View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

federal

R e s e r v e Ba n k

DALLAS, TEXAS

of

D allas

7S222

Circular No. 81-15
January 19, 1981

PRICING AND ACCESS TO FEDERAL RESERVE SERVICES

TO THE CHIEF EXECUTIVE OFFICER OF
ALL FINANCIAL INSTITUTIONS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
Printed on the following pages is the text of a press release and
Federal Register document issued on December 31, 1980, by the Board of
Governors of the Federal Reserve System announcing the schedule of fees for
certain services to depository institutions, implementation dates for pricing and
access to Federal Reserve services and principles underlying the Federal
Reserve's schedule of charges.
Procedures have been adopted for a depository institution to follow
if it maintains low or zero required reserve balances with the Federal Reserve
and it wishes to obtain services directly from the Federal Reserve. The Board
provided for immediate access by all nonmember depository institutions to
Federal Reserve Regional Check Processing Centers (RCPCs) for the collection
of local checks under current arrangements available to nonmember commercial
bank participants in RCPCs. The Board also postponed for a short period the
pricing of all check collection services and access by nonmember depository
institutions to Federal Reserve check collection facilities other than RCPCs.
Questions regarding pricing and access to Federal Reserve services
should be directed to Tony J. Salvaggio, Senior Vice President, Ext. 6224, E. W.
Vorlop, Jr., Vice President and Controller, Ext. 6223, or Larry J. Reck, Vice
President, Ext. 6337 at the Dallas Office; Robert W. Schultz, Assistant Vice
President, (915) 544-4730 at the El Paso Office; Sammie Clay, Assistant Vice
President, (713) 659-4433 at the Houston Office; or Thomas H. Robertson,
Assistant Vice President, (512) 224-2141 at the San Antonio Office.
Sincerely yours,
William H. Wallace
First Vice President

B a n k s a n d o th e r s a r e e n c o u r a g e d to use th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n ta c tin g th is Ban k;
1-800-442-7140 (in tr a s t a te ) a n d 1-800-527-9200 (in te r s ta te ). Fo r c a lls p la c e d lo cally, p le a s e use 651 plus th e
e x te n s io n referred to ab ove.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERALRESERVEpressrelease_____
For immediate release

December 31, 1980

The Federal Reserve Board today made public schedules of fees
for certain services to depository institutions, implementation dates for
pricing and access to Federal Reserve services and the principles underlying
the Federal Reserve's schedule of charges.
The Board also:
— Adopted procedures for a depository institution to follow if it
maintains low or zero required reserve balances with the Federal Reserve and
it wishes to obtain services directly from the Federal Reserve.
— Provided for immediate access by all nonmember depository institution
to Federal Reserve Regional Check Processing Centers (RCPCs) for the collection
of local checks, under current arrangements available to nonmember commercial
bank participants in RCPCs.
— Postponed for a short period the pricing of all check collection
services and access by nonmember depository institutions to Federal Reserve
check collection facilities other than RCPCs.
The Board's schedules for pricing its services, and the principles
and price determinants underlying the charges, were adopted to implement
provisions of the Monetary Control Act of 1980.
isrequired to publish a set

Under

of pricing principles

the Act, the Board

and a proposed schedule

of Federal Reserve fees, dealing with the following services:
1. Transportation of currency and coin, and coin wrapping.
2. Check clearing and collection.
3. Wire transfer of funds.
4. The use of Federal Reserve automated clearing house
facilities.
5. Net settlement of debits and credits affecting
accounts held by the Federal Reserve.
6. Book entry, safekeeping and other services connected
with the purchase or sale of government securities.
7. Noncash collection (the receipt, collection and crediting
of accounts of depository institutions in connection
with municipal and corporate securities).

-2 8.

The cost to the Federal Reserve of float (the
interest on items — generally, the dollar value
of checks — credited by the Federal Reserve to
one depository institution before being collected
from another).

These requirements of the Monetary Control Act follow upon other
provisions of the Act subjecting all depository institutions offering
transactions accounts and nonpersonal time accounts to uniform Federal
reserve requirements,

and requiring the Federal Reserve to provide System

services on the same terms to all depository institutions.
The Board said that the proposals are meant to conform to two
objectives made clear in the legislative history of the Act:
1.

Congress regarded pricing for Federal Reserve
services as a means of encouraging competition and
efficiency in the provision of such services.

2.

Congress was concerned with the amount of revenue
that would be lost to the Treasury under the Act
resulting from the lower reserve requirements
the Act establishes.
Pricing for Federal Reserve
services is expected in part to offset that loss.

At the same time. Congress charged the Board with adopting pricing
principles that "give due regard to competitive factors and the
of

an

provision

adequate level of such services nationwide."
In view of these provisions of the Act, the Board has

taken the

following actions, which include a number of revisions made in the light
of comment received on proposals published in August:
General
1.
be eligible to

Effective December 31, 1980, all depository institutions will
deposit local checks for collection in Federal Reserve Check

Processing Centers (RCPCs).

2.

On January 29, 1981, the following fee schedules for the initial

Federal Reserve Bank services to be priced —
settlement —

wire transfer of funds and net

will become effective:

WIRE TRANSFER
Telephone Advice
NO

YES

$ .80

Originator Off-Line

$2.60

3.50

Originator On-Line

5.30

1.8oi/

Receiver Off-Line

NET SETTLEMENT

Basic Settlement Charge Per Entry

$ .80

Surcharges:
Settlement Originated Off-Line

2.70

Telephone Advice requested

1 . 80- /

3.

On August 1, 1981 the following fee schedule for services

provided to automated clearing houses by Federal Reserve Banks will become
effective, concurrent with the pricing of check collection services:

AUTOMATED CLEARING HOUSE SERVICES

Intra-ACH

debits originated
& credits received
New York Reserve Bank
All other Reserve Banks

2/
0.3 cents per item-'
1.0 cent per item

Inter-ACH

debits originated
& credits received

2/
1.2 cents per item-'
1.5 cents per item

1/ Fees for advices requested by originators will become effective March 26, 1981.
2/ This fee gives recognition to the fact that the New York ACH is privately operated.

4.

Fee schedules for other services will be implemented according

to the following table, and will be announced in advance:

Service

Schedule

Check Collection & Clearing

Full access and pricing on
August 1, 1981

purchase, Sale, Safekeeping
and Transfer of Securities

Access and pricing,
1981

Noncash Collection

Access and pricing, October
1981

October

Coin and Currency Transportation
Services

Access and pricing, January 1,
1982

Coin Wrapping

Access and pricing, January 1,
1982

5.

The Board deferred action on pricing for float pending further stud

Actions to reduce float through operational improvements are underway.

Principles and Determinants of Pricing
for Federal Reserve Services
The Board adopted the following principles required by the Monetary
Control Act as the basis for Federal Reserve fees:
1.

All Federal Reserve Bank services covered by the
fee schedule shall be priced explicitly.

2.

All Federal Reserve Bank services covered by the fee
schedule shall be available to nonmember depository
institutions and such services shall be priced at the
same fee schedule applicable to member banks, except
that nonmembers shall be subject to any other terms,
including a requirement of balances sufficient for
clearing purposes, that the Board may determine are
applicable to member banks.

-

5

-

3.

Over the long run, fees shall be established on
the basis of all direct and indirect costs actually
incurred in providing the Federal Reserve services
priced, including interest on items credited prior
to actual collection, overhead, and and allocation
of imputed costs which takes into account the taxes
that would have been paid and the return on
capital that would have been provided had the
services been furnished by a private business firm,
except that the pricing principles shall give due
regard to competitive factors and the provision of
an adequate level of such services nationwide.

4.

Interest on items credited prior to collection shall
be charged at the current rate applicable in the
market for Federal funds.

In addition, the Board adopted the following pricing principles,
in view of the recognition in the Monetary Control Act and its legislative
history of the importance of encouraging competition and providing for an
adequate level of services nationwide.— "
^
5.

The Board intends that fees be set so that revenues
for major service categories match costs (inclusive
of a private sector m ar k- up) . During the initial
start-up period, however, new operational require­
ments and variations in volume may temporarily
change unit costs for some service categories.
It
is the System's intention to match revenues and
costs as soon as possible and the Board will
monitor the System's progress in meeting this goal
by reviewing regular reports submitted by the
Reserve Banks.
If, in the interest of providing
an adequate level of services nationwide, the
Board determines to authorize a fee schedule for a
service below cost, it will announce its decision.

6.

Service arrangements and related fee schedules
shall be responsive to the changing needs for
services in particular markets.
Advance notice
will be given for changes in fees and significant
changes in service arrangements to permit orderly
adjustments by users and providers of similar
services.

i / In August, the Board proposed four pricing principles in
addition to those required by the Act.
Of these, in the light of
comment received, Nos. 5,
7 and 8 have been restated and No. 6
eliminated as no longer needed after restatement of No. 5.

-6 7.

The structure of fees and service arrangements
may be designed both to improve the efficient
utilization of Federal Reserve services and
to reflect desirable longer-run improvements in
the nation's payments system.
Public comment
will be requested when changes in fees and
service arrangements are proposed that would
have significant longer-run effects on the
nation's payments system.

The Board adopted the following price determinants:
— A mark-up of 16 percent as the Private Sector Adjustment
Factor to the Federal Reserve's cost of providing services.
This factor will be reviewed annually and changed
as appropriate. 1/
— Prices will be based on full long-run costs, reviewed
at least annually in the light of estimated costs for
the ensuing year, using the Federal Reserve's Planning
and Control System (PACS) to determine full costs.
— Fees will be national for services that are uniform
across the Federal Reserve System.
These are
generally capital intensive items, and include wire
transfer, automated clearing house services, net
settlement and on-line securities transfer services.
— Where there are significant differences in costs
among Federal Reserve Districts
(or offices),
differing District or office schedules will be used.
Such prices include coin wrapping, and securities
and noncash collection at the District level and
currency and coin shipping at the office level.

