous, 24-hour nature of the FedNow Service, the opening time
will occur immediately after the close of the FedNow Service. In
addition, the Reserve Banks will implement a seven-day accounting
regime as part of implementing the FedNow Service. Under this
framework, an end-of-day balance will be calculated for each day of the
week, with transactions occurring on weekends and holidays recorded and
reported in the same way as transactions occurring Monday through
Friday.\17\ End-of-day balances will be reported on Federal Reserve
accounting records for each FedNow Service participant on each business
day.
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\15\ The Fedwire Funds Service closes at 7:00:59 p.m. ET and re-
opens for the next business day at 9:00 p.m. See 84 FR 71940
(December 30, 2019) and 85 FR 61747 (September 30, 2020). The
schedule for funds transfers through Fedwire Funds is provided in
the Reserve Banks' Operating Circular 6.
\16\ 85 FR 48522, 48531. Both the Fedwire Funds and the FedNow
Services will close at 7:00:59 p.m. ET. On weekends and holidays,
when the Fedwire Funds Service is closed, the FedNow Service close
will still align with this closing time.
\17\ The Board expects that participating institutions will
record FedNow Service transactions in their customer accounts
according to their own business day and accounting conventions
(while still providing immediate access to funds received through
the FedNow Service).
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Access to intraday credit will be available on a 24x7x365 basis to
FedNow Service participants, including those that use the FedNow
Service to send instant payments involving end

[[Page 29778]]

users or that use a liquidity management tool within the service
(FedNow LMT) to make funds transfers to other FedNow Service
participants.\18\ Access to 24x7x365 intraday credit will support the
smooth functioning of the FedNow Service (including FedNow LMT).
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\18\ 85 FR 48522, 48531-32. The FedNow LMT will enable
participants in the FedNow Service to transfer funds between one
another to support liquidity needs related to payment activity in
the FedNow Service. The tool will also be available to support
participants in private-sector instant payment services backed by
joint accounts at a Reserve Bank by enabling transfers between the
master accounts of such participants and their joint account. The
FedNow LMT will be available during specific hours, for example,
when such transfers are not currently possible through other Reserve
Bank services. Controls related to the FedNow LMT, service terms,
eligibility requirements, enrollment processes, and hours of
availability will be announced prior to the launch of the FedNow
Service through established Reserve Bank communication channels.
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C. Overnight Overdrafts Policy

Intraday overdrafts occur when an institution has a negative
balance in its Federal Reserve account during the Fedwire Funds Service
operating day. Overnight overdrafts occur when an institution has a
negative account balance at the end of the Fedwire Funds Service
operating day. While the PSR policy addresses daylight overdrafts, the
Overnight Overdrafts policy addresses overnight overdrafts.
To minimize Reserve Bank exposure to overnight overdrafts, the
Overnight Overdrafts policy imposes a penalty fee to discourage
institutions from incurring overnight overdrafts.\19\ If an institution
has a negative balance at the end of the business day, Reserve Banks
apply an overnight overdraft penalty for a 24-hour period. Currently,
the penalty fee includes a multiday charge for overnight overdrafts
over weekends and holidays. The penalty fee increases by one percentage
point for each overnight overdraft after an institution's third
overnight overdraft in a rolling 12-month period.
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\19\ See Board of Governors of the Federal Reserve System,
``Policy on Overnight Overdrafts,'' (Effective July 12, 2012).
Available at <a href="https://www.federalreserve.gov/paymentsystems/oo_policy.htm">https://www.federalreserve.gov/paymentsystems/oo_policy.htm</a>. The overnight overdraft penalty rate is equal to the
primary credit rate plus 4 percentage points (annual rate). There is
also a minimum penalty fee of 100 dollars per occasion, regardless
of the amount of the overnight overdraft.
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II. Discussion of Proposed Changes

The Board is proposing to modify the PSR policy to expand access to
collateralized capacity and reduce the administrative steps associated
with requesting collateralized capacity. With these proposed changes,
the Board intends to improve intraday liquidity management and payment
flows while assisting the Reserve Banks in managing intraday credit
risk. The proposed changes also seek to clarify the terms for accessing
uncollateralized intraday credit and the circumstances under which an
institution may remain eligible for uncollateralized capacity if its
holding company or affiliate is assigned a low supervisory rating.
Additionally, the Board is proposing changes to the PSR policy and
the Overnight Overdrafts policy to align these policies with the
deployment of the FedNow Service and a 24x7x365 payment environment.
Relatedly, the Board is proposing to incorporate the Overnight
Overdrafts policy as part III of the PSR policy in order to reflect the
close relationship between daylight overdrafts and overnight overdrafts
in an institution's account.
The Board is also proposing several technical changes and
corrections to the PSR policy. These changes are not substantive in
nature and reflect current practices that the Reserve Banks use to
administer the PSR policy.
While the Board is collectively requesting comment on the proposed
changes discussed below, the proposed changes may become effective at
different times. The Board intends for the FedNow Service-related
changes to the PSR policy and the Overnight Overdrafts policy to come
into effect when the Reserve Banks begin processing transactions
associated with the FedNow Pilot Program.\20\
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\20\ See ``Federal Reserve announces FedNowSM Pilot
Program Participants,'' (January 24, 2021), available at <a href="https://www.frbservices.org/news/press-releases/012521-federal-reserve-announces-fednow-pilot-program-participants.html">https://www.frbservices.org/news/press-releases/012521-federal-reserve-announces-fednow-pilot-program-participants.html</a>.
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A. Access to Collateralized Capacity

As noted above, while the PSR policy incentivizes collateralization
of daylight overdrafts, an institution requesting collateralized
capacity above its net debit cap must provide a business case outlining
its need and must submit an annual board of directors resolution
approving its collateralized capacity. Additionally, collateralized
capacity under the max cap program is available only to institutions
that have first completed a self-assessment. The Board is proposing
amendments to the PSR policy that would expand access to collateralized
capacity and reduce the administrative steps associated with requesting
collateralized capacity.
1. Expanding Access To Collateralized Capacity
The Board proposes to amend section II.E of the PSR policy to
expand the pool of institutions eligible to request collateralized
capacity. Specifically, while the max cap program is currently limited
to institutions with self-assessed net debit caps,\21\ the Board is
proposing to expand the max cap program by allowing institutions with a
cap category of ``zero,'' ``exempt,'' or ``de minimis'' to request
collateralized capacity from their Reserve Banks. A domestic
institution would be eligible to request collateralized capacity if its
Prompt Corrective Action (PCA) designation \22\ is
``undercapitalized,'' ``adequately capitalized,'' or ``well
capitalized.'' Similarly, a U.S. branch or agency of a foreign banking
organization (FBO) would be eligible to request collateralized capacity
if its FBO PSR capital category \23\ is ``undercapitalized,''
``sufficiently capitalized,'' or ``highly capitalized.''
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\21\ Reserve Banks would require that an institution remain
financially healthy and be eligible for regular access to the
discount window to qualify for a max cap.
\22\ 12 U.S.C. 1831o.
\23\ See section II.D.2 of the PSR policy.
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So long as an institution remains at least ``undercapitalized,''
the institution would remain eligible to request collateralized
intraday credit under the max cap program--even if the institution, the
holding company, or an affiliate has a ``fair,'' ''marginal,'' or
``unsatisfactory'' supervisory rating.\24\ Given the important role
that collateral plays in reducing credit risk to Reserve Banks, the
Board believes that the eligibility criteria for requesting
collateralized capacity should be less restrictive than the criteria
for accessing uncollateralized capacity. As a result, some institutions
that are not eligible to establish a positive net debit cap would be
eligible for collateralized capacity.\25\ The Board believes that these
proposed changes would provide institutions greater flexibility in
managing intraday credit, would assist institutions with liquidity and
risk-management planning, and would not materially increase credit risk
to Reserve Banks.
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\24\ Domestic institutions with a PCA designation of
``significantly undercapitalized'' or ``critically
undercapitalized'' would not be eligible to request collateralized
intraday credit under the max cap program. Similarly, FBOs with an
FBO PSR capital category of ``intraday credit ineligible'' would not
be eligible to request collateralized intraday credit under the max
cap program.
\25\ Section II.B, infra, describes proposed changes to the
Board's standards for requesting and maintaining uncollateralized
capacity.
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2. Reducing Administrative Steps
The Board is proposing to simplify the process for requesting and
maintaining collateralized capacity under the max cap program. Under
the current general procedure for requesting a max cap, an institution
requesting collateralized capacity must provide a

