Financial Update (July-September 1996)

Treasury program offers electronic
investment opportunities

For note option depositaries, the Treasury is offering an investment vehicle based on electronic tax deposits. David Sutton reports.

he electronic age continues to yield financial opportunities. And the Treasury is promoting these electronic financial opportunities, offering depositaries an additional source of investment funding—via the Electronic Federal Tax Payment System (EFTPS)—as part of the Treasury Investment Program.

As part of this investment program, financial institutions that are Treasury Tax and Loan (TT&L) depositaries and accept Federal Tax Deposits (FTDs) can enhance their cash management and investment operations using the settlement benefits of EFTPS.

The amazing thing is that it's quite simple. Here's how it works. Under the current paper-based Federal Tax Deposit (FTD) system, tax deposits settle at the Treasury's general account on the day after the tax due date. This settlement occurs because customers send their payments on the due date and the Federal Reserve Bank processes them the next day. However, in EFTPS, tax deposits settle on the tax due date, resulting in a decrease in the overnight use of FTD funds available to depositaries. Put simply, depositaries have access to some of these funds one day earlier under EFTPS.

By participating as a note option depositary, financial institutions can accumulate the daily tax payments received, up to an established maximum balance. Tax deposits up to the maximum balance will generally be available to the depositary institution as a source of short-term investment funding. And best of all, the funds are treated as a note, and interest is paid to the Treasury (from these funds) on a monthly basis at the federal funds rate (adjusted weekly) minus 25 basis points. So, as taxpayers begin using EFTPS, financial institutions that offer note option depositary services will have access to additional investment funding at a favorable rate of interest.

There is a substantial drawback, however. The note balance is available to the Treasury on demand. Although the Treasury generally gives institutions at least one day's notice of when a portion or the total note balance will be withdrawn, sometimes only same-day notice is given.

But settlement is easy. When the funds are called, the Federal Reserve debits the note balance through an institution's reserve/clearing account and credits the Treasury's General Account with the proceeds.

Further information about the Treasury Investment Program is available by contacting a Federal Reserve Bank TT&L representative at 1-800-650-8825.

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