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Frequently Asked Questions Payment System Risk Last Updated: 03/25/2009
Interim PSR Policy Changes FAQs
General
PSR Policy FAQs 1. May all institutions that have a Federal Reserve account incur daylight overdrafts?A daylight overdraft occurs when an institution's Federal Reserve account has a negative balance at any point during the business day. Most depository institutions that have a Federal Reserve account may incur daylight overdrafts, but certain types of financial institutions that are permitted to have Federal Reserve accounts present special risks and thus are not allowed to incur overdrafts. Examples are Edge and agreement corporations, bankers' banks (including corporate credit unions) that are not subject to reserve requirements, limited-purpose trust companies, institutions with a zero net debit cap, and (beginning July 20, 2006) government-sponsored enterprises and certain international organizations for which the Reserve Banks act as fiscal agents. Most of these institutions lack regular Discount Window access. Institutions that do not have regular access to the Discount Window should not incur daylight or overnight overdrafts in their Federal Reserve accounts.2. How is a daylight overdraft fee calculated? The Federal Reserve charges institutions fees for daylight overdrafts incurred in their Federal Reserve accounts. For each two-week reserve maintenance period, the Reserve Banks calculate and assess daylight overdraft fees, which are equal to the sum of any daily overdraft fees during the reserve maintenance period. For each day, an institution's daylight overdraft fee is the effective daily rate charged for daylight overdrafts multiplied by the average daylight overdraft for the day minus a deductible (a free amount of daylight credit). For certain institutions that do not have regular discount window access and should not incur daylight overdrafts, the Reserve Bank charges a penalty fee on average daily overdrafts. For details on the daylight overdraft fee calculations please refer to the Guide to the Federal Reserve's Payment System Risk Policy on Daylight Credit 3. What is a net debit cap? An institution's daylight overdraft net debit cap (“cap”) refers to the maximum dollar amount of uncollateralized daylight overdrafts the institution is authorized to incur in its Federal Reserve account. The dollar amount of the net debit cap is determined by an institution's cap category and its reported capital.4. What is a “max cap”? How can an institution obtain a “max cap”? Maximum daylight overdraft capacity (“max cap”) is the total amount of daylight overdraft capacity, above an institution's net debit cap, that is secured by collateral. A depository institution with a self assessed cap that may potentially exceed its net debit cap may request a max cap from its Reserve Bank. The institution must provide a business case providing the total amount of capacity desired and a justification for requesting a max cap. If the Reserve Bank approves a depository institution's request for a max cap, the institution must provide written approval from its board of directors and provide collateral that is acceptable to the Reserve Bank. 5. What is a cap breach? When does a cap breach occur? A cap breach occurs when an institution's account balance for a particular day shows one or more negative end-of-minute account balances larger than its single-day net debit cap or its “max cap” (single-day cap plus its collateralized capacity) . In addition, a cap breach would occur if an institution's average peak daily overdraft over a reserve maintenance period were greater than its two-week average cap or its “max cap” (two-week-average cap plus its collateralized capacity).6. Are depository institutions responsible for ensuring that their Federal Reserve accounts are managed effectively and have non-negative balances at the end of each day? Yes. Each account holder must have procedures in place to manage its account effectively and to ensure that it has a non-negative balance in its account at the end of each day. Reserve Banks provide tools to assist account holders in managing their Federal Reserve accounts, but these tools should not replace an institution's own internal controls for managing its account.7. Under what circumstances would an overnight overdraft charge be assessed? If an overnight overdraft is not attributable to a Reserve Bank error, the account holder normally will be assessed an overnight overdraft fee. The account holder is responsible for managing its account, so it will be charged for overnight overdrafts resulting from an error by a correspondent or other third party. In some cases, overnight overdrafts may be subject to a penalty fee. 8. How is an overnight overdraft charge calculated? Amount of the overnight overdraft x (federal funds rate plus 4 percentage points) / 360 days The minimum charge is $100. An overnight overdraft extending over a weekend or Reserve Bank holiday is usually considered one occurrence, though the Reserve Bank may assess a charge for each day that the negative balance is outstanding. If an institution incurs an excessive number of overnight overdrafts (more than three occurrences in any 12-month period), the overnight overdraft rate increases by one percentage point for each additional occurrence. Moreover, the Reserve Bank will take additional actions to minimize continued overnight overdrafts. These actions are similar to those taken in response to net debit cap violations (for more details please see the Account Management Guide Interim PSR Policy Changes FAQs 9. What provisions of the revised Payment System Risk (PSR policy) become effective on March 26, 2009?Two provisions concerning foreign banking organizations (FBOs) take effect on March 26, 2009. First, the Board has approved for certain FBOs an interim policy related to the calculation of the deductible amount from daylight overdraft fees (interim deductible). Second, the Board has approved an early implementation of the streamlined procedure for maximum daylight overdraft capacity (max cap) for eligible FBOs.10. How long will the interim provisions be effective? The provision regarding the interim deductible will remain in effect until the implementation of the core revised PSR policy, which eliminates the deductible for all institutions. The early implementation of the streamlined procedure for max caps will remain in effect within the revised PSR policy.11. What is a streamlined max cap procedure? The streamlined max cap procedure allows eligible FBOs to request from the Reserve Banks max caps of up to 100 percent of worldwide capital times the self-assessed cap multiple without:12. What institutions are eligible for the streamlined max cap? Eligible institutions include FBOs that are financial holding companies (FHC) or SOSA 1-rated institutions and have a self-assessed net debit cap.13. Can eligible FBOs obtain additional capacity under the streamlined procedure if the additional capacity is in excess of 100 percent of worldwide capital times the self-assessed cap multiple? No. Such FBOs would need to apply for the additional capacity under the general max cap procedure that has been in effect since 2001.14. Is there a minimum capacity requirement for the streamlined max cap? No. Eligible FBOs may request values from $1 to 100 percent of worldwide capital times the self-assessed cap multiple. 