On April 24, 2020, the Board of Governors of the Federal Reserve System (Fed) announced an interim final rule (Rule)1 amending its Regulation D to eliminate the limit of six withdrawals or transfers per month (or statement cycle) from savings deposits. In addition to the direct impact on money market deposit accounts (MMDAs) and other savings accounts, the change has important implications for certain deposit sweep programs and for industrial loan companies (ILCs), which historically had more limited ability to serve corporate deposit customers. Although the Rule will be “effective” on the date it is published in the Federal Register, it will be “applicable” retroactively as of April 23, 2020.
The technical change made by the Rule is relatively simple; it redefines savings deposits in a way that permits unlimited transactions in MMDAs and other savings accounts. The explanatory material in the Rule notes two reasons for the change. First, the Rule explains that on March 26, 2020, the Fed reduced the reserve requirements for transaction accounts to zero percent, meaning that “the retention of the distinction in Regulation D between reservable ‘transaction accounts’ and non-reservable ‘savings deposits’ is no longer necessary.” Second, the Rule explains that the change is being made because of “financial disruptions related to the novel coronavirus.” The Rule explains that the “amendments are intended to allow depository institution customers more convenient access to their funds and to simplify account administration for depository institutions.”
By eliminating the six-withdrawal limit, the Rule may also make it easier for some broker-dealers that historically offered MMDA sweeps via a messenger service, as “in person” withdrawals will no longer be necessary to avoid withdrawal limits, that is, the use of a messenger service can be eliminated. Combined with the removal of reserve requirements for transaction accounts, these changes also should moot the need for complicated deposit allocation logic for reserve management, at least until such time as reserve requirements are reinstituted.
Finally, although the Rule leaves in place the requirement that a depository institution reserve the right to require seven days’ written notice of a withdrawal, it does not impose any new limits on the types of depositors that can hold funds in a savings deposit or on the institutions that can offer such accounts. This means that unless the Fed changes the Rule, ILCs arguably may offer corporate customers deposit accounts with full transaction functionality that operate like negotiated order of withdrawal accounts for individuals.
The Fed requested comments on the Rule, which will be due 60 days after the Rule is published in the Federal Register.
1 https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200424a1.pdf. The Fed also published FAQs elaborating on these changes: https://www.federalreserve.gov/supervisionreg/savings-deposits-frequently-asked-questions.htm.
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