Processing of Deposit Accounts in the Event of an Insured Depository Institution Failure, 5797-5807 [E9-2113]
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5797
Rules and Regulations
Federal Register
Vol. 74, No. 20
Monday, February 2, 2009
This section of the FEDERAL REGISTER
contains regulatory documents having general
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are keyed to and codified in the Code of
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NUCLEAR REGULATORY
COMMISSION
10 CFR Chapter I
RIN 3150–AH84
Notification of Impending Waiver
Termination
AGENCY: Nuclear Regulatory
Commission.
ACTION: Notice of impending waiver
termination.
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BILLING CODE 7590–01–P
Section 651(e) of the Energy
Policy Act of 2005 (EPAct) authorized
the U.S. Nuclear Regulatory
Commission (Commission or NRC) to
issue a time-limited waiver (70 FR
51581; August 31, 2005) to allow
continued use and possession of
naturally-occurring and acceleratorproduced radioactive materials (NARM)
while the Commission developed a
regulatory framework for regulation of
the new byproduct material. The
Commission has begun terminating the
time-limited waiver in phases in
accordance to the provisions of the
‘‘Plan for the Transition of Regulatory
Authority Resulting from the Expanded
Definition of Byproduct Material’’
(transition plan) issued by the
Commission on October 19, 2007 (72 FR
59157). The first phase of waiver
terminations occurred on November 30,
2007 (72 FR 68043), and the second
phase occurred on September 30, 2008
(73 FR 14376).
This document provides advance
notification that on August 7, 2009, the
Commission will terminate the timelimited waivers for all remaining nonAgreement States and Canadian licenses
that are under NRC jurisdiction.
Alaska, Connecticut, Hawaii,
Michigan, New Jersey, and Virginia.
As provided in the transition plan, for
existing NRC licensees, NARM use
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FOR FURTHER INFORMATION CONTACT:
Shirley Xu, Office of Federal and State
Materials and Environmental
Management Programs, U.S. Nuclear
Regulatory Commission, Washington,
DC 20555–0001, telephone (301) 415–
7640 or e-mail Shirley.xu@nrc.gov.
Dated at Rockville, Maryland, this 26th day
of January 2009.
For the Nuclear Regulatory Commission.
Annette L. Vietti-Cook,
Secretary of the Commission.
[FR Doc. E9–2179 Filed 1–30–09; 8:45 am]
[NRC–2006–0011]
SUMMARY:
amendments are required within 6
months from the date of waiver
termination. For NARM users in nonAgreement States and Canadian
licensees without a NRC license, the
license applications are required within
12 months from the date waiver
termination.
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: Final rule.
SUMMARY: The FDIC is adopting a final
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 final
rule represent a continuation of longstanding FDIC procedures in processing
such balances at a failed depository
institution. The final rule also imposes
certain disclosure requirements in
connection with sweep accounts. The
final rule replaces the FDIC’s interim
rule on this subject and applies to all
insured depository institutions.
DATES: Effective Dates: The final rule is
effective March 4, 2009.
FOR FURTHER INFORMATION CONTACT:
James Marino, Project Manager, Division
of Resolutions and Receiverships, (202)
898–7151 or jmarino@fdic.gov; or
Joseph A. DiNuzzo, Counsel, Legal
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Division, (202) 898–7349 or
jdinuzzo@fdic.gov.
SUPPLEMENTARY INFORMATION:
I. 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.
A deposit account balance can be
affected by transactions 1 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
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.2
In the past, the FDIC usually took over
an institution as receiver after it had
closed on a Friday. For institutions with
1 A deposit account transaction, such as deposits,
withdrawals, transfers and payments, causes funds
to be debited from or credited to the account.
2 Some depository institutions operate ‘‘realtime’’ 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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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.
In July 2008, the FDIC issued an
interim rule on the ‘‘Processing of
Deposit Accounts in the Event of an
Insured Depository Institution Failure’’
(‘‘interim rule’’).3 Generally, the interim
rule established practices for
determining deposit and other liability
account balances at a failed insured
depository institution. Concurrent with
the adoption of the interim rule, the
FDIC issued 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 FDIC, as
receiver, to place and release holds on
liability accounts, including deposits
(‘‘Large Bank Modernization Rule’’).4
The comment period on the interim
rule ended on September 15, 2008. We
received four comments on the interim
rule. The comments are summarized
below and may be viewed in their
entirety on the FDIC’s Web site at
https://www.fdic.gov/regulations/laws/
federal/2008/08comAD26.html.5
II. Summary of the Interim Rule
Since the final rule is essentially the
same as the interim rule, the details of
the interim rule are provided below in
the discussion of the final rule. In
3 73
FR 41170 (July 17, 2008).
FR 41180 (July 17, 2008).
5 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)).
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summary, the interim rule: (1)
Articulated general principles
underlying the FDIC’s existing and
future practices and procedures for
determining account balances in the
event of an insured depository
institution failure; (2) identified and
defined the end-of-day ledger balance of
the deposit or other liability account as
the account balance the FDIC will use
to make deposit insurance
determinations in institution failures;
(3) provided that, in an institution
failure, the FDIC will use cutoff rules
previously applied by the institution in
establishing the end-of-day ledger
balances for deposit insurance
determination purposes, but noted the
possibility that, if necessary, the FDIC
might establish an FDIC Cutoff Point
coinciding with the point at which the
FDIC, as receiver, acts to stop deposit
transactions which might result in
creating new liabilities or extinguishing
existing liabilities; (4) indicated how
uncollected deposited checks and swept
funds will be treated, for deposit
insurance purposes, at failed
institutions; and (5) imposed
requirements, effective July 1, 2009, that
insured depository institutions inform
their sweep account customers of the
nature of their swept funds and how
those funds would be treated if the
institution should fail.
III. Comments on the Interim Rule
As noted, the FDIC received four
comments on the interim rule. Three of
the comments were from banking
industry trade associations and one was
from a large commercial bank. The
comments addressed the FDIC Cutoff
Point, the treatment of swept funds and
sweep account disclosures.
FDIC Cutoff Point
Two industry trade association
commenters expressed concern over the
establishment and use of the FDIC
Cutoff Point. One suggested an FDIC
Cutoff Point should be rarely used
‘‘because it would create uncertainty
and inconsistency in how accounts are
handled in a bank failure. Each
institution has different cutoff times
depending on the type of transaction as
well as geographic location. The
associations instead support the
proposed general approach for
determining deposit account balances
based on the closing ledger balances
after the normal processes of the failed
bank are completed for the day.’’ The
other trade association noted ‘‘its
concern that establishing a single cut-off
time is problematic for financial
institutions. From a technological
standpoint, most operational systems at
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large banks are not capable of changing
the current cutoff time limitations when
immediately directed by the FDIC.
Additionally, an arbitrary cutoff time
may theoretically precede normal
business days or intraday transfers by
customers, particularly in reference to
those accounts at international banks.
Therefore, we once again recommend
that the FDIC utilize the established
cutoff times used by banks in their
normal business hours.’’
Treatment of Swept Funds
One industry trade association noted
‘‘there is continuing uncertainty as to
how sweep accounts will be affected,
and how swept funds would be treated
in a bank failure. Bankers find the term
‘swept funds’ unclear, especially when
applied to non-automated transactions.
It would therefore be useful for the FDIC
to clarify the intended scope of its
regulation, including whether it is
meant to apply to funds transferred
outside the books of a bank.’’
Sweep Account Disclosure
All three industry trade associations
agreed with the FDIC’s intent to provide
clear disclosure to sweep account
customers. One association noted,
however, that ‘‘all of the bankers we
consulted on the proposal said that their
sweep agreements currently detail for
customers the sweep process, how
funds are swept into specific
investments, and that funds swept out
of the bank are not FDIC-insured
deposits. Thus, it is not clear what
additional information would be
provided as a result of an FDIC sweep
disclosure requirement.’’
Two industry trade associations and
the large bank argued that the disclosure
requirement should not be overly
prescriptive. These comment letters
noted that sweep arrangements and
their processes vary considerably across
institutions and that specifically worded
disclosures may be unsuitable when
applied across the industry. One of the
trade associations and the large bank
argued that the FDIC should not dictate
the specific language to be included in
the disclosure. Alternatively, one trade
association expressed mixed feelings
indicating some of its members feel that
a model disclosure form would be
appropriate.
All of the commenters recommended
a one-time disclosure to the customer,
most preferably when the account is
opened. They noted that periodic
disclosures would be an unnecessary
financial and regulatory burden on
institutions offering sweep products.
One trade association indicated ‘‘the
FDIC should allow banks to provide
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notice via several established means of
communication, such as sweep
contracts, client letters, transaction
confirmation statements, and monthend statements. In addition, the final
rule should clarify that banks will not
be required to modify existing client
contracts, which may have been
negotiated years ago. This would allay
banker concerns that changes in
disclosure provisions will be expensive
to implement and disruptive to sweep
customer relationships.’’
Several commenters indicated that the
potential for using the FDIC Cutoff Point
would complicate disclosure. Since the
institution cannot determine when the
FDIC Cutoff Point may be established in
the event of failure, it would be difficult
to explain to customers how their swept
funds would be treated. Some
commenters also wondered whether the
possibility of provisional holds should
be disclosed to sweep customers.
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IV. The Final Rule
The final rule essentially is
unchanged from the interim rule, except
that the preamble and the regulatory
text provide examples of sweep
accounts subject to the final rule and
explain how the FDIC will treat each of
those sweep arrangements in the event
of an institution failure. The final rule
also clarifies how the FDIC will treat
repo sweeps in the event of an
institution failure and slightly modifies
the disclosure requirements for sweep
products. The following is an
explanation of the final rule.
Underlying Principles
The final 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
the receiver must 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. Those claims
determinations will be made consistent
with the principles described below,
which are unchanged from the
principles articulated in the interim rule
and, for the most part, reflect existing
FDIC practices and procedures used to
determine account balances at
institution failures.