[[Page 29779]]

business case outlining its need for collateralized capacity and must
submit an annual board of directors resolution approving its
collateralized capacity. The Board believes that simplifying this
process would encourage more institutions to obtain collateralized
capacity, which could promote further collateralization of daylight
overdrafts.
The Board is proposing to eliminate, in most circumstances, the
requirement that institutions provide a written business case to their
Reserve Banks when requesting collateralized capacity under the max cap
program. Specifically, the Board proposes that an institution would
need to provide a written business case only if (1) the institution's
requested max cap exceeds the institution's capital measure multiplied
by 2.25, which is the cap multiple associated with the ``High'' self-
assessed cap category,\26\ or (2) the Reserve Bank exercises discretion
to require that the institution submit a business case due to recent
developments in the institution's condition.
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\26\ See n. 4, supra, for a discussion of cap categories and cap
multiples.
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The Board is also proposing to eliminate the requirement that an
institution's board of directors submit an annual resolution approving
requests for collateralized capacity. Instead, the Board proposes that
an institution's board of directors would need to provide a resolution
only when the institution initially requests collateralized capacity.
Once a Reserve Bank has approved an institution's collateralized
capacity, the collateralized capacity would generally remain in place,
without the need for further action by the institution, so long as the
institution remains at least ``undercapitalized.'' An institution would
need to submit a resolution from its board of directors if the
institution requests an increase to its previously approved
collateralized capacity.
An institution's collateralized capacity, on any given day, will
continue to equal the value of collateral the institution has pledged
to the Reserve Bank, not to exceed the difference between the
institution's max cap and its net debit cap.\27\ An institution seeking
to increase its max cap by pledging additional collateral to its
Reserve Bank must request and receive approval from its Reserve Bank.
The Board is not proposing any other changes to the process for
obtaining collateralized capacity under the max cap program.
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\27\ See n. 74 of the PSR policy.
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B. Clarifying Access To Uncollateralized Capacity

The Board is proposing to amend section II.D of the PSR policy to
clarify the terms under which institutions would be eligible to
maintain access to their uncollateralized intraday credit capacity.
Currently, the PSR policy does not detail when an institution can
request and maintain uncollateralized capacity; it states only that
``[a]n institution must be financially healthy and have regular access
to the discount window in order to adopt a net debit cap greater than
zero.'' \28\ Separately, however, the Board's Guide to the PSR policy
establishes more detailed eligibility standards for requesting and
maintaining uncollateralized capacity. The Board is proposing to
simplify these eligibility standards and incorporate them directly into
the PSR policy.
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\28\ See section II.D.1 of the PSR policy. Institutions that may
pose special risks to the Federal Reserve, such as those that are
not eligible for regular access to the discount window, those
incurring daylight overdrafts in violation of the Federal Reserve's
PSR policy, or those in weak financial condition, are generally
assigned a zero cap.
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The Board proposes to clarify in the PSR policy that an
institution's eligibility to adopt and maintain a positive net debit
cap depends on an assessment of its creditworthiness, which results
from the institution's (1) PCA designation or FBO PSR capital
category,\29\ and (2) most recent supervisory ratings. Specifically,
the Board would incorporate into the PSR policy the following table to
clarify when institutions can request a positive net debit cap.
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\29\ See section II.D.2 of the PSR policy. Reserve Banks use
information primarily from the Capital and Asset Report for Foreign
Banking Organizations (FR Y-7Q) in order to determine an
institution's FBO PSR capital category. U.S. branches and agencies
of FBOs based in jurisdictions that have not implemented capital
standards substantially consistent with those established by the
Basel Committee on Banking Supervision would be eligible to request
any of the net debit cap categories, but the Reserve Banks would
require that such institutions perform a full assessment of
creditworthiness if the FBO requests a self-assessed or de minimis
net debit cap. Reserve Banks may require a full assessment of
creditworthiness if such FBOs are requesting an exempt-from-filing
cap.

As noted in the eligibility criteria, an institution requesting a
``high,'' ``above average,'' or ``average'' net debit cap, must perform
a self-assessment of its creditworthiness, intraday funds management
and control, customer credit policies and controls, and operating
controls and contingency procedures. The Board proposes to clarify in
the PSR policy that, if an institution seeks a self-assessed net debit
cap, it would be ineligible for a positive net debit cap if its self-
assessment results in the lowest possible rating for any one of the
four components of the self-assessment in the Guide.
The Board is also proposing revisions to the PSR policy that would
clarify the impact of an institution's holding company's or affiliate's
supervisory

[[Page 29780]]

rating on the institution's eligibility for a positive net debit cap.
Currently, an institution can lose its net debit cap if its holding
company or affiliate receives a low (marginal or unsatisfactory)
supervisory rating. The Board proposes that, if an institution's
holding company or affiliate is assigned a low supervisory rating,\30\
the institution would be eligible to request the exempt, de minimis, or
average cap categories but would not be eligible to request the above
average or the high self-assessed cap categories. Additionally, Reserve
Banks will assign an institution a zero net debit cap if supervisory
information of the holding company or affiliated institutions reveals
material operating or financial weaknesses that pose significant risks
to an institution.
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\30\ For this purpose, a low supervisory rating for a holding
company would include a Deficient-2 rating in any of the components
of the Large Financial Institution (LFI) rating system or an RFI
rating of 4 or 5. A low supervisory rating for an affiliate
institution would be defined as a CAMELS rating of 4 or 5.
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The Board believes that the proposed change would provide greater
certainty to institutions and would allow the Reserve Banks to tailor
intraday credit access in response to supervisory developments.

