4000 - Advisory Opinions
Insurance Coverage for Indexed CDs
September 18, 1987
Roger A. Hood, Assistant General Counsel
This responds to your September 4, 1987 letter to Douglas H. Jones regarding the inclusion of "Indexed CDs" in the certificate of deposit program operated by your client, ***.
As described in your letter, the Indexed CDs would be issued by FDIC-insured banks selected by *** and would be purchased by retail customers of ***. The Indexed CDs would offer a fully or partially indexed interest return at maturity, with the index linked to either a stock index, the spot price of gold, or the spot prices of selected foreign currencies. Depositors would have a choice between "bull" direction CDs or "bear" direction CDs, and could also elect to exercise a "lock-in" feature to fix the return until maturity. The principal due at maturity, however, would not be indexed or put at risk.
We concur in your conclusion that the CDs described in your letter would be regarded by the Federal Deposit Insurance Corporation as deposits. Accordingly, they would be insured along with other deposit liabilities of the issuing banks within the limits prescribed by the Federal Deposit Insurance Act. The extent of such insurance coverage would depend upon the amount of the particular deposit and whether the owner of the deposit maintained any other deposits in the same right and capacity in the same bank.
As you stated in your letter, the full amount of principal and interest payable on each Indexed CD will be the obligation of the issuing bank. Each bank will credit funds received from the sale of Indexed CDs to a deposit account and such funds will be carried by the bank on its books as a deposit liability. All funds received from the issuance of Indexed CDs will be used by the issuing bank in the usual course of its business. Accordingly, the obligations come within the definition of the term "deposit" contained in section 3(l) of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)). The method by which interest on a deposit is calculated does not determine whether an obligation is a "deposit" within the meaning of section 3 (l).
You noted that the issue of the safety and soundness of the proposed CD indexes, including the adequacy of the hedging strategies to be employed by the issuing banks, will be subject to review with each bank's appropriate supervisory agency. Where the issuing bank is an insured nonmember bank and thus within the FDIC's supervisory jurisdiction, these issues should be discussed with the FDIC's Division of Bank Supervision. The FDIC's Legal Division takes no position on these issues in connection with our response to your question as to the status of the obligations as deposits.
We also call your attention to subsection 329.3(g) of the FDIC's regulations (12 C.F.R. § 329.3(g)), which provides in part that those who solicit deposits for banks are bound by the FDIC's rules regarding the advertising of interest on deposits. Subsection 329.3(f) of our rules (12 C.F.R. § 329.3(f)) prohibits inaccurate or misleading advertising of interest on deposits. Therefore, *** should ensure that its advertising of the Indexed CD program conforms to the applicable regulations.