• In making deposit insurance
determinations and in determining the
value and nature of claims against the
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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
final 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.6
• 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 in the interim rule, in the final 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-ofday ledger balance for deposit insurance
determination purposes. However, as
under the interim rule, the final 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
resulting from external transactions. The
FDIC Cutoff Point will facilitate the
orderly winding up of the institution
and the FDIC’s final determination of
6 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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the ledger balances of the deposit
accounts.
The FDIC’s 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
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
as 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.
As under the interim rule, 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
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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.7
Like the interim rule, the final rule
does not establish any new operational
requirements for insured institutions
relative to the FDIC Cutoff Point. Also,
the final 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.
In response to the comments on this
issue, FDIC reiterates that the final rule
imposes no requirements on institutions
to establish mechanisms or in any way
prepare for the possibility that the FDIC
would use its own FDIC Cutoff Point if
the institution should fail. The FDIC
emphasizes that it will apply the
institution’s normal cutoff times in most
cases, but establishing an FDIC Cutoff
Point may be essential to efficiently
produce 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 one of the principles,
specifically in the event of failure the
receiver will take control of the failed
institution 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 transactions the following
day, if that is the course of action
selected by the receiver.
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Treatment of Uncollected Deposited
Checks
As with the interim rule, under the
final rule, in determining deposit
7 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.
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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. 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; 8 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).
Further, especially in a large
depository institution failure, using endof-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
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.
8 The FDIC’s recent revisions to the FDIC’s riskbased 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 FR 69720 (Nov. 30,
2006).
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Sweep Accounts and Their Treatment in
the Event of an Institution Failure
A sweep account covered by the final
rule involves the pre-arranged transfer
of funds from a deposit account to: (1)
An investment vehicle located outside
the depository institution, or (2) another
account or investment vehicle located
within the depository institution. The
pre-arranged transfer of funds out of the
deposit account typically occurs prior to
the establishment of the depository
institution’s normal end-of-day balances
for the deposit account. Such
arrangements also may call for a return
of the transferred funds to the deposit
account the following business day in a
cycle that repeats itself daily.
After funds are swept from the
originating deposit account, the sweep
process may involve one or more
intermediate transfer steps before the
funds arrive at their final destination on
any given business day, as reflected in
the depository institution’s end-of-day
balances. Consistent with the general
principles identified in the final rule
(and discussed above), the FDIC will
make its claims determinations based on
deposit and other account balances
reflected on the books and records of the
depository institution after all normal
end-of-day processing has been
completed.
In making claims determinations on
funds swept from a deposit account, yet
still residing within the depository
institution at the institution’s normal
end-of-day, the FDIC will use the
following guidelines:
• Ownership of the funds and the
nature of the claim will be based on
records established and maintained by
the depository institution for that
specific account or investment vehicle.
• Depositor owned funds residing in
a general ledger account as of the
institution’s end-of-day will be treated
as a deposit for insurance purposes.
Further, in calculating deposit
insurance, these funds will be
aggregated with the balance in the
deposit account from which they
originally were swept if their ownership
interest has not changed. If there has
been a change in ownership, the funds
will be aggregated with the transaction
deposit account balances of the new
owner.
• The full amount of swept funds
attributable to an individual customer
residing in an omnibus or other
commingled account as of the
depository institution’s normal end-ofday will be treated as belonging to that
customer, regardless of any netting
practices established by the depository
institution.
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In the case of sweeps out of the
depository institution into deposits or
investment vehicles not residing on the
books of the depository institution, in
the event of failure the swept funds also
will be treated consistent with their
status in the end-of-day ledger balances
of the depository institution and the
external entity. If an expected transfer to
the external sweep investment vehicle is
not completed prior to the FDIC Cutoff
Point, coinciding with the time the FDIC
as receiver takes control of the failed
institution, the external investment will
not be purchased and the funds will
remain in the account identified on the
end-of-day ledger balance.
Most sweep arrangements involve a
transactional deposit account. Under the
final rule, the FDIC 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 the depository
institution’s normal posting procedures,
except that, in its role as receiver of a
failed insured depository institution, 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.
In other words, at the point the FDIC as
receiver takes control of the failed
institution, it will use its best efforts to
stop funds from flowing into or out of
the depository institution (e.g., blocking
wire transactions). The final rule does
not require a depository institution to
adjust its systems, policies or
procedures to accommodate the
receiver’s responsibility in this regard.
If, after taking control of the failed
depository institution, the receiver is
successful in stopping funds from
flowing into or out of the depository
institution, the end-of-day balances
generated from the depository
institution’s normal posting processes
will be used for insurance purposes.
Only if the receiver cannot stop funds
from flowing into or out of the
depository institution will adjustments
be necessary. Thus, the treatment of
swept funds may vary from the
depository institution’s normal end-ofday balances if the receiver cannot stop
all funds from flowing into or out of the
depository institution.
The following is a discussion of how,
under the final rule, the FDIC will treat
funds associated with various sweep
products in the event of failure.
Deposit-to-deposit sweeps. A depositto-deposit sweep moves funds between
two deposit accounts within the same
insured depository institution (‘‘internal
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sweep’’). Deposit-to-deposit sweeps
include ‘‘zero balance accounts’’
(‘‘ZBAs’’) where funds are moved
between a master demand deposit
account (‘‘parent’’) and various
subsidiary demand deposit accounts
(‘‘child’’), typically leaving a zero
balance in the subsidiary accounts at the
institution’s end-of-day. ZBAs allow a
customer to have multiple demand
deposit accounts, each with a different
business purpose, while permitting an
automatic movement of funds between
accounts necessary to fund deposit
transactions. Under the final rule, the
FDIC will treat for insurance purposes
each account as it is determined at the
institution’s normal end-of-day for each
account. Since ZBA arrangements
typically call for all child accounts to
have a zero balance at the institution’s
end-of-day, then all child accounts
associated with a ZBA will have been
reduced to zero with all of the
customer’s funds residing in the parent
account.
Many depository institutions have
established ‘‘retail sweep’’ or ‘‘reserve
sweep’’ products where a single account
is divided into two sub-accounts—a
transaction account and a money market
deposit account (‘‘MMDA’’). Retail
sweep accounts are established for the
purpose of lowering required reserves.
The amount and frequency of sweeps
are determined by the depository
institution using an algorithm designed
to minimize required reserves yet still
honor the limit of six transactions per
month imposed on MMDAs. The
customer may be unaware that this
sweep mechanism is in place, as it may
not be indicated in the original account
agreement signed by the customer. For
statement purposes the customer sees
all deposit balances as being in the
transaction account; the MMDA is not
indicated. Under the final rule a sweep
account involves the pre-arranged
transfer of funds from a deposit account
to another account or investment
vehicle. In the case of retail or reserve
sweep accounts only a single deposit
account has been established; thus,
under the final rule retail or reserve
sweep arrangements would not be
treated as a sweep account, rather as a
single account as viewed by the
customer.
An alternative arrangement with a
single account, also not considered to be
a sweep product under the final rule,
involves a MMDA with a linked NOW
account (sub-account). The customer
only is aware of the MMDA, as all funds
reported on statements are listed as
MMDA balances. Any transactions
presented against this account are
cleared using the NOW sub-account.
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The depository institution uses an
algorithm for transferring funds from the
MMDA to the NOW sub-account to
ensure the NOW sub-account has the
necessary funds to clear transactions yet
honor the limit of six monthly
transactions from the MMDA.
Eurodollar and IBF sweep accounts.
Eurodollar and IBF accounts also are
two examples of internal sweep
investment vehicles. As indicated in the
account agreement, funds in the deposit
account above a specified threshold are
swept into the Eurodollar or IBF
account owned by the same customer.
Thus, at the end of the business day, the
customer’s funds in excess of the preestablished threshold are reported as
residing in a Eurodollar account
(typically associated with the
institution’s branch in the Cayman
Islands or Bahamas) or an IBF account.
At the start of the next business day, the
depository institution will sweep the
balance back into the domestic deposit
account. The cycle typically repeats
itself daily.
In the case of Eurodollar and IBF
sweep accounts the FDIC will, for
insurance purposes, use deposit and
account balances as they are reflected as
of the institution’s normal end-of-day.
Thus, funds remaining in the domestic
deposit account (below the preestablished threshold) will be treated as
a deposit for insurance purposes. Funds
that have been swept into the Eurodollar
or IBF account, as reflected on the
institution’s end-of-day records, will be
treated as unsecured general creditor
claims against the receivership. 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,9 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
9 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).
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deposits. Eurodollar and IBF
accountholders will thus be accorded
general creditor status in the
receivership estate.
Repo sweep accounts. Repo sweep
arrangements typically are conducted
via internal transfers on the institution’s
books. As with Eurodollar and IBF
sweep accounts, repo sweep
arrangements move funds out of a
deposit account as of the depository
institution’s end-of-day. The swept
funds could be processed differently
depending on the institution’s particular
sweep mechanism.
In a properly executed repo sweep
arrangement, as of the depository
institution’s normal end-of-day, the
sweep customer either becomes the
legal owner of identified assets
(typically government securities) subject
to a repurchase agreement or obtains a
perfected security interest in those
assets. In such cases, where the sweep
customer either owns or possesses a
perfected security interest in the
identified securities, upon an institution
failure, the FDIC will recognize the
customer’s ownership or security
interest in the securities. If the value of
the securities at least equals the dollar
amount of funds swept from the
customer’s account, the customer’s
swept funds will be fully protected in
the event of failure. After failure, the
disposition of the swept funds invested
in securities will depend on the nature
of the transaction structured by the
FDIC. In a purchase and assumption
transaction, the securities and the
underlying repo arrangement will be
transferred to an acquiring institution,
which could include a bridge
institution. Under this transaction
structure, the funds normally would be
swept back into the customer’s deposit
account on the business day following
failure, thus giving the customer full
access to these funds at that point. In a
payoff of insured deposits, the customer
would receive a check or other payment
from the FDIC to reacquire the
customer’s interest in the securities
according to the FDIC normal
procedures.
