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X-5059,.
L
CRITICISMS AND SUGGESTIONS R~
ORIGINAL DRAFT (X-4878) OF REGULATION ON Nm~ CASH COLLECTIONS.
, Federal Reserve Bank of Boston.
"For the present Regulation K, which would become new Regulation G, there would be substituted a new Regulation K, dealing
with the collection of maturing notes and bills, that is, socalled non-cash items.
"The draft of the proposed Regulation which was submitted
with the Federal Reserve Board 1 s letter of June 21, 1927, in the
main follows the structure of Regulation J, dealing with check
collection.
"Section II of the proposed Regulation defines the maturing
notes ana bills which the Federal Reserve Banks may receive. The
dcfini tion appears to include the bulk of the i toms ~vhich the Federal Rosorvo Banks arc collecting. Paragraph 5 of Section Ir(a)
appoars, however, to be somewhat restrictive so far as the -pre·sent practice of this bank is concerned. Paragraph 5 reads as
follows:
1 All other negotiable instruments payable in the
United States, except checks, bank drafts, and
other cash itemo which have not been previously
dishonored.'
"It is the l?racticc of this bank at the present time to
receive drafts payable in South America, this bank handing the
items to a Boston member bank which attends to collection and
accounts to this bank for the ~roceeds. It is also the ~ractice
of this bank at the present time to receive for collection checks
drawn on Canadian banks, the items being handed by this bank to
Boston member banks who account to this bar~ for the proceeds.
"Section IV, i terns received for collection, is worded as
follows:
'(a) Each Federal Reserve B~~ will receive from its
mombor and non-member clearing banks, for collection
on the terms and conditions hereinafter prescribed,
all items defined in Section II as "maturing notes
and bills".'
If tho above section were changed to read as follows, it would
more 11early follow a similar sectbn in Regulation J ana perhaps more accurately express the real intent:
1 (a) Each Federal Reserve Bank will receive from its
member banks and from non-,no:nbur clcarinc; banks in
its ~istrict, for collection on tho terms and conditions hereinaftor proscribed, "maturing notes and
bills" as defined in Section II. 1
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X-5059
"Sub-section (b) of Section IV provides th:.it each
Federal Reserve :Sa.nk wi 11 rc cui vc from other Federal Rosorvo :Bunks and from all m,-mbor bu.nks and non- member cloarL1[~ bOJ.J.ks in other d. is tri cts •1rhich arc authorized· to route
d1roct for tho crcd.i t of their rcsuo cti vo Federal Reserve
:Sanks, for collection on the terms and co:1ciitions heroinafter nrescribod, all i toms dofL.1od in Section II as 1 maturing notes and bills'. The writer ~ould sugg8st that
ti:w words 1 i toms :ouch as defined in Section II as "maturing notes and bills 11 which uro payable within its district'
be substituted for tho ~ords 'all items defined in Section
II as "maturing notes and "bills." 1
"Sub-section (c) of Section IV provides that no Fedcro.l :Reserve Bo:ik shall recoi vo for collection any i ton payable outside of the continental U:1ited States. ThiB conflicts ·~ri th the practi cc of this bo.::Uc as roontioned atove.
"Section V of the proCJosed Regulation outlines the terrm
of coll\;ction. Inasmuch as the circular letters of the Feder-"·1 Reserve Bn."lks now contain tho unifor'n clause agreed
upon by the Governors' Collectio:1 Committee with regard to
guaraaty of prior indorso!IlGnts 0:1. collection i terns, 17!'ould
it be desirable to have this r8qlliromen t reflected in tho
terms of collection promulgnted by the Federal Reserve
Board 7 This co:1cii tion is embodied i:1 our collection ci rcular (Circular Lotter F) as Sectio.1 III, a copy of which is
Hi)ponded hereto.
If it is decided to insert in Section V any provlSlOn
1:;i th regard. to the guaranty of prior indorsements as above
suggested, the questiJn then arises whether in paragraph 1
of Section V, covering the responsi 'uili ty of the Federal Reserve :banks for due diligence and care in forwarding or presenting collection items, it would be desirable to add 'and
its guaranty of prior indorsements'. If this were done, the
conc;.i tion would be similar to that co~1tained .in a like provision in Regulation J.
11
"Section VII of t."le proposed Regulation an'9lios to
charges for co 1 lection and ~aragra~h 2 of sub-section (a)
specifies that the actual expense of registration, insurance, or transportation of bonds a~d coupons forwarded to
other uoints for collection, shall be deducted by the Federal Reserve Bank and credit giv~n for the actual :net proceeds. Would it not be well to chango the uroposed paragraph 2 so as to require such deduction 1as far as uracticable1 or 11 'when practicable' ? This inquiry is based
upon the fact that the Federal Roscrvo Bank frequently receives the sarue kinds of items from many different sources,
even in very small shipments, and later combines a lot of
small items for shipment to some ono point of collection.
In such cases it is frequently :not feasible to deduct the
expense of registration, etc., from the proceeds of individual items.
r
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X-5059.
"Sub-section (b) of Section VII provides that any member
bank or non-member ba.nk selected by the Federal Reserve Bank
as an agent to collect maturing notos and bills received under
the terms of the Regulation may mal{:o a reasonable charge for
its services in handling such maturing notes and bills. Would
it be desirable to specify in this sub-section that this shall
not be construed as permitting any bank to ma.ke a charge for
remitting for any check or draft when such check or draft is
drawn on itself regardless of whether such check or draft is
drawn on a savings or an ordinary demand account? This would
reflect the nrinciplo established in tho Board's ruling urinted on Page 964 of tho Federal Reserve Bulletin for October,
1919. 11
Federal Reserve Bank of J:Jmv York.
"REGULATION K
SECTION II. DEFINITIONS
11
3.
Uow reads 1 Checks, drafts and o thor cash i terns ·.mi ch
have ryreviously been dishonored. 1
"It is suggostoG. that this be changed to
·read: 1 Checks, drafts and other cash i terns •J~rhich have previously been dishonored, and chocks, drafts and other cash items on
which snecial advice of payment or dishonor is required. 1
11
5.
Now reads 'All other negotiable instruments payable in
tho United States, except checks, bank drafts,
and other cash i terns \·rhi ch have not been previously dishonored. '
"It is suggested that this be changed to readf
'All other negotiable instruments ~ayable in the Continental United'
States. 1
SECT IOU VII.
CHARGES FOR COLLECTION
"(a) Charges by Federal Reserve :&<ilks
11
(2) Now reads as follows:
'The actual expense of registration, insurance,
or transportation of bonds and coupons fonrarded to other points for collection shall be deducted and credit given for the actual net proceeds. 1
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X-'5059
.
I
It is suggested. that the underlined portion· be
cha~ged to read as follows:
'shall be charged by deduction
from the credit or otherwise.' This change is suggested for
the reason that it is the -practice with some of the Reserve
Banks either to accunulate these charges and bill monthly,
or to :nake separate charge.
11
"(b)
Charges by Collecting .Agents.
It is suggested that the followbg be added to
this paragraph: 'No charge shall, however, be made by any
bank for a check drawn on itself or for its own acceptance.
