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FDIC Federal Register Citations
[Federal Register: July 17, 2008 (Volume 73, Number 138)]
[Rules and Regulations]
[Page 41169-41180]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy08-17]
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Part II
Federal Deposit Insurance Corporation
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12 CFR Part 360
Processing of Deposit Accounts in the Event of an Insured Depository
Institution Failure; Large Bank Deposit Insurance Determination
Modernization; Interim and Final Rules
[[Page 41170]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AD26
Processing of Deposit Accounts in the Event of an Insured
Depository Institution Failure
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Interim rule with request for comments.
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SUMMARY: The FDIC is adopting an interim rule establishing the FDIC's
practices for determining deposit and other liability account balances
at a failed insured depository institution. Except as noted, the FDIC
practices defined in the interim rule represent a continuation of long-
standing FDIC procedures in processing such balances at a failed
depository institution. The FDIC is adopting the interim rule
concurrently with its adoption of a related final rule requiring the
largest insured depository institutions to adopt mechanisms that would,
in the event of the institution's failure: Provide the FDIC with
standard deposit account and other customer information; and allow the
placement and release of holds on liability accounts, including
deposits. This interim rule applies to all insured depository
institutions.
DATES: This interim rule is effective August 18, 2008, except for Sec.
360.8(e), which will be effective July 1, 2009. Written comments must
be received by the FDIC on or before September 15, 2008.
ADDRESSES: You may submit comments by any of the following methods:
Agency Web Site:
http://www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting comments on the Agency Web
Site.
E-mail: Comments@FDIC.gov.
Include ``Processing of Deposit
Accounts'' in the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EST).
Federal eRulemaking Portal:
http://www.regulations.gov.
Follow the instructions for submitting comments.
Public Inspection: All comments received will be posted
without
change to
http://www.fdic.gov/regulations/laws/federal including any
personal information provided. Comments may be inspected and
photocopied in the FDIC Public Information Center, 3501 North Fairfax
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m.
(EST) on business days. Paper copies of public comments may be ordered
from the Public Information Center by telephone at (877) 275-3342 or
(703) 562-2200.
FOR FURTHER INFORMATION CONTACT: James Marino, Project Manager,
Division of Resolutions and Receiverships, (202) 898-7151 or
jmarino@fdic.gov; Joseph A. DiNuzzo,
Counsel, Legal Division, (202)
898-7349 or jdinuzzo@fdic.gov; or
Christopher L. Hencke, Counsel, Legal
Division, (202) 898-8839 or
chencke@fdic.gov.
SUPPLEMENTARY INFORMATION:
I. Introduction
In January of this year the FDIC published a proposed rule
composed
of two parts (``proposed rule'').\1\ The first part proposed FDIC
practices for determining deposit and other liability account balances
at a failed insured depository institution. The second part proposed
requirements for the largest insured depository institutions to adopt
mechanisms that would, in the event of the institution's failure: (1)
Provide the FDIC with standard deposit account and other customer
information; and (2) allow the placement and release of holds on
liability accounts, including deposits.
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\1\ 73 FR 2364 (Jan. 14, 2008).
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The comment period for the proposed rule ended on April 14,
2008.
The FDIC received twenty-one comment letters, all of which may be
viewed on the FDIC's Web site at
http://www.fdic.gov/regulations/laws/
federal/2008/08comAD26.html.
Based in part on the comments received on the proposed rule,
the
FDIC has decided to finalize the proposed rule by issuing two separate
rulemakings--(1) the interim rule, covering part one of the proposed
rule and (2) a separate final rule, covering part two of the proposed
rule (``Large Bank Modernization Final Rule'').
Throughout this preamble the terms ``deposit'' (or ``domestic
deposit''), ``foreign deposit'' and ``international banking facility
deposit'' identify liabilities having different meanings for deposit
insurance purposes. A ``deposit'' is used as defined in section 3(l) of
the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) (``Section
3(l)''). A deposit includes only deposit liabilities payable in the
United States, typically those deposits maintained in a domestic office
of an insured depository institution. Only deposits meeting these
criteria are eligible for insurance coverage. Insured depository
institutions may maintain deposit liabilities in a foreign branch
(``foreign deposits''), but these liabilities are not deposits in the
statutory sense (for insurance or depositor preference purposes) for
the time that they are payable solely at a foreign branch or branches.
Insured depository institutions also may maintain liabilities in an
international banking facility (``IBF''). An ``international banking
facility deposit,'' as defined by the Board of Governors of the Federal
Reserve System in Regulation D (12 CFR 204.8(a)(2)), also is excluded
from the definition of ``deposit'' in Section 3(l) and the depositor
preference statute (12 U.S.C. 1821(d)(11)).
II. Background
Upon the failure of an FDIC-insured depository institution,
the
FDIC must determine the total insured amount for each depositor. 12
U.S.C. 1821(f). To make this determination, the FDIC must ascertain the
balances of all deposit accounts owned by the same depositor in the
same ownership capacity at a failed institution as of the day of
failure.
The Large Bank Modernization Final Rule, among other things,
requires certain large depository institutions to adopt mechanisms that
will allow the FDIC, as receiver, to place holds on liability accounts,
including deposits, in the event of failure. The amount held would vary
depending on the account balance, the nature of the liability (whether
or not it is a deposit for insurance purposes) and the expected losses
resulting from the failure. In order to calculate these hold amounts,
the rules used by the FDIC to determine account balances as of the day
of failure must be clearly established.
A deposit account balance can be affected by transactions \2\
presented during the day. A customer, a third party or the depository
institution can initiate a deposit account transaction. All depository
institutions process and post these deposit account transactions
according to a predetermined set of rules to determine whether to
include a deposit account transaction either in that day's end-of-day
ledger balances or in a subsequent day's balances. These rules
establish cutoff times that vary by institution and by type of deposit
account transaction--for example, check
[[Page 41171]]
clearing, Fedwire, ATM, and teller transactions. Institutions post
transactions initiated before the respective cutoff time as part of
that day's business and generally post transactions initiated after the
cutoff time the following business day. Further, institutions
automatically execute prearranged ``sweep'' instructions affecting
deposit and other liability balances at various points throughout the
day. The cutoff rules for posting deposit account transactions and the
prearranged automated instructions define the end-of-day balance for
each deposit account on any given business day.\3\
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\2\ A deposit account transaction, such as deposits,
withdrawals, transfers and payments, causes funds to be debited from
or credited to the account.
\3\ Some depository institutions operate ``real-time''
deposit
systems in which some deposit account transactions are posted
throughout the business day. Most depository institutions, however,
process at least some deposit account transactions in a ``batch
mode,'' where deposit account transactions presented before the
cutoff time are posted that evening or in the early morning hours of
the following day. With either system--batch or real-time--the
institution calculates a close-of-business deposit balance for each
deposit account on each business day.
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In the past, the FDIC usually took over an institution as
receiver
after it had closed on a Friday. For institutions with a few branches
in one state, deposit account transactions for the day were completed
and determining account balances on that day was relatively
straightforward. The growth of interstate banking and branching over
the past two decades and the increasing complexity of bank products and
practices (such as sweep accounts) has made the determination of end-
of-day account balances on the day of closing much more complicated.
III. The Proposed Rule
Overview
The proposed rule defined the deposit account balance used
for
deposit insurance determination purposes as the end-of-day ledger
balance of the deposit account on the day of failure. Except as noted,
the FDIC would use the cutoff times previously applied by the failed
insured depository institution in establishing the end-of-day ledger
balance for deposit insurance determination purposes. The use of end-
of-day ledger balances and the institution's normal cutoff times for
insurance determination purposes continues long-standing FDIC
procedures in processing such balances at a failed depository
institution. Whether a deposit account transaction would be included in
the end-of-day ledger balance on the day of failure would depend
generally upon how it normally would be treated using the institution's
ordinary cutoff time on that day. Many institutions have different
cutoff times for different kinds of transactions, such as check
clearing, Fedwire, ATM and teller transactions.