The FDIC has observed that some
institutions’ repo arrangements are not
properly executed. In those situations,
the sweep customer obtains neither an
ownership interest nor a perfected
security interest in the applicable
securities. A common example is where
a customer’s swept funds rest (as of the
institution’s end-of-day) in an account
in which a pool of securities are also
transferred, but where the customer has
neither an ownership interest or a
perfected security interest in any
identified security(ies). In such cases,
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upon an institution failure, under the
final rule the FDIC will treat the swept
funds as if they had not left the deposit
account from which they originated.
The FDIC notes that, in cases where
repo sweeps are improperly executed
(so that the customer obtains neither an
ownership interest or perfected security
interest in the applicable securities),
institutions should report the swept
funds as deposits in their Call or Thrift
Financial Reports, for assessment and
other purposes.
Money market mutual fund sweep
accounts. Money market mutual fund
sweeps are structured in a variety of
ways. In some cases the money market
mutual fund 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. Some money
market mutual fund sweep
arrangements result in a ‘‘same-day’’
purchase of fund shares while ‘‘nextday’’ sweeps delay the purchase of fund
shares by the customer until the day
following the investment decision. In
some cases the depository institution
will wire funds to the money market
mutual fund in payment for shares
purchased, while in other cases the
money market mutual fund will
maintain an account at the depository
institution for the purpose of accepting
new purchases. Under the final rule, the
FDIC will treat funds swept to a money
market mutual fund depending on
whether it is a same-day or next-day
sweep arrangement, and whether the
money market mutual fund maintains
an account at the depository institution
used for share purchases. These
different variations of money market
fund sweep arrangements and the
FDIC’s treatment of them in the event of
an institution failure are discussed
below.
The first type of account is a sameday money market mutual fund sweep
where the mutual fund does not
maintain an account at the depository
institution. The investment decision on
funds to be swept from a customer’s
account typically is made in the early
afternoon. Funds are wired to the
money market mutual fund prior to a
pre-established cutoff point that same
afternoon, usually by 4 p.m. Most failed
depository institutions are closed after 4
p.m. If this is the case, on the day of
failure, funds associated with same-day
money market mutual fund sweeps will
already have been wired outside the
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depository institution prior to the
failure. In this case, the sweep
transaction will be deemed as
completed and the customer’s deposit
account will reflect the sweep before
arriving at the end-of-day balance for
that day. In a purchase and assumption
transaction, the customer’s deposit
account associated with the sweep
product normally would be transferred
to the acquiring institution, which could
include a bridge bank. Under this
arrangement, the funds held with the
money market mutual fund would be
available to be swept back into the
customer’s deposit account on the
business day following failure.10 In a
payoff the sweep customer will receive
a check or other means of payment for
the value of the ownership interest in
the money market mutual fund.
For same-day money market mutual
fund sweeps, the depository institution
may be closed prior to completion of the
transmission of funds to the money
market mutual fund. In this case, the
FDIC as receiver will use its best efforts
to stop this transmission. If the
transmission of funds is blocked, the
sweep transaction will not be completed
and the customer’s deposit account will
not reflect the sweep before arriving at
the end-of-day balance for that day. In
this case, for insurance purposes, the
funds swept on the day of failure will
be treated as if they had not left the
originating deposit account.
The second type of arrangement is a
next-day money market mutual fund
sweep where the mutual fund does not
maintain an account at the depository
institution. The investment decision on
funds to be swept from a customer’s
account typically is made after the day’s
transactions are posted against the
deposit account, usually in the late
evening or early the following morning.
Funds above the pre-established
threshold are swept from the deposit
account into a temporary holding
account, which could be an omnibus
account, where they reside as of the
institution’s normal end-of-day. The
transaction with the money market
mutual fund to complete the purchase
of shares is made the following business
day, usually in the morning. For
insurance purposes the FDIC will use
end-of-day ledger balances on the day of
failure. In this case, on the day of
10 This assumes the assets of the money market
mutual fund are sufficient to maintain a $1.00 share
price. If the value of the money market share price
is compromised below $1.00 the sweep customer’s
interests will reflect this loss in value. The
customer is not eligible to file a claim against the
receiver to recover the loss in value of the money
market mutual fund shares as such shares are not
part of the receivership estate.
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failure, funds associated with next-day
money market mutual fund sweeps for
that day will not have left the
depository institution, but will reside in
the omnibus account. In this case, for
insurance purposes, the funds swept on
the day of failure will be treated as if
they had not left the originating deposit
account. Funds already residing in the
money market mutual fund resulting
from prior day sweeps will be treated as
described above for fully completed
same-day money market mutual fund
sweeps.
Under the next-day sweep
arrangement, on any given day the
deposit account balance could fall
below the pre-established threshold,
thus triggering a sweep of funds from
the money market mutual fund to the
deposit account. In this case, prior to
the depository institution’s normal endof-day, the deposit account will be
credited for the shortfall below the preestablished threshold and the omnibus
account used by the institution for this
next-day money market mutual fund
sweep product will receive an offsetting
debit entry. As of the depository
institution’s normal end-of-day, the
next-day money market mutual fund
omnibus account will consist of a series
of debit entries (reflecting instances
where funds are to be moved from the
money market mutual fund to a deposit
account) and credit entries (where funds
are to be moved from a deposit account
to the money market mutual fund). For
claims purposes, the FDIC will not net
the debits and credit entries in the
omnibus account. In effect, as discussed
in the previous paragraph, the sweep
transaction with the money market
mutual fund will not have occurred as
of the depository institution’s end-ofday—and the FDIC will regard the funds
as remaining in the money market
mutual fund. Thus, the debit entry in
the omnibus account will be used to
offset the corresponding credit to the
originating deposit account to determine
account balances for insurance
purposes.
A variation of the next-day money
market mutual fund sweep does not
involve the use of a temporary holding
account such as an omnibus account.
Under this structure the investment
decision on funds to be swept from a
customer’s account still is made after
the day’s transactions are posted against
the deposit account, but excess funds
are not debited from the deposit account
until the following morning, after endof-day balances have been determined.
Funds are wired to the money market
mutual fund the following business day
as well. For insurance purposes, the
FDIC will use end-of-day ledger
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balances on the day of failure. In this
case, on the day of failure, funds
associated with next-day money market
mutual fund sweeps for that day will
not have been removed from the deposit
account; thus the sweep will not have
occurred on the day of failure and all
funds will reside in the deposit account.
Funds already residing in the money
market mutual fund resulting from prior
day sweeps will be treated in the event
of failure as described above for fully
completed same-day money market
mutual fund sweeps.
The third type of account is a money
market mutual fund sweep where the
mutual fund maintains an account with
the depository institution for the
purpose of accepting new share
purchases. Under this arrangement
funds swept out of a customer’s deposit
account are credited, either directly or
through a series of intermediate
transactions, to an account owned solely
by the money market mutual fund. The
structure does not require that funds be
wired to the money market mutual fund
in order to purchase new shares. The
movement of funds from the customer’s
deposit account into another account at
the depository institution, in this case
one owned by the money market mutual
fund, constitutes an internal deposit
transaction. Accordingly, in the event of
failure, the FDIC as receiver would
process all internal transactions prior to
arriving at end-of-day balances used for
insurance purposes. If the depository
institution’s ownership records
establish the money market mutual fund
as the actual owner of the swept
funds,11 these sweep transactions would
be deemed to be completed. In the event
of failure the funds residing in the
money market mutual fund would be
treated as described earlier, depending
on whether the FDIC engages in a
purchase and assumption or payoff
transaction to resolve the institution. If
the depository institution’s ownership
records establish the depositors as the
actual owners of the swept funds, such
as if the money market mutual fund’s
account was established for the benefit
of the sweep customers, then the swept
funds would be deemed to be owned by
the sweep customers. In this case, for
insurance purposes, the funds swept on
the day of failure will be treated as if
they had not left the deposit account.
Fed Funds sweep accounts. A Fed
Funds account is another example of an
internal sweep investment vehicle.
These sweep arrangements function
similarly to a Eurodollar or IBF sweep.
11 Deposits owned by a mutual fund are insured
under the FDIC’s insurance rules as funds owned
by a corporation. 12 CFR 330.11.
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Thus, at the end of the business day, the
customer’s funds in excess of the preestablished threshold are swept to a Fed
Funds account, a liability of the
depository institution. At the start of the
next business day, the depository
institution will sweep the balance back
to the deposit account. The cycle
typically repeats itself daily.
In the case of Fed Funds sweep
accounts the FDIC will for insurance
purposes use deposit and account
balances as they are reflected as of the
institution’s normal end-of-day. Thus,
funds remaining in the domestic deposit
account (below the pre-established
threshold) will be treated as a deposit
for insurance purposes. Funds having
been swept to the Fed Funds account,
as reflected on the institution’s end-ofday records, will be treated as other
similarly situated Fed Funds liabilities.
Upon an institution’s failure, amounts
in a Fed Funds account in a failed
institution generally are treated as
unsecured, non-deposit liabilities and
are not eligible for insurance or
depositor preference status.
Holding company commercial paper
sweep account. Under this arrangement
the investment decision on funds to be
swept from a customer’s account
typically is made after the day’s
transactions are posted against the
deposit account, usually in the late
evening or early the following morning.
The customer’s funds in excess of the
pre-established threshold are swept out
of the deposit account to a general
ledger account on the depository
institution’s books. The depository
institution, acting as agent for its
holding company, will book the
commercial paper on the holding
company’s books. The treatment of the
swept funds in the event of failure will
depend on the ownership of the general
ledger account into which the funds are
swept. If the general ledger account is
held for the benefit of the sweep
customers, then a purchase of
commercial paper will not have been
completed. Thus, the swept funds will
be treated as if they had not left the
deposit account. If the general ledger
account is owned solely by the holding
company, then a purchase of
commercial paper will have been
completed. Thus, the swept funds will
be treated as having purchased the
holding company commercial paper.
