To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Compliance Officer



The Board of Governors of the Federal Reserve System has announced that it intends, beginning in July 2006, to require Reserve Banks to release interest and redemption payments on securities issued by government-sponsored enterprises and international organizations only when the issuer’s Federal Reserve account contains sufficient funds to cover these payments.

The Reserve Banks have been processing and posting these payments to depository institutions’ Federal Reserve accounts by 9:15 a.m. Eastern Time, the same posting time as for U.S. Treasury securities’ interest and redemption payments, even if the issuer has not fully funded its payments.

However, the rising level of intraday credit in recent years has prompted a reassessment of this practice, which is inconsistent with that of private issuing and paying agents for their customers’ securities. In general, these issuing and paying agents do not allow payments to be made for a securities issuer before the issuer has fully funded its payments.

The Board requests comment by April 16, 2004 on how best to promote a smooth market adjustment while implementing this change in its Policy Statement on Payments System Risk.

The Board first adopted the policy statement in 1985 and has modified and expanded it periodically. Its objectives are to reduce risk and increase efficiency in the payments system, including minimizing intraday float. To that end, the Board introduced fees for daylight overdrafts in 1994 but granted a temporary exemption to government-sponsored enterprises until after market participants adjusted to the introduction of fees for depository institutions. The Board completed a broad review of the Policy Statement on Payments System Risk two years ago and found that market participants have adjusted to the fees, permitting reconsideration of the temporary exemption.

Concurrent with the change for interest and redemption payments on the securities of government-sponsored enterprises and international organizations, the Board also plans to align its policy treatment of the general corporate account activity of these entities with the treatment of activity of other account holders that do not have regular access to the discount window. Such treatment would include applying a penalty fee to daylight overdrafts resulting from these entities’ general corporate payment activity.

By law, Reserve Banks act as fiscal agents for these government-sponsored enterprises and international organizations: the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, entities of the Federal Home Loan Bank System, the Farm Credit System, the Federal Agricultural Mortgage Corporation, the Student Loan Marketing Association, the International Bank for Reconstruction and Development (World Bank), the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank.

The Federal Register notice, published February 10, 2004, is available here (224 KB, 11 pages).

Date: Comments must be submitted to the Board by April 16, 2004.

For Further Information: Paul Bettge, Associate Director (202/452-
3174), Stacy Coleman, Manager (202/452-2934), or Connie Horsley, Senior Financial Services
Analyst (202/452-5239), Division of Reserve Bank Operations and Payment Systems; for the hearing impaired only: Telecommunications Device for the Deaf, Dorothea Thompson (202/452-3544).