— The Board plans to complete development of a
detailed proposal for incentive pricing by
Spring 1981.
The Reserve Banks have the option of setting fees for check services
on either a District or office basis.

1/ See attached Federal Register notice for detailed discussion of the
Private Sector Adjustment Factor.

-7 Clearing Balances

Under provisions of the Monetary Control Act many small depository
institutions will maintain with the Federal Reserve zero or small required
reserve balances.

Many such institutions will satisfy their reserve require­

ments with their own vault cash;

some will hold reserves through pass-through

arrangements but may wish to obtain services directly;

and during the 8-year

phase-in, required reserve balances will slowly change.
Two alternatives are available to an institution with zero or small
reserve balances that wishes to obtain services directly from a Federal Reserve
Bank:
The first method is to arrange with a correspondent institution or
with its reserve pass-through correspondent to post all of its Federal Reserve
credits and charges arising from its use of System services to the correspondent
institution's or pass-through correspondent's Federal Reserve account.

Such

arrangements must comply with the requirements of the Federal Reserve Bank
involved.
The second method is to establish a clearing balance with its
Reserve Bank to which Federal Reserve credits and charges may be posted.

If

the depository institution chooses the clearing balance method, the following
procedures would applyr
The necessity for as well as the size of the clearing balance will depend
upon the need to avoid frequent large daylight and overnight overdrafts.

This

evaluation will be made on a case by case basis in accordance with national
guidelines. The size of the clearing balance may be revised monthly to reflect
changes in the level and timing of an institution's transactions and the
incidence of daylight and/or overnight overdrafts.

-8 The Board has determined that earning credits will be granted

on the

actual or required clearing balance, whichever is less, at a rate equal to
the weekly average Federal funds rate.
For monetary control purposes, the required clearing balance level
will be fixed in advance of the period during which the balance must be
maintained and must be met on average during a maintenance period.
Penalties will be assessed for deficiencies in required clearing
balances.

In addition, Federal Reserve Banks will meet with depository

institutions that demonstrate an inability to maintain required balances or
that incur repeated penalties to discuss how to manage required total balances
better.

Procedures regarding clearing balances will apply to all depository

institutions as well as Federal Home Loan Banks.
Check Clearing
With respect to

check clearing and collection, the

Board endorsed the concept of separate pricing for return items and will publish
a proposal for comment during 1981, with the intent of implementing separate
fees for return items in the 1982 pricing structure.

In March 1981, the Board

will publish a final fee schedule for check clearing and collection services
to reflect estimated 1981 costs and the 16 percent private sector adjustment.

Automated Clearing House Services

The Act provides that over the long run, fees should be based on total
costs.

Proposed ACH prices are based on staff estimates of costs at an

annual

volume of approximately two billion items, which it is believed can be achieved
in approximately five years.

The Board will review the fee

schedule for ACH

services on an annual basis to determine the appropriateness of continuing
its ACH pricing policy.

-9 The Board has considered the impact its ACH pricing policy may have
on the development of private sector alternatives to the existing ACH network.
It concluded that its pricing policy is in the public interest, will result in
a more efficient payments mechanism in the long run and is consistent with the
objectives of the Act.
Prices for ACH services will be levied against the party originating
an

ACH debit and against the receiver of an ACH credit.

levied on the receiver of Federal direct deposits.

No charge will be

Automated clearing house

associations may have charges for ACH services provided to their members made
through their association if they so request.

Cash Transportation and Coin Wrapping
The Board's proposed fee schedules for currency and coin services
were the subject of substantial comment.

Commentators expressed concern over

the disparity of prices for services across and within districts.

Concern was

also expressed over the methodology used in establishing the various zones
used to determine prices for delivery of coin and currency.
The Board believes that the commentators have raised significant concerns
with respect to the currency and coin fee schedules proposed in August.
the pricing of currency and coin delivery services will be reviewed.

Therefore,

In order

to provide an opportunity for public comment on a revised schedule, the pricing
of coin and currency delivery and coin wrapping services will be delayed until
January 1982.

Float
The system is engaged in a number of improvements to its check
collection operations designed to reduce the amount of float.

-1 0 The Boa rd 's August proposal suggested second and third phases ,
following reduction of float by improvement of System operations, designed to
eliminate float to the maximum degree and price for what could not be eliminated.
As a result of consideration of comment received, the Board has
decided to continue analysis of float alternatives.

The Board will consider the

results of this analysis in 1981.
The Board's notice in this matter is attached.

Attachment

1338

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices

FEDERAL RESERVE SYSTEM
[D o cket No. R -0324]

Adoption of Fee Schedules and Pricing
Principles for Federal Reserve Bank
Services
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Adoption of Fee Schedules and
Pricing Principles.
The Monetary Control Act of
1980 (Title I of Public Law 96-221)
requires that fees be set for Federal
Reserve Bank services. The Board has
adopted a set of pricing principles for
Federal Reserve Bank services and has
established implementation dates on
which fees for each of the services will
become effective. A schedule of fees has
been adopted for wire transfer of funds,
net settlement, and automated clearing
house services. Fee schedules for the
remaining services will be announced in
advance of their implementation dates.
EFFECTIVE DATE: December 31,1980. On
that date, all depository institutions will
be eligible to deposit local checks in
Federal Reserve Regional Check
Processing Centers ("RCPCs”). On
January 29,1981, the fee schedule for the
initial Federal Reserve Bank services to
be priced—wire transfer of funds and
net settlement—will become effective.

SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Lorin S. Meeder, Assistant Director for
Federal Reserve Bank Operations (202/
452-2738); Earl G. Hamilton, Senior
Operations Analyst (202/452-3878);
David B. Humphrey, Section Chief (202/
452-2556); Myron L. Kwast, Economist
(202/452-2686); Paul P. Burik, Economist
(202/452-2556); Gilbert T. Schwartz,
Assistant General Counsel (202/452­
3625); Lee S. Adams, Senior Attorney
(202/452-3623); Daniel L. Rhoads,
Attorney (202/452-3711).
SUPPLEMENTARY INFORMATION:

I. Introduction
The Monetary Control Act of 1980
(“Act”) (Title I of Public Law 96-221)
requires that fees be set for Federal
Reserve Bank services according to a set
of pricing principles established by the
Board. The Act provides that the Board
shall begin putting into effect a schedule
of fees not later than September 1,1981.
Services covered by the fee schedules

are to be made available to all
depository institutions. The Board, in
accordance with the requirements of the
Act, published proposed pricing
principles and a schedule of fees for
comment on August 28,1980 (45 FR
58689). The period for public comment
expired on October 31,1980. After
considering the more than 230 comments
received from the public (primarily from
depository institutions and financial
institution trade groups), the Board has
adopted revised pricing principles, set a
series o f implementation dates on which
fee schedules for each of the services
will become effective, and approved fee
schedules for several of these services.
In preparing the pricing principles and
fee schedules, the Board has taken into
account the objectives of fostering
competition, improving the efficiency of
the payments mechanism, and lowering
costs of these services to society at
large. At the same time, the Board is
cognizant of, and concerned with, the
continuing Federal Reserve
responsibility and necessity for
maintaining the integrity and reliability
of the payments mechanism and
providing an adequate level of service
nationwide.
II. Background
The Act specifies that fees are,to be
set for the following Federal Reserve
Bank services in accordance with the
pricing principles adopted by the Board:
(1) currency and coin transportation
and coin wrapping;
(2) check clearing and collection;
(3) wire transfer of funds;
(4) automated clearing house (ACH);
(5) net settlement;
(6) securities services;
(7) noncash collection;
(8) Federal Reserve float; and
(9) any new services the Federal
Reserve System offers.
The legislative history of the Act
indicates that'Congress had two
objectives in establishing a requirement
that the Federal Reserve price the
seryices it provides. First, Congress
sought to encourage competition in
order to assure provision of these
services at the lowest cost to society.
While intending to stimulate
competition, Congress did not wish to
precipitate the reemergence of
undesirable banking practices—such as
non-par banking or circuitous routing of
checks—which the Federal Reserve
System was designated to eliminate.
Also, Congress w as concerned with
ensuring an adequate level of services
nationwide. Consequently, it charged
the Board with adopting pricing
principles that "give due regard to
competitive factors and the provision of

an adequate level of such services
nationwide”. This objective is clearly
established in the pricing principles
established by the Act.
Second, Congress was concerned with
the amount of revenue lost to the
Treasury due to the reduction in the
level of aggregate required reserves
resulting from the implementation of the
reserve requirement provisions of the
Act. Pricing for Federal Reserve Bank
services will generate revenue that will
partially offset the revenue loss
associated with reduced required
reserves.
III. Pricing Principles
In its August proposal, the Board
proposed eight principles as a
framework for establishing fees for
Federal Reserve Bank Services.
Principles one through four were
required by the Act while proposed
principles five through eight were added
by the Board to amplify its policies with
respect to the establishment of fees for,
and the provision of, System services.
These four additional principles 1
evoked substantial comment. Many
commentators expressed concern that
those principles suggested that the
Federal Reserve System might engage in
unfair competition. The Board believes
the concerns expressed by
commentators represent a
misunderstanding of Federal Reserve
intentions, and has accordingly modified
the additional nonstatutory principles to
address those concerns. As a result,
proposed Principles 5, 7, and 8 have
been restated, and proposed Principle 6
has been eliminated.
Public comments expressed concern
with Principle 5 because it suggested
that the Federal Reserve might subsidize
some services for long periods and/or
systematically cross-subsidize one
service from the revenue of another, to
the possible detriment of private
competitors offering the same service. In
proposing that principle the Board
intended simply to recognize that pricing
of Federal Reserve services could result
in significant volume losses for some
1The four nonstatutory principles proposed by the
Board in August were:
Principle:
5. The fee schedule shall, over the long run, be set
to recov er total costs for all priced services.
6. Fees shall be structured so a s to avoid
undesirable disruptions in service an d to facilitate
an orderly transition to a pricing environment.
7. The fee schedule, as well a s service levels,
shall be adm inistered flexibly in response to
changing m arket conditions and user d em ands.
8. Fee and service level incentives m ay be
established to improve the efficiency a n d capacity
of the present paym ents system and to induce
desirable longer run changes in the paym ents
mechanism.