If the swept funds have purchased the
holding company commercial paper, in
the event of the depository institution’s
failure the ability of the sweep customer
to redeem the commercial paper the day
following failure will depend upon a
number of factors, including the holding
company’s liquidity position and
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whether it enters bankruptcy. In a
purchase and assumption transaction,
the FDIC as receiver normally will seek
to recover the swept funds, but the
ability of the sweep customer to access
these funds, and the ultimate recovery
of these funds, may depend on factors
outside the control of the receivership.
In the event of a payoff, the sweep
customer’s recovery of swept funds will
likewise be limited by the same factors
outside the control of the receivership.
Loan sweep account. A loan sweep
account uses a customer’s excess
deposit balances to automatically pay
down a loan or other credit account
balance at the depository institution.
This is another example of an internal
sweep transaction. In this case excess
balances in a customer’s deposit
account, above a pre-established
threshold, are swept out of the deposit
account and used to pay down a loan at
the depository institution. In the event
of failure this transaction will be
completed prior to determining end-ofday deposit and account balances. Thus,
the funds will have been swept out of
the deposit account and used to reduce
the loan balance. For insurance
purposes the FDIC would treat the funds
residing in the deposit account, those
below the pre-established threshold, as
a deposit account.
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Disclosure Requirements
The interim rule imposed certain
disclosure requirements in connection
with sweep accounts, effective July 1,
2009. In particular, institutions must
prominently disclose in all sweep
account contracts and account
statements reflecting sweep account
balances whether swept funds are
deposits (as defined in 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. In addition, the
interim rule required that the
disclosures be consistent with how the
institution reports such funds on its Call
Reports or Thrift Financial Reports. In
issuing the interim rule, the FDIC asked
for comments on specific issues
associated with the sweep account
disclosure requirements.12
As discussed below, based on
comments received, the final rule
reflects modifications to the disclosure
12 Specifically, the FDIC asked for information on
what disclosures are currently made in connection
with sweep account arrangements which allow
sweep customers to ascertain the treatment of such
funds if the institution should fail? Also, what form
the disclosures take, when they are provided and
what is their frequency? In addition, the FDIC asked
if the disclosures are consistent with how such
funds are reported in Call and Thrift Financial
Reports.
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requirements in the interim rule. Under
the final rule, effective July 1, 2009,
institutions must prominently disclose
in writing to sweep account customers
whether their swept funds are deposits
within the meaning of 12 U.S.C. 1813(l):
(1) Within sixty days after July 1, 2009,
and no less than annually thereafter, (2)
in all new sweep account contracts, and
(3) in renewals of existing sweep
account contracts. 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.
The disclosure requirements do not
apply to sweep accounts where: The
transfers are within a single account, or
a sub-account; or the sweep account
involves only deposit-to-deposit
sweeps, such as zero-balance accounts,
unless the sweep results in a change in
the customer’s insurance coverage.
As noted in the comment summary,
the three industry trade associations
that commented on this issue agreed
with the FDIC’s intent to have
institutions provide clear disclosures to
sweep account customers. In response
to the comment that institutions already
provide adequate disclosures to sweep
account customers, the FDIC notes that
under the final rule (as under the
interim rule) no change to such
preexisting disclosures would be
required as long as they indicate: (1)
Whether the swept funds are deposits;
and (2) if the swept funds are not
deposits, how they would be treated if
the institution should fail.
Several commenters asked for greater
clarity regarding which sweep products
would be subject to the disclosure
requirement. Under the final rule a
sweep account involves the prearranged transfer of funds from a
deposit account to: (1) An investment
vehicle located outside the depository
institution, or (2) another account or
investment vehicle located within the
depository institution. The transaction
must be pre-arranged according to the
terms of the account agreement which
specifies rules governing the automated
transfer of funds out of and into the
deposit account. Further, the funds
must be transferred from a deposit
account to an account or investment
vehicle, either located within or outside
the depository institution. Under the
final rule, the disclosure requirements
do not apply to arrangements where the
customer initiates transfers through
instructions provided to the depository
institution, which could be on a daily
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basis, to move funds from a deposit
account to another account or
investment vehicle. The disclosure rules
also do not apply to arrangements where
transfers are within a single account (to
a sub-account), such as may be the case
with retail or reserve sweeps. In
addition, the disclosure rules do not
apply to other deposit-to-deposit
sweeps, such as ZBAs, unless the sweep
results in a change in the customer’s
insurance coverage. In the deposit-todeposit sweep arrangements of which
the FDIC is aware, the sweep does not
change the insurance coverage available
to the customer.
The FDIC agrees with the commenters
who stated that the disclosure
requirements should not be overly
prescriptive and, specifically, should
not require that specific language be
included in the disclosures. Hence, the
final rule does not impose specific
disclosure language, allowing
institutions to fashion their own
disclosures, as long as they satisfy the
disclosure requirements.
Despite the comment that the
disclosures should be required to be
provided just one time to sweep account
customers, the FDIC continues to
believe that, in order for the disclosure
requirements to be meaningful and
effective, they must be provided at the
initiation of a new sweep account
agreement between the institution and
the customer, in all agreement renewals
and on a periodic basis, but not less
than annually.
The FDIC agrees with the trade
association that suggested flexibility in
communicating the disclosure
requirements to sweep customers.
Hence, in complying with the final rule,
institutions need not modify their
existing contracts with sweep
customers, but the disclosures should be
made in all new agreements and
agreement renewals. Also, an institution
may comply with the requirement for
the initial and periodic disclosures
through, for example, client letters,
transaction confirmation statements or
account statements. The requirement in
the interim rule that such disclosures be
provided in account statements,
therefore, is not part of the final rule.
The FDIC agrees with the comments
that the potential, under the final rule,
for the FDIC using the FDIC Cutoff Point
(instead of the institution’s ordinary
cutoff point) upon the institution failure
complicates the disclosure
requirements. As discussed above, for
internal sweep arrangements, it would
not matter whether the FDIC uses the
institution’s ordinary cutoff point or an
FDIC Cutoff Point, the sweep would still
be completed as of the failure date; thus,
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the status of the swept funds would be
the same under either cutoff point. For
external sweep arrangements (for
example, external money market mutual
fund sweeps), the required disclosures
should indicate the possibility that, if
the institution should fail, the
applicable funds might not be swept to
the source outside the institution and
should indicate how the funds would be
treated in that situation—for example,
they would be treated as deposits and
insured under the applicable insurance
rules and limits.
As to the question raised in the
comments about this issue, the final rule
does not require institutions to disclose
to customers the possibility that the
FDIC would impose provisional holds
on their deposits if the institution
should fail.
VIII. Plain Language
Section 722 of the Gramm-LeachBliley 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
interim rule was unclear, and the final
rule is substantively similar to the
interim rule.
dwashington3 on PROD1PC60 with RULES
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: 25–43
hours per respondent.
Estimated Total Annual Burden:
28,870–84,400 hours.
Background/General Description of
Collection: The final rule contains a
collection of information pursuant to
the Paperwork Reduction Act (44 U.S.C.
3501 et seq.) (‘‘PRA’’). In particular, the
final rule requires, subject to a 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. In accordance with the
requirements of the Paperwork
Reduction Act of 1995, the FDIC may
not conduct or sponsor, and
respondents are not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (‘‘OMB’’)
control number. The FDIC submitted the
information collection contained in this
rule to OMB for review. No collection of
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15:02 Jan 30, 2009
Jkt 217001
information will be made until OMB
approval has been obtained.
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 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
or other mailing. 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 or
supplement 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.
The FDIC’s 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. The FDIC estimates
that the hourly burden will range from
25 hours per institution to 43 hours per
institution. The total hours are
estimated to be from 28,870 hours to
84,400 hours.
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5805
Request for Comment
Comments are invited on: (a) Whether
the collection of information is
necessary for the proper performance of
the FDIC’s functions, including whether
the information has practical utility; (b)
the accuracy of the estimates of the
burden of the information collection,
including the validity of the
methodology and assumptions used; (c)
ways to enhance the quality, utility, and
clarity of the information to be
collected; and (d) ways to minimize the
burden of the information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
All comments will become a matter of
public record.
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,’’ in the subject line of the
message. Comments may be submitted
by any of the following methods:
• Agency Web Site: https://
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 https://www.fdic.gov/regulations/laws/
federal including any personal
information provided.
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).
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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 interim rule the
FDIC certified that the interim rule
would not have a significant economic
impact on a substantial number of small
entities. The rationale for this
certification was that the interim 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 final rule imposes a disclosure
requirement on all insured depository
institutions offering one or more sweep
account products. This requirement is
subject to a delayed effective date. The
FDIC believes the disclosure
requirement in the final 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 received no comments on
whether and, if so, to what extent small
banking organizations will be affected
by the disclosure requirement in the
final rule rule.
XI. The Treasury and General
Government Appropriations Act,
1999—Assessment of Federal
Regulations and Policies on Families
The FDIC has determined that the
final rule will not affect family wellbeing 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).
dwashington3 on PROD1PC60 with RULES
List of Subjects in 12 CFR Part 360
Banks, Banking, Savings associations.
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:
■
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15:02 Jan 30, 2009
Jkt 217001
PART 360—RESOLUTION AND
RECEIVERSHIP RULES
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), Public Law 101–73,
103 Stat. 357.
2. Section 360.8 is revised to read as
follows:
■
§ 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 the FDIC
establishes 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.
(4) A sweep account is an account
held pursuant to a contract between an
insured depository institution and its
customer involving the pre-arranged,
automated transfer of funds from a
deposit account to either another
account or investment vehicle located
within the depository institution
(internal sweep account), or an
investment vehicle located outside the
depository institution (external sweep
account).
(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
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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
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.