C. Changes To Support the Deployment of the FedNow Service

The Board is proposing changes to the PSR policy and the Overnight
Overdrafts policy to align these policies with the deployment of the
FedNow Service. The proposed changes would modify the PSR policy to
address changes associated with a 24x7x365 payment environment.
Currently, intraday credit is available only during the Fedwire Funds
Service operating day. The Board recognizes that access to 24x7x365
intraday credit would support the smooth functioning of the FedNow
Service. Accordingly, the Reserve Banks will offer intraday credit on a
24x7x365 basis to all FedNow Service participants, including those that
use the FedNow Service to send instant payments between end users and
users of the FedNow LMT.\31\ The Reserve Banks will assess daylight
overdraft fees on FedNow Service participants seven days a week,
including weekends and holidays. Institutions that settle the FedNow
activity of respondents in their master accounts as correspondent banks
will be assessed daylight overdraft fees, and therefore will need to
manage their account balances to cover respondents' FedNow activity,
even if those correspondents do not directly use the FedNow Service.
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\31\ See 85 FR 48522, 48531-32. Intraday credit on a 24x7x365
basis will also be available to support participants in a private-
sector instant payment service backed by a joint account at a
Reserve Bank by enabling transfers between the master accounts of
those participants and the joint account.
---------------------------------------------------------------------------

Reserve Banks expect that FedNow Service participants will manage
their master accounts in compliance with Federal Reserve policies. As
described further below, FedNow Service participants will need to avoid
negative balances at the close of the business day. Negative balances
not cured by the end of the business day result in overnight
overdrafts.
1. Definition of ``Business Day''
The Board is proposing to revise section II.A of the PSR policy to
define the ``business day'' as the 24-hour duration beginning
immediately after the previous day's regularly-scheduled close of the
Fedwire Funds Service and the FedNow Service, and ending with the
regularly-scheduled close of the Fedwire Funds Service and the FedNow
Service.\32\ The next business day would begin immediately after the
scheduled close of the Fedwire Funds Service and the FedNow Service.
---------------------------------------------------------------------------

\32\ The business day will align on all calendar days with the
regularly scheduled close of the Fedwire Funds and the FedNow
Service at 7:00:59 p.m. ET. On weekends and holidays, when the
Fedwire Funds Service is closed, the end of the business day would
align with the close of the FedNow Service and the regularly
scheduled close time of the FedNow Service. The next business day
would begin at 7:01:00 p.m. ET.
---------------------------------------------------------------------------

Given the continuous, 24-hour nature of the FedNow Service, the
opening of the FedNow Service will occur immediately after close.
Because FedNow Service participants will have access to intraday credit
on a 24-hour basis, the Board believes that daylight overdrafts should
be based on a 24-hour business day for all institutions.
2. Daylight Overdraft and Penalty Fee Calculations
The Board is proposing to revise the daylight overdraft and the
penalty fee calculations for all institutions in order to reflect the
24-hour business day. Currently, the daylight overdraft fee is
calculated using an annual rate of 50 basis points that is prorated to
the scheduled duration of the Fedwire Funds operating day.\33\ The
Board is proposing to change section II.C of the PSR policy so that the
daylight overdraft fee would be based on the 24-hour business day. Due
to this proposed change, the effective annual overdraft rate would
continue to be 50 basis points, but the effective daily daylight-
overdraft rate would increase from 0.0000127 under the 22-hour business
day to 0.0000138 under the 24-hour business day.\34\
---------------------------------------------------------------------------

\33\ The Fedwire operating day is currently 22 hours, the
effective annual rate is (22/24) multiplied by 50 basis points, or
approximately 0.004583, and the effective daily daylight-overdraft
rate based on a 360-day year is (0.004583/360), or 0.0000127.
\34\ Under a 24-hour business day, the effective annual
daylight-overdraft rate would be (24/24) multiplied by 50 basis
points, or 0.0050, and the effective daily daylight-overdraft rate
on a 360-day year would be (.0050/360), or 0.0000138.
---------------------------------------------------------------------------

Similarly, the Board is proposing to adjust the penalty rate for
overdrafts under section II.F of the PSR policy to reflect the 24-hour
business day.\35\ The annual rate used to determine the daylight-
overdraft penalty fee is currently equal to the annual rate applicable
to the daylight overdrafts of other institutions (50 basis points) plus
100 basis points, prorated to the length of the scheduled Fedwire Funds
operating day. The 150-basis point penalty rate applied to the 24-hour
business day would increase the effective daily penalty rate slightly,
from 0.0000381 under a 22-hour business day to 0.0000416 under the 24-
hour business day.\36\
---------------------------------------------------------------------------

\35\ Certain institutions are subject to a daylight-overdraft
penalty fee levied against the average daily daylight overdraft
incurred by the institution. These include Edge and agreement
corporations, bankers' banks that are not subject to reserve
requirements, and limited-purpose trust companies.
\36\ Under a 22-hour business day, the effective annual
daylight-overdraft penalty rate is (22/24) multiplied by 150 basis
points, or 0.002778, and the effective daily daylight-overdraft
penalty rate on a 360-day year is (.002778/360), or truncated to
0.0000381. Under a 24-hour business day, the effective annual
daylight-overdraft penalty rate will be (24/24) multiplied by 150
basis points, or 0.0150, and the effective daily daylight-overdraft
penalty rate on a 360-day year would be (0.0150/360), or 0.0000416.
---------------------------------------------------------------------------

An institution's daily daylight overdraft charge (or penalty
charge) equals the effective daily rate multiplied by the institution's
average daily uncollateralized daylight overdraft, which is calculated
by dividing the sum of its negative uncollateralized Federal Reserve
account balance at the end of each minute by the total number of
minutes in the relevant business day. Currently, the relevant business
day for this purpose is the Fedwire Funds operating day (1320 minutes
under the 22-hour operating day). Under the proposal, the total number
of minutes in the relevant business day will increase to 1440 to
reflect the 24-hour business day. The increase in the length of the
relevant business day from 22 hours to 24 hours will offset in part the
increase to the effective daily rate. After accounting for changes to
the fee rates and the average uncollateralized daylight overdraft
calculation, the Board estimates that gross fees before application of
fee waivers would increase by less than 0.4 percent with

[[Page 29781]]

the move from a 22-hour business day to a 24-hour business day.\37\
---------------------------------------------------------------------------

\37\ Analysis assumes that the size and duration of
institutions' daylight overdrafts remains unchanged between a 22-
hour and 24-hour operating day. Institutions' gross daily daylight
overdraft fees are summed across a two-week reserve maintenance
period and then reduced by a fee waiver of $150, which is primarily
intended to minimize the burden of the PSR policy on institutions
that use small amounts of intraday credit.
---------------------------------------------------------------------------

3. New Posting Rule for FedNow Funds Transfers
The Board is proposing to add a new posting rule in section II.A of
the PSR policy to clarify that, for purposes of measuring daylight
overdrafts, debits and credits to an institution's master account for
funds transfers over the FedNow Service, including FedNow LMT
transfers, would post to an institution's account balance as they are
processed throughout the 24-hour business day. In this way, debits and
credits to an institution's master account related to transfers over
the FedNow Service would be treated equivalently to debits and credits
related to transfers over the Fedwire Funds Service, Fedwire Securities
Service, and the National Settlement Service.
4. Posting Certain Transactions at the Regularly Scheduled Close of the
Business Day
Currently, section II.A of the PSR policy identifies several
transaction types that are processed earlier in the day but ``[p]ost
after the close of Fedwire Funds Service.'' \38\ The Board is proposing
to revise this posting rule so that these specific transactions would
post at the regularly scheduled close of the Fedwire Funds Service and
the FedNow Service before the next business day begins. Posting these
transactions at the regularly scheduled close of the Fedwire Funds
Service and the FedNow Service would ensure that an institution's
account balance is updated before the next business day begins
(immediately after the regularly scheduled close of the Fedwire Funds
Service and the FedNow Service).
---------------------------------------------------------------------------