11
111
Federal Reserve Bank of Philadelnhia.
Draft of proposed Regulation on maturing notes and bills
(Regulation K, Section II)
11
11 Section II- 3.
If this proposed Regulation is to
be incorporated, we would suggest that the words 11 and cash
items on which snecial advice of payment or dishonor is requested' be added.
"Section II - 5. We would suggest that this be
altered to read: 'all other negotiable instruments ~ayable
in the United States, except checks, bank drafts, a.'1d other
cash itoms not b.cluded in Paragraph 3 1 •
..
.
usection VII (third line). We would suggest the
substitution of the words 'payment has been received' for
the words 'a remittance'. It is the general practice in
this Dist!"ict, and we believe in other Districts, to account
for collection i terns by a notification reading 1 Your account
has credit today for the following collection', or 1We
credit you.r account with collection 1 , or 1We credit your account with collections naid 1 , or 1 You have credit for the following collections'. A notification of this sort is not
tecr.~.nically a I remittance 1 , but is equally satisfactory, and
in· some cases more so.
11 Section
the words
selves1.
1
VII (b). We would suggest adding to this
except their own acceT)tances and checks upon tf.em-
11 It seems to us .that (c) might be omitted.
It
seems unnecessary to suggest to a bank that it may make a
charge against its own customers for services rendered by
it to them, and we think it good policy to keep out, as far
as possible, of relations between banks and their custom~rs."
X-5059-a
Federal Reserve Bank of Cleveland.
L 230
The Federal Reserve Bank of Cleveland submitted the following suggestive revision of this regUlation together with an explanation of the reason why it felt tt.at changes in the proposed draft should be made:
(Note: Make this Regulation K; change old K toG; don't change designation of M.)
REGULATION K, SERIES OF 1927
COLLECTION OF MATURING NOTES AND BILLS
SECTION I.
STATUTORY PROVISIONS
Section 13 of the Federal Reserve Act authorizes Federal
reserve banks to receive from their member banks and non-member clearing banks, for collection, maturing notes and bills and to receive from
other Federal reserve banks for collection maturing notes and bills payable within the district of the Federal reserve bank receiving suCh
1 terns.
The authority to receive such i terns for collection includes
the authority to take such steps and
~erform
such acts as may be
necessary to effect collection, and to exercise such other powers as
are reasonably incidental to the collection of such items.
SECTION II.
(a)
DEFINITIONS.
Maturing Notes and Bills. The term "maturing notes ani
bills" is, for the purposes of this regulation, hereby defined to inelude the classes of negotiable instruments listed below,
~ayable
within
the continental United States:
1.
Maturing notes, drafts, bills of exchange, acceptances, bankers' acceptances, and certificates of deposit;
2.
Drafts on savings accounts with
3.
Checks, drafts and other cash ite::ns which have previously been
dishonored;
4.
Maturing bonds and coupons; and
5.
All other negotiable
~ass-books
instrQ~ents
attached;
except checks or bank drafts
X-5059-a
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a~rel}3JL
dram1 on or uayable by non-member banks ''i'hich have not
to remit at ~ar therefor in funds accentable to the coliecting
Federal reserve bank, nrovided that any Federal reserve bank
may require any d.eposi ting .nember bank to show to such' Federal
reserve bank 1 s satisfaction that s~ecial conditions exist which
make it -rroper for sEd d. Fed.eral reserve bank to handle for co 1lection items of the character normally received by the Federsl
reserve bank as cash items.
(b)
NON-MEMBEH CLh.l\.BING BAi'~.::..
bank11 is defined to mean a non-m<;mbor
~he term
11
non-member clearing
o:,· trust company which main-
1n;::3:
tains with the Federal reserve -oank of the dh1trict in which it is located
a balance sufficient to quali.fy it under Section 13 of the Federal Reserve
Act to send cash i tGms t.o the F()d.e:r:-al :deserve Bank for purposes of exchange
or collection und.or r:e,'Slllation J
(c)
CASH ITEMS.
The term
11
caoh itcms 11 is defined to mean
negotiable instruments which aro collectib:_e nursuant to the terms of Regulation J.
(d)
COLLECTIOlil' ITEMS.
The term
11
colloction items 11 is defined to
mean those items whick arc collectible pursuant to the terms of Regulation K.
(The provisions of naragraph 5 of subdivision (a), Section II, have
been changed in the
(a)
followin~;
respects:
The definition has been broadened to include checks, bank
drafts, and other negotiable instruments normally handled as cash items,
but tho right is reserved to the Federal reserve banks to require tho depositing banks to sho,-, that special cond.i tions exist making it nroper that
what are normally cash items should be handled as collection items.
It is,
of course, tr(cO tba t it 'JVould be: Uilreasonablo for 6o-posi ting member -banks
".rl!-,.c-·
nor:~≪y 1Jt
h.c;,~ld.led.
:t._
• """'"..
as cash i teras to 1)8
1~1.n--
dlod as collecti:m itoms, but it i3 n.lso true tLc.tt in sorr.o unuf;ual casc;s
r.lE~lv
to require all i terns "!LiC'h ··:ou.ld
~
doubt exists as to the collecti'bili ty of a cash item same should be handled
by the Federul reserve
b~:llirs
as a collection item.
It is felt, therefore,
.."'t..
r
X-5059-a
•
ielnC"l
L
r.JJu,..;;.
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that it would be unwise for the regulati0n to exclude wholly from the
category of colJ.ectio:;.1 items instruments of the character
ordinar~ly
handle<i as cash items excent where such items have been -previously
dishonored.
It is also felt that the provision inserted, reserving
to the Federal reserve
b~s
.
;:'
the right to require a showing that
special conditions exist justifying the treatment of what is normally
a cash item as a collection item, creates a safeguard against abuse
of the collection facilities by the member banks.
(b)
The definition in paragraph 5 is also narrowed to apply
only to cases where the bank by vrhich tho i tern is !'ayable h...9.s agreed
remit at par in funds acceptable to tho Federal reserve bank
the collection.
This
cha...~ge
~o
tL~dertrucing
obviates the necessity for the concluding
unnumbered paragraph of subdivision (a).
It would seem that the dofini tion as revised is more accurate
and consistent with the uniform cash collection circulars of the vaious
Federal reserve banks than is the draft submitted in the original of the
proposed regulation.)
Subdivisions (c) and (d) have been added for the purpose of
avoiding any question as to what "cash ite,ns" anC.. "collection items"
are under the terms of the Regulations.)
SECTION III.
GENERAL REQIJIREiAENTS
The Federal Reserve Board, desiring to afford to the public
and to the various banks of the country a direct, expeditious, and
economical system for the collection of maturing notes and bills, has
arranged to have all Federal reserve banks collect
bills on a uniform basis and on the
·- prescribed.
te1~s
u~turing
notes and
and conditions hereinafter
-4SECTION IV.
(a)
X-5059-a
ITZJS RECEIVZD :F'CB COLLECTIOU
Each Federal reserve bnnk will receive maturing no.tes
and bills from its member banks a.;1d from non-member cleal'i r,_g "banl-cs,
in its district.