The FDIC proposed establishing an FDIC Cutoff Point, defined
as a
point in time after it takes control of the failed institution as
receiver, to allow the FDIC to make a final determination of the ledger
balances of the deposit accounts if the institution's normal cutoff
times for the accounts would impair the efficient winding up of the
institution. If the institution's ordinary cutoff time on the day of
failure for any particular kind of transaction preceded the FDIC Cutoff
Point, the institution's ordinary cutoff time would be used. Otherwise,
the institution's ordinary cutoff time for an individual kind of
transaction would be replaced by the FDIC Cutoff Point. The
``Applicable Cutoff Time'' used for any kind of transaction thus would
be the earlier of the institution's ordinary cutoff time or the FDIC
Cutoff Point. In practice, there might be several Applicable Cutoff
Times for a given failed institution, since different kinds of
transactions could have different cutoff times. No Applicable Cutoff
Time would be later than the FDIC Cutoff Point established by the FDIC,
though some could be earlier.
Under the proposed rule, transactions occurring after the
Applicable Cutoff Time would have been posted to the next day's
business, if the operations of the failed institution were carried on
by a successor institution. In a depository institution failure where
deposit operations were not continued by a successor institution,
account transactions on the day of failure would have been posted to
the applicable deposit accounts until the FDIC Cutoff Point. This
practice would have been consistent with the FDIC's current practice in
handling deposit account transactions in deposit insurance payout
situations.\4\
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\4\ This is when the FDIC handles the resolution of a failed
depository institution by making payments to insured depositors.
More commonly, the FDIC handles a failed institution by arranging a
purchase-and-assumption transaction with a healthy depository
institution. In those cases, insured depositors' funds are
transferred to the assuming institution and available at that
institution to depositors.
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Upon taking control of a failed institution as receiver, as
proposed, the FDIC would take steps necessary to limit additional
transactions to ensure, to the extent practicable, that funds would not
be received by or removed from the failed institution. These steps
might include the suspension of wire activities and new deposit account
transactions. For example, wire transactions not yet executed by the
FDIC Cutoff Point would not be allowed to occur on the day of closing.
For a failed institution operating in several time zones, the
FDIC
Cutoff Point, which would have set the latest possible time for any
particular transaction's Applicable Cutoff Time, would have been
translated into local time. For example, a 6 p.m. Eastern Time FDIC
Cutoff Point on the day an institution was closed would have meant a 5
p.m. FDIC Cutoff Point in the Central Time zone. As receiver, the FDIC
would have attempted, as it has customarily done in the past, to close
all offices of the failed institution as soon as practicable after
taking over as receiver.
Treatment of Uncollected Deposited Checks
Under the proposed rule, in determining end-of-day deposit
account
balances at a failed insured depository institution, the FDIC would
have deemed all checks deposited into and posted to a deposit account
by the Applicable Cutoff Time as part of the end-of-day deposit account
balance for insurance purposes. This approach means that the FDIC would
have used the end-of-day ledger balance of the account for purposes of
its deposit insurance determination, in contrast to using either end-
of-day available or collected funds balances. The proposed rule
differed from the FDIC's practices in an important way. In the past,
for a check that was posted to an account but not yet collected at the
time of failure--including a check already forwarded by the failed
institution for collection but not yet collected--the FDIC acted as
agent for the depositor and remitted or credited payments received on
these checks to the depositor in full. These checks were not included
in deposits on the day of failure for insurance purposes and were not
subject to deposit insurance limits.\5\ In contrast, under the proposed
rule, when a check is posted to an account at the failed institution by
the Applicable Cutoff Time, the check would have been included in the
end-of-day balance and would have been subject to deposit insurance
limits, even if uncollected.
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\5\ FDIC Adv. Op. 95-2 (Jan. 23, 1995).
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Prearranged Instructions To ``Sweep'' Funds
The proposed rule attempted to distinguish between internal
and
external sweep accounts. Internal sweep arrangements--such as those
applying
[[Page 41172]]
to zero balance accounts \6\ or where the investment vehicle is a
deposit in a foreign branch of the institution or its international
banking facility--were characterized as arrangements that sweep funds
only within the institution itself by accounting or bookkeeping
entries. External sweep arrangements--such as those connected to
investments in money market mutual funds--were characterized as
arrangements that move funds (usually by wire transfer) outside the
institution and, hence, off its books altogether.
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\6\ In the case of a zero balance account ordinarily a
customer
has a master account tied to one or more subsidiary accounts. The
institution's agreement with the customer calls for the subsidiary
account to have a zero balance at the end of each day. For example,
if funds need to be transferred from the master account to cover
checks presented against the subsidiary account, this will be done
during the nightly processing cycle. Alternatively, if there are
excess funds in the subsidiary account they will be transferred to
the master account prior to the end of the day.
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Under the proposed rule, any automated internal sweep
transaction
from one account at the failed institution to another account at the
failed institution would have been completed on the day of failure. The
FDIC as receiver, in effect, would have recognized the transfer,
pursuant to the account agreement, in determining the end-of-day
balance for deposit insurance and depositor preference purposes. Under
the proposed rule the FDIC as receiver would not, however, complete an
external sweep--a sweep in which funds leave the institution and
another entity assumes liability to the customer--if funds have not
already left the failed institution by the FDIC Cutoff Point. An
external sweep included, for example, an account where funds are swept
from a deposit account at the institution and wired to a third party
money market mutual fund every day. External sweeps also would have
included an arrangement where funds are swept from a deposit account at
a depository institution to an account or product at an affiliate of
the institution, even if the transfer is accomplished through a book-
entry at the depository institution. In some cases it would not be
practicable to stop an external sweep from occurring after the FDIC
general cutoff time. In these cases the FDIC proposed using the pre-
sweep deposit balance for insurance purposes.
The proposed rule would have applied differently to sweep
accounts
involving the transfer of funds outside the depository institution. In
those situations, the status of the funds as of the institution's day
of failure would depend on whether the funds left the institution (via
wire transfer or otherwise) before the FDIC Cutoff Point. Where funds
subject to a prearranged, automated external sweep have been
temporarily transferred to an intermediate deposit account (or omnibus
account) at the failed institution awaiting transfer to an external
source, but have not actually been transferred to the external source
(for example, the mutual fund) by the FDIC Cutoff Point, those funds
would still have been considered part of the customer's deposit account
balance for deposit insurance and receivership purposes.
The completion of prearranged internal sweep transactions
results
in the calculation of end-of-day deposit balances for insurance
proposes consistent with how such funds currently are reported on Call
and Thrift Financial Reports and are treated for assessment purposes.
As detailed in the proposed rule, the need for the FDIC to clarify the
treatment of internal sweep arrangements was motivated, in part, by the
decision in Adagio Investment Holding Ltd. v. FDIC, 338 F. Supp. 2d 71
(D.D.C. 2004) (``Adagio'').
In that case the FDIC had been appointed receiver of the
failed
Connecticut Bank of Commerce. On the night of the bank's failure, in
accordance with its customary practice, the FDIC ``completed the day's
business'' which involved processing pending transactions, including
approximately $20.2 million which had been authorized to be swept from
a demand deposit account in the bank to an account in the bank's IBF.