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices
services. In the short run, this would
imply large changes in unit costs since
many services have a high proportion of
fixed costs. If prices wpre immediately
adjusted upward, further volume losses
would result simply because insufficient
time had elapsed for Reserve Banks to
have adjusted their fixed costs. Thus,
the Board believed it desirable for
Reserve Banks to have the flexibility to
maintain prices long enough to adjust
Fixed costs.’ The Board has restated
Principle 5 to clarify these intentions.
The principle also specifies that the
Board will announce any decision to set
fees for a service below cost if such fees
are established in the interest of
providing an adequate level of services
nationwide. In light of the restatement of
Principle 5, the Board deleted proposed
Principle 6 because it w as no longer
necessary.
With respect to proposed Principle 7,
some commentators expressed concern
that the word “flexibly”, as used in the
principle, implied that the Federal
Reserve might price in a predatory
fashion in order to maintain or increase
its market share. In fact, this principle
was proposed by the Board only to
indicate that the Reserve Banks should
be sensitive to the changing needs for
services in particular markets.
Consequently, the Board has revised
this principle, now renumbered as
Principle 6. This principle also states
that advance notice will be provided
where a Reserve Bank makes fee
changes or significant service level
changes in accordance with it.
Comments on proposed Principle 8
focused on concerns that the Federal
Reserve might use w hat w as termed
“incentive pricing” either to undermine
the competitive position of private
sector providers of services or to create
additional barriers to entry. In addition,
commentators suggested that it was
inappropriate for the Federal Reserve
unilaterally to determine what long-run
changes in the payments system are in
the public interest.
The Board proposed Principle 8 for
two reasons. First, the Board wished to
recognize the desirability of inducing
more efficient utilization of Federal
Reserve services. For example, pricing
to induce off-peak use of Federal
Reserve payment services may be one
way to accomplish this goal. Second,
this principle was proposed to indicate
that certain services, such as ACH,
might be supported for a period of time
to foster development of efficient new
technologies that would benefit the
5 Of course, as specified by the Act. the Board will
require that Reserve Banks reduce their budgets to
reflect long-run reductions in service volumes.

public in the long run. Public comment
will be sought when a fee below cost is
proposed in order to induce desirable
longer-run changes in the payments
system, as already has been done with
the proposed ACH fee schedules.
Accordingly, the Board has revised this
principle, now renumbered as Principle
7, in order to clarify its intention.
Thus, the Board has adopted the
following pricing principles, which
incorporate both the specific statutory
requirements of the Monetary Control
Act and provisions intended to fulfill its
legislative intent:
1. All Federal Reserve Bank services
covered by the fee schedule shall be
priced explicitly.
2. All Federal Reserve Bank services
covered by the fee schedule shall be
available to nonmember depository
institutions and such services shall be
priced at the same fee schedule
applicable to member banks, except that
nonmembers shall be subject to any
other terms, including a requirement of
balances sufficient for clearing
purposes, that the Board may determine
are applicable to member banks.
3. Over the long run, fees shall be
established on the basis of all direct and
indirect costs actually incurred in
providing the Federal Reserve services
priced, including interest on items
credited prior to actual collection,
overhead, and an allocation of imputed
costs which takes into account the taxes
that would have been paid and the
return on capital that would have been
provided had the services been
furnished by a private business firm,
except that the pricing principles shall
give due regard to competitive factors
and the provision of an adequate level
of such services nationwide.
4. Interest on items credited prior to
collection shall be charged at the current
rate applicable in the market for Federal
funds.
5. The Board intends that fees be set
so that revenues for major service
categories match costs (inclusive of a
private sector mark-up). During the
initial start-up period, however, new
operational requirements and variations
in volume may temporarily change unit
costs for some service categories. It is
the System's intention to match
revenues and costs as soon as possible
and the Board will monitor the System's
progress in meeting this goal by
reviewing regular reports submitted by
the Reserve Banks. If, in the interest of
providing an adequate level of services
nationwide, the Board determines to
authorize a fee schedule for a service
below cost, it will announce its decision.
6. Service arrangements and related
fee schedules shall be responsive to the

1339

changing needs for services in particular
markets. Advance notice wilt be given
for changes in fees and significant
changes in seryice arrangements to
permit orderly adjustments by users and
providers of similar services.
7. The structure of fees and service
arrangements may be designed both to
improve the efficient utilization of
Federal Reserve services and to reflect
desirable longer-run improvements in
the nation’s payments system. Public
comment will be requested when
changes in fees and service
arrangements are proposed that would
have significant longer-run effects on the
nation's payments system.
IV. Price Determination
The Monetary Control Act of 1980
requires that “over the long run fees
shall be established on the basis of all
direct and indirect costs actually
incurred in providing Federal Reserve
services priced.” The Federal Reserve's
cost accounting system provides the
basis for calculating the total cost of
major services (e.g., checks, wire
transfer).
A. Private Sector A djustm ent Factor
The Monetary Control Act requires
that Federal Reserve fees take into
account imputed taxes and financing
costs that would have been incurred had
System services been provided by a
private firm. The proposed fees that
were published for comment in August,
1980 included a private sector mark-up
of 12 percent. This mark-up reflected a
middle course between alternative
models based on a sample of twelve
large banking organizations—one model
using the average cost of all bank funds
and the other using the average cost of
banks' long-term debt and equity only.
When considering this issue, the
majority of the comments received
stated that the 12 percent mark-up was
too low. The Board recognizes that no
definitive mark-up can be calculated for
the Federal Reserve for at least two
reasons. The first is that there are
various private competitors, including
large correspondent banks and
independent bank service corporations,
that now offer or would offer payments
function services that resemble those
supplied by the System, and the costs of
these competitors differ. Second, once
the type of competitor is selected, the
appropriate tax rate, interest rates on
debt, and rate of return on equity must
be ascertained. Such information may
not be explicitly provided in the
available financial statements prepared
by firms representative of the selected
type of competitor and must be inferred
in order to calculate a mark-up. Despite

1340

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices

the inherent limitations on the precision
with which a definitive mark-up can be
calculated for the Federal Reserve, the
Board believes that the methodology
that was developed and modified in
response to public comments is
consistent with the requirements of the
Act.
Comments on the Board’s August
proposals cited five major reasons for
the alleged under-estimation of the
private sector adjustment factor,
focusing on the private sector’s tax and
financing costs. First, the 12% private
sector adjustment factor (PSAF) did not
reflect the cost of funds to banks during
1980. Second, it was claimed that the
procedure used to estimate the short­
term cost of funds improperly accounted
for deposit liabilities and therefore had
a downward bias. Third, the use of a tax
rate which included the tax benefits
arising from holdings of State and local
securities was challenged. Fourth, the
assumed capital structure did not
correspond to that of actual private
sector suppliers. Fifth, it was alleged
that a mark-up based on firms other
than large banking organizations may be
more appropriate. These concerns are
considered in more detail in Appendix I.
The Board believes many of the views
expressed in these comments have
merit. Therefore, by employing a
matched capital structure, updating the
financing costs to third quarter 1980,
revising the procedures used to compute
the average interest rate on short-term
funds, and increasing the effective tax
rate, a mark-up of 15.4 percent was
generated. The procedure involved in
the computation of the markup is
presented in Table 2 of Appendix I.
Recognizing the imprecision inherent in
any attempt to impute the financing
costs incurred and taxes paid by private
sector suppliers, and in order to give
further consideration to private sector
concerns, on this occasion, the Board
elected to adopt 16 percent as the PSAF.
The Board intends to review the PSAF
annually and will adjust it as
appropriate.
B. System Costs and 1981 Fee Schedule
A number of commentators expressed
concern that the fees published by the
System were not based on the actual full
costs of providing services. Other
commentators expressed the view that
use of 1979 costs as a basis for prices to
be imposed in 1981 was inappropriate.
The fees published by the Board in
August were based on estimates of 1980
full costs of providing services and a 12
percent private sector adjustment

factor.3The derivation of full costs was
based on the Federal Reserve’s Planning
and Control System (Pj^CS), which
establishes accounting standards for the
System. That system provides for the
allocation of all Reserve Bank expenses
to the so-called “output” services
performed by the Banks. The cost
accounting principles and procedures
used in PACS are described in detail in
manuals that are available to the public.
The proposed pricing procedures
discused by the Board in August
indicated that fees would be reviewed
at least annually in light of estimated
costs of services for the ensuing year,
including a possible revision in the
private sector adjustment factor.
Consistent with this procedure, the fee
schedules for wire transfer and net
settlement have been adjusted to reflect
estimated 1981 costs and a PSAF of 16
percent. These two services will be
priced and made available to
nonmembers in January, 1981. No
adjusted fee schedules have been
adopted for any of the other services
except ACH. It is the Board's intention
to publish the revised fee schedules for
the remaining services well in advance
of their implementation dates.
C. D evelopm ent Costs
The fees for wire transfer and net
settlement include a provision for the
costs of developing a new
communications system (FRCS-80). In
using the PACS full cost as the basis for
setting Federal Reserve fees, an issue
has been raised regarding the
appropriate treatment for pricing
purposes of software development and
associated outlays. While PACS
accounting principles require that these
costs be treated as current expenses, the
Board believes, for the reasons
enumerated below, that fees should be
set to recover these costs over future
periods.
The spreading of development costs
would serve several objectives:
1. Wide short-term fluctuations in
fees due oflly to the timing and scope of
development efforts would be avoided.
These fluctuations might result in
destabilizing shifts in volume, depending
on demand elasticities. Even without
immediate shifts, a volatile pattern of
fee changes is undesirable, as it impairs
the ability of users of System services to
project their costs.
2. Spreading development costs
would provide a more equitable
matching of those customers bearing the
* However, an exception w a s provided for ACH
fees and a ceiling w a s imposed on fees for remote
endpoint cash shipments.

