The Honorable Patrick J. Toomey
House Committee on Banking and Financial Services
224 Cannon House Office Building
Washington, DC 20515

Dear Representative Toomey:

Last Friday, representatives of the Association for Financial Professionals met with Amy Smith of your staff to discuss legislation which would allow payment of interest on business checking accounts. We appreciated that discussion with Amy, and indicated that we would follow-up that meeting with a letter highlighting some key points of our conversation.

We strongly support legislation which would end promptly the prohibition (Regulation Q) against payment of interest on business checking accounts. Ending this archaic regulatory device will not terminate aggressive cash management tools like sweeps. But the end of Regulation Q will terminate the artificial environment which created the sweeps market. Products should not owe their existence to government protection through price regulation (i.e., no interest on business checking accounts). Rather, they need to demonstrate their worth in a free market as another option a customer may choose.

Some banks are supporting a delaying tactic for allowing the payment of interest on business checking, which keeps Regulation Q intact but creates yet another loophole. This tactic would expand to 24 (from six) the number of times a company can move funds between a demand deposit account (DDA) and a money market deposit account (MMDA) each month. Through daily transfers from interest-bearing accounts to cover checks drawn against demand deposits accounts, or the transfer of excess balances in the DDA to the MMDA, a bank gives its corporate clients, to some degree, checking account interest. The plan does not address a common problem for many corporate customers: they cannot anticipate all funding needs, and frequently would require multiple daily transfers to or from the money market deposit account -- not permitted under this juryrigged approach. For example, if a bank's practice were to permit one MMDA transfer per day by 2:00 p.m., and the customer were to receive significant wired funds by 6:00 p.m., the customer would have no recourse available to invest those funds.

In a letter released February 20, 1998, Federal Reserve Board Chairman Greenspan criticized this plan: "The Board supports the elimination of unnecessary or anti-competitive regulatory requirements. A 24-transaction account might aid banks in meeting competition but the Board believes that a more straightforward and more economically efficient way to address this issue would be simply to repeal the prohibition against the payment of interest on DDAs."

Should the transition to interest on business checking unfortunately require a transition period using MMDA transfers, we urge that the Federal Reserve be given authority to increase the number of transfers per month to reflect market needs.

Finally, some banking groups argue that implementation of systems and procedures to provide for business checking interest would be a difficult and costly process, requiring several years for the transition. Since banks are in the business of calculating interest, and in fact compute earnings credit for business accounts now, we believe that the transition would be relatively easy, and require no more than 90 days. Also, the legislation does not mandate but allows the option of paying interest -- let those banks which choose the option move swiftly to meet market needs.

A simple straightforward and timely repeal of Regulation Q is the best solution for all market participants.

We thank you for your interest in eliminating anti-competitive and obsolete regulatory devices like Regulation Q.

AFP represents almost 15,000 treasury and finance professionals who, on behalf of over 5,000 corporations and other organizations, are significant participants in the nation's payments systems and capital markets. Many of our members are responsible for their organizations' banking relationships, payments activities, short-term investments, and general cash management functions. Organizations represented by our members are drawn generally from both the Fortune 1000 and middle market companies -- with fifty percent of our members employed by organizations with annual sales under 1 billion dollars. They are significant users of financial services, and specifically sweeps accounts offered by banks, and they have an active interest and sizeable stake in any efforts by the 107th Congress to modernize business checking by ending the prohibition against interest payments.

Sincerely,