Because an IBF account is not a deposit for purposes of section 3(l) of
the FDI Act, the FDIC issued the holders of the IBF accounts
receivership certificates as general creditors rather than according
them priority status as depositors (pursuant to the national deposit
preference statute, described below). The creditors, claiming that the
receiver did not have authority to permit the sweeps, sued the FDIC. In
the Adagio case, the court concluded that the sweep should not have
been performed in light of the lack of ``any provision in either the
statute or regulations that would permit the sweep that occurred. * *
*'' 338 F. Supp. 2d at 81.
Post-Closing Adjustments
Under the proposed rule, the FDIC, as receiver, would have
been
able to correct errors and omissions after the day of failure and
reflect them in the day-of-closing deposit account balances.
No New Requirements Would Have Been Imposed on Open and Operating
Institutions
The proposed rule would not have required insured
institutions to
have in place computer systems capable of applying the FDIC Cutoff
Point to determine deposit account balances upon an institution's day
of failure. The FDIC, however, requested comments on whether such a
requirement should be imposed for either all institutions or,
alternatively, for ``Covered Institutions''--defined in the second part
of the proposed rule as institutions having at least $2 billion in
domestic deposits and either: More than 250,000 deposit accounts; or
total assets over $20 billion, regardless of the number of deposit
accounts.
Repo Sweep Arrangements
The preamble to the proposed rule noted that some repurchase
sweep
agreements provide for an actual sale of securities by the depository
institution to a customer (followed by the institution's repurchase of
the securities from the customer). Accordingly, when the customer uses
funds in a deposit account to make the purchase, the bank's deposit
liability to the customer is extinguished. There may be other so-called
repurchase agreements that do not provide for the actual sale and
repurchase of securities, but simply provide for the transfer of the
customer's claim from a deposit account at the depository institution
to another liability account, collateralized by either specific
securities or a pool of securities, at the same institution. In the
proposed rule, the FDIC posed the following questions:
Do some or all repurchase arrangements as actually
executed: (1) Pass title to the customer in a transaction that is
enforceable against the FDIC? or (2) create perfected security
interests that are enforceable against the FDIC?
Does the nature of some or all repurchase sweep
arrangements satisfy the definition of ``deposit'' in section 3(l) of
the FDI Act?
What arguments may be made that repurchase arrangements in
which the institution collateralizes its liability are permissible,
given restrictions on collateralizing private deposits? See Texas &
Pacific Railway Company v. Pottorff, 291 U.S. 245 (1934).
Sweeps Alternative
Under the proposed rule, funds subject to an internal sweep
that is
to take place before end-of-day balances are calculated would not be
accorded
[[Page 41173]]
treatment as deposits if they were to be swept, within the depository
institution, by prearrangement, before the institution's end-of-day
balances are determined, from a deposit to a liability not recognized
as a deposit for insurance purposes. The discussion noted that under
such an arrangement, no deposit insurance premiums would have been
assessed against these funds since they would not have been reported as
deposits by the institution. The FDIC asked whether, if the swept funds
in such arrangements were to be assessed insurance premiums, they also
should be eligible to be treated as deposits for purposes of FDIC
deposit insurance and depositor preference. The FDIC also asked whether
or to what extent such an option would involve any operational or
regulatory burden or other adverse regulatory consequences.
IV. Comments on the Proposed Rule
As noted, the FDIC received twenty-one comments on the
proposed
rule, the bulk of which addressed both parts of the proposed rule. Four
of the comments were from banking industry trade associations
(including one joint letter), two from bank regulatory authorities, ten
from large insured depository institutions, one from a law firm
representing broker-dealers who place brokered funds in insured
depository institutions, one from a member-owned electronic funds
transfer network and three from individuals. The following is a summary
of the comments we received on part one of the proposed rule--
determining deposit and other liability account balances at a failed
insured depository institution.
Use of End-of-Day Ledger Balances
All of the bank trade association commenters and many of the
large-
bank commenters agreed with the FDIC's proposal to define the deposit
account balance on the day of failure as the end-of-day ledger balance.
Further, these commenters stated that, upon an institution's failure,
the FDIC should use the end-of-day ledger balances normally calculated
by the institution; thus, such balances should not be affected by the
FDIC Cutoff Point.
FDIC Cutoff Point
The bank trade associations and large-bank commenters opposed
the
use of an FDIC Cutoff Point, proposing alternatively that the FDIC
should always use the cutoff times normally established by the insured
depository institution. They argued that introducing a new cutoff
scheme would be unfair to customers. Many commenters expressed a belief
that FDIC practices should not impinge upon the contractual
arrangements or other understandings established between the insured
depository institution and its customers. Further, it was argued that
altering the customer's understanding of how deposit transactions will
be posted would create uncertainty and may result in depositor flight.
Additionally, the implementation of an FDIC Cutoff Point was
largely viewed as technically infeasible. It was noted that deposit
systems are preprogrammed to implement cutoff times as established by
the policies of the particular insured depository institution. Adapting
these systems to accommodate an FDIC Cutoff Point would be costly,
especially since the FDIC Cutoff Point would not be known until the day
of failure.
Treatment of Sweep Account Arrangements
In general. Commenters supported at a very general level the
establishment of a regulation intended to resolve the legal confusion
brought about by the decision in Adagio. Commenters recommended that
the FDIC limit any regulation to addressing only the legal confusion
raised in Adagio. One banking trade group suggested this could be done
by language to ``explicitly provide that all automated sweep
arrangements that are codified in contract will be recognized as part
of the day's business and reflected in end-of-day ledger balances,
regardless of when the transactions are processed.'' Another banking
trade association noted its ``greatest concerns relate to the FDIC's
extensive new proposals relating to the treatment of sweep products.
Sweep transactions have been an extensively used business practice for
decades, enabling banks to secure substantial funding at reasonable
costs and their customers to achieve their financial objectives. Any
proposal that disrupts the existing treatment and expectations of
institutions and their customers vis-[agrave]-vis sweeps would
potentially impair the viability of sweeps with very serious and
unpredictable consequences.''
Generally, commenters felt the FDIC should delay a final rule
that
would go beyond narrowly addressing the Adagio concerns. One large bank
stated ``the issues raised and the potential impact to financial
markets that could result from these proposals are very substantial.
All of the proposals relating to sweeps warrant further study and
consideration by the FDIC and should be removed from this rulemaking
and should not be part of any final rule. The FDIC should consult
further with other banking and financial regulatory agencies and with
financial institutions that are key players in this market before
finalizing a rule on sweeps.'' This commenter further stated ``the
proposed regulation could have major ripple effects on other laws and
regulations that ultimately rely upon the same legal definitions of a
deposit as the Federal Deposit Insurance Act, including Regulation D,
Regulation Q, deposit insurance assessments and the nationwide 10%
deposit cap.''
Repo sweep arrangements. The FDIC's questions regarding the
nature
of funds swept through arrangements identified as repurchase agreement
sweeps generally were not addressed, other than through the overall
comment that the FDIC should only narrowly address Adagio in any final
rule. One large bank stated that it ``believes the current sweep
structures commonly used in the industry (including the structures of
securities repos) are appropriately characterized as not being deposits
under the FDIA. [The bank] further believes that any proposal to charge
FDIC insurance premiums on the amounts swept would dramatically
increase costs to banks relating to that product and could result in
the product no longer being economically viable or able to be offered
on terms that are competitive with other products offered by non-bank
market participants.''
Sweeps alternative. In the proposed rule, the FDIC asked
whether,
if the funds involved in certain sweep arrangements were to be assessed
insurance premiums, they also should be eligible to be treated as
deposits for purposes of FDIC deposit insurance and depositor
preference. No commenters addressed this question directly, although
the tenor of the comments from the large banks and bank trade
associations was that issues such as this should not be considered as
part of this rulemaking.
