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April 29, 1996

Ms. Diane K. Smith, Director
Data Services Department
Federal Reserve Bank of Cleveland
P.O. Box 6387
Cleveland, OH 44101-1387

Dear Ms. Smith:

This is in response to your letter to Martha Bethea dated April 3, 1996, concerning sweeps of certified and official checks into money market deposit accounts (MMDAs). As you know, staff believes that depository institutions may sweep their liabilities in respect of NOW and demand account balances in excess of clients' expected requirements into MMDAs under certain circumstances without causing the MMDAs to become transaction accounts for purposes of the Board's Regulation D (12 CFR Part 204).1

Staff believes, however, that depository institutions may not also sweep their certified and official checks into MMDAs for a number of reasons. For example, section 204.2(a)(1)(i) of Regulation D defines deposit to include "the unpaid balance of money or its equivalent received or held by a depository institution . . . for which it has given or is obligated to give credit . . . to an account . . . ." 12 CFR 204.2(a)(1)(i). Thus, under Regulation D, for a deposit account, the institution's liability in respect of money deposited constitutes the deposit. By contrast, section 204.2(a)(1)(iii) defines deposit to include "an outstanding teller's check, or an outstanding draft, certified check, cashier's check, money order, or officer's check . . . ." 12 CFR 204.2(a)(1)(iii). Thus, under Regulation D, for an official check, the check itself, rather than an account for money deposited, constitutes the deposit. Moreover, under section 204.2(b)(1)(ii), such checks are demand deposits. 12 CFR 204.2(b)(1)(ii). Therefore, although a depository institution's liability in respect of a deposit account can be transferred to a liability in respect of an MMDA or savings account, a certified or official check itself constitutes a demand deposit that may not be so transferred.

In addition, in the case of a demand or NOW deposit account, there is a new account card or other contract between the customer and the institution under which the institution agrees to pay checks written by the customer to the extent of the customer's balance, and which permits the institution to modify the contract under certain circumstances. By contrast, in the case of a certified or official check, the institution is responsible for paying the check as drawee or is liable to the holder as drawer on the check if it is dishonored. Absent special arrangements, the institution is not authorized to open an MMDA in the name of the holder of the check (if known), or to transfer balances to an MMDA, or to reserve the right to impose a seven days' notice requirement on payments, particularly with respect to its liability as drawer (or certifier) of the check. Consequently, the liability of the institution to pay such a check may not be swept into an MMDA.

I hope this information is helpful.

Very truly yours,

(signed) Oliver Ireland

Oliver Ireland

Associate General Counsel


1. See letters from Oliver Ireland, Associate General Counsel, dated February 2, August 1, and August 30, 1995. Return to text

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