(b)
Feder~::l
Each Federal reserve bank will receive from other
reserve b"'nks rDaturing notes and ()ills l:)ayable within its
ov'!T!l district.
(c)
In order to eliminate unnecessary delay and ex-oense
and further to increase the efficLncy of tlw collection service herein
provided, each Fecicral reserve
bE.:r.~.'c
··:111 euthorize all
non-member clearing bal:.ks in its dist<.·j.ct tJ send
bills for collection direct to
·~be
mcr:~ocr
maturine~
banks and
notes and
FeJera1 reserve bank of the district
in which such i toms ar<:: payable. for c:::edi t to the accou.."'1. t of the. Federal
rusorve bank of the district in V!r.i.1ich tho sending bank is located.
(d)
Each FedEJral reserve bank
ipj_ 11
rocci ve from member baliks
and non-member clearing banks in other districts maturing notes and bills
uayable within its own district.
(e)
No Federal reserve bank shall receive for colloction any
check or bank draft drawn on or
~ot
~ayable
by a non-member bank which can-
be collected at par in funds acceptable to the Federal reserve bank
(If the district in which such non-m,rnbor bank is located, or any i tern
payable outside OI the Continental united States.
(Tho purpose of the changes made in the original draft of
Section IV is to make effective a 1L"').iform practice with r0spect to the
direct sending operations of coll8ction i tenlS.
While i t m"ly be true
that tho Fod.oral Reserve Board does not legally have authority to require
X-5059-a
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b ;;134
i
all Federal reserve banks to authorize all member and non-member cl nring
b~iks
to
se~
collection items direct to
other Federal reserve banks,
it is ·oelievod that if the Board states itS policy to have such privilege
given to all member and non-member clearing banks by the several Federal
reserve banks, the reserve banks will conform to this policy and the
Federal Reserve Board will then be in position of being justified in
relying uport the
pros~~tion
that the Federal reserve banks
ar~
authorizing
all of their member and non-member clearing bruiks to send collection items
to other Federal restrve ba;:lk:s.
The risk of loss .,,.hich may exist with re-
spect to direct sendings of checks d.oes not exist with resl?ect to collection
items because the receiving Federal reserve bank does not give advice of
pay.nent until it has actually received payment on the
~arti~lar
item.
The provision restricting collections to items payable in
the Continental United States may render improper the collection of foreign
items by a
fOil
of the Federal reserve banks, but it "''ould seem that the
provision r-estricting the non-cash collection function to tho territorial
limits of the System as it at nresent exists is souu1d and that the Board
is justified in ryromulgating a regulation to confine these ooerations
within this territory.
This is consistent with the recommendation of the
Governors' conference in October, 1922, record. Volume 18, Part 1, Page 82.)
SECTION V.
TERMS OF COLLECTION
The Federal Reserve Board hereby authorizes the Federal reserve
banks to handle such maturing notes and bills subject to the following
terms and
cona.ition~;
a~1d
each member bank and non-member clearing bank
which sends maturing notes ru1d bills to
~!Y
Federal reserve bank for col-
lection shall by such action be d0emed: (a) to have agreed to all the
terms c:1d conditions of this regulation; (b) to have warranted to the Federal
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X-5059-aL
reserve banks t:r.c.. t it has authority to empower the Federal reserve banks
to handle i terns in the :nanner hel·einafter provided; and (c) to have agreed
to indemnify any Federal reserve balk for any loss resulting from the
failure of such sending bank to have such authority.
1.
Federal reserve banks "vill act Gmly as the collecting
agents of the sending banks anc.'c will be res"l")onsi ble only for due .
diligence and care in forwarding
2.
o~resenting
such items.
Federal reserve banks may present or forward such items
direct to ths banks on which they are drawn, at
or through which they are collectible, for
~,.hich
pa~nent
they are l)ayable,
in cash, bank draft,
or solvent credits; or -present them direct to the person, firm or corporation on which they are drawn, for uayment in cash or check; or, if
the item is not nayable in a city in which there is a Federal reserve
bank or a branch of a Federal reserve bank, then they ITk'"lY, in their O.iscretion, forward them to another agent ;nth the same authority that
they have to present or forwnrd them for payment.
3.
Items payable in another district willbo forwarded to
the Federal reserve bunk of such district or to a branch of such Federal reserve bo.nk for collection on the terms c.nd conditions herein
:prescribed.
4.
Excent as herein -provided, Federal reserve banks shall
be held liable only when they have received actual paymont in cash
or in the final proceeds of any bank draft or check received in remittance.
S3CTIOU VI.
CREDIT FOR PROCEEDS
No Federal reserve ba.'1k shall credit the reserve accou..'1 t of any
member bank or the account of any non-:neraber clearing bank or any other
Federal reserve bank for the
~nount
of any
~~turing
note or bill until
pa~~ent
X-5059-a
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r~.otr__;-
in actually arui finally collected. funds has been recei ,red by the lco1f:RP
ing Federal reserve bank.
(This ·l)uragra'!)h is amended by slight changes in all language
a~d
the total elimination of the provision in the original draft that
after credit, the collecting Federal reserve bank shall have the right
in the event it does not receive payment in finally collected funds 1
to charge the reserve account or clearing accoUIYt for the a:nount of
U!e item •. The
lan~~age
is also changed to mention accounts of Fed-
eral reserve banks because, in the direct
sendi~lg
operations, the account
of the Federal reserve bank in whose district the i tern originated will be
credi ted with the proceeds. )
SECTION VII.
(a)
CHARGES FOR COLLECTION
CHARGES BY FEDERAL
made by any Federal reserve
ba~k
~.ESERVE Bk\l'KS.
Uo charge shall be
for the service performed by it in the
collection of maturing notes and bills, except that:
1.
Any charge made by another collecting agent shall be
deducted and final credit given for the actual net proceeds;
2.
The actual expense of registration, insurance, or transportation of bonds and coupons forwarded to other points
for collection shall be deducted and final credit given
for the actual net proceeds;
3~
All
telegra~h
collection of
and telephone charges in connection with the
ma~~ring
notes and bills shall be charged to
the bank making the requB&l involving such expense; and
4 •.
~service
charge of fifteen cents per item on all maturing
notes and bills returned
un~aid a~d
unurotested shall be
charged to the bank from ·vhich such i toms were rccei ved
for collection.
This
c..~argc
shall not be made on i terns
that arc protested.
(b)
CHARGES BY OOLLEC'IING AGENTS.
Any member bank or non-
member bank selected by a Federal reserve bank as an agent to collect maturing notes anc bills received under
the terms of this regulation, may make a reasonable charge
for its service in ha..."ldling such maturing notes and bills;
except that no such charge shall bo made for hr:ndling
checks and bnnk drafts.
SEC'l'ION VIII.
OT"B:ER RULES AND REGULATIONS
All Federal reserve banks shall also promulgate rQles and
regulations id.cntical in terms, not inconsistent with the provisions
of the law or of this
regul~tion,
governing the details of the collection
of maturing notes and bills by such Federal reserve banks.
Such rules
and regulations shall be binding upon any member or non-member clearing
bank which sends maturing notes and bills to its Federal reserve bank or
any other Federal reserve bank for account of its Federal reserve bank.
