81 FR 93923 - Proposed Guidelines for Evaluating Joint Account Requests, Request for Comments

FEDERAL RESERVE SYSTEM

Federal Register Volume 81, Issue 246 (December 22, 2016)

The Board of Governors of the Federal Reserve System (Board) is requesting comment on proposed guidelines to evaluate requests for joint accounts at Federal Reserve Banks (Reserve Banks) by private- sector arrangements within the U.S. payment system. Under the Federal Reserve Act (FRA), Reserve Banks have the authority to open accounts for member banks and other eligible depository institutions. The Reserve Banks typically permit a single master account per eligible institution but have, in limited cases, opened joint accounts for specific uses. Given the potential for this type of account to be of interest to payment system participants, the Board proposes to establish guidelines to be considered in evaluating requests for joint accounts to facilitate settlement for payment systems in the United States. The Board seeks comment on all aspects of the proposed guidelines.

[Federal Register Volume 81, Number 246 (Thursday, December 22, 2016)]
[Notices]
[Pages 93923-93926]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-30860]



[[Page 93923]]

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FEDERAL RESERVE SYSTEM

[Docket No. OP--1557]


Proposed Guidelines for Evaluating Joint Account Requests, 
Request for Comments

SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is requesting comment on proposed guidelines to evaluate requests for 
joint accounts at Federal Reserve Banks (Reserve Banks) by private-
sector arrangements within the U.S. payment system. Under the Federal 
Reserve Act (FRA), Reserve Banks have the authority to open accounts 
for member banks and other eligible depository institutions. The 
Reserve Banks typically permit a single master account per eligible 
institution but have, in limited cases, opened joint accounts for 
specific uses. Given the potential for this type of account to be of 
interest to payment system participants, the Board proposes to 
establish guidelines to be considered in evaluating requests for joint 
accounts to facilitate settlement for payment systems in the United 
States. The Board seeks comment on all aspects of the proposed 
guidelines.

DATES: Comments on the proposed guidelines must be received on or 
before February 21, 2017.

ADDRESSES: You may submit comments, identified by Docket No. OP-1557, 
by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue NW., 
Washington, DC 20551.
    All public comments are available from the Board's Web site at 
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
except as necessary for technical reasons. Accordingly, your comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
3515, 1801 K Street NW. (between 18th and 19th Street NW.), Washington, 
DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Susan V. Foley, Senior Associate 
Director (202-452-3596), Kylie Stewart, Manager (202-245-4207), or Ian 
C.B. Spear, Senior Financial Services Analyst (202-452-3959), Division 
of Reserve Bank Operations and Payment Systems, Board of Governors of 
the Federal Reserve System; for users of Telecommunications Device for 
the Deaf (TDD) only, contact 202-263-4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 13(1) of the FRA authorizes each Reserve Bank to ``receive 
from any of its member banks or other depository institutions . . . 
deposits of current funds in lawful money.'' \1\ The Reserve Banks 
routinely open and maintain individual Federal Reserve accounts for 
eligible institutions. The Reserve Banks have also, in limited cases, 
opened joint accounts for specific purposes, including conducting 
settlement for payment systems. A joint account is held for the benefit 
of multiple depository institution account holders. Currently, the 
Reserve Banks maintain two joint accounts to facilitate settlement 
between users of private-sector payment services operated by The 
Clearing House (TCH): One to facilitate wholesale payments through the 
Clearing House Interbank Payments System (CHIPS) and another to 
facilitate TCH's Universal Payment Identification Code (UPIC) service 
for ACH payments.\2\ Both of these joint accounts are long-standing, 
with the more recent account being established approximately 15 years 
ago. The Reserve Banks do not offer joint accounts as a standard 
available account option, and consistent with the Reserve Banks' 
authority under the FRA, institutions seeking to collectively establish 
a joint account at a Reserve Bank must individually satisfy the FRA's 
eligibility requirements to establish a Federal Reserve account.
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    \1\ 12 U.S.C. 342.
    \2\ CHIPS is a multilateral netting system that continuously 
settles wholesale payments between two or more participating 
institutions.
    TCH offers a UPIC service that enables its customer's end users 
to provide payment instructions to third parties without disclosing 
their bank account information and enables such end users to change 
banking relationships without needing to notify each payor of the 
change (the UPIC remains the same). The joint account for UPIC 
transactions enables the settlement of ACH credit transactions using 
UPICs when the transactions are sent by customers of the Reserve 
Banks' FedACH service and destined for participants in TCH's UPIC 
service.
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    For purposes of the proposed guidelines, the joint account would be 
held for the benefit of ``joint account holders,'' that is, depository 
institutions that are eligible to open an account with a Reserve Bank 
and that under the rules of a private-sector payment system are either 
required or permitted to be one of the joint account holders. Each of 
the joint account holders authorizes a single entity to serve as the 
``agent'' for the joint account holders with respect to the account and 
to provide instructions with respect to the joint account.\3\ As in the 
case of the existing joint accounts, the account-holding Reserve Bank 
would be authorized to act on any instruction provided by the agent, 
consistent with the security procedures and other provisions of the 
joint account agreement.\4\ In addition, and also consistent with 
existing practice, the joint account holders would indemnify the 
account-holding Reserve Bank jointly and severally for losses related 
to the Reserve Bank's operation of the joint account. The ``operator'' 
of the private-sector arrangement, which could be the agent of the 
joint account or a separate entity, would provide the clearing services 
for, and typically serve as the source for the positions of, the 
participants in the private-sector arrangement. ``Participants'' could 
include joint account holders, as well as other depository institutions 
and nondepository institutions that are directly part of the private-
sector arrangement's payment system.
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    \3\ Joint account holders must authorize the same agent as a 
condition of being a joint account holder, but any joint account 
holder may withdraw from the joint account with appropriate notice. 
Although joint account holders must be eligible depository 
institutions, the designated agent of the private-sector arrangement 
would not need to be a depository institution.
    \4\ Rules and agreements among the parties would determine what 
obligations the agent has to the joint account holders with respect 
to instructions initiated by the agent.
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    Given the ongoing evolution of the U.S. payment system, there may 
be broader interest in establishing joint accounts to facilitate 
settlement on the part of market participants. For instance, as part of 
the Board's and Reserve Banks' (collectively the Federal Reserve's) 
Strategies for Improving the U.S. Payment System efforts, the Federal 
Reserve is facilitating a multiyear collaborative effort to support the 
desired outcome of ``a ubiquitous, safe, faster electronic solution for 
making a broad variety of business and personal payments supported by a 
flexible and cost-effective means for payment clearing and settlement 
groups to settle their positions rapidly and with