15. Are there any modified requirements for FBOs obtaining the max cap under the streamlined procedure? While institutions that apply for a max cap are currently subject to a review of financial and supervisory information, the streamlined procedure is more explicit that this review will include an assessment analogous to the liquidity reviews performed on domestically-chartered institutions.16. What are the key differences between the general and streamlined max cap procedures? The key differences of the streamlined procedure are:17. What is the interim deductible? The interim deductible available for daylight overdraft pricing purposes to eligible FBOs is based on a capital measure of 100 percent of worldwide capital rather than up to 35 percent. The interim deductible must be fully collateralized at all times.18. What FBOs are eligible? An eligible FBO must request and receive Reserve Bank approval for a streamlined max cap and have unencumbered collateral pledged at all times to their Reserve Bank equal to or greater than the amount of the deductible. If the FBO meets the eligibility criteria for the streamlined max cap (FHC or SOSA-1 rating and a self-assessed net debit cap), but had its max cap approved under the general procedure (for example, an eligible FBO with an existing max cap or a max cap above the amount allowed under the streamlined procedure), it is also eligible for the interim deductible, provided it has pledged the required collateral.19. How is the required collateral for the interim deductible calculated? The deductible is calculated by multiplying the fraction of eligible worldwide capital by 10 percent. The FBOs receiving the interim deductible should provide collateral equal to or exceeding 100 percent x worldwide capital x 10 percent.20. Do collateral margins for PSR purposes differ from those for the discount window purposes? No. Collateral eligibility and margins remains the same for PSR and Discount Window purposes.21. What are the implications if an institution fails to collateralize its interim deductible as required? If an institution fails to collateralize the interim deductible, it will be counseled and may be removed from the interim deductible program. PSR Policy Changes FAQs 22. Why was the Payment System Risk (PSR) policy revised? The revised PSR Policy represents a new approach to improve intraday liquidity and payment flow for the banking system, while controlling the credit risk to Reserve Banks. The revised policy seeks to address a combination of intraday liquidity, operational, and credit risks in the wholesale payment systems, in particular, risks associated with the shift of larger Fedwire payments later in the day due to a combination of industry and other factors. These changes to the PSR policy are one effort under a multi-pronged strategy involving the Federal Reserve and the financial industry.23. What do the revisions to the PSR policy include? The revisions to the PSR policy explicitly recognize the role of the central bank in providing intraday balances to healthy depository institutions. The revised policy encourages institutions to voluntarily pledge collateral to cover daylight overdrafts by providing such overdrafts at a zero fee and by raising the fee for uncollateralized daylight overdrafts to 50 from 36 basis points. Other important changes to the PSR policy include the adjustment of net debit caps to eliminate the lower of the existing two overdraft limits, the elimination of the current deductible for daylight overdraft fees, an increase in the fee waiver to $150 from $25, and an increase in the penalty daylight overdraft fee for ineligible institutions.24. What is the effective date of the revised PSR Policy? The interim provisions regarding an early adoption of a streamlined max cap procedure and the interim policy that changes the deductible calculation for eligible FBOs will be effective on March 26, 2009. Implementation for the remaining revisions will take place between the fourth quarter of 2010 and the first quarter of 2011; a specific date will be announced by the Board at least 90 days in advance.25. Will Reserve Banks require institutions that incur daylight overdrafts to pledge collateral? No. The revised policy intends for the collateralization of DLODs to be voluntary to avoid disrupting the operation of the payment system and to avoid creating a burden for a large number of small users of daylight overdrafts.26. What type of collateral is acceptable to pledge for intraday credit purposes? Collateral eligibility will remain the same for PSR policy purposes as for discount window purposes. A listing of the most commonly pledged asset types can be found by clicking on the Collateral Margins Table on this site. Additionally, in-transit collateral may also be pledged for PSR purposes. All collateral must be acceptable to the Reserve Banks.27. Do collateral margins for PSR purposes differ from those for the discount window? No. Collateral margins will remain the same for PSR policy purposes as for the discount window. See the Collateral Margins Table on this site for more information.28. What is unencumbered collateral for PSR purposes, such as pricing? Unencumbered collateral for PSR purposes is collateral pledged to the Reserve Banks for discount window or PSR purposes that is not securing an advance. Under some circumstances, rules for determining whether collateral is available may differ for PSR and discount window purposes. For example, under term lending (announced July 30, 2008) institutions requesting an advance of more than 28 days will need to hold an additional 33 percent of collateral in excess of the collateral required for the advance. The additional collateral may not be available for discount window purposes, but would be considered available (unencumbered) for PSR purposes. 