costs with those realizing the benefits of
development efforts.
3. Development efforts, viewed from a
managerial standpoint, are investments
to improve future levels of service and
operational efficiency. Requiring that
the entire cost of such efforts be
recovered in the year in which they are
incurred would create a substantial
barrier to future development efforts.
4. While in the private sector, product
development costs are expensed as they
are incurred for financial reporting
purposes economic factors rather than
accounting conventions determine the
price-setting process.
To establish a policy for spreading
development costs, the Board has
decided that (a) its use be limited to
cases in which development costs would
have a material impact on unit costs; (b)
when used, conservative time periods
should be set for full cost recovery; (c) a
financing factor, to be based on the
marginal cost of long term capital,
should be applied to the deferred
portion of development costs; and (d)
the System should announce the use of
this technique when it is applied. In
developing the wire transfer fee
schedule, the Board has used this
technique to incorporate FRCS-80
development costs.
D. Pricing to Im prove Service E fficiency
(Incentive Pricing)
The Board’s August proposal
contained references to additional
pricing concepts being developed to use
surcharges or discounts to affect
customer behavior, and thus encourage
more efficient utilization of resources in
payment services. Such pricing concepts
could result in smoothing check and
wire transfer processing workloads and
reductions in check and ACH return
items. The Board plans to complete
development of a detailed proposal for
this type of pricing by sprihg of 1981
and, if adopted by the Board, may
incorporate such concepts in 1982 fee
schedules.
E. Billing Procudures
The August pricing proposal
contained no details about the
procedures for billing by Reserve Banks.
Commentators, however, were of the
view that billing procedures should be
uniform across Federal Reserve offices.
A recent survey indicated that Reserve
Bank billing procedures being developed
in accordance with current System
guidelines were not as uniform as
desired by commentators.
The Board expressed its desire1for
greater uniformity and requested the
System’s Conference of First Vice
Presidents to develop a uniform billing

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices
cycle, a standard interval between
presentation of the bill and debiting the
charges to the account of a depository
institution, and a minimum standard for
information that will be provided to
depository institutions to describe the
charges made. The Board plans to
announce the details of the System’s
billing procedures by February 16,1981.
After that announcement, each Reserve
Bank will begin as soon thereafter as
operationally feasible to develop and
test its billing procedures with member
banks using check services and with
nonmember institutions with a clearing
or reserve account using RCPC services.
Such testing should continue for at least
two billling cycles prior to the actual
levying of lees.4
F. Clearing Balances
The Monetary Control Act imposes
Federal reserve requirements on all
depository institutions with transaction
accounts or non-personal time deposits.
Nevertheless, a number of member and
nonmember depository institutions will
maintain zero or negligible required
reserve balances with the Federal
Reserve because of the lower reserve
ratios established by the Act or because
of the phase-in provisions. These
institutions may want direct access to
some or all Federal Reserve services.
However, their reserve balances held at
Federal Reserve Banks may be
considered inadequate for clearing
purposes. Consequently, the Board will
provide two alternative methods
whereby depository institutions
maintaining zero or negligible required
reserve balances with Federal Reserve
Banks will be able to receive Federal
Reserve Bank services directly, in
accordance with the access provisions
of the Act.
The first-method is for a depository
institution to arrange with a
correspondent institution or with its
reserve pass-through correspondent to
post all of its Federal Reserve credits
and charges arising from its use of
System services to the correspondent
institution’s or pass-through
correspondent's Federal Reserve
account. Such arrangements must
comply with the requirements of the
Federal Reserve Bank involved. The
second method is for the depository
institution, regardless of whether or not
its reserves are held through a pass­
through correspondent, to establish a
clearing balance with its Reserve Bank
to which Federal Reserve credits and
4 All nonm em ber depository institutions will h ave
RCPC check services available to them beginning
D ecember 31,1900. Nonm em bers with a reserve or
clearing account w ould obtain test bills for RCPC
services during the test billing period.

charges may be posted. If the depository
institution chooses the clearing balance
method, the following procedures would
apply.
The need for as well as the size of the
clearing balance will depend upon the
need for balances to avoid frequent or
large daylight and overnight overdrafts.
This evaluation will be made on a case
by case basis in accordance with
national guidelines. The size of the
clearing balance may be revised
monthly to reflect changes in the level
and timing of an institution's
transactions and the incidence of
daylight and/or overnight overdrafts.
The Board's August proposal
suggested that required clearing
balances receive earnings credits equal
to the 91 day Treasury bill rate. Many
commentators suggested that the
earnings credit rate should be the
Federal funds rate, noting that the Act
required that float be priced at the
Federal funds rate. They also pointed
out that a Federal funds earnings rate
would provide a greater incentive for
institutions to maintain clearing
balances at required levels.
For these reasons, the Board has
determined that earnings credits will be
granted on the lesser of the actual or
required clearing balance at a rate equal
to the weekly average Federal funds
rate. These earnings credits are not
transferable between depository
institutions and can only be used to
offset charges incurred by the use of
System services. However, if during a
particular billing period a depository
institution receives earnings credits in
excess of the charges it has incurred for
System services, it may carry over the
credits and apply them to System
service charges incurred at any time in
the subsequent 12 months. Any excess
credits remaining at the conclusion of
the 12 month period are forfeited.
For monetary control purposes, the
required clearing balance level will be
fixed in advance of the period during
which the balance must be maintained
and must be met on average during a
statement week. Each depository
institution with a required clearing
balance will have to maintain a required
weekly average total balance—required
clearing balances plus, if applicable,
required reserve balances. At the end of
each maintenance period any balances
held with a Federal Reserve office will
first be allocated to the clearing balance
requirement and the remainder will
apply to the required reserve balance.
Thus, if a depository institution holds an
average total balance with a Federal
Reserve office during the maintenance
period that is less than the required
balance—required clearing balances

1341

plus required reserve balances—the
depository institution will be considered
to be deficient in reserves. If the
deficiency in average total balances is
greater than required reserves, the
remaining shortfall will be considered
deficient clearing balances. If the
maintained total balance exceeds the
required balance, the institution will be
considered to be holding excess
reserves. However, in the case where a
depository institution elects to pass
through its required reserves and in
addition maintains a required clearing
balance direetly with a Federal Reserve
Office, the required clearing balance
will be administered separately from the
required reserve balance.
Required clearing balances will be
subject to a 2 percent carry over
provision (which also applies to
required reserve balances), but
deficiencies in excess of this carryover
will be subject to a penalty rate.
Clearing balance deficiencies from zero
to twenty percent (after the application
of carryover) will be penalized at a 2
percent annual rate while deficiencies in
excess of 20 percent (after carryover)
will be penalized at a 4 percent annual
rate. The maintenance period for
required clearing balances will
correspond to the maintenance period
for required reserve balances.
Depository institutions are expected to
meet their clearing and reserve balance
requirements on a continuing basis.
Federal Reserve Banks will meet with
depository institutions that demonstrate
an inability to maintain required
balances or that incur repeated
penalties to discuss how better to
manage required total balances.
Procedures regarding clearing balances
will apply to all depository institutions
as well as Federal Home Loan Banks.
G. Pricing Adm inistration
The pricing proposals published for
comment divided fees into those that
would be administered locally and those
that would be administered nationally.
National fee schedules would be
uniform throughout the System and are
associated with services that are
generally capital intensive and have
similar long-run costs across Districts.
National fee schedules were proposed
for wire transfer, net settlement, ACH,
and on-line securities transfer services.
Fee schedules that vary by Federal
Reserve District or office were proposed
for services where there are significant
cost differences across District (or
across separate offices within the
District) an d /o r where the market for
that service is local in scope. District
fees were proposed for coin wrapping,
securities and noncash collection