\38\ Currently, there are various transactions that post after
the close of Fedwire Funds, including currency and coin shipments;
noncash collection; term-deposit settlements; Federal Reserve Bank
checks presented after 3:00 p.m. eastern time but before 3:00 p.m.
local time; foreign check transactions; small-dollar credit
corrections and adjustments; term deposit settlements; and all debit
corrections and adjustments. Discount-window loans and repayments
are normally posted after the close of Fedwire as well; however, in
unusual circumstances, a discount window loan may be posted earlier
in the day with repayment 24 hours later, or a loan may be repaid
before it would otherwise become due.
---------------------------------------------------------------------------

The Board is also proposing to clarify that Fedwire Funds Service
and FedNow Service transactions occurring during extensions of the
Fedwire Funds Service and the FedNow Service would be backdated so that
they post at the regularly scheduled close of the Fedwire Funds and the
FedNow Service and not at the end of the extended hours. As a result, a
funds transfer occurring during an extension of the Fedwire Funds
Service and the FedNow Service would post to an institution's account
before the next regularly scheduled business day begins.\39\ This
practice would ensure that Reserve Banks monitor daylight overdrafts
based on a consistent 24-hour business day even on days when the
Fedwire Funds and the FedNow Service are extended.
---------------------------------------------------------------------------

\39\ The Reserve Banks will continue to use an ex post system to
measure daylight overdrafts in institutions' Federal Reserve
accounts. As an example, if the close of the Fedwire Funds Service
and the FedNow Service is extended from the regularly scheduled
close of 7:00:59 p.m. ET to 7:30:59 p.m. ET, a transaction occurring
at 7:10 p.m. ET, would post at 7:00 p.m. ET for purposes of
measuring daylight overdrafts.
---------------------------------------------------------------------------

5. Changes to the Policy on Overnight Overdrafts
The Board is proposing to incorporate the Overnight Overdrafts
policy as part III of the PSR policy. The Board believes that
incorporating the Overnight Overdrafts policy into the PSR policy would
underscore the close relationship between daylight overdrafts and
overnight overdrafts.
The Board is also proposing modifications to simplify the Overnight
Overdrafts policy and align the Overnight Overdrafts policy with the
deployment of the FedNow Service. The Board is proposing that all
institutions would continue to be charged an overnight overdraft
penalty fee rate equal to the primary credit rate plus 4 percentage
points (annual rate) if its Federal Reserve account has a negative
balance at the end of the scheduled business day--that is, at the
regularly scheduled close of the FedNow Service.
Currently, the penalty fee includes a multiday charge for overnight
overdrafts over weekends and holidays. FedNow Service participants that
incur an overnight overdraft before a weekend or holiday will have the
opportunity to achieve a positive balance before the close of business
day on a Saturday, Sunday, or holiday. Accordingly, the Board proposes
that a FedNow Service participant would not automatically incur a
multiday charge for an overnight overdraft before a weekend or holiday.
However, institutions that are not FedNow Service participants and
incur an overnight overdraft before a weekend or holiday will not have
the opportunity to achieve a positive balance before the end of the
weekend or holiday. Accordingly, these institutions would automatically
incur a multiday charge for an overnight overdraft before a weekend or
holiday.
The Board is proposing to eliminate the fee-escalation feature in
the Overnight Overdrafts policy for all institutions. The current
Overnight Overdrafts policy includes a fee-escalation feature where the
penalty fee for an overnight overdraft increases by one percentage
point for each overnight overdraft after an institution has already
experienced three overnight overdrafts in a rolling 12-month period.
The escalation feature is rarely triggered since overnight overdrafts
are uncommon. Additionally, Reserve Banks have other risk-mitigation
tools for institutions that incur frequent overnight overdrafts. For
example, Reserve Banks can counsel institutions that incur overnight
overdrafts (by letter or phone) and, when necessary, can escalate the
counseling to an institution's senior management. Reserve Banks also
have discretion to remove an institution's access to intraday credit.
Accordingly, the Board believes that maintaining the fee-escalation
feature once the FedNow Service launches would add unnecessary
complexity to the Overnight Overdrafts policy and would not
meaningfully reduce risk to the Reserve Banks.

D. Technical Changes to Text of the PSR Policy

The Board is also proposing technical changes to the PSR policy.
First, the Board proposes to revise a sentence in footnote 61 of the
PSR policy, which states that, for purposes of the PSR policy, the
Reserve Banks evaluate U.S. branches and agencies of an FBO as a family
``because these entities have no existence separate from the FBO.'' The
Board proposes to amend this provision to state that, because U.S.
branches and agencies are part of a single FBO family, all the U.S.
offices of FBOs (excluding U.S.-chartered bank subsidiaries and U.S.-
chartered Edge subsidiaries) should be treated as a consolidated family
relying on the FBO's capital.
Second, the Board proposes to revise a sentence in footnote 76 of
the PSR policy, which discusses the streamlined procedure that highly
capitalized FBOs can use to request a max cap. The amendment would
clarify that the streamlined procedure is available to

[[Page 29782]]

``highly capitalized'' FBOs, not ``well capitalized'' FBOs.\40\
---------------------------------------------------------------------------

\40\ Generally, the ``highly capitalized'' FBO capital category
corresponds to the ``well capitalized'' PCA designation for domestic
institutions. See n. 63 of the PSR policy.
---------------------------------------------------------------------------

III. Request for Comment

The Board is seeking comment on all aspects of the proposed
changes. The Board also requests comment on the following specific
questions:
1. Would the proposed changes help to clarify the conditions for
maintaining access to intraday credit for purposes of your
institution's liquidity planning and risk management efforts?
2. If the Board were to adopt the proposed simplifications to the
procedure for requesting a max cap, should the Board eliminate the
existing streamlined process for FBOs to request a max cap in section
II.E.2 of the PSR policy? If not, how would FBOs continue to benefit
from the streamlined process in section II.E.2?
3. Should the supervisory ratings of an institution's holding
company and affiliate(s) continue, as proposed, to be key factors in a
Reserve Bank's evaluation of whether an institution is eligible for
uncollateralized intraday credit?

IV. Regulatory Flexibility Act

Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
et seq.) to address concerns related to the effects of agency rules on
small entities, and the Board is sensitive to the impact its rules may
impose on small entities. The RFA requires agencies either to provide
an initial regulatory flexibility analysis with a proposed rule or to
certify that the proposed rule will not have a significant economic
impact on a substantial number of small entities. While the Board does
not believe that the proposed changes would have a significant impact
on small entities, and regardless of whether the RFA applies to the PSR
policy per se, the Board has nevertheless prepared the following
Initial Regulatory Flexibility analysis in accordance with 5 U.S.C.
603. The Board requests public comments on all aspects of this
analysis.
1. Statement of the need for, objectives of, and legal basis for,
the proposed rule.
Section 11(j) of the Federal Reserve Act \41\ authorizes the Board
to oversee the Reserve Banks' provision of intraday credit to Reserve
Bank account holders. The Board is issuing this proposal to better
align the PSR policy with the Board's objectives to reduce the reliance
of the banking industry on uncollateralized intraday credit while
ensuring the smooth operation of payment and settlement systems. The
Board is also proposing changes that would support the deployment of
the FedNow Service.
---------------------------------------------------------------------------

\41\ 12 U.S.C. 248(j).
---------------------------------------------------------------------------

