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TERM DEPOSIT FACILITIES

On September 4, 2014, the Federal Reserve issued a Press Release announcing that beginning in October, Term Deposit Facilities (TDFs) will incorporate an early withdrawal feature.

What is a TDF? In an overview of TDFs published by the Fed, it stated: “The term Deposit Facility is a program through which the Federal Reserve Banks offer interest-bearing term deposits to eligible institutions. The Term Deposit Facility was established to facilitate the conduct of monetary policy by providing a tool that may be used to manage the aggregate quantity of reserve balances held by depository institutions. An increase in term deposits outstanding drains reserve balances because funds used to pay for them are removed from the accounts of participating institutions for the life of the term deposit. Term deposits cannot be used to satisfy reserve requirements or clear payments. Term deposits can be used as collateral for discount window advances or for payment system risk purposes.”

TDFs will operate under both fixed rate and floating rate formats. “The Federal Reserve will announce offerings of term deposits in advance of the operation date. The announcement will specify the details of the operation and will be available on the Board of Governors’ web site. The terms will be awarded through different formats, including a competitive single-price auction format with a non-competitive bidding option, a fixed rate format at the interest rate specified in advance, or a floating rate format. The interest rate paid on term deposits awarded through a floating-rate format will be the operation effective interest rate, which is determined by the average daily effective rates over the term of the instrument. The daily effective rate is the sum of the value of the reference rate for that day and the spread rate for the operation.”

The Federal Reserve will announce offerings of term deposits in advance of the operation date. A TDF participant can submit a tender for term deposits directly, using the TDF application, or through an agent, such as a correspondent bank. The announcements are made on the Fed’s web site. Auction operations can involve either competitive or non competitive tenders. TDF participants can submit one or the other, but not both. The announcements include information about the total offering amount, term, maximum and minimum bid amounts per institution, and maximum bid rate. For example, an announcement made on January 9, 2013 specified a total offering amount of $3,000,000,000, a maximum bid per institution of $1,250,000,000, a minimum amount of $10,000, and a maximum bid rate of 0.75000%. While the minimum bid can vary from auction to auction, a review of several auction announcements revealed that $10,000 was the specified minimum in each case.

For more information about TDFs, visit the Fed’s web site at www.federalreserve.gov. Banks located in the Federal Reserve Bank of Philadelphia’s district can call Donna Wilson, at (215) 574-6595 for guidance on how to get started as a TDF participant.

This Alert is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific problem. Advice should be obtained from a qualified attorney or tax practitioner in the jurisdiction where the advice is sought.

Werb & Sullivan Duane D. Werb
300 Delaware Avenue, Suite 1300 Brian A. Sullivan
Wilmington, DE 19801 Jack J. Shrum
(302) 652-1100 Mathew P. Austria
William M. Aukamp