(The language of this section has been changed to provide for
lL"liform rules and regulations to be nromulgated by all Federal reserve
ba.."lks, consistent with the law and the Board's regulation, with respect
to the details of collection of maturing notes ancl bills. It would seem
that inasmuch as the non-cash collection function is to be exercised
throughout the System, the details of administration prescribed by the
Federal reserve banks should not differ in form or substance because:
X-5059-a
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. ·. ·.;·, ~-, §.).
1.
In the event any litigation arises in which the rul~s
and regulations prescribed by the
favorable to the rules
ban~;.s
a~d re~~lations
f~du
are in question, a decision
prescribed by the Federal re-
serve banks will be beneficial to all banks equally if the
~revisions
of the circulars of the several banks are identical, whereas if there
is a difference in l&•guage, it may be questionable whether the decision of the Court will be beneficial to all the Federal reserve banks.
If the decision is adverse, the change necessitated by it should be
made in iQentical form in all circulars promulgated by the banks so that
they 1"Till be equally protected against the possibilities of the adverse
case;
2.
For the purpose of clarity in administration, especially
in view of the direct sending nrivilege, it would seem that the circulars
should be identical in form;
3.
It would seem that circulars identical in terms on the non-
cash collection function are advisable
bec~se
they would give to all
banks the benefit of the combined thought of the officers of the different banks who are familiar with the non-cash collection problem, and
should result in the preparation of a better circular than would be the
case if each bank, individually, nrepared its circular.
It is suggested
that the preparation of the ..uniform circular should be entrusted to
the Standing Committee on Collection as that
commi~tee 1 s
members cousti-
tute, presumably, the best qualified representatives of the various
banks to deal with this problem; and
4.
A further reason for a uniform circular is that it would
prevent inconsistencies in nractice in the different Federal reserve districts which are confusing, not only to the member and non-member clearing
banks, but to the officers and operating departments of the several Federal
http://fraser.stlouisfed.org/
reserve banks
Federal Reserve Bank of St. Louis
as well.)
X-5059-b
Federal Reserve Bank of Richmond.
Referring to tne Board's nro-posed Regulation K,
Series of 1927, "Collection of Maturing !totes and Bills," the
following cha~ges are suggested:
SECTI01l II.
DEFINITIOHS
C'nange paragraph 3 to read: 11 Checks, drafts
and oth8r cash items which :have previously
been dishonored; and checks, drafts and other
cash items on which special advice of -payment
or non-payment is G.esired. 11
Change paragraph 5 to read: "All other negotiable ins tru:nen ts payable in the Con tin en tal United
States, except checks, drafts and other cash items
which have not been previously dishonored or upon
which no special advice of payment or non-payment
is desired."
These changes are suggested because it is understood to be the general custom a~ong reserve banks to handle
cheCks, drafts and other cash items as non-cash items for collection at the request of member banks ~hen special advice
of payment or non-payment is desil·od, regardless of ''~hether
or not su~~ items have previously been dishonored.
The collecting banks (agents), how·Jve~', are not
permitted to make a charge for their services in handling
cheCks, drafts and other cash i terns, whether they have previously been dishonored or not, and therefore it would seem that
Section VII (b) - 11 Charges b;y- Collecting Agents" - should be
changed, regardless of wbe ther the above srzgges tions are adopted by the Board, by adding the following to that section appearing at the bottom of nage five. The last clause regarding acceptances of member banks is in accordance with the Board 1 s ruling XIII-B, 302.
"Provided, however, no such charge shall be
made for handling checks, drafts and other
cash items reed ved under the terms of this
regulation: and provided further, that no
such charge shal1 be made by a member bank
for handling its own accer)tances. 11
Section II.
It is also suggested tha.t the last paragraph under
at the bottom of page one, be changed to read:
app~aring
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X-5059-:b·
i
l.
"The term 'maturing notes a:;:.d. bills 1 o.o0s not
include checks, bank drafts, or othe:.· cash
items which cannot be collected at par in
fu:'lds accent able to t:ne collecting Federal
reserve batik; that is, cash items drawn on
or payable lJy non-~ernber ba::l.ks which a:rc not
on the ·oar list issued by the Federal Reserve
13oard. 11
This wi 11 avoid the handling of checks on non-member non--par banks as
non-cash items and the nossibility of such banks 1 exacting an exchange
charge on such items, which is -prohibited under Section VII (b), as
above revised. It will be noted tba.t 11 certificates of deposit 11 have
been omitted in revising the above paragrauh, and it is also suggested that the words 11 or certificate of deposi t 11 be orni tted from Section
IV (c) at the bottom of page two. The omission of 11 certificates of
deposi t 11 from these two paragraphs is suggested because i t is understood that the Federal Reserve :Board has ~~led t~ut a cortificate of
de~osit is in effect a -promissory ~ote of the bank issuing it and
may be received as a non-ca~>h i tern for collection, and. the issuing
bank may therefore mru~e an exchonge charge when remitting for it.
In view of this ruling certificates of deposit payable by non-member
non-p~ banks are now handled by the Federal reserve b~~ks as noncash items for collection &~d should not be excluded in these paragraphs.
SECTION V. 3.
In accordance with tho report of the Standing Co~
mittee on Collections to the Conference of Governors of November 12,
1923, Federal reserve barucs are permitted to route drafts with documents attached, payable at s it,ht or on demand, whether such drafts
be purchased, discounted, or received for atollection, direct to the
point of ')ayment in another district, when specifically requested to
do so, and they are also permitted to route any collection item with
a definite rna turi ty direct to t.."le point of paywn t when it is necessary to co so, in order that the item may reach the point of payment
by maturity. It would seem that this paragraph should ma'>ce provision
for these exceptions by the addition of the following:
"Provided, ho'!lever, that items ;vith a definite
maturity, -payable in another clistrict, may be
forwarded d.irect to the ulace of payrrent in
such other district when it is necessary to
cio so in order to reach the place of nayment
by maturity, and, fUrther, that sight or demand drafts with documents attached, uayable
in another district, may be forwarded direct
to the place of payment l'Then the collecting reserve ban."k:: is s-pecifically requested to do so • 11
. -3-
SECTION VI.
X-5059-b
CREDIT FOR RElHTT.ANCES
It is not the vractice of reserve banks to pass credit
for collection items until they have received actual.and final payment in
cash ,or in the proceeds of any bank draft or check received in remittance,
as provided for in Section V. 4. The circular of this bank nrovides that
"whEm remittance foro. collection item is received in the form of a bank
draft or check, credit will not bo nassed to the me:nber bank's reserve
account until such draft or check is actually collected." It is understood that this is the general practice among Federal reserve banks, and
it would seem that section should be altered to meet the generally accepted practice (which is doubtless a sound one) and should simply read as
follows:
111To Federal reserve ba:lk shall crcdi t the reserve
account of any member or non-member clearing bank
with tho amount of any maturing note or bill until
it has received actual payment in cash or in the
proceeds of an~~ bank 6.roft or check received in remi ttance. 11
SECTION VII. (a) (2)
It is not always ~racticable to deduct the expenses
mentioned in this paragraph in giving credit for the proceeds of such collections, and such cats are usually ascertained later and Charged to the
banks from which such collections were received; It is also the practice
of at least one of the Federal reserve banks to acctullUlate such charges
and mal-ce monthly dl argos to tho o.ccoun ts of member banks , with sui table
statements. It is suggested, therefore, that this paragraph read:
The actual expenses of registration, insurance, or
transportation of bonds and coupons forwarded to
other points for collection may be charged to the
bank from which such bonQs and coupons were received
for collection."