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices

1342

services, while office fees were
proposed for currency and coin shipping
services. The Board proposed that
Reserve Banks be given the option to set
fees for check services on either a
District or office basis.
It is contemplated that national price
changes will be reviewed by the
Conference of First Vice Presidents and
local prices could be changed by each
Reserve Bank. Any change in fees would
be done in accordance with the pricing
principles adopted by the Board.
However, during the initial phases of
pricing, it is anticipated that issues of
service and pricing policy will arise that
could have significance for the long-term
role of the Federal Reserve in the
payments mechanism. To deal with
these issues during the implementation
period, a Pricing Policy Committee,
consisting of representatives from the
Board and the Reserve Banks, has been
established to review all major changes
in fees and service levels.
V. Specific Services
A. W ire Transfer/N et Settlem ent
The proposed fee schedules published
in August were based on 1979 actual
costs adjusted for anticipated 1980 cost
increases and a 12 percent private
sector adjustment factor. These cost
estimates have now been revised to
reflect estimates of 1981 costs and
volume as well as the recommended 16
percent private sector adjustment factor.
In addition, the revised fee schedules
include FRCS-80 development costs
attributable to the wire transfer
function, which have been allocated
over the 10 year estimated useful life of
this system. Off-line originator and
telephone advice fees have been
adjusted to reflect the increases in
personnel and communications costs.
These adjustments result in a
schedule for wire transfer fees as
follows:
F e« S ch e d u le —W ire T ra n sfe r
[Effective Jan. 29, 1961 ]
Telephone
advice

who requests the advice. The Board
believes that the party requesting the
service should bear the cost because
that party is the one contracting with the
Federal Reserve for the telephone
advice.
Under present procedures the
originator of a wire transfer may not
know if the receiver is on-line or off-line.
Consequently, the originator nay not
know if a telephone advice is necessary.
The Reserve Banks have prepared a
directory for on-line originators that
contains information to enable
originators to select the appropriate
message type code and thereby
ascertain the cost associated with each
transfer. In order to provide originators
with time to modify their operations to
be able to take account of such
encoding, the Board determined that the
fee for telephone advice requested by
the originator will be delayed until
March 26,1981.
In some cases, originators of wire
transfers do not request that telephone
advices be made to the off-line
receivers. Because the receivers are
never certain when a wire transfer may
be arriving, they may place a standing
order with their Reserve Bank for
telephone advice of all wire transfers
that are not requested by the originator.
In order to service such receivers of wire
transfers, all Reserve Banks will offer
standing order telephone advice service
if sufficient demand should develop for
this service. In these cases, the receiving
institution will be charged for this
service. Fees for the standing order
telephone advice will go into effect on
January 29, 1981.
The fees for net settlement services, in
which a third party typically requests
the Reserve Banks to post entries to
reserve accounts as a result of clearing
arrangements outside of the Federal
Reserve, were proposed to be the same
as the fees for wire transfer.
Accordingly, the net settlement prices
were adjusted in the same manner as
wire transfer prices.
Fee Schedule—Net Settlement
[Effective Jan. 29, 1901]

No
Originator on-line ......................... ......................

Yes

$0.00

$2.60

Receiver o fi-line........................... .....................................

*1.00

'F ee s for aovwes requested by originators will become
effective Mar 26, 1981

In the August proposal, telephone
advices provided to off-line receivers
were to be charged to the requesting
party. Some commentators suggested
that since the telephone advice
primarily benefits the receiver, that
party should bear the cost regardless of

Baste settlement charge per entry..................................
Surcharges:
Settlement Originated O ff-Line.................................
Telephone advice requested....................................

$0.80
2.70
1 1-80

'Fees for advices requested by originators w ill become
effective Mar. 26, 1981.

B. Check Clearing and Collection
Many commentators indicated that
the introduction of pricing and open
access, together with float reduction
efforts, will significantly affect the

evolution of the nation's payment
systems, the pattern of customer
relationships, and the role of Reserve
Banks as providers of financial services.
These commentators urged the Board to
adopt a more deliberate schedule for
instructing these charges in order to
allow the private sector an opportunity
to identify and evaluate service
alternatives, to redefine pricing and
marketing strategies, and to adjust to
Reserve Bank billing arrangements.
In response to these comments, the
Board has decided to delay pricing and
full nonmember access to check clearing
and collection services until August 1,
1981. However, in view of the December
31,1980 effective date for NOW
accounts for all depository institutions
and in order to limit the impact of
delaying nonmember access to check
collection services, the Board has
decided to authorize access to current
RCPC arrangements without charge to
all nonmember depository institutions. It
should be noted that nonmember
commercial banks currently are
permitted to deposit local items in
RCPCs.
Because they must be manually
processed, return items contribute
disproportionately to the System's total
check clearing and collection costs—
approximately one percent of all checks
deposited for collection with the Federal
Reserve are returned and account for
eight percent of check clearing
expenses. However, a separate charge
for return items was not included in the
original Board proposal because it was
believed that such fees would probably
not be sufficiently high to have a
significant impact on the behavior of the
paying institution or its customers. In
addition, a separate fee for return items
would add a further complication to the
fee schedule and administration. Many
commentators have argued that the
failure to charge separately for return
items, under a price schedule intended
to recover all Federal Reserve costs,
unfairly increases the fee for all nonretumed checks. Thus, though a
separate charge might not change the
behavior of participants in the collection
system, it would more equitably place
the cost on the parties responsible for
return items.
The Board has endorsed the concept
of separate pricing for return items and
will publish a proposal for comment
during 1981, with the intent of
implementing separate fees for return
items in the 1982 pricing structure. In
March 1981, the Board will publish a
final fee schedule for check clearing and
collection services to reflect estimated
1981 costs and a 16 percent private

Federal Register / Vol. 46, No. 3 / Tuesday, January 6. 1981 / Notices
sector adjustment factor. The check fee
schedule for 19B1 will be set to fully
recover all costs, including return item
processing costs. When return items are
separately priced in 1982, other fees in
the check schedule will be reduced.
C .A C H
Commercial ACH service fees
published in August were based on
mature volume costs, rather than on
current costs. Commentators generally
supported this decision as necessary to
encourage the development of electronic
funds transfer, provided that the Federal
Reserve disclose the total costs
associated with providing ACH services,
define a mature volume environment,
and set a specific deadline for pricing to
recover full costs. Concern was
expressed by some commentators that
pricing at less than full cost could act as
a barrier to possible new private sector
ACH operations.
The Act provides that over the long
run, fees should be based on total costs,
proposed ACH prices are based on staff
estimates of costs at an annual volume
of approximately two billion items,
which it is believed can be achieved in
approximately five years. Maintaining
prices at or near their current levels as
volume increases and unit costs decline
should result in a declining level of
Federal Reserve support for each ACH
item processed. Continuing this
procedure in the future would enable the
System to recover some or all of its
development costs. The Board will
review the fee schedule for ACH
services on an annual basis to
determine the appropriateness of
continuing its ACH pricing policy.
The Board has considered the impact
its ACH pricing policy may have on the
development of private sector
alternatives to the existing ACH
network. It concluded that its pricing
policy is in the public interest, will result
in a more efficient payments mechanism
in the long run and is consistent with the
objectives of the Act. Most private
commentators agreed with this position.
The August proposal stated that
charges for all services will be levied
against the party originating the
transaction or requesting the service.
There is general agreement that Federal
reserve charges should be levied on the
originator of an ACH debit. However,
several commentators requested the
Board to levy charges on the receiver of
an ACH credit. The receiver is the party
that, if the transaction were made by
check rather than ACH, would incur the
expense of sending the check for
collection. To charge the originator of an
ACH credit could discharge financial
institutions from marketing ACH credit

transactions. Since a depository
institution is under no obligation to
participate in an ACH arrangement, it
can choose to avoid this cost by
informing its depositors that the
institution will not handle such
transactions. Accordingly, the Board has
determined that the charge for the
processing of an ACH credit be imposed
on the receiver. (No charge would be
levied on the receiver.of a U.S.
government direct deposit credit; these
items are handled by the Federal
Reserve as part of its fiscal agency
function.)
The Board's proposal provided that
members of an ACH association could
have charges for ACH services made
either through the association or directly
at the member's option. Comments from
some ACH associations, including the
National Automated Clearing House
Association, requested the System to
levy all ACH charges for association
members through the association and
not provide the opportunity for direct
billing. These commentators noted a
parallel in net settlement services where
it w as proposed that all charges would
be made to the clearinghouse for its
members. Associations also felt their
own billing procedures would be
simplified. The Board is of the view that
the relationship between the System and
the ACH association does not parallel
the relationship established for net
settlement services, since in the latter
instance the service does not result in
the processing of individual
transactions. The Board believes that
the issue of requiring ACH association
members to receive charges for ACH
services through the association should
be resolved through private agreements.
It would be inappropriate for the System
to become involved in the enforcement
of such private arrangements. Thus,
charges for ACH services will be
imposed through the ACH association if
the association so requests, unless an
individual member requests direct
billing from the Reserve Bank.
In its comment, the New York
Clearing House, which sponsors the
New York Automated Clearing House
Association (NYACH), stated that the
proposed inter-ACH price did not give
sufficient recognition of the processing
performed by NYACH. Accordingly,
NYACH requested that the Federal
Reserve reimburse it for the reduction in
Federal Reserve costs for items NYACH
processes. The Board believes that the
original pricing structure is still
appropriate because users of the ACH
are not being charged at full cost. The
Board finds insufficient justification to
reimburse NYACH at the present time

1343

because the revenues from ACH
services will not cover Federal Reserve
costs.
Access to, and pricing of, ACH
services will commence on the same
date as check collection services
(August 1,1981) using the following fee
schedule published in the August
proposal.
Fm S ch ad u to —A u to m ate d C learing H o u se
S e rv ic e s
[E ffective Aug. 1, 1901]

Federal Reserve District

...
...
...
Cleveland..................................... ...
...
A tla n ta ......................................... ...
Chicago........................................ ...
...
...
...
Dallas............ .............................. ...
.