Consistent treatment across sweep transactions. Several
commenters
argued that, if the FDIC proceeds with the rulemaking, it should treat
each sweep transaction the same for claims purposes. One banking trade
association argued that ``all these products have one common element--
once swept from a deposit account, and until returned to the deposit
account, none of the bank's obligations meets the definition of a
`deposit' under the Federal Deposit Insurance Act and are therefore not
covered by deposit insurance in the event of the bank's insolvency.
This characterization of sweeps is consistent with the long-standing
practices of virtually every financial institution and has been the
widely accepted practice by banking regulators for decades.'' In this
regard, the commenter noted that, should the FDIC afford different
[[Page 41174]]
treatment across sweep products, it ``would therefore result in
different (and, to a certain degree, arbitrary) treatment under the
Proposal. Our members have great concern as to these potential
disparities that could result, in some cases from nothing more than
differences in the mechanisms used to execute and arrange sweep
transactions.''
To provide consistent treatment among the various sweep
products,
several commenters suggested the FDIC should do away with the internal
versus external distinction between sweep transactions as well as the
Class A versus Class B distinction. ``We urge the FDIC to eliminate
these unnecessary distinctions, to the extent that the FDIC proceeds
with rulemaking around sweeps at all, and treat similar sweep products
the same, despite different methods used by banks for processing the
necessary transfers and posting the relevant accounts.''
V. Rationale for Interim Rulemaking
As noted above, the practices being adopted in the interim
rule
were proposed in part one of the proposed rule. Hence, the FDIC is
adopting those practices through the usual public notice-and-comment
procedures pursuant to requirements in the Administrative Procedure
Act, 5 U.S.C. 553. Before adopting the interim rule as a permanent
rule, however, the FDIC invites comment on all aspects of the interim
rule, including an aspect of the proposed rule on which the FDIC had
not requested specific comment.
The interim rule addresses how the FDIC will treat sweep
accounts
upon an insured institution failure. The result is that, in many cases,
the swept funds will not be treated by the FDIC as deposit obligations
of the failed institutions. As explained above, that means the swept
funds will not be eligible for deposit insurance coverage and will not
be afforded status as a deposit under the depositor preference statute.
Commenters on the proposed rule indicated that sweep account customers
are aware of this potential consequence if the institution were to
fail. In order to ensure that sweep account customers are aware that
their funds will not be treated as deposits if the insured institution
fails, however, the FDIC will require institutions to prominently
disclose to customers whether the swept funds are deposits and the
status of the swept funds if the institution failed. The effective date
of this requirement will be deferred until July 1, 2009 to allow the
FDIC to consider specific comments on the disclosure requirement.
(Further explanation of the disclosure requirement is provided below
under ``Request for Comments.'')
VI. The Interim Rule
After fully considering the comments on the proposed rule,
FDIC has
adopted the interim rule substantially as proposed, with some
modifications in connection with the treatment of ``internal and
external'' sweep transactions, and in other limited areas. As noted,
the interim rule requires institutions to disclose to customers whether
the swept funds are deposits and the status of the swept funds if the
institution failed, but the effective date of this requirement is
deferred to allow for public comment. In addition, the FDIC will
entertain comments on all other aspects of the interim rule.
Underlying Principles
The interim rule describes the method for determining the
value and
nature of claims against a failed insured depository institution to be
used in the event of failure. Upon taking control of a failed insured
depository institution it is the receiver's responsibility to construct
an ending balance sheet for the depository institution (which becomes
the beginning balance sheet for the receivership) and determine the
value and nature of the claims against the failed institution,
including claims to be made by depositors, general creditors,
subordinated creditors, and shareholders. Such claims determinations
will be made consistent with the principles described below, which for
the most part reflect existing practices and procedures used to
determine account balances in the event of failure.
In making deposit insurance determinations and in
determining the value and nature of claims against the receivership on
the institution's date of failure the FDIC, as insurer and receiver,
will treat deposits and other liabilities of the failed institution
according to the ownership and nature of the underlying obligations
based on end-of-day ledger balances for each account using, except as
expressly provided otherwise in the interim rule, the depository
institution's normal posting procedures.
In its role as receiver of a failed insured depository
institution, in order to ensure the proper distribution of the failed
institution's assets under the FDI Act (12 U.S.C. 1821(d)(11)) as of
the FDIC Cutoff Point, the FDIC will use its best efforts to take all
steps necessary to stop the generation, via transactions or transfers
coming from or going outside the institution, of new liabilities or
extinguishing existing liabilities for the depository institution.\7\
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\7\ This principle draws a sharp distinction between
transactions involving the transfer of funds into or out of the
failed institution and transactions intended to move funds between
accounts or otherwise on the books and records of the failed
institution. The receiver will act to stop the inflow and outflow of
cash/assets at the point at which it takes control of the failed
institution; thus transactions involving the transfer of assets into
or out of the failed institution may be blocked or suspended.
Transactions internal to the failed institution's operations
initiated prior to the FDIC Cutoff Point--including those initiated
through prearranged automated instructions--will still be conducted
after the point of failure as part of a necessary process to arrive
at the end-of-day ledger balances and to establish the nature of the
claim recognized by the receiver.
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End-of-day ledger balances are subject to corrections for
posted transactions that are inconsistent with the above principles.
End-of-Day Ledger Balances and Cutoff Points
As proposed, in the interim rule the deposit or liability
account
balance used for deposit insurance determination purposes is defined as
the end-of-day ledger balance of the deposit or other liability on the
day of failure. Except as noted, the FDIC will use the cutoff rules
previously applied by the failed insured depository institution in
establishing the end-of-day ledger balance for deposit insurance
determination purposes. However, the interim rule allows the FDIC to
establish an FDIC Cutoff Point, coinciding with the point in time at
which the receiver acts to stop deposit transactions which might result
in creating new liabilities or extinguishing existing liabilities. The
FDIC Cutoff Point will facilitate the orderly winding up of the
institution and the FDIC's final determination of the ledger balances
of the deposit accounts in those cases where the institution's normal
cutoff rules prevent or impair the FDIC's ability to promptly determine
the end-of-day ledger balance of the deposit or other liability. The
intention is to complete internal postings of transactions presented or
authorized prior to the institution's normal cutoff rules or the FDIC
Cutoff Point, as applicable, according to the depository institution's
normal procedures--thus, as explained below, the nature of the
liability may change after the FDIC Cutoff Point. Any transaction--
including sweep arrangements--would be completed for that day according
to normal procedures if it involves only the movement of funds between
accounts within the confines of the depository institution. Some sweep
arrangements shift funds within the depository institution from a
[[Page 41175]]
deposit account to ownership in a sweep investment vehicle. The value
and nature of these claims will be determined as they rest on the books
and records of the depository institution as reflected in its end-of-
day ledger balances.
If the institution's ordinary cutoff time for the day's
business on
the day of failure for any particular kind of transaction precedes the
FDIC Cutoff Point, the institution's ordinary cutoff time will be used.
Where the institution's ordinary cutoff time for an individual kind of
transaction is later than the FDIC Cutoff Point, the institution's
cutoff time will be replaced by the FDIC Cutoff Point. The ``Applicable
Cutoff Time'' used for any kind of transaction thus will be the earlier
of the institution's ordinary cutoff time or the FDIC Cutoff Point.
Different kinds of transactions may have different Applicable Cutoff
Times. Transactions occurring after the Applicable Cutoff Time will be
posted a subsequent day's business, if the operations of the failed
institution are carried on by a successor institution or by the FDIC as
receiver or insurer.