2. Small entities affected by the proposed rule. Pursuant to
regulations issued by the Small Business Administration (SBA) (13 CFR
121.201), a ``small entity'' includes an entity that engages in
commercial banking and has assets of $600 million or less (NAICS code
522110). As of January 2021, nearly 3,200 institutions that maintain
Federal Reserve accounts are small entities. Approximately 3,000 of
those institutions maintain positive net debit caps. However, none of
these institutions currently have a max cap. The proposal would only
affect those entities, regardless of size, that choose to request
additional collateralized capacity beyond their uncollateralized net
debit cap. The proposed changes would clarify, but would not alter,
institutions' eligibility to request and maintain net debit caps.
3. Projected reporting, recordkeeping, and other compliance
requirements. The proposed changes would alter the procedures by which
institutions obtain collateralized intraday credit from the Reserve
Banks. As described above, the proposed changes would expand access to
collateralized capacity, and would simplify and reduce the
administrative steps associated with obtaining and keeping
collateralized capacity. If an institution requests collateralized
capacity for the first time or requests an increase in its
collateralized capacity, it would need to submit a resolution from its
board of directors. Generally, an institution would not need to provide
a business case justifying its request for collateralized capacity, nor
would it need to obtain a self-assessed net debit cap before it can
request collateralized capacity.
4. Identification of duplicative, overlapping, or conflicting
Federal rules. The Board has not identified any Federal rules that
duplicate, overlap with, or conflict with the proposed changes to the
PSR policy.
5. Significant alternatives. The Board does not believe that
alternatives to the proposed changes would better accomplish the
objectives of limiting credit risk to the Reserve Banks while
minimizing the economic impact on small entities, but the Board
welcomes comments on potential alternatives.

V. Competitive Impact Analysis

When considering changes to an existing service, the Board conducts
a competitive impact analysis to determine whether there will be a
direct and material adverse effect on the ability of other service
providers to compete effectively with the Federal Reserve in providing
similar services due to differing legal powers or the Federal Reserve's
dominant market position deriving from such legal differences.\42\ The
Board believes that there would be no adverse effects to other service
providers resulting from the proposed changes to the PSR policy and the
Overnight Overdrafts policy. While the proposed changes could provide
institutions with additional collateralized intraday credit in their
Federal Reserve accounts, as well as access to uncollateralized
intraday credit on a 24x7x365 basis, institutions could use this credit
to fund payments activity using private-sector or Reserve Bank
services, at their discretion.
---------------------------------------------------------------------------

\42\ See The Federal Reserve in the Payments System (issued
1984; revised 1990), Federal Reserve Regulatory Service 9-1558.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

In accordance with section 3512 of the Paperwork Reduction Act of
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The OMB control number is 7100-0217.
The Board reviewed the PSR policy changes it is considering under the
authority delegated to the Board by the OMB. Comments are invited on:
(a) Whether the collections of information are necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collections, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collections on
respondents, including through the use of automated collection
technique or other forms of information technology; and
(e) Estimates of the capital or start-up costs and costs of
operation, maintenance, and purchase of services to provide
information.
All comments will become a matter of public record. Comments on
aspects of this notice that may affect reporting, recordkeeping, or
disclosure requirements and burden estimates

[[Page 29783]]

should be sent to the addresses listed in the ADDRESSES section of this
document. A copy of the comments may also be submitted to the OMB desk
officer: By mail to U.S. Office of Management and Budget, 725 17th
Street NW, #10235, Washington, DC 20503; by facsimilie to (202) 395-
5806; or by email to: <a href="/cdn-cgi/l/email-protection#e889819a89b79b9d8a85819b9b818786a887858ac68d8798c68f879e">[email&#160;protected]</a>, Attention, Federal
Banking Agency Desk Officer.

Proposed Revisions, With Extension for Three Years, of the Following
Information Collection

(1) Title of Information Collection: Annual Report of Net Debit
Cap.
Agency Form Number: FR 2226.
OMB Control Number: 7100-0217.
Frequency of Response: Annually.
Respondents: Institutions' boards of directors.
Abstract: Federal Reserve Banks collect these data annually to
provide information that is essential for their administration of the
Board's Payment System Risk (PSR) policy. The reporting panel includes
all financial institutions with access to the discount window that are
eligible to request intraday credit. The Report of Net Debit Cap
comprises three resolutions, which are filed by an institution's board
of directors depending on its needs. The first resolution is used to
establish a de minimis net debit cap and the second resolution is used
to establish a self-assessed net debit cap.\43\ The third resolution is
used to establish simultaneously a self-assessed net debit cap and
maximum daylight overdraft capacity.
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\43\ Institutions use these two resolutions to establish a
capacity for daylight overdrafts above the lesser of $10 million or
20 percent of the institution's capital measure. Financially-healthy
U.S. chartered institutions that rarely incur daylight overdrafts in
excess of the lesser of $10 million or 20 percent of the
institution's capital measure do not need to file board of directors
resolutions or self-assessments with their Reserve Bank.
---------------------------------------------------------------------------

Current Actions: Currently, institutions with a self-assessed net
debit cap may file the third resolution in order to obtain
collateralized capacity under the max cap program. The proposed changes
to the PSR policy would expand access to collateralized capacity under
the max cap program to include all domestic institutions with a PCA
designation of undercapitalized, adequately capitalized, or well
capitalized. The proposed changes would also expand access to
collateralized capacity under the max cap program to include all FBOs
with an FBO PSR category of undercapitalized, sufficiently capitalized,
or highly capitalized. Finally, the proposed changes would eliminate
the requirements that an institution provide (i) a business case
outlining its need for collateralized capacity and (ii) an annual board
of directors resolution approving its collateralized capacity. In order
the facilitate these proposed changes to the PSR policy, the third
resolution would be amended so that an eligible institution could
request collateralized capacity regardless of whether the institution
has a self-assessed net debit cap. The proposed revision would not
increase the estimated average hours per response to FR 2226 but would
likely expand the estimated number of respondents requesting
collateralized capacity under the max cap program.
Estimated number of respondents: De Minimis Cap: Non-FBOs, 893
respondents and FBOs, 18 respondents; Self-Assessment Cap: Non-FBOs,
106 respondents and FBOs, 9 respondents; and Maximum Daylight Overdraft
Capacity, 59 respondents.
Estimated average hours per response: De Minimis Cap--Non-FBOs, 1
hour and FBOs, 1.5 hour; Self-Assessment Cap--Non-FBOs, 1 hour and
FBOs, 1.5 hours, and Maximum Daylight Overdraft Capacity, 1 hour.
Estimated annual burden hours: De Minimis Cap: Non-FBOs, 893 hours
and FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 106 hours and FBOs,
13.5 hours; and Maximum Daylight Overdraft Capacity, 59 hours.
The following portion titled ``Federal Reserve Policy on Payment
System Risk'' will not publish in the Code of Federal Regulations.

Federal Reserve Policy on Payment System Risk

Revisions to Section II.A of the PSR Policy

The Board proposes to revise section II.A of the PSR policy as
follows:
A. Daylight Overdraft Definition and Measurement
A daylight overdraft occurs when an institution's Federal Reserve
account is in a negative position during the business day.\33\ The
Reserve Banks use an ex post system to measure daylight overdrafts in
institutions' Federal Reserve accounts. Under this ex post measurement
system, certain transactions, including Fedwire funds transfers, FedNow
funds transfers, book-entry securities transfers, and net settlement
transactions are posted as they are processed during the business day.
Other transactions, including ACH and check transactions, are posted to
institutions' accounts according to a defined schedule. The following
table presents the schedule used by the Federal Reserve for posting
transactions to institutions' accounts for purposes of measuring
daylight overdrafts.

