Summary of the Interim Final Rule
Effective on April 24, 2020, the Board of Governors of the Federal Reserve System (the “Board”) adopted an Interim Final Rule (the “Rule”) permitting depository institutions to immediately suspend the six transactions per month limitation on savings deposits, also referred to as money market deposit accounts (“MMDA”), under Regulation D (Reserve Requirements). The Rule follows the Board’s March 26 elimination of reserve requirements on all transaction accounts, obviating the need for a regulatory distinction in Regulation D between “transaction accounts” subject to reserves and “savings deposits” not subject to reserves. The Board has stated that it currently has no intention to reinstate reserve requirements on transaction accounts, but may do so in the future.
Before the Rule, “savings deposits” as defined in Regulation D were subject to a limit of six transfers or withdrawals per month (or similar statement cycle).1 The Rule deletes this six-transfer limit from the savings deposit definition. The Rule also deletes the provisions in the savings deposit definition that require depository institutions to prevent transfers and withdrawals in excess of the limit, or to proactively monitor savings deposits for transfers or withdrawals exceeding the limit. The Rule thus allows depository institutions to immediately suspend enforcement of the six-transfer limit and to allow their customers to make an unlimited number of transfers and withdrawals from their savings deposits.
Depository institutions are not required to eliminate the transaction limitation. Regardless of whether depository institutions do so they may still report the deposit accounts as savings deposits so long as they continue to reserve the right to require seven days prior written notice of a withdrawal.
The Rule has no expiration date.2 The Board will be able to reimpose the transaction limits in the future but would need to do so through notice-and-comment rulemaking. Comments on the Rule will be due 60 days after publication in the Federal Register.
It appears that the Board is moving away from the existing reserves policy, which was instituted in the 1980s to implement monetary policy by allowing the Board to limit the money supply. In January 2020 the Board announced its intention “to implement monetary policy in a regime in which an ample supply of reserves ensures that control over . . . interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates, and in which active management of the supply of reserves is not required.”3
Impacts of the Interim Final Rule
- Sweep Program Linked Account Structure. Most broker-dealer sweep programs utilize a dual account structure in which an MMDA is linked to a transaction account in order to manage reserves by maintaining as much of the deposits as possible in the reserve-free MMDA. With the elimination of the reserves requirement on transaction accounts and the elimination of the monthly transaction limits on MMDAs, the linked account approach is no longer necessary.
- Industrial Loan Company Deposits. Industrial loan companies (“ILCs”) are prohibited from offering demand deposit accounts and are limited to offering savings accounts and negotiable order of withdrawal (“NOW”) accounts. Commercial entities are not eligible to hold NOW accounts. These restrictions have greatly limited the ability of ILCs to attract deposits from commercial entities. However, with the adoption of the Rule, ILCs may now offer MMDAs with unlimited withdrawals so long as they reserve the right to require seven days prior written notice of withdrawal — a right that is rarely, if ever, exercised. Therefore, the Rule gives ILCs much greater flexibility in attracting deposits from commercial entities.
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The full text of the Proposal as posted on the Federal Reserve’s website can be found here.
Seward & Kissel LLP will continue to provide insight on developments regarding deposit markets. If you have any questions, please contact Paul Clark, Casey Jennings, Jessica Cohn, or Nathan Brownback in the Washington, DC office at 202-737-8833.
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1 12 C.F.R. §204.2(d)(2).
2 Relatedly, in its FAQs about eliminating reserve requirements on transaction accounts, the Board indicates that it has no current plans to re-impose reserve requirements. Board, Reserves Central – Reserve Account Administration Application Frequently Asked Questions – Elimination of Reserve Requirements, FAQ #5.
3 Statement Regarding Monetary Policy Implementation and Balance Sheet Normalization, https://www.federalreserve.gov/newsevents/pressreleases/monetary20190130c.htm (Jan. 30, 2020).