(2) A check posted to the Close-ofBusiness 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 involving sweep
accounts:
(i) For internal sweep accounts, the
FDIC will determine the ownership of
the funds and the nature of the
receivership claim based on the records
established and maintained by the
institution for that specific account or
investment vehicle as of the closing day
end-of-day ledger balance. (For
example, if a sweep account entails the
daily transfer of funds from a demand
deposit account to a Eurodollar account
at a foreign branch of the insured
depository institution, if the institution
should fail on that day, the FDIC would
treat the funds swept to the Eurodollar
account, as reflected on the institution’s
end-of-day records, as an unsecured
general creditor’s claim against the
receivership.);
(ii) For external sweep accounts, the
FDIC will treat swept funds consistent
with their status in the end-of-day
ledger balances of the depository
institution and the external entity, as
long as the transfer of funds is
completed prior to the Applicable
Cutoff Time. (For example, if funds held
in connection with a money market
sweep account are wired from a
customer’s deposit account at the
insured depository institution to the
mutual fund prior to the Applicable
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dwashington3 on PROD1PC60 with RULES
Cutoff Time, if the institution should
fail on that day, the FDIC would
recognize that sweep transaction as
completed for claims and receivership
purposes.);
(iii) For repurchase agreement sweep
accounts, where, as a result of the sweep
transaction, the customer becomes
either the legal owner of identified
assets subject to repurchase or obtains a
perfected security interest in those
assets, the FDIC will recognize, for
receivership purposes, the customer’s
ownership interest or security interest
in the assets.
(4) For deposit insurance and
receivership purposes in connection
with the failure of an insured depository
institution, the FDIC will determine the
rights of the depositor or other liability
holder as of the point the Close-ofBusiness Account Balance is calculated.
(e) Disclosure requirements.
Beginning July 1, 2009, in all new
sweep account contracts, in renewals of
existing sweep account contracts and
within sixty days after July 1, 2009, and
no less than annually thereafter,
institutions must prominently disclose
in writing to sweep account customers
whether their 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 quarterly
Consolidated Reports of Condition and
Income or Thrift Financial Reports. The
disclosure requirements imposed under
this provision do not apply to sweep
accounts where: The transfers are
within a single account, or a subaccount; or the sweep account involves
only deposit-to-deposit sweeps, such as
zero-balance accounts, unless the sweep
results in a change in the customer’s
insurance coverage.
By order of the Board of Directors.
Dated at Washington, DC, this 27th day of
January, 2009.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. E9–2113 Filed 1–30–09; 8:45 am]
BILLING CODE 6714–01–P
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Jkt 217001
SOCIAL SECURITY ADMINISTRATION
20 CFR Part 404
[Docket No. SSA–2008–0070]
RIN 0960–AG93
Expiration Date Extension for
Musculoskeletal Body System Listings
Social Security Administration.
Final rule.
AGENCY:
ACTION:
SUMMARY: This final rule extends for 2
years the date on which the
Musculoskeletal System Listing of
Impairments will no longer be effective.
We use the body system listings at the
third step of the sequential evaluation
process when we evaluate your claim
for benefits based on disability under
title II and title XVI of the Social
Security Act. Other than extending the
effective date of the listings, we have
not revised the musculoskeletal listings.
This extension will ensure that we
continue to have the medical evaluation
criteria in the listings to adjudicate
disability claims involving disorders of
the musculoskeletal body system at the
third step of the sequential evaluation
process.
DATES: This final rule is effective on
February 2, 2009.
FOR FURTHER INFORMATION CONTACT:
Cheryl A. Williams, Acting Director,
Office of Medical Listings
Improvements, 6401 Security
Boulevard, Baltimore, MD 21235–6401.
Call (410) 966–4163 for further
information about this final rule. For
information on eligibility or filing for
benefits, call our national toll-free
number, 1–800–772–1213 or TTY 1–
800–325–0778, or visit our Internet site,
Social Security Online, at https://
www.socialsecurity.gov.
SUPPLEMENTARY INFORMATION:
Electronic Version
The electronic file of this document is
available on the date of publication in
the Federal Register at https://
www.gpoaccess.gov/fr/.
Background
We use the Listing of Impairments
(the listings) at the third step of the
sequential evaluation process to
evaluate claims filed by adults and
children for benefits based on disability
under the title II and title XVI programs.
We divide the listings into two parts:
Part A for adults and part B for children.
If you are age 18 or over, we apply the
listings in part A when we assess your
claim. If you are under age 18, we first
use the criteria in part B of the listings.
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5807
If the criteria in part B do not apply, we
may use the criteria in part A when
those criteria give appropriate
consideration to the effects of the
impairment(s) in children. (See
§§ 404.1525 and 416.925.)
Explanation of Changes
In this final rule, we are extending
until February 18, 2011, the date on
which the Musculoskeletal System (1.00
and 101.00) listings will no longer be
effective. We periodically review and
update the listings in light of medical
advances in disability evaluation and
treatment and our program experience.
We last updated the medical criteria for
the Musculoskeletal System listings on
November 19, 2001. 66 FR 58010. While
we intend to publish proposed and final
rules to update the Musculoskeletal
System listings as quickly as possible,
we cannot publish final rules revising
these listings by February 19, 2009, the
current expiration date.
Regulatory Procedures
Justification for Final Rule
We follow the Administrative
Procedure Act (APA) rulemaking
procedures specified in 5 U.S.C. 553
when developing regulations. 42 U.S.C.
902(a)(5). The APA provides exceptions
to its notice and public comment
procedures when an agency finds there
is good cause for dispensing with such
procedures on the basis that they are
impracticable, unnecessary, or contrary
to the public interest. We have
determined that, under 5 U.S.C.
553(b)(B), good cause exists for
dispensing with the notice and public
comment procedures for this rule. Good
cause exists because this final rule only
extends the date on which the
musculoskeletal body system listings
will no longer be effective. It makes no
substantive changes to the listings. The
current regulations expressly provide
that we may extend, revise, or repromulgate the listings. Therefore, we
have determined that opportunity for
prior comment is unnecessary, and we
are issuing this regulation as a final rule.
In addition, we find good cause for
dispensing with the 30-day delay in the
effective date of a substantive rule
provided by 5 U.S.C. 553(d)(3). As
explained above, we are not making any
substantive changes in the body system
listings. Without an extension of the
expiration dates for these listings, we
will lack the medical evaluation criteria
needed for assessing impairments in
this body system at the third step of the
sequential evaluation process. In order
to ensure that we continue to have these
listings in our rules, we find that it is
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Agencies
[Federal Register Volume 74, Number 20 (Monday, February 2, 2009)]
[Rules and Regulations]
[Pages 5797-5807]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-2113]
=======================================================================
-----------------------------------------------------------------------
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The FDIC is adopting a final 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 final rule represent a continuation of long-
standing FDIC procedures in processing such balances at a failed
depository institution. The final rule also imposes certain disclosure
requirements in connection with sweep accounts. The final rule replaces
the FDIC's interim rule on this subject and applies to all insured
depository institutions.
DATES: Effective Dates: The final rule is effective March 4, 2009.
FOR FURTHER INFORMATION CONTACT: James Marino, Project Manager,
Division of Resolutions and Receiverships, (202) 898-7151 or
jmarino@fdic.gov; or Joseph A. DiNuzzo, Counsel, Legal Division, (202)
898-7349 or jdinuzzo@fdic.gov.
SUPPLEMENTARY INFORMATION:
I. 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.
A deposit account balance can be affected by transactions \1\
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 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.\2\
---------------------------------------------------------------------------
\1\ A deposit account transaction, such as deposits,
withdrawals, transfers and payments, causes funds to be debited from
or credited to the account.
\2\ 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.
---------------------------------------------------------------------------
In the past, the FDIC usually took over an institution as receiver
after it had closed on a Friday. For institutions with
[[Page 5798]]
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.
In July 2008, the FDIC issued an interim rule on the ``Processing
of Deposit Accounts in the Event of an Insured Depository Institution
Failure'' (``interim rule'').\3\ Generally, the interim rule
established practices for determining deposit and other liability
account balances at a failed insured depository institution. Concurrent
with the adoption of the interim rule, the FDIC issued 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 FDIC, as receiver, to place and release
holds on liability accounts, including deposits (``Large Bank
Modernization Rule'').\4\
---------------------------------------------------------------------------
\3\ 73 FR 41170 (July 17, 2008).
\4\ 73 FR 41180 (July 17, 2008).
---------------------------------------------------------------------------
The comment period on the interim rule ended on September 15, 2008.
We received four comments on the interim rule. The comments are
summarized below and may be viewed in their entirety on the FDIC's Web
site at https://www.fdic.gov/regulations/laws/federal/2008/
08comAD26.html.\5\
_____________________________________-
\5\ 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. Summary of the Interim Rule
Since the final rule is essentially the same as the interim rule,
the details of the interim rule are provided below in the discussion of
the final rule. In summary, the interim rule: (1) Articulated general
principles underlying the FDIC's existing and future practices and
procedures for determining account balances in the event of an insured
depository institution failure; (2) identified and defined the end-of-
day ledger balance of the deposit or other liability account as the
account balance the FDIC will use to make deposit insurance
determinations in institution failures; (3) provided that, in an
institution failure, the FDIC will use cutoff rules previously applied
by the institution in establishing the end-of-day ledger balances for
deposit insurance determination purposes, but noted the possibility
that, if necessary, the FDIC might establish an FDIC Cutoff Point
coinciding with the point at which the FDIC, as receiver, acts to stop
deposit transactions which might result in creating new liabilities or
extinguishing existing liabilities; (4) indicated how uncollected
deposited checks and swept funds will be treated, for deposit insurance
purposes, at failed institutions; and (5) imposed requirements,
effective July 1, 2009, that insured depository institutions inform
their sweep account customers of the nature of their swept funds and
how those funds would be treated if the institution should fail.