[[Page 93924]]

finality.'' \5\ To help foster this outcome, the Federal Reserve in 
2015 established the Faster Payments Task Force (Task Force), 
consisting of diverse payment industry stakeholders, to identify 
effective approaches to implementing safe, ubiquitous, faster payments 
capabilities in the United States.
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    \5\ The Strategies for Improving the U.S. Payment System paper 
was published in January 2015, and is available at https://fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf.
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    The Task Force developed a process whereby proposals for safe, 
ubiquitous, faster payment capabilities (``faster retail payment 
systems'') could be assessed by a qualified independent assessment team 
and the Task Force against the Faster Payments Effectiveness Criteria 
developed by the Task Force.\6\ As part of this process, the Federal 
Reserve made proposers aware that they could discuss Reserve Bank 
services, such as settlement options, with Federal Reserve 
representatives if they had an interest in using those services to 
facilitate their proposed faster retail payment systems. Federal 
Reserve staff received one request from an organization to open a joint 
account to facilitate settlement to support that organization's 
proposed faster retail payment system.
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    \6\ The Task Force's Faster Payments Effectiveness Criteria is 
available at https://fedpaymentsimprovement.org/wp-content/uploads/fptf-payment-criteria.pdf. The Federal Reserve contracted with an 
external firm to support the Task Force efforts to perform a 
qualified independent assessment of the faster payments solution 
proposals (https://fedpaymentsimprovement.org/news/press-releases/fre-in-effort-to-assess-faster-payments/). The faster retail 
payments solutions provided to the qualified independent assessment 
team and the Task Force are considered confidential within the 
process established by the Task Force. The Task Force intends to 
release a final report mid-2017, which will contain the proposals 
and assessments for those organizations that agree to be included in 
that report.
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    The Board recognizes that other potential providers may contemplate 
similar account arrangements or might reconsider their options for 
settlement capabilities if they understood better the availability of 
joint accounts. The Board therefore proposes to establish guidelines 
for evaluating requests for joint accounts to facilitate settlement. In 
particular, a private-sector arrangement may seek a joint account 
model, in certain instances, to facilitate near credit-risk-free 
settlement in support of its payment system. Today, the credit-risk-
free settlement of U.S. dollar payment, clearing, and settlement 
systems typically requires the Reserve Banks to make the appropriate 
debits and credits to accounts on their books. Under one potential 
joint account model, each participant in the private-sector arrangement 
would rely on the presence of balances held in a Federal Reserve 
account to obtain certainty that transactions settled via the 
arrangement are ultimately backed by funds on deposit at the central 
bank.\7\
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    \7\ Other potential models are also offered by the Reserve 
Banks, for example the Reserve Banks' National Settlement Service, 
https://www.frbservices.org/nationalsettlement/index.html.
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II. Discussion of Proposed Guidelines