----------
\33\ For purposes of measuring daylight overdrafts, the business
day is the 24-hour period of time that begins immediately after the
regularly-scheduled close of the Fedwire Funds Service (on days when
the Fedwire Funds Service is open) and the FedNow Service (on all
days, including weekends and holidays).

Procedures for Measuring Daylight Overdrafts \34\

Opening Balance (Previous Business Day's Closing Balance)
Post throughout the business day:

+/- FedNow funds transfers
+/- Fedwire funds transfers \35\
+/- Fedwire book-entry securities transfers
+/- National Settlement Service entries.
+ Fedwire book-entry interest and redemption payments on securities
that are not obligations of, or fully guaranteed as to principal and
interest by, the United States \36\
+ Electronic payments for matured coupons and definitive securities
that are not obligations of, or fully guaranteed as to principal and
interest by, the United States.\37\

----------
\34\ This schedule of posting rules does not affect the
overdraft restrictions and overdraft measurement provisions for
nonbanks established by the Competitive Equality Banking Act of 1987
and the Board's Regulation Y (12 CFR 225.52).
\35\ Funds transfers that the Reserve Banks function for certain
international organizations using internal systems other than
payment processing systems such as Fedwire will be posted throughout
the business day for purposes of measuring daylight overdrafts.
\36\ The GSEs include Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie
Mac), entities of the Federal Home Loan Bank System (FHLBS), the
Farm Credit System, the Federal Agricultural Mortgage Corporation
(Farmer Mac), the Student Loan Marketing Association (Sallie Mae),
the Financing Corporation, and the Resolution Funding Corporation.
The international organizations include the World Bank, the Inter-
American Development Bank, the Asian Development Bank, and the
African Development Bank. The Student Loan Marketing Association
Reorganization Act of 1996 requires Sallie Mae to be completely
privatized by 2008; however, Sallie Mae completed privatization at
the end of 2004. The Reserve Banks no longer act as fiscal agents
for new issues of Sallie Mae securities, and Sallie Mae is not
considered a GSE.
The term ``interest and redemption payments'' refers to payments
of principal,

[[Page 29784]]

interest, and redemption on securities maintained on the Fedwire
Securities Service.
The Reserve Banks will post these transactions, as directed by
the issuer, provided that the issuer's Federal Reserve account
contains funds equal to or in excess of the amount of the interest
and redemption payments to be made. In the normal course, if a
Reserve Bank does not receive funding from an issuer for the
issuer's interest and redemption payments by the established cut-off
hour of 4:00 p.m. eastern time on the Fedwire Securities Service,
the issuer's payments will not be processed on that day.
\37\ Electronic payments for credits on these securities will
post according to the posting rules for the mechanism through which
they are processed, as outlined in this policy. However, the
majority of these payments are made by check and will be posted
according to the established check posting rules as set forth in
this policy.

* * * * *
Post at the close of the Fedwire Funds Service and the FedNow
Service \51\

+/- All other transactions. These transactions include the following:
Currency and coin shipments; noncash collection; term-deposit
settlements; Federal Reserve Bank checks presented after 3:00 p.m.
eastern time but before 3:00 p.m. local time; foreign check
transactions; small-dollar credit corrections and adjustments; term
deposit settlements; and all debit corrections and adjustments.
Discount-window loans and repayments are normally posted after the
close of the Fedwire Funds Service as well; however, in unusual
circumstances a discount window loan may be posted earlier in the day
with repayment 24 hours later, or a loan may be repaid before it would
otherwise become due.

----------
\51\ The posting of transactions that occur during extensions of
the Fedwire Funds Service and the FedNow Service will be backdated
to the regularly scheduled close of the Fedwire Funds Service and
the FedNow Service.

* * * * *

Revisions to Section II.C of the PSR Policy

The Board proposes to revise section II.C, paragraphs 3 and 4 of
the ``Federal Reserve Policy on Payment System Risk'' as follows:

C. Pricing

* * * * *
Daylight overdraft fees for uncollateralized overdrafts (or the
uncollateralized portion of a partially collateralized overdraft) are
calculated using an annual rate of 50 basis points, quoted on the basis
of a 24-hour day and a 360-day year. The effective daily rate equals
the annual rate divided by 360.\57\ An institution's daily daylight
overdraft charge is equal to the effective daily rate multiplied by the
institution's average daily uncollateralized daylight overdraft.
An institution's average daily uncollateralized daylight overdraft
is calculated by dividing the sum of its negative uncollateralized
Federal Reserve account balances at the end of each minute of the
regularly scheduled business day by the total number of minutes in the
24-hour business day. A negative uncollateralized Federal Reserve
account balance is calculated by subtracting the unencumbered, net
lendable value of collateral pledged from the total negative Federal
Reserve account balance at the end of each minute. Each positive end-
of-minute balance in an institution's Federal Reserve account is set to
equal zero. Fully collateralized end-of-minute negative balances are
similarly set to zero.

----------
\57\ The effective daily daylight-overdraft rate is truncated to
0.0000138.

* * * * *

Revisions to Section II.D of the PSR Policy

The Board proposes to revise section II.D of the ``Federal Reserve
Policy on Payment System Risk'' as follows:
II. D. Net Debit Caps (Uncollateralized Intraday Credit Capacity)
Each institution incurring uncollateralized daylight overdrafts in
its Federal Reserve account must adopt a net debit cap, that is, a
ceiling on the total uncollateralized daylight overdraft position that
it can incur during any given day. An institution's cap category and
capital measure determine the size of its net debit cap. Specifically,
the net debit cap is calculated as an institution's cap multiple times
its capital measure:

net debit cap = cap multiple x capital measure

Cap categories and their associated cap levels, set as multiples of
an institution's capital measure, are listed below:

Net Debit Cap Multiples
------------------------------------------------------------------------
Cap category Cap multiple
------------------------------------------------------------------------
High...................................... 2.25.
Above average............................. 1.875.
Average................................... 1.125.
De minimis................................ 0.4.
Exempt-from-filing \60\................... $10 million or 0.20.
Zero...................................... 0.
------------------------------------------------------------------------
\60\ The net debit cap for the exempt-from-filing category is equal to
the lesser of $10 million or 0.20 multiplied by the capital measure.

Pledging collateral does not increase an institution's net debit
cap, although certain institutions may be eligible to obtain additional
collateralized capacity in excess of their net debit caps (see section
II.E). For the treatment of overdrafts that exceed the net debit cap,
see section II.G.
While capital measures differ, the net debit cap provisions of this
policy apply similarly to foreign banking organizations (FBOs) as to
U.S. institutions. Consistent with practices for U.S.-chartered
depository institutions, the Reserve Banks will advise home-country
supervisors of the daylight overdraft capacity of U.S. branches and
agencies of FBOs under their jurisdiction, as well as of other
pertinent information related to the FBOs' caps. The Reserve Banks will
also provide information on the daylight overdrafts in the Federal
Reserve accounts of FBOs' U.S. branches and agencies in response to
requests from home-country supervisors.
1. Eligibility
An institution must have regular access to the discount window in
order to adopt a net debit cap greater than zero. Granting a net debit
cap, or any extension of intraday credit, to an institution is at the
discretion of the Reserve Bank. As detailed in the following matrix, an
institution's eligibility to adopt and maintain a positive net debit
cap depends on the institution's creditworthiness as determined by (1)
its Prompt Corrective Action (PCA) designation \61\ or FBO PSR capital
category,\62\ and (2) the supervisory rating.