III. Comments on the Interim Rule
As noted, the FDIC received four comments on the interim rule.
Three of the comments were from banking industry trade associations and
one was from a large commercial bank. The comments addressed the FDIC
Cutoff Point, the treatment of swept funds and sweep account
disclosures.
FDIC Cutoff Point
Two industry trade association commenters expressed concern over
the establishment and use of the FDIC Cutoff Point. One suggested an
FDIC Cutoff Point should be rarely used ``because it would create
uncertainty and inconsistency in how accounts are handled in a bank
failure. Each institution has different cutoff times depending on the
type of transaction as well as geographic location. The associations
instead support the proposed general approach for determining deposit
account balances based on the closing ledger balances after the normal
processes of the failed bank are completed for the day.'' The other
trade association noted ``its concern that establishing a single cut-
off time is problematic for financial institutions. From a
technological standpoint, most operational systems at large banks are
not capable of changing the current cutoff time limitations when
immediately directed by the FDIC. Additionally, an arbitrary cutoff
time may theoretically precede normal business days or intraday
transfers by customers, particularly in reference to those accounts at
international banks. Therefore, we once again recommend that the FDIC
utilize the established cutoff times used by banks in their normal
business hours.''
Treatment of Swept Funds
One industry trade association noted ``there is continuing
uncertainty as to how sweep accounts will be affected, and how swept
funds would be treated in a bank failure. Bankers find the term `swept
funds' unclear, especially when applied to non-automated transactions.
It would therefore be useful for the FDIC to clarify the intended scope
of its regulation, including whether it is meant to apply to funds
transferred outside the books of a bank.''
Sweep Account Disclosure
All three industry trade associations agreed with the FDIC's intent
to provide clear disclosure to sweep account customers. One association
noted, however, that ``all of the bankers we consulted on the proposal
said that their sweep agreements currently detail for customers the
sweep process, how funds are swept into specific investments, and that
funds swept out of the bank are not FDIC-insured deposits. Thus, it is
not clear what additional information would be provided as a result of
an FDIC sweep disclosure requirement.''
Two industry trade associations and the large bank argued that the
disclosure requirement should not be overly prescriptive. These comment
letters noted that sweep arrangements and their processes vary
considerably across institutions and that specifically worded
disclosures may be unsuitable when applied across the industry. One of
the trade associations and the large bank argued that the FDIC should
not dictate the specific language to be included in the disclosure.
Alternatively, one trade association expressed mixed feelings
indicating some of its members feel that a model disclosure form would
be appropriate.
All of the commenters recommended a one-time disclosure to the
customer, most preferably when the account is opened. They noted that
periodic disclosures would be an unnecessary financial and regulatory
burden on institutions offering sweep products. One trade association
indicated ``the FDIC should allow banks to provide
[[Page 5799]]
notice via several established means of communication, such as sweep
contracts, client letters, transaction confirmation statements, and
month-end statements. In addition, the final rule should clarify that
banks will not be required to modify existing client contracts, which
may have been negotiated years ago. This would allay banker concerns
that changes in disclosure provisions will be expensive to implement
and disruptive to sweep customer relationships.''
Several commenters indicated that the potential for using the FDIC
Cutoff Point would complicate disclosure. Since the institution cannot
determine when the FDIC Cutoff Point may be established in the event of
failure, it would be difficult to explain to customers how their swept
funds would be treated. Some commenters also wondered whether the
possibility of provisional holds should be disclosed to sweep
customers.
IV. The Final Rule
The final rule essentially is unchanged from the interim rule,
except that the preamble and the regulatory text provide examples of
sweep accounts subject to the final rule and explain how the FDIC will
treat each of those sweep arrangements in the event of an institution
failure. The final rule also clarifies how the FDIC will treat repo
sweeps in the event of an institution failure and slightly modifies the
disclosure requirements for sweep products. The following is an
explanation of the final rule.
Underlying Principles
The final 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 the receiver must 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. Those claims determinations will be made consistent with
the principles described below, which are unchanged from the principles
articulated in the interim rule and, for the most part, reflect
existing FDIC practices and procedures used to determine account
balances at institution failures.
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 final 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.\6\
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\6\ 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 in the interim rule, in the final 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, as under the interim rule,
the final 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 resulting from external
transactions. 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.
The FDIC's 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 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 as 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.
As under the interim rule, 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
[[Page 5800]]
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.\7\
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\7\ 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.
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Like the interim rule, the final rule does not establish any new
operational requirements for insured institutions relative to the FDIC
Cutoff Point. Also, the final 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.
In response to the comments on this issue, FDIC reiterates that the
final rule imposes no requirements on institutions to establish
mechanisms or in any way prepare for the possibility that the FDIC
would use its own FDIC Cutoff Point if the institution should fail. The
FDIC emphasizes that it will apply the institution's normal cutoff
times in most cases, but establishing an FDIC Cutoff Point may be
essential to efficiently produce 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 one of
the principles, specifically in the event of failure the receiver will
take control of the failed institution 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 transactions the following day, if that is the
course of action selected by the receiver.
Treatment of Uncollected Deposited Checks
As with the interim rule, under the final rule, 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. 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; \8\ 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).
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\8\ 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 FR 69720 (Nov. 30, 2006).
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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 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.
Sweep Accounts and Their Treatment in the Event of an Institution
Failure
A sweep account covered by the final rule involves the pre-arranged
transfer of funds from a deposit account to: (1) An investment vehicle
located outside the depository institution, or (2) another account or
investment vehicle located within the depository institution. The pre-
arranged transfer of funds out of the deposit account typically occurs
prior to the establishment of the depository institution's normal end-
of-day balances for the deposit account. Such arrangements also may
call for a return of the transferred funds to the deposit account the
following business day in a cycle that repeats itself daily.
After funds are swept from the originating deposit account, the
sweep process may involve one or more intermediate transfer steps
before the funds arrive at their final destination on any given
business day, as reflected in the depository institution's end-of-day
balances. Consistent with the general principles identified in the
final rule (and discussed above), the FDIC will make its claims
determinations based on deposit and other account balances reflected on
the books and records of the depository institution after all normal
end-of-day processing has been completed.
In making claims determinations on funds swept from a deposit
account, yet still residing within the depository institution at the
institution's normal end-of-day, the FDIC will use the following
guidelines:
Ownership of the funds and the nature of the claim will be
based on records established and maintained by the depository
institution for that specific account or investment vehicle.
Depositor owned funds residing in a general ledger account
as of the institution's end-of-day will be treated as a deposit for
insurance purposes. Further, in calculating deposit insurance, these
funds will be aggregated with the balance in the deposit account from
which they originally were swept if their ownership interest has not
changed. If there has been a change in ownership, the funds will be
aggregated with the transaction deposit account balances of the new
owner.
The full amount of swept funds attributable to an
individual customer residing in an omnibus or other commingled account
as of the depository institution's normal end-of-day will be treated as
belonging to that customer, regardless of any netting practices
established by the depository institution.
[[Page 5801]]
In the case of sweeps out of the depository institution into
deposits or investment vehicles not residing on the books of the
depository institution, in the event of failure the swept funds also
will be treated consistent with their status in the end-of-day ledger
balances of the depository institution and the external entity. If an
expected transfer to the external sweep investment vehicle is not
completed prior to the FDIC Cutoff Point, coinciding with the time the
FDIC as receiver takes control of the failed institution, the external
investment will not be purchased and the funds will remain in the
account identified on the end-of-day ledger balance.
Most sweep arrangements involve a transactional deposit account.
Under the final rule, the FDIC 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 the depository institution's normal
posting procedures, except that, in its role as receiver of a failed
insured depository institution, 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. In other words, at the point the FDIC as receiver takes
control of the failed institution, it will use its best efforts to stop
funds from flowing into or out of the depository institution (e.g.,
blocking wire transactions). The final rule does not require a
depository institution to adjust its systems, policies or procedures to
accommodate the receiver's responsibility in this regard.
If, after taking control of the failed depository institution, the
receiver is successful in stopping funds from flowing into or out of
the depository institution, the end-of-day balances generated from the
depository institution's normal posting processes will be used for
insurance purposes. Only if the receiver cannot stop funds from flowing
into or out of the depository institution will adjustments be
necessary. Thus, the treatment of swept funds may vary from the
depository institution's normal end-of-day balances if the receiver
cannot stop all funds from flowing into or out of the depository
institution.
The following is a discussion of how, under the final rule, the
FDIC will treat funds associated with various sweep products in the
event of failure.
Deposit-to-deposit sweeps. A deposit-to-deposit sweep moves funds
between two deposit accounts within the same insured depository
institution (``internal sweep''). Deposit-to-deposit sweeps include
``zero balance accounts'' (``ZBAs'') where funds are moved between a
master demand deposit account (``parent'') and various subsidiary
demand deposit accounts (``child''), typically leaving a zero balance
in the subsidiary accounts at the institution's end-of-day. ZBAs allow
a customer to have multiple demand deposit accounts, each with a
different business purpose, while permitting an automatic movement of
funds between accounts necessary to fund deposit transactions. Under
the final rule, the FDIC will treat for insurance purposes each account
as it is determined at the institution's normal end-of-day for each
account. Since ZBA arrangements typically call for all child accounts
to have a zero balance at the institution's end-of-day, then all child
accounts associated with a ZBA will have been reduced to zero with all
of the customer's funds residing in the parent account.
Many depository institutions have established ``retail sweep'' or
``reserve sweep'' products where a single account is divided into two
sub-accounts--a transaction account and a money market deposit account
(``MMDA''). Retail sweep accounts are established for the purpose of
lowering required reserves. The amount and frequency of sweeps are
determined by the depository institution using an algorithm designed to
minimize required reserves yet still honor the limit of six
transactions per month imposed on MMDAs. The customer may be unaware
that this sweep mechanism is in place, as it may not be indicated in
the original account agreement signed by the customer. For statement
purposes the customer sees all deposit balances as being in the
transaction account; the MMDA is not indicated. Under the final rule a
sweep account involves the pre-arranged transfer of funds from a
deposit account to another account or investment vehicle. In the case
of retail or reserve sweep accounts only a single deposit account has
been established; thus, under the final rule retail or reserve sweep
arrangements would not be treated as a sweep account, rather as a
single account as viewed by the customer.
