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Chapter 4000

PROTECTING COLLATERAL PLEDGED BY DEPOSITARIES TO SECURE PUBLIC MONEY ON DEPOSIT

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This chapter provides Federal Reserve Banks (FRBs) with requirements and standard operating procedures for safekeeping, reporting, and monitoring collateral pledged by depositaries to secure public money on deposit.

Section 4010—Applicability

When a Federal agency places funds on deposit with a financial institution, the financial institution must pledge collateral under the conditions described in this chapter. The pledging of collateral by a financial institution is necessary to protect the Federal Government against risk of loss. State, local, and municipal deposits are not covered under this chapter.

Section 4015—Authority

See, inter alia, 12 U.S.C. 90, 265, 266, and 1789a; 31 U.S.C. 321 and 3303; and 31 CFR 202 and 380.

Section 4020—Definitions

Collateral Management System (CMS)—An application operated by the FRB that maintains a record of and values collateral pledged in Fedwire book-entry, non-Fedwire book-entry, or in definitive (physical) form for all Treasury collateral programs administered by the FRBs. FRBs process collateral transactions maintained and valued on this system.

Delivery Instructions—Instructions issued by a depositary to its district FRB requesting release of specific securities from the institution’s safekeeping account. Those instructions also specify where the FRB should transfer the depositary’s securities.

Depositary—A financial institution designated by Treasury to hold public money and perform other services per 31 CFR 202. Agencies that have the requisite statutory authority to hold public funds outside of the Treasury must use depositaries to hold those funds.

Federal Reserve Banks (FRBs)—Fiscal agents of the Federal Government that serve specific geographical areas and act as custodians of collateral pledged to Government agencies.

Financial Institution—A bank, savings and loan, credit union, or other such entity as defined under 31 CFR 202.

National Book Entry System (NBES)—A centralized FRB system facilitating the transfer of book-entry securities. NBES also stores and maintains relevant information about those securities.

Recognized Insurance Coverage—Insurance coverage provided by the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Share Insurance Fund, administered by the National Credit Union Administration, and other qualified organizations recognized by Treasury under 31 CFR 202.

Security Account Reports—Two essential reports available in the Treasury Collateral Management and Monitoring (TCMM) application. The FRB Security Account Holdings Report is available monthly. This report lists all securities pledged to an agency. Additionally, the Collateral Monitoring Recap Report is available monthly and provides agencies with a recap of security collateral values and the amount to be collateralized for their V accounts (see below) throughout the month.

Treasury Collateral Management and Monitoring (TCMM)—A centralized application operated by the Federal Reserve to monitor securities and other financial assets pledged as collateral to secure public funds.

TCMM Operations Team—An FRB unit providing centralized customer service for Treasury collateral programs for eligible securities, or other financial assets pledged to secure public monies.

V Account—A four-digit alphanumeric collateral account number (such as V000) assigned to a Federal agency to which collateral can be pledged by a depositary. The V account number is established in CMS and NBES, and it is used in TCMM.

Section 4025—Responsibilities for Public Money

Treasury’s Bureau of the Fiscal Service (Fiscal Service) promulgates rules and provides guidance for the security of public money on deposit in depositaries. This is done through 31 CFR 202, which sets out high-level guidance, and through the TFM, which provides more detailed guidance and procedures that agencies, depositaries, and FRBs must follow to ensure that funds are secured. All agencies, depositaries, and FRBs must remain informed of and compliant with the latest collateral regulations, rules, and procedures.

Relevant TFM chapters include:

Fiscal Service determines the types of acceptable collateral depositaries can use to secure deposits of public money. Fiscal Service also determines appropriate margins on pledged collateral. See 31 CFR 380 and the TreasuryDirect website for additional information.

The following subsections outline the distribution of responsibilities for securing deposits of public money.

4025.10—FRBs

All FRBs must secure pledged collateral to protect public funds.

4025.20—TCMM Operations Team

The TCMM Operations Team must:

  • Ensure that pledged collateral is eligible and sufficient to secure deposits of public money;
  • Maintain and distribute FS Form 5902: Resolution Authorizing Execution of Depositary, Financial Agency, and Collateral Agreement; and FS Form 5903: Depositary, Financial Agency, and Collateral Agreement. See Treasury Collateral Management and Monitoring website to obtain these forms;
  • Maintain a current list of collateral contacts;
  • Make available the FRB Security Account Holdings Report and the Collateral Monitoring Recap Report to agencies on a monthly basis through TCMM system;
  • Make available the Collateral Monitoring Recap Report to depositaries on a monthly basis through TCMM system;
  • Open collateral accounts in NBES, CMS, and TCMM system; and
  • Value collateral.