29. Can collateral pledged for other purposes be used to collateralize daylight overdrafts for pricing purposes? Yes, if unencumbered. Unencumbered collateral pledged to the discount window, as well as PSR collateral held for problem institutions or for max cap purposes, can be used to offset daylight overdraft fees.30. What information sources will be available for institutions to determine the value of collateral pledged in real time or near real time? The Federal Reserve is assessing its collateral management systems and processes, including the needed and desired functionality and process improvements for such systems in the short and long term. In response to industry feedback, the Federal Reserve has identified a number of changes it intends to implement prior to the effective date of the revised policy. In the short term, the Federal Reserve plans to improve pledging and withdrawal of specific types of securities and increase information available intraday and interday on pledged collateral through the Reserve Banks Account Management Information (AMI) application*. The Federal Reserve will also publish general timing guidelines for collateral pledging and withdrawal to help institutions better track when collateral is determined to be pledged and released by the Reserve Banks.31. How can institutions obtain further details on collateral management and other system and process changes under the revised policy? The Federal Reserve will provide further details on this website. Please check back periodically, especially as we approach the implementation window.32. Will there be limits on intraday credit even when the credit is fully collateralized? Yes. The policy retains a single-day net debit cap that applies to the total of collateralized and uncollateralized daylight overdrafts. The Federal Reserve believes that it is appropriate and prudent to have limits on intraday credit even when the credit is fully collateralized. Limits or caps complement the use of collateral in risk mitigation.33. Will the amount of collateral pledged increase my net debit cap? No. Collateralized daylight credit will not increase an institution's capacity; it simply offsets the institution's fees associated with daylight credit extension. Like the current policy, an institution that requires capacity that exceeds its net debit cap must apply for additional daylight overdraft capacity (max cap).34. Are there any revisions to the max cap process? Yes. The requirement that institutions must have already explored other alternatives to address their increased liquidity needs before considering a max cap has been eliminated. In addition, the revised policy establishes a streamlined procedure for max caps for eligible FBOs. An early adoption of the streamlined procedure for max caps becomes effective March 26, 2009.35. Are there any changes to the ex post counseling in situations when a daylight overdraft exceeds an institution's net debit cap? Yes. The revised policy provides Reserve Banks some additional flexibility, if the daylight overdraft that caused the cap breach is fully collateralized. In such cases, the Reserve Banks may forgo ex post counseling for two incidents of fully collateralized overdrafts per two consecutive reserve-maintenance periods (four weeks). Institutions with de minimis, self-assessed, or max caps are eligible. Exempt cap institutions already have flexibility in counseling under the current policy, which will remain in effect under the revised policy. Institutions subject to a zero cap and those not eligible to incur daylight overdrafts are not entitled to this additional flexibility.36. Why is the Federal Reserve Bank introducing collateral into the Daylight Overdraft (DLOD) fee calculation? The use of collateral at a zero fee is intended to improve liquidity management and payment flows for the banking system while also helping to mitigate the credit exposures of the Reserve Banks.37. What will be the fees associated with daylight overdrafts under the revised policy? The revised policy introduces major changes in daylight overdraft pricing:38. How will the uncollateralized daylight overdrafts fees be calculated? In calculating an institution's fees, the value of unencumbered collateral pledged to the Reserve Banks will be subtracted from all negative end-of-minute account balances to determine the institution's uncollateralized negative end-of-minute balances. The uncollateralized negative end-of-minute account balances will be summed and divided by the number of minutes in the Fedwire funds transfer operating day to arrive at the daily average uncollateralized daylight overdraft, which will be assessed at 50 basis point (annual rate) fee. Daily daylight overdraft fees for each reserve maintenance period will be added together and applied a fee waiver.39. What are the changes affecting the fee waiver? The fee waiver for all users of intraday credit has been modified to reduce the burden of the PSR policy on institutions that use small amounts of daylight credit. First, the fee waiver has been increased to $150 from $25. Second, the waiver's application has been modified: it will be subtracted from the gross fees (in a two-week reserve-maintenance period) of any institution, except for institutions subject to a penalty fee*. In contrast, the current waiver of $25 only applies to gross fees of institutions that have charges less than or equal to $25 (in a two-week reserve maintenance period). The waiver will not result in refunds or credits to an institution.40. What are the changes affecting the deductible? Under the revised PSR policy, the fee deductible has been eliminated as a source of free credit. Free credit under the revised policy will be provided instead through collateralized daylight overdrafts at a zero fee and the increased fee waiver.41. How can institutions assess the impact of the revised PSR policy? To assist institutions in understanding the effect of the revised policy on their daylight overdraft fees, a simplified fee calculator is available at https://www.federalreserve.gov/apps/RPFCalc/. The calculator enables institutions to provide daylight overdraft and collateral data to estimate their daylight overdraft fees under the revised PSR policy. |
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