An alternative arrangement with a single account, also not
considered to be a sweep product under the final rule, involves a MMDA
with a linked NOW account (sub-account). The customer only is aware of
the MMDA, as all funds reported on statements are listed as MMDA
balances. Any transactions presented against this account are cleared
using the NOW sub-account. The depository institution uses an algorithm
for transferring funds from the MMDA to the NOW sub-account to ensure
the NOW sub-account has the necessary funds to clear transactions yet
honor the limit of six monthly transactions from the MMDA.
Eurodollar and IBF sweep accounts. Eurodollar and IBF accounts also
are two examples of internal sweep investment vehicles. As indicated in
the account agreement, funds in the deposit account above a specified
threshold are swept into the Eurodollar or IBF account owned by the
same customer. Thus, at the end of the business day, the customer's
funds in excess of the pre-established threshold are reported as
residing in a Eurodollar account (typically associated with the
institution's branch in the Cayman Islands or Bahamas) or an IBF
account. At the start of the next business day, the depository
institution will sweep the balance back into the domestic deposit
account. The cycle typically repeats itself daily.
In the case of Eurodollar and IBF sweep accounts the FDIC will, for
insurance purposes, use deposit and account balances as they are
reflected as of the institution's normal end-of-day. Thus, funds
remaining in the domestic deposit account (below the pre-established
threshold) will be treated as a deposit for insurance purposes. Funds
that have been swept into the Eurodollar or IBF account, as reflected
on the institution's end-of-day records, will be treated as unsecured
general creditor claims against the receivership. 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,\9\ 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
[[Page 5802]]
deposits. Eurodollar and IBF accountholders will thus be accorded
general creditor status in the receivership estate.
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\9\ 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).
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Repo sweep accounts. Repo sweep arrangements typically are
conducted via internal transfers on the institution's books. As with
Eurodollar and IBF sweep accounts, repo sweep arrangements move funds
out of a deposit account as of the depository institution's end-of-day.
The swept funds could be processed differently depending on the
institution's particular sweep mechanism.
In a properly executed repo sweep arrangement, as of the depository
institution's normal end-of-day, the sweep customer either becomes the
legal owner of identified assets (typically government securities)
subject to a repurchase agreement or obtains a perfected security
interest in those assets. In such cases, where the sweep customer
either owns or possesses a perfected security interest in the
identified securities, upon an institution failure, the FDIC will
recognize the customer's ownership or security interest in the
securities. If the value of the securities at least equals the dollar
amount of funds swept from the customer's account, the customer's swept
funds will be fully protected in the event of failure. After failure,
the disposition of the swept funds invested in securities will depend
on the nature of the transaction structured by the FDIC. In a purchase
and assumption transaction, the securities and the underlying repo
arrangement will be transferred to an acquiring institution, which
could include a bridge institution. Under this transaction structure,
the funds normally would be swept back into the customer's deposit
account on the business day following failure, thus giving the customer
full access to these funds at that point. In a payoff of insured
deposits, the customer would receive a check or other payment from the
FDIC to reacquire the customer's interest in the securities according
to the FDIC normal procedures.
The FDIC has observed that some institutions' repo arrangements are
not properly executed. In those situations, the sweep customer obtains
neither an ownership interest nor a perfected security interest in the
applicable securities. A common example is where a customer's swept
funds rest (as of the institution's end-of-day) in an account in which
a pool of securities are also transferred, but where the customer has
neither an ownership interest or a perfected security interest in any
identified security(ies). In such cases, upon an institution failure,
under the final rule the FDIC will treat the swept funds as if they had
not left the deposit account from which they originated. The FDIC notes
that, in cases where repo sweeps are improperly executed (so that the
customer obtains neither an ownership interest or perfected security
interest in the applicable securities), institutions should report the
swept funds as deposits in their Call or Thrift Financial Reports, for
assessment and other purposes.
Money market mutual fund sweep accounts. Money market mutual fund
sweeps are structured in a variety of ways. In some cases the money
market mutual fund 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. 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. In some cases the depository institution will wire
funds to the money market mutual fund in payment for shares purchased,
while in other cases the money market mutual fund will maintain an
account at the depository institution for the purpose of accepting new
purchases. Under the final rule, the FDIC will treat funds swept to a
money market mutual fund depending on whether it is a same-day or next-
day sweep arrangement, and whether the money market mutual fund
maintains an account at the depository institution used for share
purchases. These different variations of money market fund sweep
arrangements and the FDIC's treatment of them in the event of an
institution failure are discussed below.
The first type of account is a same-day money market mutual fund
sweep where the mutual fund does not maintain an account at the
depository institution. The investment decision on funds to be swept
from a customer's account typically is made in the early afternoon.
Funds are wired to the money market mutual fund prior to a pre-
established cutoff point that same afternoon, usually by 4 p.m. Most
failed depository institutions are closed after 4 p.m. If this is the
case, on the day of failure, funds associated with same-day money
market mutual fund sweeps will already have been wired outside the
depository institution prior to the failure. In this case, the sweep
transaction will be deemed as completed and the customer's deposit
account will reflect the sweep before arriving at the end-of-day
balance for that day. In a purchase and assumption transaction, the
customer's deposit account associated with the sweep product normally
would be transferred to the acquiring institution, which could include
a bridge bank. Under this arrangement, the funds held with the money
market mutual fund would be available to be swept back into the
customer's deposit account on the business day following failure.\10\
In a payoff the sweep customer will receive a check or other means of
payment for the value of the ownership interest in the money market
mutual fund.
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\10\ This assumes the assets of the money market mutual fund are
sufficient to maintain a $1.00 share price. If the value of the
money market share price is compromised below $1.00 the sweep
customer's interests will reflect this loss in value. The customer
is not eligible to file a claim against the receiver to recover the
loss in value of the money market mutual fund shares as such shares
are not part of the receivership estate.
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For same-day money market mutual fund sweeps, the depository
institution may be closed prior to completion of the transmission of
funds to the money market mutual fund. In this case, the FDIC as
receiver will use its best efforts to stop this transmission. If the
transmission of funds is blocked, the sweep transaction will not be
completed and the customer's deposit account will not reflect the sweep
before arriving at the end-of-day balance for that day. In this case,
for insurance purposes, the funds swept on the day of failure will be
treated as if they had not left the originating deposit account.
The second type of arrangement is a next-day money market mutual
fund sweep where the mutual fund does not maintain an account at the
depository institution. The investment decision on funds to be swept
from a customer's account typically is made after the day's
transactions are posted against the deposit account, usually in the
late evening or early the following morning. Funds above the pre-
established threshold are swept from the deposit account into a
temporary holding account, which could be an omnibus account, where
they reside as of the institution's normal end-of-day. The transaction
with the money market mutual fund to complete the purchase of shares is
made the following business day, usually in the morning. For insurance
purposes the FDIC will use end-of-day ledger balances on the day of
failure. In this case, on the day of
[[Page 5803]]
failure, funds associated with next-day money market mutual fund sweeps
for that day will not have left the depository institution, but will
reside in the omnibus account. In this case, for insurance purposes,
the funds swept on the day of failure will be treated as if they had
not left the originating deposit account. Funds already residing in the
money market mutual fund resulting from prior day sweeps will be
treated as described above for fully completed same-day money market
mutual fund sweeps.
Under the next-day sweep arrangement, on any given day the deposit
account balance could fall below the pre-established threshold, thus
triggering a sweep of funds from the money market mutual fund to the
deposit account. In this case, prior to the depository institution's
normal end-of-day, the deposit account will be credited for the
shortfall below the pre-established threshold and the omnibus account
used by the institution for this next-day money market mutual fund
sweep product will receive an offsetting debit entry. As of the
depository institution's normal end-of-day, the next-day money market
mutual fund omnibus account will consist of a series of debit entries
(reflecting instances where funds are to be moved from the money market
mutual fund to a deposit account) and credit entries (where funds are
to be moved from a deposit account to the money market mutual fund).
For claims purposes, the FDIC will not net the debits and credit
entries in the omnibus account. In effect, as discussed in the previous
paragraph, the sweep transaction with the money market mutual fund will
not have occurred as of the depository institution's end-of-day--and
the FDIC will regard the funds as remaining in the money market mutual
fund. Thus, the debit entry in the omnibus account will be used to
offset the corresponding credit to the originating deposit account to
determine account balances for insurance purposes.
A variation of the next-day money market mutual fund sweep does not
involve the use of a temporary holding account such as an omnibus
account. Under this structure the investment decision on funds to be
swept from a customer's account still is made after the day's
transactions are posted against the deposit account, but excess funds
are not debited from the deposit account until the following morning,
after end-of-day balances have been determined. Funds are wired to the
money market mutual fund the following business day as well. For
insurance purposes, the FDIC will use end-of-day ledger balances on the
day of failure. In this case, on the day of failure, funds associated
with next-day money market mutual fund sweeps for that day will not
have been removed from the deposit account; thus the sweep will not
have occurred on the day of failure and all funds will reside in the
deposit account. Funds already residing in the money market mutual fund
resulting from prior day sweeps will be treated in the event of failure
as described above for fully completed same-day money market mutual
fund sweeps.
