CUNA Comment Letter

CUNA supports $50 million limit on fedwire securities transfers

Sent Via E-mail to

August 6, 2001

Ms. Jennifer Johnson, Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, D.C. 20551

Re: Docket No. R-1107; Interim Policy Statement

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Federal Reserve's interim policy statement that would allow a depository institution that has a self-assessed net debit cap to pledge collateral to its Federal Reserve Bank (Reserve Bank) to access additional daylight overdraft capacity above its net debit cap level. As a national trade association, CUNA represents more than 90 percent of the nation’s 10,600 state and federal credit unions. This letter was developed under the auspices of CUNA’s Payment Systems Subcommittee, chaired by Terry West, President and CEO of Jax Navy Federal Credit Union, Jacksonville, Florida. CUNA supports the interim policy statement because it would provide greater flexibility in the payment system with only a minimal increase in the credit risk exposure of the Federal Reserve.

The Policy Statement on Payments System Risk (Policy) was introduced in 1985 to reduce payment systems risks. The Reserve Banks risk losses when depository institutions use credit from their Reserve Bank accounts. This credit is referred to as "daylight credit" or "daylight overdrafts." Reserve Banks face risk if depository institutions are unable to settle their daylight overdraft before the end of the day. As a result, in 1985 the Policy required all depository institutions incurring daylight overdrafts in their Reserve Bank accounts to establish a maximum limit (net debit cap) on those overdrafts. In 1990, the Federal Reserve established that a depository institution's funds and book-entry securities overdrafts would be combined for purposes of determining the institution's compliance with its net debit cap. The old policy required that those depository institutions with frequent and material book-entry securities overdrafts collateralize the full amount of these overdrafts.

Under the interim policy, the Federal Reserve will allow Reserve Banks to eliminate the frequent and material distinction. Instead, the policy will allow Reserve Banks to require collateral from a self-assessed depository institution that frequently exceeds its cap, but only for the overdraft amount that exceeds its net debit cap. Since less of the overdraft will be collateralized, this could increase the exposure for the Federal Reserve.

Although the Federal Reserve's credit risk is marginally increased as a result of the interim policy, CUNA believes that this increased risk is outweighed by the benefit to the payments system. The amount of collateral that would be required under the interim policy is less than before. This change should provide those few depository institutions that were burdened with higher collateral requirements greater flexibility in managing their daylight overdraft position.

The Federal Reserve also requests comments on whether requiring depository institutions with exempt-from-filing and de minimis caps to apply for higher net debit caps if they frequently exceed their caps because of book-entry securities transfers would create an undue burden. However, frequently exceeding a net debit cap indicates that a depository institution's payment activities with the Federal Reserve have expanded and become more complex. In that case, it may be appropriate to require the institution to complete a self-assessment and apply for a higher net debit cap. Although this requirement would be burdensome for the depository institution, it may serve a useful purpose in that it forces the institution to acknowledge and assess the complexity of its payment activities.

The Federal Reserve also requests comments on whether the interim policy would cause institutions to pledge additional collateral to a Reserve Bank or would they primarily use collateral already pledged to a Reserve Bank. The new policy requires institutions to pledge less collateral for securities transfers than the previous one. As a result of this new measure, institutions will have to reassess where they put their funds. CUNA believes that this interim policy may result in a reduction in the amount of collateral that is pledged to the Federal Reserve.

CUNA supports this interim policy because it would expand flexibility for depository institutions with minimal credit risk to the Federal Reserve. If you have any further questions, please contact me at (202) 682-4200.


Michelle Q. Profit
Assistant General Counsel