Ms. Andrea M. Corcoran
Director, Division of Trading
   and Markets
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, N.W.
Washington, DC 20581

Dear Ms. Corcoran:

This is in response to your inquiry regarding the status of overnight deposits in foreign branches of domestic banks for purposes of the statutory prohibition against payment of interest on demand deposits (12 U.S.C. § 371a) and the Board's Regulation Q (12 C.F.R. 217), which implements that prohibition. Payment of interest on such deposits does not necessarily violate Regulation Q.

Section 217.1(c)(2) of Regulation Q provides that "this regulation does not apply to 'any deposit that is payable only at an office located outside of the United States' (i.e., the states of the United States and the District of Columbia) as defined in section 204.2(t) of the Board's Regulation D . . . ." 12 C.F.R. 217.1(c)(2). Section 204.2(t) of Regulation D provides that

"Any deposit that is payable only at an office located outside the United States" means (1) a deposit of a United States resident that is in a denomination of $100,000 or more, and as to which the depositor is entitled, under the agreement with the institution, to demand payment only outside the United States or (2) a deposit of a person who is not a United States resident as to which the depositor is entitled to demand payment only outside the United States.

12 C.F.R. 204.2(t). Accordingly, a deposit of a U.S. resident that is not less than $100,000, or any deposit of a person who is not a U.S. resident, may bear interest without violating Regulation Q if the deposit is payable only at an office located outside the U.S.

Board staff has advised that the exemption from Regulation D, and therefore Regulation Q, reflects that "[a] customer who makes a deposit that is payable solely at a foreign office assumes the risk that the foreign country might impose restrictions on withdrawals." Staff Op. of July 29, 1983, Federal Reserve Regulatory Service (FRRS) 2-330.1. Thus, a guarantee of payment by a U.S. bank in the event the deposit is not paid at the foreign office subjects the deposit to Regulation D and hence to Regulation Q. Id.

Moreover,

A promise to pay such a deposit may be manifested by a course of dealing as well as contract. Consequently, when, as a matter of practice, the holders of time deposits payable outside the United states in fact receive the proceeds of the time deposits on presentment at a domestic office of the bank or at an agent for the bank, a question would exist whether there is a promise to pay the deposit within the United States. Regulation D . . does not permit a bank to promise to do so and still take advantage of the exception.

Staff Op. of July 7, 1986, FRRS 2-330.2.

The Board has recognized the practice of placing funds in offshore branches of domestic banks. In a 1994 supervisory letter, the Board stated that U.S. banks with foreign branches were expected to have adequate policies to inform their U.S customers with deposit accounts in their foreign branches that such deposits are not insured by the Federal Deposit Insurance Corporation, have lesser preference in a liquidation than domestic deposits, and are subject to cross-border risks. See SR 94-49, September 2, 1994.

I hope this information is helpful. Further questions may be directed to me or to Rick Heyke (202/452-3688) of my staff.

Very truly yours,

(signed) Oliver Ireland

Oliver Ireland