Sec. 204.131 Participation by a depository
institution in the secondary market for its own time deposits.
(a) Background. In 1982, the Board issued an interpretation concerning
the effect of a member bank's purchase of its own time deposits in the
secondary market in order to ensure compliance with regulatory restrictions
on the payment of interest on time deposits, with the prohibition against
payment of interest on demand deposits, and with regulatory requirements
designed to distinguish between time deposits and demand deposits for federal
reserve requirement purposes (47 FR 37878, Aug. 27, 1982). The interpretation
was designed to ensure that the regulatory early withdrawal penalties in
Regulation Q used to achieve these three purposes were not evaded through
the purchase by a member bank or its affiliate of a time deposit of the
member bank prior to the maturity of the deposit.
(b) Because the expiration of the Depository Institutions Deregulation
Act (title II of Pub. L. 96-221) on April 1, 1986, removed the authority
to set interest rate ceilings on deposits, one of the purposes for adopting
the interpretation was eliminated. The removal of the authority to set
interest rate ceilings on deposits required the Board to revise the early
withdrawal penalties which were also used to distinguish between types
of deposits for reserve requirement purposes. Effective April 1, 1986,
the Board amended its Regulation D to incorporate early withdrawal penalties
applicable to all depository institutions for this purpose (51 FR 9629,
Mar. 20, 1986). Although the new early withdrawal penalties differ from
the penalties used to enforce interest rate ceilings, secondary market
purchases still effectively shorten the maturities of deposits and may
be used to evade reserve requirements. This interpretation replaces the
prior interpretation and states the application of the new early withdrawal
penalties to purchases by depository institutions and their affiliates
of the depository institution's time deposits. The interpretation applies
only to situations in which the Board's regulatory penalties apply.
(c) Secondary market purchases under the rule. The Board has determined
that a depository institution purchasing a time deposit it has issued should
be regarded as having paid the time deposit prior to maturity. The effect
of the transaction is that the depository institution has cancelled a liability
as opposed to having acquired an asset for its portfolio. Thus, the depository
institution is required to impose any early withdrawal penalty required
by Regulation D on the party from whom it purchases the instrument by deducting
the amount of the penalty from the purchase price. The Board recognizes,
however, that secondary market sales of time deposits are often done without
regard to the identity of the original owner of the deposit. Such sales
typically involve a pool of time deposits with the price based on the aggregate
face value and average rate of return on the deposits. A depository institution
purchasing time deposits from persons other than the person to whom the
deposit was originally issued should be aware of the parties named on each
of the deposits it is purchasing but through failure to inspect the deposits
prior to the purchase may not be aware at the time it purchases a pool
of time deposits that it originally issued one or more of the deposits
in the pool. In such cases, if a purchasing depository institution does
not wish to assess an applicable early withdrawal penalty, the deposit
may be sold immediately in the secondary market as an alternative to imposing
the early withdrawal penalty.
(d) Purchases by affiliates. On a consolidated basis, if an affiliate
(as defined in Sec. 204.2(q) of Regulation D) of a depository institution
purchases a CD issued by the depository institution, the purchase does
not reduce their consolidated liabilities and could be accomplished primarily
to assist the depository institution in avoiding the requirements of the
Board's Regulation D. Because the effect of the early withdrawal penalty
rule could be easily circumvented by purchases of time deposits by affiliates,
such purchases are also regarded as an early withdrawals of the time deposit,
and the purchase should be treated as if the depository institution made
the purchase directly. Thus, the regulatory requirements for early withdrawal
penalties apply to affiliates of a depository institution as well as to
the institution itself.
(e) Depository institution acting as broker. The Board believes that
it is permissible for a depository institution to facilitate the secondary
market for its own time deposits by finding a purchaser for a time deposit
that a customer is trying to sell. In such instances, the depository institution
will not be paying out any of its own funds, and the depositor does not
have a guarantee that the depository institution will actually be able
to find a buyer.
(f) Third-party market-makers. A depository institution may also establish
and advertise arrangements whereby an unaffiliated third party agrees in
advance to purchase time deposits issued by the institution. The Board
would not regard these transactions as inconsistent with the purposes that
the early withdrawal penalty is intended to serve unless a depository institution
pays a fee to the third party purchaser as compensation for making the
purchases or to remove the risk from purchasing the deposits. In this regard,
any interim financing provided to such a third party by a depository institution
in connection with the institution's secondary market activity involving
the institution's time deposits must be made substantially on the same
terms, including interest rates and collateral, as those prevailing at
the same time for comparable transactions with other similarly situated
persons and may not involve more than the normal risk of repayment.
(g) Reciprocal arrangements. Finally, while a depository institution
may enter into an arrangement with an unaffiliated third party wherein
the third party agrees to stand ready to purchase time deposits held by
the depository institution's customers, the Board will regard a reciprocal
arrangement with another depository institution for purchase of each other's
time deposits as a circumvention of the early withdrawal penalty rule and
the purposes it is designed to serve.
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