The third type of account is a money market mutual fund sweep where
the mutual fund maintains an account with the depository institution
for the purpose of accepting new share purchases. Under this
arrangement funds swept out of a customer's deposit account are
credited, either directly or through a series of intermediate
transactions, to an account owned solely by the money market mutual
fund. The structure does not require that funds be wired to the money
market mutual fund in order to purchase new shares. The movement of
funds from the customer's deposit account into another account at the
depository institution, in this case one owned by the money market
mutual fund, constitutes an internal deposit transaction. Accordingly,
in the event of failure, the FDIC as receiver would process all
internal transactions prior to arriving at end-of-day balances used for
insurance purposes. If the depository institution's ownership records
establish the money market mutual fund as the actual owner of the swept
funds,\11\ these sweep transactions would be deemed to be completed. In
the event of failure the funds residing in the money market mutual fund
would be treated as described earlier, depending on whether the FDIC
engages in a purchase and assumption or payoff transaction to resolve
the institution. If the depository institution's ownership records
establish the depositors as the actual owners of the swept funds, such
as if the money market mutual fund's account was established for the
benefit of the sweep customers, then the swept funds would be deemed to
be owned by the sweep customers. In this case, for insurance purposes,
the funds swept on the day of failure will be treated as if they had
not left the deposit account.
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\11\ Deposits owned by a mutual fund are insured under the
FDIC's insurance rules as funds owned by a corporation. 12 CFR
330.11.
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Fed Funds sweep accounts. A Fed Funds account is another example of
an internal sweep investment vehicle. These sweep arrangements function
similarly to a Eurodollar or IBF sweep. Thus, at the end of the
business day, the customer's funds in excess of the pre-established
threshold are swept to a Fed Funds account, a liability of the
depository institution. At the start of the next business day, the
depository institution will sweep the balance back to the deposit
account. The cycle typically repeats itself daily.
In the case of Fed Funds sweep accounts the FDIC will for insurance
purposes use deposit and account balances as they are reflected as of
the institution's normal end-of-day. Thus, funds remaining in the
domestic deposit account (below the pre-established threshold) will be
treated as a deposit for insurance purposes. Funds having been swept to
the Fed Funds account, as reflected on the institution's end-of-day
records, will be treated as other similarly situated Fed Funds
liabilities. Upon an institution's failure, amounts in a Fed Funds
account in a failed institution generally are treated as unsecured,
non-deposit liabilities and are not eligible for insurance or depositor
preference status.
Holding company commercial paper sweep account. Under this
arrangement the investment decision on funds to be swept from a
customer's account typically is made after the day's transactions are
posted against the deposit account, usually in the late evening or
early the following morning. The customer's funds in excess of the pre-
established threshold are swept out of the deposit account to a general
ledger account on the depository institution's books. The depository
institution, acting as agent for its holding company, will book the
commercial paper on the holding company's books. The treatment of the
swept funds in the event of failure will depend on the ownership of the
general ledger account into which the funds are swept. If the general
ledger account is held for the benefit of the sweep customers, then a
purchase of commercial paper will not have been completed. Thus, the
swept funds will be treated as if they had not left the deposit
account. If the general ledger account is owned solely by the holding
company, then a purchase of commercial paper will have been completed.
Thus, the swept funds will be treated as having purchased the holding
company commercial paper.
If the swept funds have purchased the holding company commercial
paper, in the event of the depository institution's failure the ability
of the sweep customer to redeem the commercial paper the day following
failure will depend upon a number of factors, including the holding
company's liquidity position and
[[Page 5804]]
whether it enters bankruptcy. In a purchase and assumption transaction,
the FDIC as receiver normally will seek to recover the swept funds, but
the ability of the sweep customer to access these funds, and the
ultimate recovery of these funds, may depend on factors outside the
control of the receivership. In the event of a payoff, the sweep
customer's recovery of swept funds will likewise be limited by the same
factors outside the control of the receivership.
Loan sweep account. A loan sweep account uses a customer's excess
deposit balances to automatically pay down a loan or other credit
account balance at the depository institution. This is another example
of an internal sweep transaction. In this case excess balances in a
customer's deposit account, above a pre-established threshold, are
swept out of the deposit account and used to pay down a loan at the
depository institution. In the event of failure this transaction will
be completed prior to determining end-of-day deposit and account
balances. Thus, the funds will have been swept out of the deposit
account and used to reduce the loan balance. For insurance purposes the
FDIC would treat the funds residing in the deposit account, those below
the pre-established threshold, as a deposit account.
Disclosure Requirements
The interim rule imposed certain disclosure requirements in
connection with sweep accounts, effective July 1, 2009. In particular,
institutions must prominently disclose in all sweep account contracts
and account statements reflecting sweep account balances whether swept
funds are deposits (as defined in 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. In addition, the interim
rule required that the disclosures be consistent with how the
institution reports such funds on its Call Reports or Thrift Financial
Reports. In issuing the interim rule, the FDIC asked for comments on
specific issues associated with the sweep account disclosure
requirements.\12\
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\12\ Specifically, the FDIC asked for information on what
disclosures are currently made in connection with sweep account
arrangements which allow sweep customers to ascertain the treatment
of such funds if the institution should fail? Also, what form the
disclosures take, when they are provided and what is their
frequency? In addition, the FDIC asked if the disclosures are
consistent with how such funds are reported in Call and Thrift
Financial Reports.
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As discussed below, based on comments received, the final rule
reflects modifications to the disclosure requirements in the interim
rule. Under the final rule, effective July 1, 2009, institutions must
prominently disclose in writing to sweep account customers whether
their swept funds are deposits within the meaning of 12 U.S.C. 1813(l):
(1) Within sixty days after July 1, 2009, and no less than annually
thereafter, (2) in all new sweep account contracts, and (3) in renewals
of existing sweep account contracts. 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. The disclosure requirements do not apply to sweep accounts
where: The transfers are within a single account, or a sub-account; or
the sweep account involves only deposit-to-deposit sweeps, such as
zero-balance accounts, unless the sweep results in a change in the
customer's insurance coverage.
As noted in the comment summary, the three industry trade
associations that commented on this issue agreed with the FDIC's intent
to have institutions provide clear disclosures to sweep account
customers. In response to the comment that institutions already provide
adequate disclosures to sweep account customers, the FDIC notes that
under the final rule (as under the interim rule) no change to such
preexisting disclosures would be required as long as they indicate: (1)
Whether the swept funds are deposits; and (2) if the swept funds are
not deposits, how they would be treated if the institution should fail.
Several commenters asked for greater clarity regarding which sweep
products would be subject to the disclosure requirement. Under the
final rule a sweep account involves the pre-arranged transfer of funds
from a deposit account to: (1) An investment vehicle located outside
the depository institution, or (2) another account or investment
vehicle located within the depository institution. The transaction must
be pre-arranged according to the terms of the account agreement which
specifies rules governing the automated transfer of funds out of and
into the deposit account. Further, the funds must be transferred from a
deposit account to an account or investment vehicle, either located
within or outside the depository institution. Under the final rule, the
disclosure requirements do not apply to arrangements where the customer
initiates transfers through instructions provided to the depository
institution, which could be on a daily basis, to move funds from a
deposit account to another account or investment vehicle. The
disclosure rules also do not apply to arrangements where transfers are
within a single account (to a sub-account), such as may be the case
with retail or reserve sweeps. In addition, the disclosure rules do not
apply to other deposit-to-deposit sweeps, such as ZBAs, unless the
sweep results in a change in the customer's insurance coverage. In the
deposit-to-deposit sweep arrangements of which the FDIC is aware, the
sweep does not change the insurance coverage available to the customer.
The FDIC agrees with the commenters who stated that the disclosure
requirements should not be overly prescriptive and, specifically,
should not require that specific language be included in the
disclosures. Hence, the final rule does not impose specific disclosure
language, allowing institutions to fashion their own disclosures, as
long as they satisfy the disclosure requirements.
Despite the comment that the disclosures should be required to be
provided just one time to sweep account customers, the FDIC continues
to believe that, in order for the disclosure requirements to be
meaningful and effective, they must be provided at the initiation of a
new sweep account agreement between the institution and the customer,
in all agreement renewals and on a periodic basis, but not less than
annually.
The FDIC agrees with the trade association that suggested
flexibility in communicating the disclosure requirements to sweep
customers. Hence, in complying with the final rule, institutions need
not modify their existing contracts with sweep customers, but the
disclosures should be made in all new agreements and agreement
renewals. Also, an institution may comply with the requirement for the
initial and periodic disclosures through, for example, client letters,
transaction confirmation statements or account statements. The
requirement in the interim rule that such disclosures be provided in
account statements, therefore, is not part of the final rule.
The FDIC agrees with the comments that the potential, under the
final rule, for the FDIC using the FDIC Cutoff Point (instead of the
institution's ordinary cutoff point) upon the institution failure
complicates the disclosure requirements. As discussed above, for
internal sweep arrangements, it would not matter whether the FDIC uses
the institution's ordinary cutoff point or an FDIC Cutoff Point, the
sweep would still be completed as of the failure date; thus,
[[Page 5805]]
the status of the swept funds would be the same under either cutoff
point. For external sweep arrangements (for example, external money
market mutual fund sweeps), the required disclosures should indicate
the possibility that, if the institution should fail, the applicable
funds might not be swept to the source outside the institution and
should indicate how the funds would be treated in that situation--for
example, they would be treated as deposits and insured under the
applicable insurance rules and limits.
As to the question raised in the comments about this issue, the
final rule does not require institutions to disclose to customers the
possibility that the FDIC would impose provisional holds on their
deposits if the institution should fail.
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 interim rule was
unclear, and the final rule is substantively similar to the interim
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: 25-43 hours per respondent.
Estimated Total Annual Burden: 28,870-84,400 hours.
Background/General Description of Collection: The final rule
contains a collection of information pursuant to the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.) (``PRA''). In particular, the
final rule requires, subject to a 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. In accordance with the
requirements of the Paperwork Reduction Act of 1995, the FDIC may not
conduct or sponsor, and respondents are not required to respond to, an
information collection unless it displays a currently valid Office of
Management and Budget (``OMB'') control number. The FDIC submitted the
information collection contained in this rule to OMB for review. No
collection of information will be made until OMB approval has been
obtained.
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 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
or other mailing. 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 or supplement 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