Entities without deposit insurance or a federal banking supervisor face an uphill battle to access the federal payments system, thanks to
But the state of Texas doesn't have to worry about any of that. It already has access.
The Texas comptroller of public accounts, the state's tax collection and treasury arm, has had a master account — which grants access to payments rails and various other central banking services — with the Federal Reserve Bank of Dallas at least since 1995, according to the
Through this account, the Texas comptroller can hold cash and securities at the Fed and wire funds directly to other account holding institutions, most of which are banks and credit unions. The services are not free, but Chris Bryan, a spokesman for the agency, said the state reaps huge savings thanks to its master account and an account with the Depository Trust Company, a privately operated securities clearinghouse.
"Direct access to the Fed and DTC saves the state millions in fees that would otherwise be paid to commercial banks for these services," Bryan said.
Other notable non-depositories with master accounts include trusts — including one controlled by the state of Tennessee — several prominent financial institutions such as DTC and the Chicago Mercantile Exchange and the Tennessee Valley Authority, a New Deal-era government corporation that provides energy to several southern states.
These groups have all opened accounts legally, sometimes with help of government designations. But some observers see the fact that these entities have access to the federal payments systems as being at odds with the
Caitlin Long, founder and CEO of Custodia Bank, said the presence of these account holders raises fairness concerns.
"Why does one state have a master account and the other 49 not?" Long told American Banker. "Or, if you are the Texas banks, why is the state of Texas allowed to circumvent you and go straight to the Fed, instead of having to work with you, a Texas bank?"
The Federal Reserve Bank of Kansas City
Legally eligible
The Fed board's 2022 guidance established a three-tiered review process for granting master accounts. Tier 1 applicants are those with federal deposit insurance, they have the easiest path to an account. Tier 2 institutions are noninsured groups that are supervised by federal bank regulators and they see a moderate level of scrutiny. Entities that fall under Tier 3 are neither insured nor federally supervised and they receive the most scrutiny.
For all three tiers, "legal eligibility" is a prerequisite for obtaining a master account. But, despite several questions raised from the public about the framework before it was finalized, the board opted not to explicitly define what constitutes legal eligibility. The final guidance notes that the board has interpretive authority over this matter via the Federal Reserve Act.
Julie Hill, a law professor at the University of Alabama and a leading scholar on master account policy, said most entities listed in the Fed's database are banks and credit unions that conform with the now-formalized standards. But, she noted, that the presence of some non-depositories could demonstrate how reserve banks have come to think about master accounts over time.
"It shows that the Fed's understanding of what their mandate was under the Monetary Control Act of 1980 has evolved away from everyone getting access to everything at the same price," Hill said. "At some point, the Fed decided it didn't want to apply the statute in that way."
The Monetary Control Act gave the Fed authority over nonmember banks by requiring them to maintain a balance of reserves. It has featured prominently in three recent lawsuits regarding master accounts, including the one brought by Custodia. Plaintiffs have argued that the law entitles them to an account, while the Fed has said — and courts have confirmed — that it has discretion over the matter.
But the Monetary Control Act is not the only piece of legislation shaping the Fed's account granting practices.
Government sponsored enterprises, such as the Federal Home Loan banks, Fannie Mae, Freddie Mac and Farmer Mac, were all granted master account access by statute. The Dodd-Frank Act of 2010 allows firms designated as financial market utilities to have master accounts. Section 13 of the Federal Reserve Act permits reserve banks to grant clearing accounts to nonmember trusts.
In states we trust
In 1979, the state of Tennessee Treasury set up a trust expressly for obtaining a master account at the Fed.
The State Trust of Tennessee, as it was known, had access to the Fedwire Securities Services, the Automated Clearing House, or ACH, system and check processing services, according to written testimony submitted by the state treasurer to the Tennessee legislature in 2016. It could also clear and control warrants and checks issued by the state.
Over time, the department wrote, the Fed curtailed the services that state-owned trusts could access, diminishing the savings associated with holding a master account. As of 2016, the only services it received from the Fed, according to the written testimony, were check clearing and "related imaging services."
Still, the state cleared $1.5 billion of warrants and checks through its master account between July 1, 2015, and April 30, 2016, resulting in an estimated $80,000 of savings compared to what it would have paid a commercial bank.
A state spokesperson said the trust was decommissioned in 2017 as a result of the Fed curbing the number of features available to the state and diminishing its savings in light of the declining use of paper checks. But, the account is listed as open on the Fed's website.
Bryan said Texas has faced restrictions and legal obligations related to its account, including a requirement that it give up its sovereign immunity — which shields the state from civil and criminal litigation. The state's trust also does not earn interest on cash balances held at the Fed and it can only wire funds in relation to the comptroller's core business, rather than other investments.
"We have been able to comply with all Fed restrictions and continue to benefit from the account," Bryan said.
Designated holders
In 2010, Title VIII of Dodd-Frank granted the Financial Stability Oversight Council — which is chaired by the Treasury secretary and composed of the heads of various other regulatory agencies — the ability to designate certain entities deemed to be of systemic importance as financial market utilities. This classification subjects these groups to enhanced supervision.
The Fed implemented Title VIII through its Regulation HH, which states that reserve banks may allow financial market utilities to "establish and maintain an account" that provides access to "certain services." These do not include regular access to the Fed's discount window, though these entities can borrow from the last resort lending facility under emergency circumstances through a different provision of Dodd-Frank.
Of the eight designated financial market utilities, seven have master accounts. The only one that does not is The Clearing House Payments Company, which is owned by a consortium of large banks and operates payments networks that compete with the Fed's payment rails.
The Chicago Mercantile Exchange, which operates a large derivatives clearing marketplace, is one of these designated entities and it has had an account with the Federal Reserve Bank of Chicago since 2016. Laurie Bischel, a spokesperson for CME Group, the exchange's parent company, said the financial market utility tag brings with it annual Title VIII exams conducted by the Fed board, Chicago Fed and Commodity Futures Trading Commission.
Bischel said CME maintains an account with the Fed not to realize cost savings, but rather to help it meet its safety and soundness obligations.
"For CME Group, having Fed access isn't about savings. Rather, it's about managing risk and satisfying regulatory obligations outlined in CFTC Regulation 39.35, which is designed to ensure a strong framework for the U.S. financial system as a whole," she said. "In addition, it's important to note that our Fed accounts are subject to banking fees just as are all other banking relationships."
Fiscal agents
The Treasury Department also has the ability to designate institutions as agents to provide services on its behalf. This is how the Tennessee Valley Authority — the federally owned utility company created by Congress in 1933 — secured its account with the Fed.
The TVA provides power to the state of Tennessee as parts of its neighboring states. It is government-owned and must make minimum payments to the Treasury each year, but it is not designated as a GSE and it operates like a for-profit corporation in many ways. But, the Authority has a fiscal agency agreement with the Fed, in which the central bank administers the bonds issued by the Authority.
An operating circular from the Federal Reserve's Financial Services division last year noted that the board's recent guidelines around master account access confirmed that the Treasury has the ability to authorize account holders.
Overall, Hill said the types of entities that have been granted master accounts have remained broadly consistent over time. Most of the changes, she said, have come on the fringes from nontraditional applicants.
"The Fed is more careful about the types of groups it allows to have accounts," she said. "They're still on the same path as before, but more restrictive on the types of entities they want to provide services to."
