Becoming a Note Option Depository:A Profitable Investment

When evaluating different investment opportunities, has your institution considered the federal government? For several years, the U.S. Treasury has made the Treasury Investment Program available to Treasury Tax & Loan (TT&L) financial institutions.

In basic terms, the Treasury Investment Program acts as a savings account for the Treasury. Participating bankers can hold federal tax deposits (FTDs) they collect from their customers and invest them before remitting the payments to the Treasury. They can lend these funds in the Federal Funds market or invest them in instruments that offer even greater returns. The cost of funds is one of the lowest in the market--25 basis points less than the Fed Funds rate.

There are two ways you can participate in the Treasury Tax & Loan Program--either as a Remittance or Note Option institution. Both alternatives enable you to invest your customers' tax payments. However, Remittance Option institutions can only use the funds overnight, whereas Note Option depositories can invest them in open-ended interest bearing securities until the Treasury withdraws, or "calls," the funds. Generally, large Note Option participants can expect a call one to three times a week, whereas smaller institutions receive less frequent calls and are given greater lead time before remitting funds to the Treasury.

The Treasury Investment Program is a profitable investment opportunity, and recent changes in tax collection mechanisms are persuading many financial institutions to choose the Note instead of the Remittance Option. Remittance Option depositories can't hold overnight federal tax payments paid electronically using the Electronic Federal Tax Payment System (EFTPS). By the end of this year, an estimated 95 percent of all federal taxes paid through TT&L institutions will be via EFTPS instead of paper coupons.

What does this mean for Treasury Investment Program participants?

The level of investment available will be significantly less. Remittance Option depositories that do not want to lose these investment opportunities can enroll in the Program as Note Option institutions.

Even more investment opportunities exist for Note Option institutions, such as the Direct Investment and Special Direct Investment options. We will talk more about these options in the next Payments Quarterly. In the meantime, if you are interested in learning more about the Treasury Investment Program, contact Scott Davis in St. Louis at (314) 444-8972.