4025.30—Depositaries

Depositaries must:

  • Complete FS Form 5902 and FS Form 5903 (see Treasury Collateral and Monitoring website) and submit these forms to the TCMM Operations Team to establish collateral security accounts;
  • Pledge sufficient eligible collateral security as required by the Secretary of the Treasury;
  • Provide agencies and FRBs with requested information; and
  • Advise agencies when the depositary is not able or willing to pledge collateral.

4025.40—Agencies

Each agency must:

  • Establish a TCMM account and V account by completing the TCMM Agency Access Form, available on Treasury Collateral Management and Monitoring website;
  • Provide the TCMM Operations Team with a timely annual update of contact information;
  • Notify the TCMM Operations Team immediately when there are changes to authorized individuals. See Treasury Collateral Management and Monitoring website to obtain the form to update contact information;
  • Provide timely address changes to the TCMM Operations Team;
  • Notify Fiscal Service, in writing, when canceling a V account. The agency must state that it no longer has collateral holdings and no longer needs the V account;
  • Develop and maintain internal operating procedures to ensure the security of public money. Fiscal Service may request a copy of agency procedures;
  • Ensure that TCMM system has the most accurate and up-to-date amount on deposit to be collateralized. This allows the TCMM Operations Team to maintain sufficient collateral in excess of the recognized deposit insurance limit (generally $250,000). See 12 CFR 330 (Deposit Insurance Coverage); and
  • Monitor agency collateral records by reviewing the monthly FRB Security Account Holdings Report and the Collateral Monitoring Recap Report. Both reports are available in the TCMM application.

4025.50—Fiscal Service

Fiscal Service must:

  • Assign and maintain V account numbers and provide agency information to the FRB so that the FRB may establish accounts; and
  • Establish the collateral policy (except for acceptability and valuation).

4025.60—Fiscal Service

Fiscal Service must also:

  • Establish and maintain lists of acceptable collateral and assigned margins; and
  • Periodically update the criteria and guidance for acceptable collateral and applicable margins. See TreasuryDirect website.

Section 4030—Agency Accounts

If an agency requests a collateral pledge and does not have a V account, the TCMM Operations Team must advise the agency to contact Fiscal Service. Fiscal Service instructs the agency on how to complete the TCMM Agency Access Form and assigns the agency an account number.

The TCMM Operations Team contacts the agency for the amount to be collateralized. The TCMM Operations Team also requests the completed FS Form 5902 and FS Form 5903 from the depositary (see Treasury Collateral Management and Monitoring website), if needed. After the completed forms are received, the TCMM Operations Team contacts the FRB New York’s NBES Central Business Application Function (CBAF) to input the V account number into NBES. The agency can verify in TCMM system that collateral has been pledged.

Section 4035—Financial Institution Agreement

To accept deposits of public money, a financial institution must be designated by Treasury as a depositary and financial agent of the Federal Government under 31 CFR 202. Before accepting deposits in excess of the recognized insurance coverage, each depositary must complete FS Form 5902 and FS Form 5903, available on Treasury Collateral Management and Monitoring website.

When a financial institution contacts the TCMM Operations Team about pledging collateral to secure agency deposits, the TCMM Operations Team ensures it has a completed FS Form 5902 and FS Form 5903 on file from the financial institution. If it does not, the TCMM Operations Team sends those forms to the financial institution along with a cover letter and a copy of 31 CFR 202 and 380.

The financial institution must complete and return the forms to the TCMM Operations Team before a collateral account is established or securities are deposited. The TCMM Operations Team maintains all pledging documentation. This includes the FS Form 5902 and FS Form 5903 and any other pertinent collateral transaction documents.

Section 4040—Acceptable Collateral

Unless otherwise specified by the Secretary of the Treasury, depositaries may pledge collateral in the form of transferable securities of any of the acceptable classes as noted in Fiscal Service guidance. The FRB accepts collateral at values (mark to market) it assigns. See TreasuryDirect website.

Securities not negotiable without endorsement or assignment are acceptable if the depositary either places its unqualified endorsement on each security or furnishes an appropriate resolution and irrevocable power of attorney authorizing the FRB to assign the securities.

Section 4045—Receiving Collateral

If an agency expects its account balance to exceed the recognized deposit insurance limit (generally $250,000), it must set the new amount to be collateralized in TCMM system to ensure effective monitoring of collateral. As long as a depositary supplies the V account number and has completed FS Form 5902 and FS Form 5903, the TCMM Operations Team must accept the pledge of acceptable collateral.