Intra-ACH
debits
originated
and credits
received
(cents per
item)

Inter-ACH
debits
originated
and credits
received
(cents per
item)

1.0
0.3
1.0
1.0
1,0
10
1.0
1.0
1.0
10
1.0
1.0

1.5
1.2
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5
1.5

D. Cash Transportation and Coin
W rapping
The Board's proposed fee schedules
for currency and coin services were the
subject of substantial comment.
Commentators expressed concern over
the disparity of prices for services
across and within districts. Concern was
also expressed over the methodology
used in establishing the various zones
used to determine prices for delivery of
coin and currency; in the opinion of
some commentators, the zones appeared
to be arbitrary. Questions were also
raised concerning the proposed service
levels. Commentators also expressed
the opinion that the proposed prices and
service levels could cause a
deterioration in the quality of currency.
Several commentators also were
concerned that full cost recovery for
these services would result in significant
increases in charges for rural and
remote endpoint deliveries as urban
institutions drop the services.
The Board believes that the
commentators have raised significant
concerns with respect to the currency
and coin fee schedules proposed in
August. Therefore, the pricing of
currency and coin delivery services will
be reviewed. In order to provide an
opportunity for public comment on a
revised schedule, the pricing of coin and
currency delivery and coin wrapping
services will be delayed until January,
1982.

1344

Federal Register / Vol. 46, No. 3 / Tuesday, January 6. 1981 / Notices

E. Purchase, Sale, Safekeeping, and
Transfer o f Securities
Only a few public comments were
received on the Board's proposed fee
schedule for securities services. Of those
commenting, several suggested that the
Treasury Department and various
Federal agencies should absorb all or a
portion of the costs of book-entry and
secondary market transfer services
offered by the Reserve Banks for
Treasury and Federal agency securities.
The Treasury and various Federal
agencies, which derive direct and
indirect benefits from the Federal
Reserve’s book-entry and securities
transfer services, reimburse the Reserve
Banks for the expenses associated with
issuing and paying book-entry
securities. The aspects of these services
that woiild be priced relate to secondary
market activities—transactions between
two private parties. Before the Federal
Reserve offered book-entry
arrangements, these transactions were
handled by, and at the expense of, the
parties involved. Thus, the direct
benefits of the lower cost and more
effective and secure services offered by
the Federal Reserve for the safekeeping
and transfer of these securities accrue to
the users of the service. In this respect,
the pricing structure provides a
reasonable balance in the sharing of
costs and benefits of the services
between the public and private sectors.
The Board has adopted the proposed
October, 1981 pricing for, and
nonmember access to, securities
services. A revised fee schedule will be
developed, based on estimates of 1981
costs and a 16 percent private sector
adjustment factor. These revised fees
will be published in the first quarter of
1981.
The JMew York Federal Reserve Bank
has for some time imposed a schedule of
surcharges on securities transfers
initiated by wire during peak hours. This
procedure was implemented in an
attempt to remedy computer capacity
limitations at that Bank. The Board has
authorized the New York Federal
Reserve Bank to continue to apply a
surcharge schedule, pending Board
review of the general questions of
incentive pricing in the Spring of 1981.
F. Noncash Collection Service
The proposed fee schedule for
noncash collection published in August
received no significant comment. The
Board adopted the proposed October,
1981 pricing for and nonmember access
to, this service. As in the case of
securities, fees for noncash collection
services prices will be based on 1981
cost estimates and a 16 percent private
sector adjustment factor.

G. Float
The Federal Reserve’s August pricing
proposal suggested a three phase effort
to reduce and/or price Federal Reserve
float. Phase I would reduce float through
operational improvements which would
speed up the collection process and,
thus, debit payor banks more promptly.
Phase II would adjust availability
schedules for depositing banks to reflect'
actual collection time more closely.
Phase III would price any remaining
float and incorporate this charge into
the price of the service creating the
float.
Commentators generally endorsed
Phase I because payor banks and their
customers will bear the greater burden
of the cost of the loss of float while
collecting banks will bear the lesser
expense for operational improvements.
A number of commentators requested
the opportunity to comment on one
proposed Phase I improvement,
electronic check collection.
The main concern about the
remainder of the Federal Reserve’s float
proposal centered on using fractional
availability to adjust credit availability
schedules to depositors. Most
commentators opposed the use of
fractional availability as being too
complex and costly and inconsistent
with general banking practice. A number
of commentators also noted that Phases
II and III, unlike Phase I, transfer the
cost of float reduction and pricing to
depositing banks.
As a result of these comments, further
analysis is underway. This analysis will
consider fractional availability and
other float pricing alternatives such as
charging the payor bank for float,
expanding Phase I further to eliminate
the need for Phase II, and the
elimination of interterritory
transportation float by the so-called
"immediate advice of credit” approach.
This analysis will also address the
operational impact of various
alternatives on the users of Federal
Reserve services. Recommendations will
be presented to the Board in 1981.

pricing might place them at a
competitive disadvantage. They observe
that they continue to bear a higher
reserve burden than nonmember
institutions for eight years, yet by the
Fall of 1981 they would be on an equal
basis with nonmembers with regard to
access and charges for System services.5
Many of these commentators noted that
the Act does not require that pricing
begin until September, 1981.
Table I shows Board staff estimates of
the temporal pattern of member bank
gains and losses resulting from the
combination of reserve requirement
reductions and pricing of Federal
Reserve services under the Monetary
Control Act. Line 1 indicates the likely
increase in costs due to the pricing of
Federal Reserve services and the
reduction or pricing of Federal Reserve
float. The extent to which service fee
costs might be passed on to bank
customers is not known and is not
allowed for in the table. However, float
reductions obtained through operational
improvements—debiting accounts more
promptly—are not included as a direct
cost to member banks. These costs,
about 50 percent of total float, will likely
be absorbed by account holders at
member banks who will find their
accounts debited more promptly than
before when cash letter presentment is
expedited. Line 2 of the table indicates
the gain to member banks from the
reserve requirement reductions
scheduled in the Act.
The net impact of these extra costs
and revenues is shown in line 3. In the
aggregate, member banks will
experience positive net revenues under
the Monetary Control Act. These
aggregate figures, however, may mask
possible negative net revenues for some
member banks in some years. It is
estimated that negative impacts, which
appear to primarily affect medium size
correspondent banks, would be
substantially eliminated if member
banks pass through only 50 percent of
the direct cost of Federal Reserve priced
services.

VI.
Cost and Competitive Concerns of 5 In addition, access to System services by
nonm em bers may reduce member bank revenues
Member Banks
from correspondent business. Pricing of Federal
Almost all member bank
Reserve services, however, may improve a
c o rrespondent’s competitive position, offset this
commentators expressed their concern
effect, and increase correspondent revenues.
that the Board’s proposed schedule for
Table 1.—Projected Member Bank Costs and Revenues1
[In millions of dollars]
1981
1 Member bank cost of services and float...............................................
2. Member bank revenues from reserve requirement reductions...........
3. Net impact (2-1 )................................................................................ ......

$199
590
391

1982
$895
1,112
217

1983
$996
1,736
740

1984
$1,107
2,275
1,168

Total
$3,197
5,713
2,516

‘ Uses 1980 deposit structure, 13% opportunity cost of reserves and float; 10% cost inflation rate for priced services (net of
productivity improvements); 10% growth in float; 8% deposit growth rate (including NOW accounts); 1981 estimated service
costs; a 16% mark-up; new pricing/access schedules; published float reduction goals; and current phase-down schedules for
reserve requirements.

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices
In evaluating the concerns of member
banks, it w as noted that Congress did
not intend the Monetary Control Act to
increase the burden on member banks.
However, any significant delay in the
pricing schedule either because of equity
concerns or for any other reason, would
increase the cost of the Act to the
Treasury in 1981 beyond those estimates
provided to the Congress. It would also
delay nonmember bank access to
important payment services. The same
increased Treasury costs results would
result if temporary price discounts or
earnings credits on reserves were given
to member banks to reduce their cost of
services during a transition period.
The Board also noted that the delays
in the implementation schedule, while
adopted for operational reasons, will
have the effect or reducing significantly
the cost burdens on member banks in
1981. When considering the advisability
of taking additional steps to reduce the
relative burden of members, the
following factors were evaluated: (1) the
difficulty of identifying those specific
member institutions liable to incur
serious initial adverse impacts; (2) the
operational complexity inherent in any
remedy designed to ameliorate the
actual incidence of these impacts; (3) the
possibility that members initially
adversely affected could offset these
impacts by passing through to their
customers the costs of Federal Reserve
services; and (4) the consequent
increases in Treasury costs. The Board
concluded that the adoption of an
additional delay in service access and
pricing, a price discount policy for
members, or earnings credits on member
5,1 For example, Senator Proxmire, during Senate
consideration of the Monetary Control Act. said
that:
It is not the intent of the legislation to provide
a ccess to Fed services immediately or without
charge. To do so w ould put m embers at a
competitive d isad van tag e since they are now
holding reserves th at are interest free, a n d those
reserves will be gradually reduced over four years.
N onm em ber reserv es will be phased-in o ver eight
years, so the com bination of that long phase-in
period a n d the fee schedule will h av e to be taken
into consideration. A fter the eight y e a r period there
will b e no differences in reserves, nor should there
b e differences in access to Fed services, but until
then it is likely that there will be differences. The
final judgment on just w hat those differences will
b e is left to the Federal R eserve Board. 126 Cong.
Rec. S 3167 (M arch 27, I960).

bank reserve balances is unwarranted
at this time.
By order of the Board of Governors of the
Federal Reserve System, December 30,1980.
Theodore E. Allison,

