FR Proposes Tiered Framework for Master Account Application Evaluations
On March 1, 2022, the Federal Reserve (the “Fed”) released a request for public comment on its newly proposed framework for evaluating “master account” applications submitted by financial institutions for direct access to the Fed's payment system.
If the application is approved, the applying institution would be permitted to settle financial transactions with the Fed. However, if the applicant fails to establish a master account, it would be required to contract with an existing member of the system and receive Fed approval of this agreement.
Six Principles for Review
The proposal builds upon the Fed's original proposed framework released on May 11, 2021 outlining the following six principles for review:
The Reserve Bank (“RB”) must ensure that the applicant institution is eligible for a master account and has a "well-founded, clear, transparent, and enforceable legal basis for its operations." Additionally, the RB should determine whether the operations of the institution’s services would prevent it from being able to comply with relevant laws and regulations, such as anti-money laundering (“AML”) regulations, United States sanctions and consumer protection regulations.
The applicant institution would need to demonstrate that it does not pose any potentially undue risks to the RB, such as credit, operational, settlement and cyber risks.
The RB would need to verify that granting the applicant institution access to the master account and the Fed financial system would not pose potentially undue risks to the overall payment system. This should be assessed by review of the interactions between the institution and the payment system and determination of whether the institution is in, and is expected to continue to be in, sound financial condition.
The RB should coordinate with other RBs and the Fed to determine whether any strains on the applicant institution could spread to other components of the financial system.
The RB should confirm that the applicant institution’s Bank Secrecy Act (“BSA”) and AML compliance programs meet regulatory requirements.
The RB should evaluate any adverse effects on the Fed’s ability to adequately implement its monetary policy.
Tiered System
Under the proposed tiered framework, the RB will be able to assess and determine the appropriate level of due diligence and scrutiny in the review process for master account applications.
The tiers are as follows:
Tier One
Applies to federally insured institutions
Review standard: unless otherwise deemed necessary, these institutions incur "a less intensive and more streamlined review"
Tier Two:
Applies to institutions subject to federal prudential supervision
Review standard: "intermediate level of review"
Tier Three:
Applies to institutions without federal prudential supervision
Review standard: “strictest level of review”
Comment Period
The comment period will remain open for a period of 45 days after the publication in the Federal Registrar. Financial institutions who would be subject to this review process framework should consider submitting comments to advocate for your institution’s point of view.