Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 90-3 (IB)
January 19, 1990


SUBJECT: Foreign (Non-US) Currency Denominated Deposits Offered At Domestic Depository Institutions

                        In response to an inquiry forwarded to the Board from the Chicago Federal Reserve Bank, the Board of Governors of the Federal Reserve System decided that after December 31, 1989, it would to no longer object to the issuance of foreign (non-U.S.) currency denominated deposits by depository institutions in the United States.  As domestic deposits, these deposits are subject to reserve requirements specified in Regulation D and are expected to be insured and assessable for insurance premiums within insured institutions, unless otherwise stated by the FDIC.  These deposits must be converted to the U.S. dollar equivalent in order to determine whether the bank is obligated to file the Currency Transaction Report ("CTR"), IRS Form 4789.  Regulation CC governing the availability of funds and collection of checks in U.S. dollar denominated transaction accounts is not applicable to foreign currency denominated deposits.

                        These instruments are anticipated to be structured in one of three ways:  1) the bank may receive foreign currency from the depositor and at maturity of the deposit make payment in the original foreign currency that was received; 2) the bank may receive U.S. dollars, convert these dollars into a foreign currency, and at maturity make payment in the foreign currency or convert the principal and interest back into U.S. dollars; or 3) the bank may receive U.S or foreign currency and index the deposit based on the movement of the exchange rate of a foreign currency relative to the U.S. dollar or to another foreign currency.

                        Instruments with a return indexed to the performance of a currency relative to the U.S. dollar or another currency, as in example 3 above, may be considered a futures contract under the Commodity Exchange Act and subject to regulation by the Commodities Futures Trading Commission (CFTC).  This issue is currently under review by the CFTC.

                        The sophistication of this product also warrants appropriate customer disclosure by the bank pertaining to the potential risks of these instruments.  Advertising of interest paid on all deposits is subject to Regulation Q.  In order to protect the bank from adverse litigation, institutions offering such deposits should disclose to the customer, preferably in writing, that the principal deposited is subject to exchange rate risk which may adversely impact the amount of interest and principal returned in U.S. dollar terms.

                        Several foreign countries have policies and restrictions concerning the off-shore issuance of financial instruments denominated in their currencies.  Banks should be aware of the off-shore issuance policies of each country in whose currency the bank is offering deposits.

                        The Federal Reserve System does not contemplate creating a clearing mechanism for foreign currency denominated deposits.  Institutions offering such instruments are expected to provide for the clearing of these instruments.

                        Banks offering these deposits are expected to develop and/or augment foreign exchange policies, procedures and internal controls to monitor and control possible risk to the bank from these instruments.  Foreign (non-U.S.) currency deposits held in U.S. offices are to be included in the institution's overall consolidated foreign currency position and limits.  Deficiencies and exceptions in internal controls should be noted in the examination report.

                        For reporting purposes, foreign (non-U.S.) currency denominated deposits held at U.S. offices must be converted to the U.S. dollar equivalent, as per respective reporting instructions, and included in all existing Federal Reserve reports that collect information on deposits at U.S. offices of depository institutions.  A list of affected Federal Reserve (FR) reports is provided as attachment 1.  In addition, a new report, the Report of Foreign (non-U.S.) Currency Deposits (FR 2915), will be collected from depository institutions that also file the Report of Transaction Accounts, Other Deposits and Vault Cash (FR 2900).  Examination staff is requested to ascertain proper filing of these reports by institutions offering foreign currency deposits.  Information on the treatment of foreign currency denominated deposits on reports collected by the Federal Financial Institutions Examination Council (FFIEC) will be forthcoming from the FFIEC.

                        A confidential survey of institutions planing to offer foreign currency denominated deposits is provided in attachment II.  This information is not to be made available to the public and is for supervisory purposes only.  Henceforth, reserve bank staff may determine which institutions offer these instruments by monitoring the Report of Foreign (non-U.S.) Currency Deposits (FR 2915).

                        Questions concerning reporting requirements for Federal Reserve reports may be directed to Martha Bethea (x3181) or Geary Cunningham (x3830) at the Board.  Bank supervisory questions related to foreign (non-U.S.) currency denominated deposits should be directed to Michael Martinson (x3640) or Hank Calenti (x3033) at the Board.

William A. Ryback
Deputy Associate Director

Attachments maybe obtained from Federal Reserve Bank

SR letters | 1990