Secretary of the Board.
Appendix I—The Private Sector
Adjustment Factor (PSAF)
In accordance with the Monetary
Control Act of 1980 the Federal Reserve
is required to price its services to reflect
its actual costs plus the financing and
tax costs that a private sector supplier
would incur. Since the System’s cost
accounting information does not include
these private sector costs, it is necessary
to derive an adjustment factor or mark­
up to apply to the System’s cost
accounting data.
The first step in deriving the private
sector adjustment factor requires a
determination of the value (at historical
cost) of the System's assets employed in
the production of priced services. The
value of assets used by the System to
execute its central bank functions,
supervisory and regulatory
responsibilities, and duties as the
Treasury’s fiscal agent have been
excluded. The composition of the asset
base for priced services is shown in
Table 1 and totals $284.9 million.
The capital structure is assumed to
approximate that of large correspondent
banks’ payments function service
operations. It is comprised of 45% debt
(21% short-term and 24% long-term) and
55% equity. When the average tax and
interest rates and the average rate of
return on equity of the sample of large
banking organizations are applied to
this capital structure, a 15.4% private
sector adjustment factor is derived.6
Although the Board accepted the
methodology used to derive the 15.4%
mark-up, it adopted a 16.0% private
sector adjustment factor. The Board
decided that a rounding up of the PSAF
w as appropriate in this instance, after
giving consideration to the inherently
limited precision of the procedures used
to derive the PSAF.
As indicated above, the Board
proposed a 12% PSAF in August.
Commentators asserted that a 12% PSAF
substantially underestimated the tax
and financing costs borne by the
System’s private sector competitors. The
under-estimate was attributed to five
major sources: (1) the failure to reflect
1980 cost of funds data, (2) the improper
treatment of interest on deposits subject
to Regulation Q, (3) the use of tax rate
• T h is PSAF is b ase d upon a cost of capital of
16.8% as described in footnote 3 to T a b le 2,

1345

reflecting tax benefits not necessarily
available to correspondent operations,
(4) the use of a capital structure which
did not Coincide with that observed for
private sector suppliers, and (5) the use
of an alternative model for the
computation of the PSAF (bank service
corporations). These concerns are
discussed below.
Use o f 1980 Cost o f Funds. The earlier
12 percent mark-up was based upon
information published in the annual
reports of 12 large banking organizations
for year-end 1979.7 These data were
updated using financial reports for the
third quarter of 1980. The average
interest rates on all types of debt rose
between year-end 1979 and the third
quarter 1980, with the increase in the
average interest rate on short-term bank
funds being relatively large.8 Using
updated cost information, the proposed
mark-up increased 0.8 of a percentage
point to 12.8 percent.®
Low Cost o f Short-term Bank Debt. A
number of commentators felt that the
average interest rate for short-term debt
used in the August proposal (6.91
percent) was too low. They attributed
this to a failure to recognize the
effective, as opposed to the contractual,
rate of interest paid on deposits subject
to Regulation Q. They contended that
deposits arising from payments function
operations would typically earn an
implicit rate of interest (in the form of
services provided to depositors). In
addition, the non-deposit components of
short-term debt did not include interest
paid on several categories of discount
liabilities, such as acceptances, since
such information cannot be identified on
banks' financial reports. The interest
rate paid on these liabilities is at a
market rate. To the extent that banks’
payments function operations require
short-term financing from non-deposit
sources, such financing would therefore
be obtained at market rates.
7 The financial reports of BankAmerica. Citicorp,
C hase M anhattan, M anufacturers H anover, |. P.
Morgan, Chemical, Continental Illinois, Bankers
Trust, First Chicago, W estern Bancorporation,
Security Pacific and W ells Fargo w ere used.
8 Numerous com m entators urged the a d option o f
mark-up b a se d on the marginal tax rate, interest
rates on debt, an d rate of return on equity rath er
than the average rates. The Board believes that it
would be inappropriate to use marginal costs
because the mark-up is intended to impute the
financing costs that the F ederal Reserve itself w ould
b e incurring on its existing capital equipment a s if it
w ere a private business firm.
9 Using data for the first three q uarters of 1980,
the average intererst rates w ere 8.17% for short-term
d e b t and 8.66% for long-term debt. T he pre-tax
average rate of return on equity w as 20.3%.

1346

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices

In light of these arguments, the Board
adopted a revised procedure for the
calculation of the average interest rate
on short-term debt. By deleting domestic
demand deposits from the calculation of
the average short-term interest rate, the
revised procedure (in addition to
updating to 1980) increase the average
interest rate on short-term funds to 10.44
percent and raised the mark-up by an
additional 0.7 of a percentage point to
13.5 percent.
Changing the Tax Rate. The tax rate
used in the August proposal w as 26
percent, the value-weighted average of
the effective tax rates applicable to all
of the operations of the 12 large banking
organizations.
First, some confusion arose because
the procedure employed to calculate the
tax rate is not that typically used by
accountants. Several different measures
of tax rates have been developed.
Accountants compute a firm’s tax rate in
any given year by dividing its tax
liability by gross income. This
procedure can be misleading from an
economic standpoint. The tax liability
associated with the gross income
recognized in any year can be
dichotomized into taxed paid (due) in
that year and taxes which will not be
remitted until another year. The latter
component is known as deferred taxes.
Deferred taxes should not be treated as
a cost in the year they are declared. The
26 percent tax rate used in the August
proposal was an average of effective tax
rates, each computed by dividing taxes
paid by gross income.
A second criticism of the 26 percent
tax rate was that it exaggerated the tax
benefits associated with correspondent
operations. Commentators concentrated
on the inclusion of tax benefits that
banks derive from their portfolios of taxexempt State and local government
securities and other tax preferenced
assets, such as leases. The
commentators argued that tax exempts
are not held in conjunction with, or as a
result of their payments function service
operations and the relevant tax rate is
therefore substantially closer to 46
percent (the statutory Federal rate).
The Board accepted the concept that
each function of a bank should be
assumed to pay taxes at a rate that
would be associated with the income
and tax rate applicable to a particular
bank operation. Publicly available
financial reports provide little specific
information on this matter. As a result of
the uncertainty surrounding the effective
tax rate appropriate to payments
function operations, the Board's August
proposal used an average effective tax
rate reflecting the average effective tax

rates of all operations undertaken by
banks.
While the Board found merit with the
commentators’ concern that the average
effective tax rate associated with
payments function operations is higher
than that of the bank as an integrated
entity, the Board did not adopt an
average rate for several reasons. First,
the plant and equipment employed in
these operations would yield two forms
of tax benefits. To the extent that a
faster depreciation schedule is used for
tax purposes than for financial
reporting, deferred taxes would arise. In
addition, newly acquired plant and
equipment may have qualified for
investment credits. Not only would it be
inappropriate to ignore these benefits,
but it should be recognized that
correspondent payment services are
relatively capital intensive and would
therefore provide a greater relative tax
benefit to these organizations than to
the bank as an integrated entity.
Other factors are related to the
treatment of a particular function’s
earnings. If earnings from payments
function services are reinvested in
another function, but all revenues, costs,
and tax benefits are passed back to the
payments function operation, that
operation can exploit the full range of
tax benefits (including those from State
and local securities, loan loss
provisions, and leasing activities)
available to the bank as an integrated
entity. Economic theory provides some
support for this position. To the extent
that a bank achieves cost economies by
integrating different operations, the
costs (including taxes) of the individual
operations are not additive. That is, the
sum of the costs that each operation
would independently incur is greater
than the bank actually incurs because of
its ability to exploit economies of
offering diverse services. W here there
are customer tie-ins between services,
the cost of offering a package of services
can be less than the cost of providing
the same combination of services
separately.
Cognizant of these factors and the
difficulties involved with their accurate
measurement, the Board decided to
increase the effective tax rate to 34%.
This estimate of the effective tax rate
applicable to payments function
operations was obtained by calculating
the average effective tax rate on taxequivalent income for the sample of
twelve large banking organizations. The
higher effective tax rate caused the pre­
tax rate of return on equity to increase
to 22.7 percent (based on the updated
1980 costs) and thereby caused the

mark-up to increase by an additional 1,1
percentage points to 14.6 percent.
Underlying Capital Structure. The 12
percent mark-up was bas&d on a capital
structure midway between those
underlying the two alternative mark-ups
presented to the Board in August. The
capital structure underlying both
markups exhibited characteristics of the
capital structure of twelve large banking
organizations. The capital structure
consistent with the lower mark-up
replicated the average capital structure
of the sample. Therefore, it was
characterized by a very high proportion
of short-term debt (assumed to include
deposits) relative to the proportion of
long-term debt and equity. The capital
structure used to derive the higher mark­
up was composed only of long term debt
and equity. While not necessarily
inappropriate, it was not obvious that
the compromise capital structure would
change in a systematic fashion as the
composition of System assets devoted to
the provision of priced services changed.
The Board adopted an alternative
approach assuming that the System has
a “matched" capital structure. With
such a structure all of the System's
“long-lived” assets are assumed to be
financed with long-term debt and equity
and all of the System’s “short-lived”
assets are assumed to be financed with
short-term liabilities. Under this
approach, the assumed Federal Reserve
capital structure is dependent upon the
composition of the System’s assets
devoted to the provision of services.1
0
Compared to the capital structure
assumed in the August proposal, the
“matched” capital structure has a lower
proportion of short-term debt and a
higher proportion of long-term debt and
equity. By employing a "matched”
capital structure, updating the financing
costs to third quarter 1980, revising the
procedure used to compute the average
interest rate on short-term funds, and
increasing the effective tax rate, a
markup of 15.4 percent was generated.
The procedure involved in the
computation of the mark-up is presented
in Table 2. Recognizing the imprecision
inherent in any attempt to impute the
10Federal Reserve buildings, furniture, equipment
and other reel esta te w ere classified as “long-lived”
and assum ed to be financed by 30 percent long-term
debt and 70 percent equity. These percentages w ere
b ased upon 12 large banking organizations*
composition of long-term debt or equity as a percent
of long-term debt plus equity. Short-lived a ss e ts
(difference a n d suspense accounts, net, a n d
deferred charges] w ere assum ed to be totally
financed by short-term debt. With this approach,
the assum ed Federal Reserve capital structure
becom es 21 percent short-term debt, 24 percent
long-term debt, an d 55 percent equity. T able 1
provides more detailed information regarding the
System 's asse ts devoted to the provision of priced
services.