11
The word 11 shall 11 in this paragraph has been changed to
"may , because it is the practice of Federal reserve banks to absorb
such expenses if they amount to less than twenty-five cents.
11
X-5059-c
'
L
Federal Reserve Bo.nk of Chi eng:o.
REGULU.'IIOH K, S:SF..IES OF 1927,
COLLECTION OF MATURHJG NOTES AND BILLS.
* * *
The proposed Regulc tion K appeo.rs to satisfactorily cover the
non-cash collections function, with the following exceptions:
Section II, paragraph 5, construes the term "maturing notes
and bills" to include "all other negotiable instruments payable in
the United States, except cheCks, bank drafts, and all other items
which ht:;.ve not been previously dishonored. 11 Under this interoretation, checks received undar snecial i::1s tructions, such as telegraph
payment or non-payment, could not be i1anu.led as non-cash collection
items. This paragraph directly conflicts with the uniform instructions in the check collection circulars of all Federal reserve bnnks
which provide thL" t, i f !':lny member bank should desire to bave any
checks lk"lndled by a Federal reserve bnnk under any instructions contrary to the uniform instructions, it will be necessary for such
member oc.nk to forward such checks as individual non-cash i terns
with the instructions noted in the lot tor of transmi tta1, for collection and credit when pnid, in accordance with the terms of our
current Non-Cash Collections Bulletin.
I do not believe it was intended to change the present
practice of handling checks under special instructions, and my
opinion seems to be confirmed by paragraph (c), Section IV, of the
proposed Regulation K which, by implication, nrovides for their
handling, inasmuch as thot paragraph excludes the handling of any
check drawn on or payable by a non-member bank which cannot be
collected at par in funds acceptable to tho collecting Federal reserve bank. If, in Section II, r.aragraph 5, the words, 11 all other
negotiable instruments payable in the United States," were added to
the end of paragraph 4 and the remaining words of paragraph 5 were
struck out entirely, the condition would be corrected.
In the next to the last line on pago 1, the third word, 11 and, 11
could be omitted with clarifying effect and make more definite the
interpretation that "maturing notes and. bills" does not include checks
drawn on mn-member banks, which can:1ot be collected at ror, etc ..
Section VI provides that, upon recei~t of a remittance in payment of a collection i tern,. the Federal reserve b:1nk will give credit
in the reserve account of the member bank from which such item was received, subject to payment of such remittance in actually and finally
collected funds.. It is, at present, a requirement of the non-cash collection regulations that credit and advice of credit should not be given
until receipt of payment in immediately available funds, and it is our
view that this practice should. be. continued., We should not carry float
on non-cash collection i terns a:1d advice of payment should be definite
and finai, as at the present time •.. Under Section VI as it now stands,
X-5059-~
-2-
Federal reserve bo.n~:s would carry flo:1t and advice of credit could
not be considered as definite and final.
•
~J4J
X-5059-d
Federal Reserve Eank of St.
Louis~
. July 9th. 1927.
:MEMOP.A..'TDUM TO MR.
~v.tARTIN:
I have gone over the ~rouosed new Regulation on
non-cash collections, which accompanied Federal Reserve Eoard
letter X-4878., and have the following suggestions to offer:
Section II (a) 3 Should be changed to read: 11 Checks
and drafts and other cash i terns
which have previously been dishonored; and checks, drafts and
other cash items on which s~ecial
advice of payment or dishonor is
required."
5 Should be changed to read~ 11 All
other negotiable instruments payable in the Continental United
States."
The above changes are suggested for the reason that
banks quite frequently desire to handle cash items on a non-cash
basis, in order to obtain an actual advice of payment before passing credit to their customers.
Section IV (b). I would omit from the third line
in this paragraph "are autl;J.orized to 11 , for the reason that with one
exception, all of the Federal Reserve Banks have given each other
Federal Reserve Bank blanket authority to handle non-cash items received from all of their member banks or non-member clearing banks,
and there appears to be no necessity for the receiving Reserve Bank
checking to see whether the member barik or non-member clearing bank
forwarding the item has authority. Such checking would result in
unnecessary work, inconvenience and exuense.
Section V 3. The Sta~ding Committee on Collections,
in its Report to the Conference of Governo~s, November 12th, 1923,
recommended that Federal Reserve Banks be permitted, in their discretion, to route any documentery draft payable at sight or on demand,
whether such Qraft be purchased, discounted or received for collection,
direct to the point of payment in another District, but only when
snecifically requested to do so by the member bank selling, rediscount":"
ing or depositing for collection. This recommendation was approved by
the Governors Conference. I, t:~refore, reco~nend that the paragraph
under review be altered so as to provide for items payable in another
Di"strict being forwarded direct to point of payment, either when the
depositing bank requests that they be so forwarded, or it is necessary
-2to so forward an item in order that it may reach the point of payment
on or before maturity.
,.
Section V 2. As I interpret this paragraph, it would
permit a Federal Reserve Bank forwarding non-cash items payable in
the City in which it is located to other banks in such city for collection and remittance, which is the plan recently tried out by the
Federal Reserve Bank of Minnea~olis, and ~hich caused so much disturbance.
Section VI. This paragraph, as drawn, makes credit
conditional under certain cir~nstances. The Federal Reserve Bank
of St. Louis never intentionally credits a collection until the -proceeds are in actually collected funds. If an item is sent to an
out-of-town bank and returns are received in St. Louis exchange, credit is given after the draft on St. Louis is actually collected. ·If
returns are received in the form of exclu~nge payable at some point
other than St. Louis, credit is given after such exchange has been
converted into actual funds on which there is no possible recourse.
This part of the Regulation as drawn is apparently intended to parmit credit being passed prior to a Federal )l.eserve Bank receiving
final payment of the remittance received from a collecting agent,
without liability on the part of the Federal Reserve Bank.
Section VII (a) 2 provides that expense other than
collection charges be deducted when giving credit for the proceeds
of a collection. This is rather impractical, and has been discussed at meetings of the Standing Commdttee on Collections, particularly in respect to telegraphic costs. To illustrate: Suppose the
Fe~ral Reserve Bank of St. Louis receives a collection from the
Federal Reserve Bank of New York or one of its member banks payable
at Evansville, Indiana, whiCh is to be forwarded by registered mail
and insured. The expense of registration and insurance would have
to be held in suspenso, awaiting returns on the collection, and then
deducted from tho returns received before crediting the net proceeds,
whereas, following the usual procedure, the day the expense was incurred, or not later than the following day, a charge would go thru,
and the accounting procedure would be ended. When an item is returned unpaid, there is nothing from which to deduct such expense,
and the charge must necessarily be put thru in the manner described.
Why qelay putting it thru until the item has been paid or returned
unpa~d?