    The Board proposes the following guidelines to evaluate requests 
for joint accounts by a private-sector arrangement within the U.S. 
payment system. The proposed guidelines are intended to broadly outline 
considerations necessary for evaluating such requests. Requests would 
be evaluated on a case-by-case basis, and evaluating a particular 
request would likely require more-specific considerations and 
information based on the complexity of the arrangement and other 
factors.

1. Each Joint Account Holder Must Meet All Applicable Legal 
Requirements To Have a Federal Reserve Account, and the Reserve Bank 
Will Not Have Any Obligation to Any Non-Account Holder With Respect to 
the Funds in the Account

    Only an institution that is eligible to have a Federal Reserve 
account under the FRA and applicable Federal Reserve rules, policies, 
and procedures is able to be a joint account holder. Section 13(1) of 
the FRA permits Reserve Banks to receive deposits from member banks or 
other depository institutions.\8\ Section 19(b)(1)(A) further defines 
depository institutions to include any insured bank, any mutual savings 
bank, any savings bank, any savings association as defined in the 
Federal Deposit Insurance Act, any insured credit union as defined in 
the Federal Credit Union Act, and those entities that are eligible to 
``make application to become'' a federally insured institution.\9\ As a 
result, unless otherwise specified by statute, only those entities that 
meet the definition of a depository institution are legally able to 
obtain Federal Reserve accounts and payment services.\10\ All other 
nondepository institutions are ineligible for accounts and payment 
services. Moreover, as part of evaluating any joint account requests, 
and consistent with Federal Reserve policies and procedures, the 
account-holding Reserve Bank must approve all joint account holders 
that are part of a proposed private-sector arrangement.\11\ Consistent 
with the limits on the Reserve Banks' deposit-taking authority, a 
Reserve Bank's obligation with respect to any funds in a joint account 
will be limited to the joint account holders, and no non-account 
holders may have any rights against the Reserve Bank with respect to 
those funds.
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    \8\ 12 U.S.C. 342.
    \9\ 12 U.S.C. 461(b).
    \10\ There are certain statutory provisions allowing Reserve 
Banks to act as a depository and fiscal agent for the Treasury and 
certain government-sponsored entities (See i.e., 12 U.S.C. 391, 393-
95, 1823, 1435) as well as for certain international organizations 
(See i.e., 22 U.S.C. 285d, 286d, 290o-3, 290i-5, 290l-3). In 
addition, Reserve Banks are authorized to offer deposit accounts to 
designated financial market utilities (12 U.S.C. 5465), Edge and 
Agreement corporations (12 U.S.C. 601-604a, 611-631), branches or 
agencies of foreign banks (12 U.S.C. 347d), and foreign banks and 
foreign states (12 U.S.C. 358).
    \11\ The designated agent or operator of the private-sector 
arrangement would not need to be a depository institution. The 
designated agent would, however, need to be approved by the account-
holding Reserve Bank, pursuant to these guidelines.
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2. The Private-Sector Arrangement Must Demonstrate That It Has a Sound 
Legal and Operational Basis for Its Payment System

    The private-sector arrangement must have a sound legal and 
operational basis for its payment system, including an effective legal 
framework for achieving settlement finality. The arrangement must have 
analyzed the application of U.S. sanction programs, Bank Secrecy Act 
and anti-money-laundering requirements or regulations, and other laws 
and regulations (including the Electronic Funds Transfer Act) as 
applicable, and must have established appropriate compliance 
procedures. The private-sector arrangement must provide an analysis of 
the attachment risk related to the account and the impact of 
participant insolvency on the account, as well as have policies and 
procedures to minimize disruption to its system when one of its 
participants, the agent, or the operator fails, when fraudulent 
activity occurs, or in the event of operational failures. Requestors of 
a joint account will likely be required to provide supporting legal 
analysis as well as the system's rules, agreements, and other governing 
documents.
    An evaluation under this guideline will take into account the 
applicable supervisory framework for the private-sector arrangement, 
including the agent, the operator, and the participants.\12\ The