----------
\61\ An insured depository institution is (1) ``well
capitalized'' if it significantly exceeds the required minimum level
for each relevant capital measure, (2) ``adequately capitalized'' if
it meets the required minimum level for each relevant capital
measure, (3) ``undercapitalized'' if it fails to meet the required
minimum level for any relevant capital measure, (4) ``significantly
undercapitalized'' if it is significantly below the required minimum
level for any relevant capital measure, or (5) ``critically
undercapitalized'' if it fails to meet any leverage limit (the ratio
of tangible equity to total assets) specified by the appropriate
federal banking agency, in consultation with the FDIC, or any other
relevant capital

[[Page 29785]]

measure established by the agency to determine when an institution
is critically undercapitalized (12 U.S.C. 1831o).
\62\ The four FBO PSR capital categories for FBOs are ``highly
capitalized,'' ``sufficiently capitalized,'' ``undercapitalized,''
and ``intraday credit ineligible.'' To determine whether it is
highly capitalized or sufficiently capitalized, an FBO should
compare its risk-based capital ratios to the corresponding ratios in
Regulation H for well-capitalized and adequately capitalized banks.
12 CFR 208.43(b). Additionally, an FBO must have a leverage ratio of
4 percent or 3 percent (calculated under home-country standards) to
qualify as, respectively, highly capitalized or sufficiently
capitalized. To determine whether it is undercapitalized, an FBO
would compare its risk-based capital ratios to the corresponding
ratios in Regulation H. Additionally, an FBO would be deemed
undercapitalized if its home-country leverage ratio is less than 3
percent. Finally, to determine whether it is intraday credit
ineligible, an FBO should compare its risk-based capital ratios to
the corresponding ratios in Regulation H for significantly
undercapitalized banks. Additionally, an FBO would be deemed
intraday credit ineligible if its home-country leverage ratio is
less than 2 percent.

Eligibility Criteria for Requesting a Positive Net Debit Cap
----------------------------------------------------------------------------------------------------------------
Supervisory rating \63\
Domestic capital category/ FBO -------------------------------------------------------------------------------
PSR capital category Marginal or
Strong Satisfactory Fair Unsatisfactory
----------------------------------------------------------------------------------------------------------------
Well capitalized/Highly Eligible.......... Eligible.......... Eligible.......... Ineligible (Zero
capitalized. net debit cap).
Adequately capitalized/ Eligible.......... Eligible.......... Eligible.......... Ineligible (Zero
Sufficiently capitalized. net debit cap).
Undercapitalized................ May be eligible May be eligible Ineligible (Zero Ineligible (Zero
subject to a full subject to a full net debit cap). net debit cap).
assessment of assessment of
creditworthiness. creditworthiness.
Significantly or critically Ineligible (Zero Ineligible (Zero Ineligible (Zero Ineligible (Zero
undercapitalized/Intraday net debit cap). net debit cap). net debit cap). net debit cap).
credit ineligible.
----------------------------------------------------------------------------------------------------------------
\63\ Supervisory composite ratings, such as the Uniform Bank Rating System (CAMELS) and the RFI Rating System,
are generally assigned on a scale from 1 to 5, with 1 being the strongest rating. Thus, a supervisory rating
of 1 is considered Strong, a rating of 2 is considered Satisfactory, a rating of 3 is considered Fair, a
rating of 4 is considered Marginal, and a rating of 5 is considered Unsatisfactory. An institution will not be
eligible for uncollateralized capacity if a supervisory agency assigns a Marginal or Unsatisfactory
supervisory rating to the institution. If an institution's holding company has been assigned a Deficient-2
rating in any of the components of the Large Financial Institution (LFI) rating system or an RFI rating of 4
or 5, the institution will not be eligible to request the above average and high self-assessed net debit caps
but may be eligible for a lower net debit cap. Similarly, if an institution's affiliates are assigned a
Marginal or Unsatisfactory supervisory rating, the institution will not be eligible to request the above
average and high self-assessed net debit caps but may be eligible for a lower net debit cap. Reserve Banks
will assign an institution a zero net debit cap if supervisory information of the holding company and
affiliated institutions reveals material operating or financial weaknesses that pose significant risks to the
institution.

As described further in section II.D.2.a, an institution seeking to
establish a net debit cap category of high, above average, or average
must perform a self-assessment of its own creditworthiness, intraday
funds management and control, customer credit policies and controls,
and operating controls and contingency procedure. An institution that
performs a self-assessment will be deemed ineligible for a positive net
debit cap if its self-assessment results in the lowest possible rating
for any one of the four components of the self-assessment process.
2. Cap Categories
* * * * *
a. Self-Assessed
In order to establish a net debit cap category of high, above
average, or average, an institution must perform a self-assessment of
its own creditworthiness, intraday funds management and control,
customer credit policies and controls, and operating controls and
contingency procedures.\64\ For domestic institutions, the assessment
of creditworthiness is based on the institution's supervisory rating
and PCA designation.\65\ For U.S. branches and agencies of FBOs that
are based in jurisdictions that have implemented capital standards
substantially consistent with those established by the Basel Committee
on Banking Supervision, the assessment of creditworthiness is based on
the institution's supervisory rating and its FBO PSR capital
category.\66\ An institution may perform a full assessment of its
creditworthiness in certain limited circumstances--for example, if its
condition has changed significantly since its last examination or if it
possesses additional substantive information regarding its financial
condition. Additionally, U.S. branches and agencies of FBOs based in
jurisdictions that have not implemented capital standards substantially
consistent with those established by the Basel Committee on Banking
Supervision are required to perform a full assessment of
creditworthiness to determine their ratings for the creditworthiness
component. An institution performing a self-assessment must also
evaluate its intraday funds-management procedures and its procedures
for evaluating the financial condition of and establishing intraday
credit limits for its customers. Finally, the institution must evaluate
its operating controls and contingency procedures to determine if they
are sufficient to prevent losses due to fraud or system failures. The
Guide includes a detailed explanation of the self-assessment process.
* * * * *

----------
\64\ This assessment should be done on an individual-institution
basis, treating as separate entities each commercial bank, each Edge
corporation (and its branches), each thrift institution, and so on.
An exception is made in the case of U.S. branches and agencies of
FBOs. Because these entities are part of a single FBO family, all
the U.S. offices of FBOs (excluding U.S.-chartered bank subsidiaries
and U.S.-chartered Edge subsidiaries) should be treated as a
consolidated family relying on the FBO's capital.
\65\ See n. 61 supra.
\66\ See n. 62 supra.