Section VII(b) woUld ap~ear to permit the making of a
reasonable charge for the collecting of checks and drafts drawn on
banks which r~ve previously been dishonored, and, if the suggestions
I have rmde in respect to Section II ware adopted, would permit a
collection charge on any checks and drafts drawn on banks, which,
of course, is inconsistent with the Act and Regulation J.
Very truly yours,
(S)
0. M. Attebery,
Deputy Governor.
X-5059-ei.
Federal Reserve Bank of Minneapolis.
Hon. D. R. Crissinger, Governor,
Federal Reserve Board,
Washington, D. C.
Dear Governor Crissinger:
With further reference to the Board's letter x4878, dated June
21, 1927, regarding the pro~osed Regulation K,(Collection of maturing notes and bills), we advise that our Directors are still unanimously opposed to the handling of non cash collections, .and have
only consented to handle them the same as we did nrevious to February 1, 1927, for the sake of harmony and uniformity in the System.
Our people feel that if we must handle them, we should be given '
more protection than the proposed regulo ti ons afford. For ins tanc~,
we have before us at the moroont a report upon a non member bank,
the Pioneer Sta.te Bank of Glentana, Montana. This bank has been
remitting to us at par willingly, but it does not do so promptly~
In fa.ct, at tho moment they are eight days behind, and for over a
period of a month the returns have been eJt:trerooly unsatisfactory.
We a.re today removing the bank from our par list.
According to the proposed regulations of the Board, if we
should today receive a Bill of Lading draft on a concern in Glentana, Montana, we would be required to send such draft to tho Pioneer
State Bank of Glentana fo·r collection, because there is no other bank
at that point. If the draft was collected and the bank sent us a
draft upon their correspondent in payment, which subsequently proved
to be no good because the Glentana bank closed during the interim,
we certainly would be guilty of gross negligence in handling the item,
and could not possibly ~ut ~ any reasonable defense. This is not an
isolated case but a serious problem in our district, and has been
for the past eight years. Certainly we should not be required to
handle non cash items which we have to collect through a bank to which
we will not send transit items.
In our present non cash collection circnlar, we protect ourselves
by the following language:
11 It(the Federal Reservt- Ba..."lk of Milmeapolis)reserves
the right on receipt of any collection item payable at a.
place not on the Federal Reserve intra-district collection
system list, to return the same ;ri thout presentation".
'herefore if the regulation mmt be issued on non cash collection, we
that we should be protected by some such clause as the above.
~elieve
-2-
X-5059-e
You •:vi.ll observe tba t in the proposed regulations of the Board,
under (c) of (4) only checks, bank drafts or Certificates of Deposit
are exempt, and not other non cash items.
~
If we have intern.reted (2) under Section V (Terms of Collection)
correctly, it means just this: If a firm in New York City draws a
draft upon a firm in Minneapolis with negotiable securities attached,
and such draft is received for collection by us from the Federal Reserve Bank of New York or one of its direct sending member banks,
we can acc~t from the payer a bank check in settlement. If later it
is discovered that the bank check is no good, we will be relieved of
liability and the ultimate loser will be the drawer of the draft.
When Mr. Wyatt was here
the other day, he told me it was the
impression of the Board that the Federal Reserve Bank would be protected under Section 6, because we would not pass credit to our endorser
until we had actually collected such bank check. Nevertheless, the
negotiable securities are out of our possession and in the hands of
an irresponsible party, and the drawer of the draft would be out of
luck. I do not believe that this is the kind of service that nine of
the Federal reserve banks want to render to their member bankS.
Furthermore, if we interpret the regulation correctly, a member
bank or non member bank to which we send a draft ~ith securities attached, could accept a bank check upon a competing bank in payment
of such draft and deliver the securities. If such bank cheCk subsequently proved to be no good and the member could not recover from
the payer of the draft, such member bank would be relieved of liability. I do not belL ve that '?Te want to give our member banks any
such leeway.
The same would be true of drafts which we sent to other Federal
reserve banks. We therefore believe that if Federal reserve banks
in Federal reserve cities and branch cities want to collect drafts
in such cities, they should assume cow)lete responsibllity for the
collection of such drafts. In making this proposal, I am not unmindful of the great responsibility and the liability that I have
mentioned many, mzny times before the Governors' Conferencea. In
reference to drafts 1)ayable outside of cities in ~"lhich are located
Federal reserve banks or branches, we believe tr~t the Federal Reserve System is entirely justified in ~otecting itself by agreement, in accepting a draft in payment from our collecting agent,
but we do not believe that agreement or regulation should permit
our collecting agent to accept anything other than cash or its
equivalent and assume complete responsibility and liability for
collection.
I have repeatedly maintained that because of conditions which
exist in the different districts, it is impracticable to attempt
to put the handling of non cash items upon a uniform basis, and we
still feel that it is unnecessary to issue a regulation in reference
to the handling of non cash collections. We are sending herewith a
copy of our Circular No.350, under which we ba.ve been operating,
and under 'vhich \"Te would prefer to continue to operate rather than:
by uniform regulation,
Yours resn.ectfully,
(S)
R. A. Young
Governor
X-5059-{
Federal Reserve Bank of Kansas City. '"7ith reference to Regu.lation K, covering non-cash
col:le ctions, I have this to sa,;y. .As the Boa.rci well
knows, inasmuch as this matter has been under discussion,
I have ~ersistently opnosed the non-cash collection feature as it is now carried on, ~"ld in this Op!Josi tion I
have been unauimously supported by our board and the
officers of this bank, and I si~cerely believe that a
great maj Jrity of the member banl::s of the Tenth District
are in accord with our position. We believe it was not
the spirit of the original Federal Reserve .Act to have
Federal reserve bonks doing business on the street but
to confine their activities to bnnks only.
11
I have been intimately associated with corporations
for more than forty years, and. it has always been my desire, whenever it could be done co~1siste::1tly, to do the
things that pleased our stockholders. That has been and
is now the policy of this bank. I a~ confirmed in the
belief that tho majority of our stoCkholders are opposed
to non-cash collections, as is evidenced by the questionnaires sent out and the replies received. I have attend~
ed the bankers' conventions in every state com:?rising
the Tcmth Fed.eral Reserve District, and uw reaction is as
stated in the foregoing paragraph. Twice the .American
Bankers' .Association has unanimously declared for revision
of the non-cash collection system as it is now carried on.
The above facts are wr~t have controlled me in i~ action
in this matter.
11 Last September we wore authorized by the Board that
we might handle those non-cash items in such manner as we
deemed best.
11
11 If the Federal Reserve Board, in view of all I have
recited, still believes that tr~ present system of handling
non-cash collections is right, the Federal Reserve Bank of
Kansas City will bow to its mandate and carry on, but we
wish to go on record as being opposed to the present system
a::1d believe that the plan proposed by the Federal Reserve
B~ik of Kansas City and the Federal Reserve Bank of .Atlanta,
copy of which was forwarded to the Board under date of December 13, 1926, by Chairman McClure, is a fair compromise
~nd would meet the situation in a fair and just spirit.
248
x-:-:o59-g
l.
249
Federal Reserve Bank of Dallas.