Federal Register / Vol. 48, No. 3 / Tuesday, January 8, 1981 / Notices
financing costs incurred and taxes paid
by private sector suppliers, the Board
rounded the private sector adjustment
factor up to 16 percent.1
1
Table 1.—Assets Employed in the Production
o f Priced Services1

Tabte 2,—The Calculation of the Private
Sector Adjustment factor—
Continued
[Dollars in miflions]
Percent

“Short-lived” assets:
Difference and suspense act.. Net1 .....................
Deferred charges*...................................................

$134.3
3.4

Total'*.....................................................................

Equity...........................................

55

158.0

Asset base..............................

[Dollars in millions, 1979]

100

284.9

Financing costs: 2
Short-term debt (at 10.44 percent)...............
Long-term debt (at 8.66 percent)..................
Equity (at 22.7 percent before taxes)..........

$6.2
5.8
35.9

Total assumed financing and tax ex­
penses...................................................
Cost of system services to be marked up....

47.9
310.7

Private sector adjustment factor (per­
cent) »
............................................................

15.4

137.7

“Long-toed" assets:
Bank premises, net..................... .......... .................
Furniture and equipment, net.................................
Other real estate......................................................

409.3
85.1
27.4

Total.......................................................................

521.8

Total assets......................................................................

659.5

Assets of priced services*: $659.5 (.432)

264.9

“Short-lived" assets................................................
“Long-lived” assets.................................................

59.5
225.4

‘ Source: Board of Governors of the Federal Reserve
System, Annual Report 1979.
•The Difference and Suspense Account, Net figure in
Table 1 is not equal to the net figure that can be computed
from data presented on pp. 308-9 ($181.9 million) of the
Annua/ Report for two reasons. First, the Annua! Report
figures refers only fb year-end 1979. Since this value fluctu­
ates month to month over the year, an average ol the 12
month-end figures over 1979 (giving $292.0 million) was
used. Second, the figure reported in Tabie 1 incorporates the
estimated impact of a r important accounting change made In
1980 This accounting change transferred some 54% Of the
nei Difference and Suspense Account value to check float,
where it more property belongs This 54% figure is based
upon the average of check suspense items (net) to total
suspense items (net) for Ihe frst three months o1 1 980 at ait
Reserve Banks. Thus, the Difference and Suspense Account,
net figure.shown in the Table was computed as $134.3
million » (1 - .54) $292.0 miHion.
‘ Deferred Charges are not separately reported in the
Annual Report, but are included in the "AM Other” figure on
p. 308.
*
A preliminary fee schedule for check and ACH services
was forwarded to Congress in November 1978. At that time
“Overdrafts'' were included among the System assets to be
financed. They are no longer treated in that manner because
an institution incurring an overdraft can be required to
maintain excess balances equal to the amount of the over­
draft in the subsequent period in addition to being penalized
at a rate of ten percent Therefore such overdrafts are, in
e ffe ct “ setl-financing' .
‘ Those assets which could be explicitly identified as
st^pportjng a nonpriced service are not included in Table 1.
Other assets which supported both priced and nonpriced
services required different treatment. The cost of priced
services (less shipping expenses) represented 43.2% of total
System costs (less note issue and shipping expenses). This
ratio is applied to the total asset base of $659.5 million
(which supports both priced and nonpriced services) to
determine the value of assets ahocabte to the priced serv­
ices atone. Shipping and note issue expenses represent
"passed through private sector or U.S. Treasury costs and
are excluded from the ratio since little or no Federal Reserve
assets are involved in their production.

Tabte 2.—The Calculation of the Private
Sector Adjustment factor
[Dollars in millions]
Percent
Capital structure: 1
Short-term debt..........................
Long-term debt...........................

21
24

$59.5
67.4

“ The Board rejected a mark-up of 20 percent th at
w as based on bank service corporations’ average
cost of capital. Although several com m entators
a d vo cated Ihe adoption of such a m odel, d a ta w ere
a vailable only for relatively small firms a n d these
did not offer a mix of services com parable to that
offered either by the Federal Reserve or large
c orrespondent banks. A disproportionately large
share of the processing performed b y the firms in
the sam ple involved local checks affd the
p reparation of accounting statem ents a s opposed to
a w ide range of paym ents services of a local and
nonlocal nature.

1Using the "m atched" capital structure, it is assumed that
all "short-toed” assets (valued at $59.5 miHion in Tabie 1)
are financed exclusively with short-term debt and that all
"long-lived" assets (valued at $225.4 minion in Table 1) are
financed with a combination of long-terni debt and equity.
The particular combination used. 30% long-term debt and
70% equity, was Ihe average ratio of Fong-term debi to long­
term debt plus equity for 1979 as well as the five year period
from 1975 through 1979 for 12 large banking organizations.
*During the first 9 months of 1980 the 12 large benking
organizations sampled paid an estimated average effective
short-term interest rate of 10 44% and an average long-term
interest rate of 8.6% Their average after tax rate of return
on equity was 15.0%. The 34% effective tax rate was
derived using year-end 1979 data due to the absence of an
allocation of the tax liability into cunent and deferred catego­
ries and the absence of a report of the tax benefits derived
from holdings of State and local securities in the financial
reports for me third quarter of 1960. Using the 34% effective
tax rate, an average pre-tax rate of return on equity of
22.7% was computed.
3The PSAF = (47.9/310.7) x 100. The average pre-tax cost
Of
capital
iB
.21(10.44%)
-f24(8.66% )
+
.55(22.7%) = 16.8%.

Appendix II—Service Descriptions
A . W ire Transfer o f R eserve A ccount
Balances Service
Wire transfer services provide for the
immediate movement of funds between
any two depository institutions which
maintain accounts with the Federal
Reserve.
Five levels of services are available:
(1) on-line origination of a transfer
without telephone advice (notification)
to the receiver, (2) on-line origination of
a transfer with telephone advice to the
receiver, (3) off-line origination without
telephone advice to the receiver, (4) off­
line origination with telephone advice to
the receiver and (5) off-line receiver
requesting telephone advice where none
has been requested by the originator.
The most common wire transfer
transaction is originated from an on-line
terminal or computer at a depository
institution and processed through the
Federal Reserve's automated
communication facilities with immediate
settlement and transmission of an
advice to the receiving depository
institution's on-line terminal or
computer. Off-line origination of a
transfer allows depository institutions
without on-line facilities to initiate wire
transfers by telephone request to a
Federal Reserve office. Except for
initiation by telephone, off-line wire
transfers are processed in the same

1347

manner as on-line transactions.
Telephone notification to an off-line
receiver provides information
concerning funds credited to their
accounts earlier than would otherwise
occur.
The originator will be charged for the
wire transfer services including a fee for
telephone advice to an off-line receiver
if requested by the originator. If the
receiver has instructed the Reserve
Bank office to provide telephone advice
when none has been requested by the
originator, the off-line receiver will be
charged for the telephone advice. If the
originator requests that telephone
advice be provided to a receiver and the
receiver has a standing order, the
originator will be charged not the
receiver.
B. N et Settlem ent Service
The net settlement service is the
posting of debit and credit advices
generated by a third party to accounts
held on the books of the Federal
Reserve.12The third party is typically a
provider of financial services to
depository institutions (e.g., a private
sector clearing house, credit card
associations, funds transfer system, etc.)
who normally processes a large number
of transactions among its member
institutions. In addition to sorting,
delivering or communicating data, the
third-party maintains records of these
transactions. At the end of a business
day, the third party sums all
transactions for each institution and
delivers or transmits to the Federal
Reserve the entries to effect settlement
among the participating institutions.
Charges for the net settlement service
will be calculated based on the number
of entries in each settlement and will be
levied against either the third party
ordering the settlement or each
institution participating in the
settlement.
C. A utom ated Clearing H ouse Services
The ACH service is the clearing,
settling and delivery of electronic
payments. Fees for automated clearing
house (ACH) service reflect costs based
on an expected mature volume and are
applicable at all Federal Reserve
operated clearing and settlement
facilities. These fees include receiving
sorting, reconciling, settling and delivery
of both debit and credit ACH
transactions. The fee for the Federal
Reserve Bank of New York reflects the
local ACH processing done by the
12Gross settlem ent, that is, the posting of deb its
and credits associated w ith the direct use o f other
Federal Reserve services, is not charged for
separately since its cost is of necessity included in
the fee for each service.

1348

Federal Register / Vol. 46, No. 3 / Tuesday, January 6, 1981 / Notices

private sector with only settlement and
transportation provided by the Federal
Reserve.
1. Intra-ACH transactions
Intra-ACH transactions are processed
by only one Federal Reserve Bank ACH
facility.
2. Inter-ACH transactions
Inter-ACH transactions are processed
by at least two facilities.
|FR Doc. 81-278 Filed 1-5-81; 8:45 am|

BILLING CODE S210-01-M


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102