* * * * *
d. Zero
Some institutions that could obtain positive net debit caps choose
to have zero caps. Often these institutions have very conservative
internal policies regarding the use of Federal Reserve intraday credit.
If an institution that has adopted a zero cap incurs a daylight
overdraft, the Reserve Bank counsels the

[[Page 29786]]

institution and may monitor the institution's activity in real time and
reject or delay certain transactions that would cause an overdraft. If
the institution qualifies for a positive cap, the Reserve Bank may
suggest that the institution adopt an exempt-from-filing cap or file
for a higher cap if the institution believes that it will continue to
incur daylight overdrafts or overdrafts in excess of its assigned cap
limit.
In addition, a Reserve Bank may assign an institution a zero net
debit cap. Institutions that may pose special risks to the Reserve
Banks, such as those without regular access to the discount window,
those incurring daylight overdrafts in violation of this policy, those
that are ineligible for intraday credit based on their supervisory
rating and PCA designation/FBO PSR capital category (see section II.A),
or those that are otherwise in weak financial condition are generally
assigned a zero cap (see section II.F). Recently chartered institutions
may also be assigned a zero net debit cap.
Certain institutions with zero caps, including institutions that
have been involuntarily assigned a zero cap by a Reserve Bank, may be
eligible to request collateralized capacity from their Reserve Bank
(see sections II.E). * * *
* * * * *

Revisions to Section II.E of the PSR Policy

The Board proposes to revise section II.E of the ``Federal Reserve
Policy on Payment System Risk'' as follows:

E. Collateralized Intraday Credit Capacity

Subject to the approval of its administrative Reserve Bank, an
eligible institution may pledge collateral to secure collateralized
daylight overdraft capacity in addition to uncollateralized capacity
from its net debit cap.\74\ The resulting combination of
uncollateralized and collateralized capacity is known as the maximum
daylight overdraft capacity (max cap) and is defined as follows:

maximum daylight overdraft capacity = net debit cap + collateralized
capacity.\75\

Once approved, the Reserve Bank will monitor the institution to
ensure that it does not exceed its max cap. Pledging less collateral
reduces an institution's effective maximum daylight overdraft capacity
level, but pledging more collateral does not increase the maximum
daylight overdraft capacity above the approved max cap level.
1. Eligibility
An institution that wishes to expand its daylight overdraft
capacity by pledging collateral should consult with its administrative
Reserve Bank. A domestic institution is eligible to request
collateralized intraday credit if its PCA designation is
``undercapitalized,'' ``adequately capitalized,'' or ``well
capitalized.'' \76\ Similarly, an FBO is eligible to request
collateralized intraday credit if its FBO PSR capital category is
``undercapitalized,'' ``sufficiently capitalized,'' or ``highly
capitalized.'' \77\ Provided that it meets these capitalization
requirements, an institution is eligible to request collateralized
capacity even if the institution is not eligible to adopt a positive
net debit cap (see section II.D.1).

----------
\74\ The administrative Reserve Bank is responsible for the
administration of Federal Reserve credit, reserves, and risk-
management policies for a given institution. All collateral must be
acceptable to the administrative Reserve Bank. The Reserve Bank may,
at its discretion, accept securities in transit on the Fedwire
Securities Service as collateral to support the maximum daylight
overdraft capacity level. Collateral eligibility and margins are the
same for PSR policy purposes as for the discount window. See <a href="http://www.frbdiscountwindow.org/">http://www.frbdiscountwindow.org/</a> for information.
\75\ Collateralized capacity, on any given day, equals the
amount of collateral pledged to the Reserve Bank, not to exceed the
difference between the institution's maximum daylight overdraft
capacity level and its net debit cap in the given reserve
maintenance period.
\76\ See n. 61, supra.
\77\ See n. 62, supra.
2. General Procedure for Requesting Collateralized Capacity
If an institution is requesting collateralized capacity for the
first time, it must submit a resolution from its board of directors
indicating its board's approval of the requested max cap. Increases to
collateralized capacity previously approved by Reserve Banks will also
require a board of directors resolution. In most cases, an institution
will not have to provide to a Reserve Bank a business case justifying
its request for collateralized capacity. However, an institution must
provide a business-case justification if:
<bullet> The institution requests a max cap in excess of its
capital measure multiplied by 2.25; or
<bullet> The administrative Reserve Bank exercises discretion to
require that the institution submit a business-case justification due
to recent developments in the institution's condition.
Once a Reserve Bank has approved an institution's collateralized
capacity, the collateralized capacity will remain in place, without the
need for further action by the institution, provided that the
institution maintains the eligibility standards outlined above.
3. Streamlined Procedure for Certain FBOs
An FBO that is highly capitalized \78\ and has a self-assessed net
debit cap may request from its Reserve Bank a streamlined procedure to
obtain a maximum daylight overdraft capacity. These FBOs are not
required to provide documentation of the business case or obtain a
board of directors resolution for collateralized capacity in an amount
that exceeds its current net debit cap (which is based on 10 percent
worldwide capital times its cap multiple), as long as the requested
total capacity is 100 percent or less of worldwide capital times a
self-assessed cap multiple.\79\ In order to ensure that intraday
liquidity risk is managed appropriately and that the FBO will be able
to repay daylight overdrafts, eligible FBOs under the streamlined
procedure will be subject to an initial and periodic review of
liquidity plans that are analogous to the liquidity reviews undergone
by U.S. institutions.\80\ If an eligible FBO requests capacity in
excess of 100 percent of worldwide capital times the self-assessed cap
multiple, it would be subject to the general procedure.

----------
\78\ See n. 62, supra.
\79\ For example, an FBO that is highly capitalized is eligible
for uncollateralized capacity of 10 percent of worldwide capital
times the cap multiple. The streamlined collateralized capacity
procedure would provide such an institution with additional
collateralized capacity of 90 percent of worldwide capital times the
cap multiple. As noted above, FBOs report their worldwide capital on
the Annual Daylight Overdraft Capital Report for U.S. Branches and
Agencies of Foreign Banks (FR 2225).
\80\ The liquidity reviews will be conducted by the
administrative Reserve Bank, in consultation with each FBO's home
country supervisor.

* * * * *

Revisions to Section II.F of the PSR Policy

The Board proposes to revise section II.F, paragraphs 3 and 4 of
the ``Federal Reserve Policy on Payment System Risk'' as follows:

F. Special Situations

Certain institutions are subject to a daylight-overdraft penalty
fee levied against the average daily daylight

[[Page 29787]]

overdraft incurred by the institution. These include Edge and agreement
corporations, bankers' banks that are not subject to reserve
requirements, and limited-purpose trust companies. The annual rate used
to determine the daylight-overdraft penalty fee is equal to the annual
rate applicable to the daylight overdrafts of other institutions (50
basis points) plus 100 basis points. The effective daily overdraft
penalty rate equals the annual penalty rate divided by 360.\81\ The
daylight-overdraft penalty rate applies to the institution's daily
average daylight overdraft in its Federal Reserve account. The
daylight-overdraft penalty fee for these institutions is charged in
lieu of, not in addition to, the daylight overdraft fee that applies to
other institutions.

----------
\81\ The effective daily daylight-overdraft penalty rate is
truncated to 0.0000416.

* * * * *
Add Part III. Policy on Overnight Overdrafts as follows:

Part III. Policy on Overnight Overdrafts

An overnight overdraft is a negative balance in a Federal Reserve
account at the close of the business day. The Board expects
institutions to avoid overnight overdrafts.
To minimize the Reserve Banks' exposure to overnight overdrafts,
which are not always collateralized, the Board authorizes Reserve Banks
to discourage depository institutions from incurring overnight
overdrafts by charging a penalty fee. Institutions that do not
extinguish their daylight overdrafts and incur overnight overdrafts are
subject to ex post counseling in addition to a penalty fee.
The Board establishes the following penalty rate structure for
overnight overdrafts:
1. An overnight overdraft penalty rate of the primary credit rate
plus 4 percentage points (annual rate).
2. A minimum penalty fee of 100 dollars, regardless of the amount
of the overnight overdraft. The minimum fee is administered per each
occasion.
3. A charge for each calendar day (including weekends and holidays)
that an overnight overdraft is outstanding.

----------
\92\ See n. 33, which defines the term ``business day'' for this
purpose.

* * * * *

By order of the Board of Governors of the Federal Reserve
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2021-11649 Filed 6-2-21; 8:45 am]
BILLING CODE P

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