[[Page 93925]]

agent and the operator of the private-sector arrangement should be 
subject to the examination authority of a federal or state supervisory 
agency and be in compliance with the requirements imposed by its 
supervisor regarding financial resources, liquidity, participant 
default management, and other aspects of risk management. As discussed 
in the proposed guideline below, the private-sector arrangement also 
would be expected to manage risks consistent with the standards 
outlined in Part I of the Board's Policy on Payment System Risk (PSR 
Policy), even if the private-sector arrangement is not otherwise 
subject to the PSR Policy.\13\
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    \12\ For example, the Bank Service Company Act grants federal 
banking agencies the authority to regulate and examine third-party 
service providers and bank service companies that perform services 
for depository institutions under the federal banking agencies' 
supervision as if the company were an insured depository 
institution. 12 U.S.C. 1867(b). Evaluation under this guideline 
could therefore include considering whether the operator and agent 
of the private-sector arrangement would be subject to such 
supervision.
    \13\ The Board's PSR Policy sets forth standards regarding the 
management of risks that financial market infrastructures (FMIs) 
present to the financial system when an FMI expects to settle a 
daily aggregate gross value of $5 billion on a given day and when 
providing accounts and services to FMIs. Generally, FMIs are 
multilateral systems among participating financial institutions, 
including the system operator, used for the purposes of clearing, 
settling, or recording payments, securities, or other financial 
transactions. For the purposes of a system that uses a joint account 
to facilitate settlement, the standards would be applicable 
regardless of the daily aggregate gross value in a given day. The 
PSR policy is available at https://www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
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3. The Design and Rules of a Private-Sector Arrangement Must Be 
Consistent With the Federal Reserve's Policy Objectives To Promote a 
Safe, Efficient, and Accessible Payment System for U.S. Dollar 
Transactions and Be Consistent With the Intended Use of the Arrangement

    The design and rules of the private-sector arrangement must be 
consistent with the Federal Reserve's policy objectives of fostering 
the long-term safety, efficiency, and accessibility of the U.S. dollar 
payment system. An evaluation under this guideline would assess whether 
the private-sector arrangement promotes payment system improvements and 
innovations and the extent to which the arrangement fosters competition 
in the payment system. Of relevance is whether the system is widely 
available for use by its intended end users and is designed to minimize 
the risk of disruption (rejection or delay of payments) to end users. 
Also of relevance is whether the system creates undue inefficiencies in 
the payment process or undue barriers to interoperability within the 
U.S. dollar payment system.
    A private-sector arrangement that uses a joint account to 
facilitate settlement should also conform to the standards in the PSR 
Policy for risk management. Thus, even if the PSR Policy would not 
otherwise apply, before authorizing the establishment of a joint 
account, the private-sector arrangement would need to demonstrate that 
it has a general risk-management framework appropriate for the risks 
the system poses to the operator, agent, participants, the Reserve Bank 
granting the joint account, and other relevant parties and payment 
systems.
    Finally, the design and rules of the private-sector arrangement, 
including rules relating to the funding of and disbursements from the 
joint account, should be consistent with the intended use of the 
account. For example, the rules should not provide an incentive for a 
participant that is not a joint account holder and not eligible for its 
own individual Federal Reserve account to use its participation in the 
arrangement, including the funding of its obligations under the 
arrangement through a joint account holder, to inappropriately take 
advantage of the credit-risk-free nature of the joint account for 
purposes other than settling payments through the arrangement.

4. Provision of a Joint Account Must Not Create Undue Credit, 
Settlement, or Other Risks to the Reserve Banks

    Granting a request for a joint account must not create undue risks 
to a Reserve Bank. For instance, requests for joint accounts involving 
a financially unsound operator or agent would not be approved. 
Financially unsound depository institutions also may not be approved as 
accountholders for the joint account. In addition, the agent or 
operator and joint account holders must demonstrate an ongoing ability 
to meet all their obligations under the joint account agreement with a 
Reserve Bank, including during periods of stressed operating conditions 
or default by the agent, operator, one or more joint account holders, 
or other participants.
    The manner in which the joint account will be used in support of 
the private-sector arrangement and any anticipated use of Reserve Bank 
services must also be identified as part of a joint account request. 
The private-sector arrangement must structure its use of the joint 
account and Reserve Bank services, including settlement processes, in a 
manner that seeks to avoid intraday overdrafts. No overnight or 
intraday credit would be permitted in a joint account. The agent also 
must demonstrate ways to monitor the joint account at all times 
necessary to avoid overdrafts and to promptly cover any inadvertent 
overdrafts. Further, the agent must demonstrate the ability to 
appropriately manage and control the transactions originated and 
received by the joint account.