The interim rule differs from the proposed rule in cases
where
deposit operations are not continued after failure in order to provide
consistency in the determination of deposit balances regardless of
whether the deposit operations were continued. In a depository
institution failure where deposit operations are not continued by a
successor institution, account transactions on the day of failure also
will be posted to the applicable accounts as described above. Since
there is no next business day in this case, rather than posting
transactions occurring after the Applicable Cutoff Time as the next
day's business, such transactions will be handled depending on the
nature of the transaction. In the case of a cash or other deposit
occurring after the Applicable Cutoff Time, such funds--which would not
be included in the end-of-day ledger balance used for claims purposes--
would be disbursed to the account owner. If a cash or other withdrawal
is made after the Applicable Cutoff Time, such funds--again which would
not be included in the end-of-day ledger balance used for claims
purposes--could be used by the receiver to satisfy a claim against the
receivership.\8\
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\8\ A deposit account withdrawal in the form of an official
check drawn on the failed depository institution would not be used
by the receiver to satisfy the insured deposit claim. Official items
are considered to be deposits for deposit insurance purposes;
therefore, such official withdrawals would be treated differently
from cash withdrawals.
---------------------------------------------------------------------------
The interim rule does not establish any new operational
requirements for insured institutions relative to the FDIC Cutoff
Point. Also, the interim rule explicitly authorizes the FDIC, as
receiver, to correct errors and omissions after the day of failure and
reflect them in the end-of-day ledger balances.
Several commenters argued against the establishment of an
FDIC
Cutoff Point and recommended that the FDIC use end-of-day balances as
normally calculated by the insured depository institution. As noted
above, the FDIC will apply the institution's normal cutoff times in
most cases, but establishing an FDIC Cutoff Point is essential to the
efficient finalization of end-of-day ledger balances in some
situations. Strictly applying a depository institution's pre-
established cutoff times in all circumstances is inconsistent with the
duties and responsibilities of the receiver--as articulated in the
principle indicated above. In the event of failure the receiver will
take control of the failed institutions and simultaneously will act to
stop deposit or other transactions involving creating new liabilities
or extinguishing existing liabilities. In many cases, this can be done
consistent with the institution's normal cutoff times, but in others it
cannot and the FDIC will establish an FDIC Cutoff Point. If the
receiver is successful in stopping these external transactions after it
takes control there will be no new transactions to be posted affected
by an FDIC Cutoff Point. In this case, the end-of-day ledger balances
on the day of failure will be calculated using the failed institution's
pre-established cutoff points. If the receiver is unsuccessful in
stopping the external transactions, the FDIC Cutoff Point establishes a
basis for posting these inadvertent transactions the following day, if
that is the course of action selected by the receiver.
Treatment of Uncollected Deposited Checks
As proposed, in determining deposit account balances at a
failed
insured depository institution, the FDIC will deem all checks deposited
into and posted to a deposit account by the Applicable Cutoff Time as
part of the end-of-day ledger balance for insurance purposes. As
detailed in the proposed rule, this treatment of uncollected deposited
checks is warranted because: Depository institutions use and calculate
the ledger balance in a more consistent way than other balances; it is
consistent with the way that depository institutions report deposits on
Call Reports and Thrift Financial Reports; it is the balance the FDIC
uses to determine an institution's assessment base for calculating the
institution's deposit insurance assessments; \9\ it is the easiest
balance for depositors to understand; and it is the most frequently
used balance on financial statements provided to customers. Using
ledger balances also is consistent with the definition of a deposit in
the Federal Deposit Insurance Act (``FDI Act''), which includes
balances both ``conditionally'' or ``unconditionally'' credited to a
deposit account. 12 U.S.C. 1813(l).
---------------------------------------------------------------------------
\9\ The FDIC's recent revisions to the FDIC's risk-based
assessment system have made an institution's assessment base, which
is used to determine its deposit insurance assessment, virtually
identical with an institution's deposits as defined in the Federal
Deposit Insurance Act. The revisions eliminated the ``float''
deductions previously used to compute an institution's assessment
base; hence, deposits posted to a deposit account but not yet
collected are now part of the assessment base. The stated rationale
for eliminating the float deduction from the calculation of an
institution's assessment base was that such deductions were small
and decreasing as a result of legal, technological and system
payment changes. 71 Fed. Reg. 69720 (Nov. 30, 2006).
---------------------------------------------------------------------------
Further, especially in a large depository institution
failure,
using end-of-day ledger balances may be the only operationally feasible
means for the FDIC to make deposit insurance determinations timely and
expeditiously. As discussed in more detail in the Large Bank
Modernization Final Rule, the FDIC is statutorily obligated to pay
insured deposits ``as soon as possible'' after an insured depository
institution fails. 12 U.S.C. 1821(f)(1). The FDIC places a high
priority on providing access to insured deposits promptly and, in the
past, has usually been able to allow most depositors access to their
deposits on the business day following closing. The largest insured
institutions today are much bigger than any institution has been in the
past and are growing increasingly complex. Providing prompt access to
depositors if one of these institutions were to fail would prove
difficult if adjustments for uncollected funds were necessary.
This treatment of uncollected deposited checks, however, will
differ from the FDIC's past practice in an important way. In the past,
for a check that was posted to an account but not yet collected at the
time of failure--including a check already forwarded by the failed
institution for collection but not yet collected--the FDIC acted as
agent for the depositor and remitted or credited payments received on
these checks to the depositor in full. These checks were not included
in deposits on the day of failure for insurance purposes and were not
subject to deposit
[[Page 41176]]
insurance limits.\10\ In contrast, under the interim rule, when a check
is posted to an account at the failed institution as provided by the
Applicable Cutoff Time, the check will be included in the end-of-day
ledger balance and will be subject to deposit insurance limits, even if
uncollected.\11\
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\10\ FDIC Adv. Op. 95-2 (Jan. 23, 1995).
\11\ The FDIC's treatment of uncollected checks is subject to
the FDIC's rights and obligations under the FDI Act. See, e.g., 12
U.S.C. 1822(d); FDIC v. McKnight, 769 F.2d 658 (10th Cir. 1985);
cert. denied sub nom., All Souls Episcopal Church v. FDIC, 475 U.S.
1010 (1986). Although the FDIC will immediately honor uncollected
checks through the payment of deposit insurance and the issuance of
receivership certificates, if a check is ultimately uncollectible,
the ledger balance of the depositor will be adjusted accordingly,
and the FDIC will seek reimbursement from the depositor and adjust
the depositor's receivership claim (if any) as necessary.
---------------------------------------------------------------------------
Some depositors may receive less favorable treatment under
the
interim rule than if the FDIC were to continue to use its past approach
to handling uncollected deposited checks. The increasing speed with
which checks are processed as a result of electronic check processing,
the use of checking account debit cards and other developments,
however, should limit the effect of the final rule in this regard.
Moreover, the past approach would not be feasible in a larger bank
failure, and the FDIC must plan for all contingencies.
Prearranged Instructions To ``Sweep'' Funds
The proposed rule distinguished between internal and external
sweep
accounts. This distinction was created to recognize the receiver's
responsibility, upon taking control of the failed institution, to stop
the generation of new deposit or other transactions which might result
in creating new liabilities or extinguishing existing liabilities for
the depository institution or its customers to protect the appropriate
distribution to claimants.