REGULATION K•
(New.)
"We recommend that definition 5 under Section II be amended to
read as follows:
'All other chases in action whether negotiabie or not,
payable in the.United States, which the Federal Reserve Banks
in their resnective circulars may set forth. 1
"Collection items are of various kinds and are frequently nonnegotiable in character. To confine collection items to negotiable
instruments would ulace an· enormous burden upon each receiving Federal Reserve Bank in that the first duty would be to determine the
negotiability of the instrument offered for coilection. Therefore
we think it would be utterly impossible to confine collection items
to negotiable instruments. In addition the definition as set .forth
in this section are so limited in character that it would deprive
the Federal Reserve Banks of th~ right to hanulc as collcytion items
such instruments as bank drafts, checks with documents attached, etc.
11 In actual practice •,ve cut out in our Ti'ansi t Devartment and
handle through our Collection De·oartment member banks Oi'I'Il drafts
dra;m on their correspondents and sent to us for credit, except
those drawn on local banks, for the following reasons: First, ·.ve
have in the past found several instances where two or more banks
were kiting and we have found ~~e handling of their drafts for collection to be an effective rneans for stopping this practice. Second,
we have noted other instances where b~~~s have attempteu to create
a balance with us by dra·::ring against uncollected funds with their
correspondoo ts, hoping to cover them before the drafts are presented.
If our ecsh .. ilotter containing these drafts should be delayed in the
mail, or tho items missent, we could very easily pay out the funds
before we r~d any way of knowing that the drafts would not be ~aid.
It is our opinion that cash letters are intended to include only
miscellaneous checks which a bank receives in the regular course
of business, and should not include a ba.nk 1 s own draft, or items
of this character, and we soc no reason why a~y hardship is being
worked upon a member bank by refusing to handle their o'TJD. drafts
as cash i terns, as they ""Till reed ve credit irmncdia tely unon actual
payment, and if they ~ish to receive more prompt credit the wire
transfer facilities are available.
Wo also cut out of our Transit De-partment and handle through
our Collection Department, checks Yn th documents attached for the
reason that 'J!!C desire to avoid nossi ble controversies in cases
where documents might become detached. Our Collection Department
makes a record of all attachments. 11
11
L
X-5059-h
Federal Reserve Bank of San Franc_isco.
July 16, 1927.
Walter ~,:yatt, Esq.,
General Counsel, Federal Reserve Board,
Washington, D. C.
Dear Mr. Wyatt:
The definition of maturing notes ana bills aunearing
in my letter of July 11, 1927, contains an inhibition which is a
little stronger than I had intended.
While it is not our practice to handle as non-cash
collections bank drafts or other checks or certificates of deposit
drawn on, payable at, uayable through or payable by non-member
banks ;yhi ch do not remit to the Federal Reserve Bank at par in
acceptable funds in settlement of cash i terns, we do, however, very
occasionally handle notes or other evidences of indebteili~ess which,
by reason of their tenor, must be presented to a non-uar bank for
collection because there is no member or non-member par bank in the
same town to which suoh items might be sent by us.
While it might be desirable for Federal Reserve Banks
not to collect this character of items also, it would not seem desirable to change the existing practice ~ithout first submitting it
for consideration to the Collection Committee and the Governors'
Conference. No doubt in many districts the only restriction on
dealings with non-par banks is to refuse to handle, either as cash
items or as non-cash items, bank drafts or other checks or certifica tcs of deuosi t which must be pre sen ted for payment to non-member
banks designated.
I should like, therefore, to modify the recommendation
contained in the letter hereinabove mentioned, as follows:
REGULATION K, Section II.
The following is suggested:
Section II, Definition A, Maturing Notes and Bills.
Tho tE~rm 11 maturing notes and bills, 11 for the purpose of this Regulation, has been construed &~~ is hereby defined as
including notes, drafts, bills of exchange, acceptances,
bankers acccp t::m ces, bonds, warrants, coupons, bank drafts
L f)5f
-2-
X-5059-h
or other cl1ecks or certificates of deposit and all
other evidences of indebtedness payable in the .continental United Sta~os;
but the term shall not include
bank drafts or other checks or certificates of deposit drawn on, payable at, oayable through or
payable by banks or trust companies which cio not
remit to tho Federal Reserve Bank at par in acceptable funds in settlement of cash items.
It is also recommended
t~~t
Section IV (c) be changed to read:
11 No Federal Reserve Bank shall receive for collection
bank drafts or other checks or certificates of deposit
drawn on, l?ayable at, payable through or payable by
banks or trust companies ~hich do not remit to the
Federal Reserve Bank at par in acceptable funds in
settlement of cash items."
(/
Yours very truly,
(S)
Ira Clerk
Deputy Governor.
X-5059-i
I.
Federal Reserve Bsnk of San Francisco,"REGULATION K, Section II.
The followinr is suggested:
Section II, Definition A, Maturing Notes and Bills.
The term 'maturing notes and bills,' for the pu.r-oose of
this Regulation, has been construed and is Dereby defined
as
including notes, drafts, bills of exchange, acceptances, bankers acceptances, bonds, warrants, coupons,
checks, certificates of de-posit, and. all other evidences of indebtedness payable in continental Un:i.ted
States;
but the term sr~ll not include
notes, drafts, bills of exchange, acceutances, bankers acceutances, bonds, warrants, coupons, checks,
certificates of deposit, or other evidences of indebtedness, drawn on, payable at, paya:Jle through
or payable by, banks or trust companies which do
not remit to the Federal Reserve Barik at par in
acceptable funds in settlement of cash items.
No purpose can be seen in making specific mention of
drafts on savings banks with pass book attached, as these
are already covered as drafts hereinabove; nor in making
specific mention of checks and drafts and other cash i terns
which have ureviously been dishonored, particularly when
this classification, by inference, eliminates checks '':'hich
have not previously been presented. It is quite a comnon
custom for banl>:s to forward for colltction checks or bank
drafts as special items that represent collections for
which the collecting ban.l.c '.'l'ill not part with funds to tDeir
customers until actual final settlement has been received
therefor.
The word 'maturing 1 has been purposely left out in
these recom:nendations because it might imply that the maturity of a bond, note, etc. must be im:nediately pending,
whereas it is quite proper, and iudeed common, for a bank
to forward such items to their points of payment weeks or
even months before maturity.
In paragraph 5, particular mention is made, in the
Board's proposal, of n~gotiable instruments. As a large
quantity of promissory notes, etc. which are received for
collection are QQa-negotiable, it does not seem desirable
or necessary to refuse to handle such inr;truments; nor is
it practicable for reserve bili1ks to exa~ine collections in
order to determine wnether or not they are negotiable. Socalled '~ay checks 1 , for i1~tance, used by firms to settle
--2-
X-5059-i .
wages of laborerB, are nothin~:!_" more than receipts when executed for nayment. Drafts of ma.ny railroaas are not negotiable. Nevertheless, t.L-•ese a:1cl numerous other classes of
credit instruments are collected through ·bnnking channels.
As an extreme case, might be mentioned meal tickets issued
by one of the Departments of the United States Goverrunent,
and received by this bank fr:;r collection.