5. Provision of a Joint Account Must Not Create Undue Risk to the 
Overall Payment System

    The private-sector arrangement must not cause undue credit, 
settlement, or other risks to the efficient operation of other payment 
systems or the payment system as a whole. In evaluating a joint account 
request under this guideline, the operational and financial interaction 
with and use of other payment systems is relevant, as is the extent to 
which the use of the joint account may restrict a portion of funds from 
being available to support intraday liquidity needs of individual 
depository institutions for other payment and settlement activity.

6. Provision of a Joint Account Must Not Adversely Affect Monetary 
Policy Operations

    The joint account must not adversely affect the conduct of monetary 
policy. The provision of a joint account could have important 
implications for monetary policy implementation, particularly if a 
joint account or joint accounts in aggregate have balances that 
fluctuate to the extent that they materially affect the supply of 
reserve balances available to depository institutions for meeting 
reserve requirements. Joint account balance volatility could be a 
particular concern if a future monetary policy framework relies on 
controlling the supply of reserves. Evaluation of the potential 
monetary policy implications of use of a joint account would include 
whether the balance in the joint account would be treated as reserves, 
the expected predictability and volatility of payment flows into and 
out of the joint account, and the potential for a Reserve Bank to 
impose limitations on account volatility without affecting the intended 
function of the arrangement.
    Because of the potential effects on monetary policy implementation 
of the volatility of balances or payment flows in joint accounts, as a 
condition of opening the joint account, the Reserve Bank would retain 
the right to limit account volatility or require information on the 
level or the projected volatility of balances. An information 
requirement might include a notice period within which the agent must 
notify the Reserve Bank of shifts in account balances greater than a 
designated threshold. The Reserve Bank might also retain the right to 
impose a limit on the absolute size of the account at any time it 
determines appropriate. Finally, if other potential conditions 
discussed above are ineffective, the Reserve Bank might also

[[Page 93926]]

retain the right to restrict further or close joint accounts if 
warranted to implement appropriate monetary policy objectives.

III. Process for a Joint Account

    The Board and the Reserve Banks will consider requests submitted to 
the Reserve Banks against the final guidelines when published.
    As discussed above, the account agreement may place conditions on 
the private-sector arrangement, the agent, operator, or account holders 
regarding matters pertinent to the joint account, including, for 
example, limits on the level or volatility of account balances, 
requirements for information on projected balances or volatility of 
balances, or requirements related to compliance with risk management 
standards, including those within the PSR Policy.

IV. Request for Comment

    The Board requests comment on all aspects of the proposed 
guidelines, including whether the scope and application of the proposed 
guidelines are sufficiently clear and appropriate to achieve their 
intended purpose and other criteria or information that commenters 
believe may be relevant to evaluate a joint account request under the 
proposed guidelines. The Board further seeks comment specifically on 
the following aspects of the proposed guidelines:
     What information, if any, about the establishment of an 
individual joint account should be made public?
     If the Reserve Banks reserved the right to set limits on 
balances in joint accounts, to require information on projected 
balances or volatility of balances, or to restrict further or close 
joint accounts (as discussed in guideline six), how, if at all, would 
the possibility of such limits affect interest in establishing a joint 
account, or use of such an account once opened? Are there other types 
of restrictions or conditions that, while equally effective in 
attaining the same objectives, might be less burdensome to a private-
sector arrangement if placed on joint accounts once in use?
     Are there additional criteria or information that may be 
relevant to evaluate joint account requests for U.S. depository 
institutions to provide services to foreign clearing and settlement 
arrangements?
    Finally, the Board also seeks comment on whether the Board or the 
Reserve Banks should consider other steps or actions to facilitate 
settlement for private-sector arrangements in light of market 
participants' efforts to develop faster retail payment solutions.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, December 19, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-30860 Filed 12-21-16; 8:45 am]
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