Under the interim rule, any automated sweep transaction
transferring funds internally from one deposit account at the failed
institution to a sweep investment vehicle at the failed institution
will be completed on the day of failure. In the case of sweeps out of
the failed institution into external investment vehicles, the swept
funds will be treated consistent with their status in the end-of-day
ledger balances. If an expected transfer to the external sweep
investment vehicle is not completed prior to the FDIC Cutoff Point, the
external investment will not be purchased and the funds will remain in
the account identified on the end-of-day ledger balance.
Where funds are swept internally to an investment vehicle at
the
failed institution, the FDIC will recognize the transfer, pursuant to
the account agreement, in determining the end-of-day ledger balance for
deposit insurance and depositor preference purposes. This approach is
consistent with the principle articulated in the interim rule that the
FDIC will treat deposits and other liabilities of the failed
institution on the date of failure based on the ownership and the
nature of the underlying obligations as reflected in the end-of-day
ledger balance. The completion of prearranged internal sweep
transactions in the calculation of end-of-day deposit and other
balances for insurance proposes also is consistent with how such funds
currently are reported on Call and Thrift Financial Reports and are
treated for assessment purposes.
Eurodollar and IBF accounts are two examples of internal
sweep
investment vehicles. Accounts that include a Eurodollar or IBF sweep
arrangement typically begin each business day with balances only in a
domestic deposit account. At the end of the business day, the
customer's end-of-day ledger balance is reported as a Eurodollar
account (typically associated with the bank's branch in the Cayman
Islands or Bahamas) or an IBF account. At the start of the next
business day, the depository institution will report the balance as
being back in the domestic deposit account. The cycle typically repeats
itself daily.
Usually the underlying contract for a Eurodollar sweep
specifies
that the obligation at the foreign branch is not payable in the United
States and, hence, is not a deposit,\12\ for deposit insurance and
depositor preference purposes. Upon an institution's failure, amounts
in a Eurodollar account in a foreign branch of the failed institution
are treated as unsecured, non-deposit liabilities and are not eligible
for insurance or depositor preference status. The same treatment will
apply to sweeps to IBFs, which by statutory definition are not
deposits. Eurodollar and IBF accountholders will thus be accorded
general creditor status in the receivership estate.
---------------------------------------------------------------------------
\12\ The definition of ``deposit'' in the FDI Act expressly
excludes: ``Any obligation of a depository institution which is
carried on the books and records of an office of such bank or
savings association located outside of any State, unless (i) such
obligation would be a deposit if it were carried on the books and
records of the depository institution, and would be payable at an
office located in any State; and (ii) the contract evidencing the
obligation provides by express terms, and not by implication, for
payment at an office of the depository institution located in any
State.'' 12 U.S.C. 1813(l)(5)(A). Also, the FDI Act defines IBF
obligations as non-deposits, which are not eligible for deposit
insurance or deposit preference status. 12 U.S.C. 1813(l)(5)(B).
---------------------------------------------------------------------------
It is important for customers to be aware that whether an
account
has deposit status--versus general creditor status--can be far more
important for large depositors than the question of whether the account
is fully insured. To illustrate, assume that $5.1 million is swept from
a customer's checking account into a Eurodollar account. Further,
assume that the failed institution's assets would be worth
approximately eighty percent of its total deposit liabilities. In this
illustration, if the funds had remained deposits the customer would
have received approximately $4.1 million ($100,000 in deposit insurance
plus an eighty percent dividend on the uninsured portion of the
deposit), thus losing $1 million. However, since Eurodollar accounts
are not deposits for purposes of either FDIC insurance or depositor
preference, in this situation the customer would lose the entire $5.1
million upon the institution's failure.
Institutions do not pay deposit insurance assessments on
liabilities denominated, as of an institution's end-of-day ledger
balance, as foreign deposits or IBF deposits. Some of the commenters
who addressed sweep account issues raised in the proposed rule
acknowledged that sweep products (particularly those involving the
transfer of funds from deposit accounts to non-U.S. deposits,
securities repos, fed funds and money market mutual funds) result in
obligations of the insured institution that would not be eligible for
insurance and do not have deposit preference status. One commenter
stated that, ``[m]ost of these products are designed for and used by
corporate and institutional customers who are sophisticated enough to
understand the business terms,'' thus suggesting that such customers
are aware of the potential consequences in the event of failure of the
institution.
Under the interim rule, the sweep to an IBF (for example, as
described in the Adagio decision) will be completed for that day by the
receiver on the day of failure and the account holders, who hold end-
of-day ledger IBF accounts after the sweep, will be deemed to be
general creditors of the receivership, rather than depositors, under
the deposit preference statute.\13\
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\13\ Rights are fixed as reflected in the depository
institution's end-of-day ledger balances. Those rights would not be
changed if, for example, it was impractical to reprogram the bank's
computers before a liability swept to a foreign branch of an insured
institution as of the day of the institution's failure and was
treated by the computer as having been swept back to a deposit
account at a bridge bank or assuming bank serving as the successor
to the failed institution.
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[[Page 41177]]
Repo sweep arrangements are another example of sweep
arrangements
that are generally conducted via internal transfers on the
institution's books. Repo sweeps can differ considerably in
documentation, actual execution, and timing. The FDIC, to the extent
consistent with the principles articulated in the interim rule, will
carry out repo sweeps in reaching end-of-day ledger balances. If as of
the end-of-day ledger balance the repo sweep customer is the legal
owner of identified securities subject to a repurchase agreement, the
FDIC will acknowledge that ownership interest.
Based on industry information, as reflected in some comment
letters, money market mutual fund sweeps may be structured in a variety
of ways. In some cases the money market mutual funds shares are held
directly in the name of the sweep account holder, but in other cases
the money market mutual fund account is either in the name of the
depository institution or in the name of the transfer agent for the
mutual fund. Shares are sold or allocated to the individual sweep
customer depending on the particulars of the sweep arrangement.
Further, some money market mutual fund sweep arrangements result in a
``same-day'' purchase of fund shares while ``next-day'' sweeps delay
the purchase of fund shares by the customer until the day following the
investment decision.
Regardless of the internal mechanics of the money market
mutual
fund sweep arrangement, under the interim rule the FDIC will treat
funds swept in connection with a money market mutual fund sweep
arrangement consistent with the account where the funds are reported as
reflected in the end-of-day ledger balances. The results of this
determination may be affected by whether the sweep arrangement
contemplated the movement of funds outside the institution. If an
expected transfer is not completed on the day of failure due to the
application of the second principle discussed above (that the receiver
will stop the generation of new deposit or other transactions which
might result in creating new liabilities or extinguishing existing
liabilities for the depository institution or its customers), the
account holder's rights will be fixed based on where the funds actually
reside as of the end-of-day ledger balance. As with the treatment of
other sweep products, this treatment is consistent with the principle
that the FDIC will treat deposits and other liabilities of the failed
institution on the date of failure based on the ownership and the
nature of the underlying obligations as reflected in the end-of-day
ledger balance.
Money market mutual fund sweeps are the most prevalent case
involving a sweep investment vehicle designed to move outside of the
depository institution, and have them come to rest in a separate legal
entity. Another example is where funds are swept from a deposit account
at a depository institution to an account or product at an affiliate of
the institution, even if the transfer is accomplished through a book-
entry at the depository institution. When the sweep investment vehicle
rests outside the depository institution, under the interim rule the
status of the funds as of the institution's day of failure will depend
on whether the funds have been used to purchase the sweep investment
vehicle prior to the FDIC Cutoff Point. For some sweep arrangements the
purchase may not be completed for that day prior to the FDIC Cutoff
Point. For example, an institution could have an arrangement to
transfer funds from a customer's demand deposit account into an account
at an affiliated depository institution, to be conducted each day late
in the evening. In this case, under the interim rule if the funds had
not been transferred to the sweep investment vehicle as of the FDIC
Cutoff Point, they still will be considered to be a deposit for
insurance purposes. This treatment is in furtherance of the FDIC's
obligation as receiver to stop the generation of new deposit or other
transactions that might result in creating new liabilities or
extinguishing existing liabilities for the depository institution after
the institution has failed.