The last uaragraph of Section II, subdivision (a), -pertaining to checks, bank drafts or certificates of de-posit
drawn on or payable by non-member banks, will be eliminated
if the foregoing suggestion be acceuted. If the suggestion,
ho 1!"ever, be not acce-pted, tha uaragra-ph should be chan;~ed
because it carries the inference that the ~ederal Reserve
Banks require £Q.!!_-member banks to remit in settlement of
certificates of deposit in available funds at Par. As you
will recall, tho Federal Reserve Board has ruled that certificates of deposit are not accontable by Federal Reserve
Banks as cash items, and, inasmuch as certificv.tos of deposit must ch':cossarily be handled as special collection
items, it would not seem desirable to impose unon non-member
banks the requirement thG.t they shall remit at nar for their
own certificates of deposit, when not collectible as a cash
i te:n. A special collection needs s-pocial service, t:md,
while the act of charGing for such collections merely because
they must be specially handled, is not condoned, longdrawnout disputes ~ith member banks on this noint have been cvoidcd because of the feeling that the -primary interest of this
bank is in collucting no.1-'nt:;mbcr-bank chocks nt -par.
Section IV(c) provides that no Federal Reserve Bank
shall receive for collection any check, benk draft, or
certificate of deposit, drawn on or -r:layable at a non-member
bank which cannot bl: collected at nar in funds accentable
to tho Federal Resurvc Bank. If the suggestions hereinabove mentioned are not adonted, it is suggested that the
languate be changed to ree.d as follo'VS:
1No Federal Reserve Bank shall receive for collection,
notes, drafts, bills of exchange, accentances, bankers accontances, bonds, warrants, counons, checks,
certiticates of deposit, or other evidences of indebtedr..ess, o.ra,llln on, -payable at, nayable through or T_Jayable by, banks or trust companies 'll'hich do not remit
to the Federal reserve oank at nar in acceptable funds
in settlement of cash items. 1
"This would be in harmony with the lJresent :practice o:t' not having any dealings with non-illember banks the items of which ccmnot be collected at par
in funds acceptable to Fedt:>ral reserve banks.
-311
Section V, naragraph (1).
The follo·"ing change is suggested.
11
1. Federal reserve ban;~s wi 11 act only as the collecting
agents of the sending banl~s and 'lVill be resnonsible only
for due diligence and care in ferwaraiBg-eP nresenting s~efi
itew~ and effecting collection of such items.
11 The slight change in the language is intended. to cover the resnonsibility of a Federal reserve bank for collecting checks or drafts which
have been handed or remitted to it in lieu of settlement of collection
items. It is not uncommon to forward an item to an out-of-town bank
and to receive in settlement a draft drawn on the bank's correspondent
at still another point, which draft in turn has to be collected before
surrendering the proceeds of the collection to the depositing bank.
The term 'presenting and effecting 1 ,,,ould seem to be sufficiently inclusive to carry the oneration to its completion.
Section V, paragraph (3). This para[;raph provides that
Federal Reserve Banks must forward items uayable in other districts to
the Federal reserve bank of that District. TPis, of course, is impracticable, particularly if the point at which the item is payable is
closer to the Federal reserve bank of the district in which the item
originates and the maturity of the instrlli~ent is so short as not to
permit sending the i tern first to the Federal reserve bank of the other
district. I t is suggested that this paragraph be changed to require
member and non-member clearing banks to forw~rd items payable in another
district direct to the Federal reserve bank or branch of that district,
except where the element of time makes this impracticable because of
the short maturity of the collection, in 1r.hich event they may be denosi ted ···i th the Federal reserve bank of the district for collection through
the most expeditious channel. The 'Regulation should not urohi bit a
Federal reserve bank sending items for collection direct to banks in
other districts. It is a lack of economy for the System to have the
sa;m collection handled by t"'ro S&]aarate Federal reserve banks. Member
and non~member clearing be~ks, therefore, should be required (except
in speoial cases in which the element of time is involved) to forward
items payable in another district or zone to the nearest Federal reserve
bank or branch. It became necessary for the Federal Reserve Bank of San
Francisco to require its ba~~s to direct-route collections in order to
avoid what was regarded as an unnecessary expense. In the case of
coupons, the exoense of handling both by this bank and another Federal
Reserve Bank appeared unjust to the System, and by requiring directrouting the expense was cut in half.
11
"Section VI. The Regulation provides that, upon receipt of a
remittance in settlement of a collection item, the Federal reserve banks
will give credit in the account of the bank from which the item was received, subject to final payment. It is not t:b...e practice of this b£mk to
give credit for collections 1L~til final funds have been received. It is
obvious that a bnnk which forwards an i tern for coliection does not ·,rish
-4-
X-5059-i
to receive credit exee~t in such form that it con safely -pass the funds
to its customer without the Dossibili ty of later having to "!)art with
them because the collection had been incomplete when settlement was
made with its customer. It is recommended that this provision be
eliminated from the Regulation.
"Section VII, paragraph (a), subdivision (2). It is suggested
that in view of the definition of 'maturing notes. and bills,' contained
in Section IIA, this paragranh be changed to read:
"'The actual exnense of registration, insurance or transportation on maturing notes and. bills forwarded to other
points for collection shall be deducted and credit given
for the actual net nro ceeds. '
"Frequently notes and drafts are supported by securities and documents
which should be forwarded by registered mail, and s erne times also insured.
"Section VII, paragraph (a), subdivision (3).
that this subdivision be changed as follows:
It is suggested
All telegraph and telephone charges in connection. with
the collection of maturing notes and bills shall be
charged to the bank 11 maki:ag-tae-Pe~aeet-:i::avelv4ag-sB:-eh
e*~e:ase for which the collection is made; and
111
"Frequently it becomes necessary for the urotection of both the Federal
reserve bank and the bank for which the collection is being made, to incur telegraphic expense tin connection ~dth collections. If a refund by
the Federal reserve bank can only be made wren the expense is incurred
at the request of the bank for which the collection is being made, it
may leave room for argument as to whether or not the expense, in the
light of SQbsequent facts, was justified. The Federal reserve banks
~hould be left free to use their discretion in effecting collections
~d have th• ~ight to recover cost of justified expenses whether or
not incurred at the request of tbe depositing bank.
"Section IX. Guaranty of Endorsement. Inasmuch as it has
been pointed out that large quantities of items are received for
collection which are not negotiable, it seems importa.J.t to require
that the depositing bank guarantee all prior endorsements of notes,
drafts , bills of e:X change, a.ccentances , bankers acce-ptances , warrants,
checks, certificates of deoosit,"and all other such evidences of indebtedness rrhich require endorsement in order t 0 effect collection.
"You will recall that it was agreed in the conference with the
Board in December, 1924, that all Federal reserve ba~ks should req~ire
items lodged for collection to bear the endorsers' guarantee of all
prior endorsements, and that if the endorsement upon an item did not
include a written or printed guaranty of all prior endorsements, the
act of sending the item to a Federal reserve bank would be deemed to
constitute such guaranty. Inasmuch as the Federal reserve banks have
this '?revision embodied in their operating circular, the Board may
not
desire to incorporate in its Regulations. It is mentioned, however,
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