When the TCMM Operations Team receives pledging instructions from the depositary, it must determine if the agency has been assigned a V account number. If not, the TCMM Operations Team must advise the agency to contact Fiscal Service for an account number assignment. If the depositary has not previously pledged securities to an agency, it must complete the FS Form 5902 and FS Form 5903. The TCMM Operations Team sends these forms to the depositary (see Section 4035). The TCMM Operations Team also determines if the securities pledged are acceptable as collateral (see Section 4040). All district FRBs deposit the securities into the depositary’s safekeeping account pledged to the agency.

The FRB may receive a deposit of securities from an off-line depositary without prior receipt instructions. In this case, the securities operations staff at the district FRB should not reverse the deposit automatically but should contact the depositary to determine the proper disposition of the deposit.

Section 4050—Excess Collateral

A depositary must pledge all collateral to a specific agency V account. If a depositary pledges collateral in excess of the requested amount, the entire pledge is applied to the indicated agency account. For example, Agency “X” requests a pledge of $103,000. The depositary chooses to pledge $105,000 because of the profile of its securities portfolio. Agency “X” is credited with the entire $105,000 pledge, not just the $103,000 requested.

Section 4055—Maturing Securities

The TCMM Operations Team monitors agency V accounts to identify maturing securities. Because most of the pledged securities are made in book-entry form, the FRB must have procedures in place to prevent under-collateralization of the agency account. This could result from either the redemption or payment of pledged securities. In this case, the FRB sends a report notifying each depositary of its upcoming maturing securities. Depending on the circumstances, the TCMM Operations Team must take the actions discussed below.

4055.10—Substitution Required

If the TCMM Operations Team determines that a depositary’s collateral account must remain at the current level, the FRB contacts the depositary at least 10 business days before the maturity date of the current pledged securities. The FRB report instructs the depositary in substituting collateral. If the depositary does not substitute new collateral one business day before the maturation/redemption date, the TCMM Operations Team calls the depositary to discuss the need for additional collateral or the withholding of proceeds.

4055.20—Substitution Not Required

If the collateral amount can be reduced without under-collateralizing the V account, the TCMM Operations Team releases the collateral.

4055.30—Substitution Required But Not Received

Book-entry securities must be redeemed and paid on their maturity date. However, the TCMM Operations Team withholds payment if it does not receive a collateral substitution from a depositary on time. The TCMM Operations Team holds redemption proceeds in a general ledger account until the depositary deposits substitute collateral into the account pledged to the agency, or until the agency lowers the amount to be collateralized.

Section 4060—Depositary Mergers

It is important that agency and TCMM Operations Team collateral records correctly reflect the outcome of depositary mergers. This ensures that collateral deficiencies do not develop. When an agency maintains accounts with two depositaries, each account is separately insured by recognized deposit insurance (generally $250,000). If two depositaries serving the same agency merge, the surviving depositary may need to pledge additional collateral to replace the insurance coverage lost because of the merger.

Section 4065—Availability of Monthly Reports

TCMM Operations Team provides the FRB Security Account Holdings Report and the Collateral Monitoring Recap Report monthly. Agencies and depositaries use these reports to ensure that their deposits are adequately protected and to evaluate whether any changes are needed to their amounts to be collateralized.

Section 4070—Handling Collateral Pledged by an Insolvent Depositary

If a depositary that has pledged collateral to an agency becomes insolvent, the TCMM Operations Team should refer to Volume II, Part 8, Chapter 3000, for guidance. Neither the TCMM Operations Team nor the agency can authorize the release of collateral in the event of a depositary’s insolvency. Only Fiscal Service can instruct the TCMM Operations Team to release collateral held under 31 CFR 202 for an insolvent depositary.

Contacts

Direct inquiries concerning this chapter to:

Department of the Treasury
Bureau of the Fiscal Service
Revenue Collections Management
Bank Policy and Oversight Division
3201 Pennsy Drive, Building E
Landover, MD 20785
Telephone: 202-874-8471
Email: BMT@fiscal.treasury.gov

Contact the TCMM Operations Team at:

TCMM Operations Team
Federal Reserve Bank of St. Louis
1421 Dr. Martin Luther King Drive
St. Louis, MO 63016-3716
Telephone: 888-568-7343, option 2
Fax: 866-707-6574

For information describing acceptable collateral and its valuation, see TreasuryDirect website.

For information on collateral policy, see Treasury Collateral Management and Monitoring website.