In some cases it will not be practicable to stop
automatically
generated sweeps from occurring after the FDIC Cutoff Point, requiring
the necessary adjustments post closing.
Sweeps Alternative
Under the interim rule, the receiver will establish the value
and
nature of claims based on the end-of-day ledger balance for each
account. In the proposed rule the FDIC asked whether certain swept
funds, if assessed insurance premiums, also should be eligible to be
treated as deposits for purposes of FDIC deposit insurance and
depositor preference. Based in part on the comments received on this
issue, the FDIC has decided not to change current practices.
VII. Request for Comments
The FDIC invites interested parties to submit comments during
a 60-
day comment period on all aspects of the interim rule, including
whether insured depository institutions should be required to disclose
to sweep account customers that swept funds will not be treated as
deposits if the institution were to fail. More specifically, comments
are requested on Sec. 360.8(e) of the interim rule which, as indicated
above, is subject to an extended delayed effective date:
In all sweep account contracts and account statements
reflecting
sweep account balances, institutions must prominently disclose
whether swept funds are deposits within the meaning of 12 U.S.C.
1813(l). If the funds are not deposits, the institution must further
disclose the status such funds would have if the institution
failed--for example, general creditor status or secured creditor
status. Such disclosures must be consistent with how the institution
reports such funds on its Call Reports or Thrift Financial Reports.
As noted above, several commenters stated that sweep
customers
generally are aware of how the swept funds would be treated in the
event of failure. Over the past year, FDIC staff held meetings with
groups of corporate treasurers to discuss the potential implications of
the proposed rule. During these meetings, corporate treasurers stated
that many institutions provided some disclosure to sweep customers
about the potential consequences of these transactions. However, it was
evident those disclosures did not result in a consistent understanding
of how these funds would be treated in the event of failure.
This interim rule clearly states the FDIC's intent to use for
claims purposes end-of-day ledger balances as normally reflected on the
books and records of the insured depository institution. Prior to this
end-of-day ledger balance calculation, funds could have been swept from
a deposit account into a sweep investment vehicle. The movement of
funds from a deposit account into a sweep investment vehicle not
considered to be a deposit for insurance purposes can have significant
implications for the sweep customers. In the case of a Eurodollar
sweep, for example, the swept funds would have general creditor
standing with a considerably higher loss exposure relative to an
uninsured deposit claim.
The FDIC is concerned that the treatment of swept funds in
the
event of failure is not clearly understood by sweep customers. A better
understanding of this treatment by sweep customers is important to
avoid
[[Page 41178]]
misconceptions which may arise in the event of failure. While many
institutions currently provide some disclosures to sweep customers, the
FDIC believes the significance of the consequences to depositors of
some sweep transactions necessitates consistent disclosures by
institutions providing sweep services. In this context, it is
particularly important for institutions to disclose to sweep customers
that the completion of some sweep transactions may result in their
funds being subject to treatment as general creditor claims.
In the Large Bank Modernization Final Rule--the companion to
this
interim rule--the FDIC discusses several important objectives
including: (1) Providing liquidity to depositors, (2) enhancement of
market discipline, (3) equity in the treatment of depositors of insured
institutions and (4) preservation of franchise value in the event of
failure. These objectives can be undermined if sweep customers do not
have a clear understanding of the treatment of swept funds in the event
of failure.
Specifically the FDIC is interested in responses to the
following
questions:
What disclosures are currently being made in connection
with sweep account arrangements which allow the sweep customer to
ascertain the treatment of such funds in the event of failure?
What form do these disclosures take, when are they
provided, and what is their frequency?
Are the disclosures consistent with how such funds are
reported on Call or Thrift Financial Reports?
VIII. Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law
106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the Federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. No commenters suggested that the proposed rule was
unclear, and the interim rule is substantively similar to the proposed
rule.
IX. Paperwork Reduction Act
OMB Number: New Collection.
Frequency of Response: On occasion.
Affected Public: Insured depository institutions offering
sweep
account products.
Estimated Number of Respondents: 1,170 to 1,970.
Estimated Time per Response: 25-49 hours per respondent.
Estimated Total Annual Burden: 28,870-84,400 hours.
Background/General Description of Collection: The interim
rule
contains collections of information pursuant to the Paperwork Reduction
Act (44 U.S.C. 3501 et seq.) (``PRA''). In particular, the interim rule
requires, subject to an extended delayed effective date, depository
institutions offering sweep products to disclose whether the swept
funds are deposits for insurance purposes and, if not, how these funds
would be treated in the event of failure. The collections of
information contained in this section of the interim rule have been
submitted to OMB for review.
Estimated costs: Compliance with the disclosure requirement
will
require insured depository institutions offering sweep products, which
do not currently provide adequate disclosures, to modify their sweep
account documentation, including customer account statements, to
include new language indicating whether swept funds are a deposit for
insurance purposes and, if not, how such funds would be treated in the
event of failure. Further, additional documentation may be provided to
sweep customers as part of a statement mailing on a one-time basis.
Implementation cost will be mitigated by the delayed effective date of
this requirement. Sweep account documents must be reprinted
periodically in any case, and the cost of including the disclosure
requirement should be minimal. Further, most insured depository
institutions already make certain disclosures to customers, and the new
requirements would simply replace these disclosures. After
implementation, on-going cost should be negligible. Future printings of
sweep account documentation will have to be conducted in any case to
replenish stock, and the disclosure requirement should not add to the
cost of such printings given its brief nature. Customer account
statements would continue to be provided according to normal business
practices. Further, staff training must be conducted periodically, and
the disclosure requirement should not materially add to the length or
complexity of this training.
The exact number of insured depository institutions offering
sweep
products is unknown. It is the FDIC's experience that the vast majority
of large institutions offer some sweep arrangement as part of their
cash management services. The prevalence of sweep offerings among
smaller community banks is far less prevalent. This analysis assumes
that all insured depository institutions with total assets of at least
$2 billion offer at least one sweep product (370 institutions). It is
further assumed that between 10 and 20 percent of the remaining 8,000
insured institutions also offer a sweep product (800 to 1,600
institutions). The total number of respondents is estimated to be
between 1,170 and 1,970.
Implementation costs will vary based on the size, nature and
scope
of the depository institutions sweep programs. It is estimated that
compliance costs for the very largest and super-regional banking
organizations are between $25,000 and $50,000 while smaller regional
organizations were placed at $10,000 to $20,000. Other large
organizations (those with at least $2 billion in total assets) were
assigned a cost estimate of $1,500 to $3,000. Costs for community banks
were estimated to be between $1,000 and $2,000. Under these
assumptions, the overall disclosure costs are estimated to be between
$1.73 million and $3.46 million at the lower end of the number of
institutions believed to be engaging in sweep operations (1,170). If as
many as 1,970 depository institutions maintain sweep operations the
total costs are estimated to range between $2.53 million and $5.06
million.
Based on the above cost estimates the number of hours needed
to
meet the disclosure requirements per institution is calculated as
follows. $1.73 million / 1,170 institutions = $1,480 per institution.
Assuming an hourly cost of $60 for employee time generates the minimum
time estimate of 25 hours per institution. The upper range of the cost
estimate is $2,960 which is equivalent to 49 hours ($3.46 million /
1,170 institutions / $60 hourly employee cost = 49 hours). Total hours
are estimated at a minimum as: ($1.73 million / $60 hourly employee
cost = 28,870 hours) and at the upper range as: ($5.06 million / $60
hourly employee cost = 84,400 hours).
