April 11, 1994
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 16-94
INVESTMENT ISSUES COMMITTEE NO. 7-94
MEMBERS - ONE PER COMPLEX NO. 24-94
RE: DAYLIGHT OVERDRAFT PRICING
__________________________________________________________
In the 1980's the Federal Reserve Board (the "Board")
developed a payments system risk reduction program designed to
reduce both the direct risk to the Federal Reserve of overdrafts
at Reserve Banks and systemic risk stemming from the failure of a
participant on a private large-dollar transfer network.
In 1985, the Board established a policy of capping net
intraday ("daylight") overdrafts of depository institutions. The
Board adopted refinements to its policy in 1987 and 1990.
Currently, depository institutions establish a maximum amount of
intraday overdrafts that they may incur in their account at the
Reserve Banks. This maximum, or net debit cap, is a multiple of
a depository institution's risk-based capital and is based on the
institution's assessment of its own creditworthiness, credit
policies and operational controls. The self-assessment is done
using guidelines established by the Board and is reviewed by the
institution's primary supervisory agency examiners.
Effective April 14, 1994, the Board is adopting a new
component to its payments system risk reduction program, under
which Reserve Banks will charge a fee for average daily intraday
overdrafts in reserve and clearing accounts. The fee will be
phased-in over a three year period. Under the current 10-hour
Fedwire operating day, beginning on April 14, 1994, the fee will
be
10 basis points (on an annual basis), rising to 20 basis points
on April 13, 1995, and 25 basis points on April 11, 1996.
The average daily overdraft will be calculated by dividing
the sum of the negative reserve or clearing account balances at
the end of each minute of the scheduled Fedwire operating day
(with positive balances set to zero) by the total number of
minutes in the scheduled Fedwire operating day.
The Board has provided a de minimis level of free overdrafts
by incorporating a deductible into its pricing policy. The
deductible is an amount equal to 10 percent of the risk-based
capital used by the institution in calculating its net debit cap.
The gross fee will be reduced by the amount of the deductible,
valued at the daylight overdraft fee for a 10-hour operating day.
If you have not already done so, we urge you to contact your
custodian bank(s) to discuss the potential impact of the Reserve
Banks' daylight overdraft charges on your custody arrangement.
We understand that some custodian banks have communicated to
clients an intention not to pass daylight overdraft charges along
to clients while others may consider passing charges only to
clients to whom the bank's intra-day overdraft with its Federal
Reserve bank can be attributed. Many funds and custodian banks
are working cooperatively with their clients to minimize or
prevent the occurrence of daylight overdrafts.
One particular issue that you may want to address with your
custodian bank(s), and with the dealers with whom your funds
conduct repurchase agreements, is the impact of daylight
overdrafts caused by the return of collateral on repurchase
agreements. Collateral is ordinarily returned early in the day
to the dealer's clearing bank triggering payment of the
repurchase agreement proceeds to a fund's custodian bank. The
payment of the repurchase proceeds may create a negative balance
in the dealer's account at
the clearing bank. The negative balance will not be covered
until the collateral as been reassigned to current day repurchase
agreements.
The dealer's clearing bank may pass the resultant daylight
overdraft charges on to the dealer who will need to determine how
to eliminate or cover these additional costs. Some dealers have
approached fund groups with the following requests/solutions:
1. return collateral to the dealer's clearing bank later
in the day
2. use triparty repos where the fund enters into an
agreement with a dealer and a clearing bank so that all
cash and securities movements take place within the
clearing bank
It has been suggested that the Institute hold a meeting to
assure that members are fully informed about this matter and to
take stock of members' experience in preparing for and adapting
to the Fed's new daylight overdraft pricing policy. We would
appreciate your returning the attached form to Diane Butler,
Director - Operations & Fund Custody at fax # 202/326-5841 to
help us determine the need for such a meeting.
In any case, we will monitor this issue and keep you
informed of developments.
Thank you for your attention to this matter.
Donald J. Boteler
Vice President - Operations
Attachment
INVESTMENT COMPANY INSTITUTE
Daylight Overdraft Pricing
[ ] Yes, I believe a meeting is necessary and I would either
attend or send someone.
[ ] No, I believe a meeting is not necessary at this time.
NAME
FIRM
TELEPHONE
Please return to:
Diane Butler
Director - Operations & Fund Custody
FAX: 202/326-5841