Comments: In addition to the questions raised elsewhere in
this
Preamble, comment is solicited on: (1) Whether the collection of
information is necessary for the proper performance of the functions of
the agency, including whether the information will have practical
utility; (2) the accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used; (3) the quality, utility, and clarity
of the information to be collected; (4) ways to minimize the burden of
the collection of information on those who are to respond, including
through the use of appropriate automated, electronic, mechanical, or
other technological collection techniques or other forms of information
technology; e.g., permitting electronic submission of responses; and
(5) estimates of capital or start-up costs
[[Page 41179]]
and costs of operation, maintenance, and purchases of services to
provide information.
Addresses: Interested parties are invited to submit written
comments to the FDIC concerning the Paperwork Reduction Act
implications of this proposal. Such comments should refer to
``Processing of Deposit Accounts, 3064-AD26.'' Comments may be
submitted by any of the following methods:
Agency Web Site:
http://www.FDIC.gov/regulations/laws/
federal. Follow instructions for submitting comments on the Agency Web
Site.
E-mail: comments@FDIC.gov.
Include ``Processing of Deposit
Accounts, 3064-AD26'' in the subject line of the message.
Mail: Executive Secretary, Attention: Comments, FDIC, 550
17th St., NW., Room F-1066, Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street Building (located
on F Street), on business days between 7 a.m. and 5 p.m. (EST).
A copy of the comments may also be submitted to the OMB
desk officer for the FDIC, Office of Information and Regulatory
Affairs, Office of Management and Budget, New Executive Office
Building, Room 3208, Washington, DC 20503.
Public Inspection: All comments received will be posted
without
change to
http://www.fdic.gov/regulations/laws/federal including any
personal information provided. In accordance with the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.) the FDIC may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid Office of Management
and Budget (OMB) control number.
X. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires a federal
agency
publishing a notice of proposed rulemaking to prepare and make
available for public comment an initial regulatory flexibility analysis
that describes the impact of the proposed rule on small entities. 5
U.S.C. 603(a). As defined in regulations issued by the Small Business
Administration (13 CFR 121.201), a ``small entity'' includes a bank
holding company, commercial bank or savings association with assets of
$165 million or less (collectively, small banking organizations). The
RFA provides that an agency is not required to prepare and publish a
regulatory flexibility analysis if the agency certifies that the
proposed rule would not have a significant impact on a substantial
number of small entities. 5 U.S.C. 605(b).
In publishing the proposed rule the FDIC certified that the
proposed rule would not have a significant economic impact on a
substantial number of small entities. The rationale for this
certification was that the proposed rule would establish the FDIC's
practice for determining deposit account balances at a failed insured
depository institution and would impose no requirements on insured
depository institutions.
The interim rule imposes a disclosure requirement on all
insured
depository institutions offering one or more sweep account products.
This requirement is subject to an extended delayed effective date to
allow the FDIC to consider specific comments on the disclosure
requirement before insured depository institutions must comply with it.
Preliminarily, the FDIC believes the disclosure requirement in the
interim rule will not have a substantial impact on a substantial number
of small banking organizations, mainly because such entities are much
less likely than larger insured depository institutions to offer sweep-
account products. Such products are typically offered by insured
depository institutions serving large commercial and institutional
customers. The FDIC welcomes comments on whether and, if so, to what
extent small banking organizations will be affected by the disclosure
requirement in the interim rule.
XI. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the interim rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
List of Subjects in 12 CFR Part 360
Banks, Banking, Savings associations.
0
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation hereby amends part 360 of title 12 of the
Code of Federal Regulations as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
0
1. The authority citation for part 360 continues to read as follows:
Authority: 12 U.S.C. 1819(a) Tenth, 1821(d)(1),
1821(d)(10)(c),
1821(d)(11), 1821(e)(1), 1821(e)(8)(D)(i), 1823(c)(4), 1823(e)(2);
Sec. 401(h), Pub. L. 101-73, 103 Stat. 357.
0
2. Add new Sec. 360.8 to read as follows:
Sec. 360.8. Method for determining deposit and other liability
account balances at a failed insured depository institution.
(a) Purpose. The purpose of this section is to describe the
process
the FDIC will use to determine deposit and other liability account
balances for insurance coverage and receivership purposes at a failed
insured depository institution.
(b) Definitions.--(1) The FDIC cutoff point means the point
in time
established by the FDIC after it has been appointed receiver of a
failed insured depository institution and takes control of the failed
institution.
(2) The applicable cutoff time for a specific type of deposit
account transaction means the earlier of either the failed
institution's normal cutoff time for that specific type of transaction
or the FDIC cutoff point.
(3) Close-of-business account balance means the closing
end-of-day
ledger balance of a deposit or other liability account on the day of
failure of an insured depository institution determined by using the
applicable cutoff times. This balance may be adjusted to reflect steps
taken by the receiver to ensure that funds are not received by or
removed from the institution after the FDIC cutoff point.
(c) Principles.--(1) In making deposit insurance
determinations and
in determining the value and nature of claims against the receivership
on the institution's date of failure the FDIC, as insurer and receiver,
will treat deposits and other liabilities of the failed institution
according to the ownership and nature of the underlying obligations
based on end-of-day ledger balances for each account using, except as
expressly provided otherwise in this section, the depository
institution's normal posting procedures.
(2) In its role as receiver of a failed insured depository
institution, in order to ensure the proper distribution of the failed
institution's assets under the FDI Act (12 U.S.C. 1821(d)(11)) as of
the FDIC Cutoff Point, the FDIC will use its best efforts to take all
steps necessary to stop the generation, via transactions or transfers
coming from or going outside the institution, of new liabilities or
extinguishing existing liabilities for the depository institution.
(3) End-of-day ledger balances are subject to corrections for
posted
[[Page 41180]]
transactions that are inconsistent with the above principles.
(d) Determining closing day balances.--(1) In determining
account
balances for insurance coverage and receivership purposes at a failed
insured depository institution, the FDIC will use close-of-business
account balances as may be adjusted for funds that are received by or
removed from the institution after the FDIC cutoff point.
(2) A check posted to the close-of-business account balance
but not
collected by the depository institution will be included as part of the
balance, subject to the correction of errors and omissions and
adjustments for uncollectible items that the FDIC may make in its role
as receiver of the failed depository institution.
(3) In determining close-of-business account balances, the
FDIC
will recognize contractual, automated transfers (or sweeps) of funds
from a deposit account to a non-deposit account or investment vehicle
at the institution scheduled to take place before the final calculation
of the institution's end-of-day ledger balances for that day.
(4) For deposit insurance and receivership purposes in
connection
with the failure of an insured depository institution, a depositor's
and other liability-holder's rights will be determined as of the point
the close-of-business account balance is calculated. These rights may
be adjusted as necessary to account for funds that are received by or
removed from the institution after the FDIC cutoff point.
(e) Effective July 1, 2009, in all sweep account contracts
and
account statements reflecting sweep account balances, institutions must
prominently disclose whether swept funds are deposits within the
meaning of 12 U.S.C. 1813(l). If the funds are not deposits, the
institution must further disclose the status such funds would have if
the institution failed--for example, general creditor status or secured
creditor status. Such disclosures must be consistent with how the
institution reports such funds on its Call Reports or Thrift Financial
Reports.
By order of the Board of Directors.
Dated at Washington, DC, this 17th day of June, 2008.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E8-15493 Filed 7-16-08; 8:45 am]
BILLING CODE 6714-01-P
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