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FEDERA L RESERVE BANK OF DALLAS

DALLAS, TEXAS

75222
Circular No. 83-66
May 13, 1983

PROCEDURES TO REDUCE AND/OR PRICE FLOAT
TO ALL DEPOSITORY INSTITUTIONS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
In March 1983, the Federal Reserve Board approved a program to
reduce and to price Federal Reserve interterritory check float and check holdover
float. The Board has now approved a program to eliminate or price the remaining
categories of Federal Reserve check float.
The Board has decided to recover float on interterritory return items
by deferring credit on such items for one day. This means that credit for unpaid
items being returned to an endorser in another Reserve office territory will be
deferred one day rather than immediate credit being granted as is the current
practice. This procedure will be implemented in August 1983.
In reference to float associated with midweek closings and nonstandard
holidays, the Board has decided to eliminate or price this float, beginning in
October 1983, by giving Reserve Banks three options:
1.

Modify availability schedules for depositors.

2.

Modify current practice of posting funds received for the
of the institution on the day the institution is closed.

3.

Price the float by including its value in the check collection
service.

account

Intraterritory transportation float and other categories of check float
will be recovered by adding these float costs to the cost of the Federal Reserve’s
check collection service. The addition of these costs to the check collection
service will begin in October 1983.
Details of these programs are explained in the attached text of the
Board’s press release and Federal Register notice. Questions concerning these
changes may be directed to Donald L. Jackson, (214) 651-6118 at the Head Office;
Robert W. Schultz, (915) 544-4730 at the El Paso Branch; Vernon L. Bartee,
(713) 659-4433 at the Houston Branch; or John A. Bullock, (512) 224-2141 at the
San Antonio Branch.
Additional copies of this circular will be furnished upon request to the
Public Affairs Department, Extension 6289.
Sincerely yours,

William H. Wallace
First Vice President
Banks and others are encouraged to use the follow ing incom ing WATS numbers in con tacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

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

'STEM

FEDERAL RESERVE press release
■ f'W RE^f*

For immediate release

May 4, 1983

The Federal Reserve Board has approved procedures to eliminate
or price the remaining categories of Federal Reserve check float.

This type

of float is the value of checks for which the Federal Reserve has given
credit to the institution that deposited the checks for collection, but for
which the Federal Reserve has not yet received payment.
The Board acted under the Monetary Control Act of 1980, which
requires the System to reduce and price remaining Federal Reserve float.
The B o a r d ’s approval of these procedures is the latest in a series of actions
to fulfill these requirements.
In November 1982,

the Board requested public comment on a proposal

to charge depository institutions for large

($50,000 or more)

interterritory

returned checks as a result of a wire notification from the returning Federal
Reserve office.

Interterritory returned checks cause Federal Reserve float

because Reserve Banks are unable to debit immediately the original depositing
institution’s account for the returned checks.
After reviewing comment received,
the proposal.

As suggested by commentors,

the Board decided not to adopt

the Board deferred credit

for interterritory returned items for one day.

This one-day deferral of

credit will eliminate $130 million of interterritory return-item float.

This

procedure will be implemented in August 1983 to provide Reserve Banks and de­

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pository institutions sufficient time to make necessary operational changes.
In April 1982, the Board proposed an amendment to Regulation J to
require paying banks to pay for checks delivered or made available to them on
days the paying banks are closed and on which the Reserve Bank is open.

Such

days consist of midweek closing days— regular weekdays on which a depository
institution closes as permitted by state law— and nonstandard holidays— days
on which the paying bank is closed because of a state or local holiday.
In response to comment received,
posed amendment at this time.

the Board did not adopt the pro­

As an alternative, the Board decided to eliminate

or price float arising from midweek closings and nonstandard holidays, beginning
in October 1983,. by giving Reserve Banks three options to deal with such float.
The three options are:
—

a Reserve Bank could modify its availability schedule
for local depositors so that credit for checks drawn
on closed institutions would be deferred an additional
day.

—

a Reserve Bank could modify its current practice of
posting funds received for the account of the insti­
tution on the day the institution is closed.

—

Reserve Banks could price all or any remaining float
arising from midweek closings or nonstandard holidays
by including the value of such float in the cost of the
Federal Reserve's check collection service.

The Board also had requested comment in November 1982 on proposals
to price intraterritory transportation float and the other remaining categories
of check float.

The Board has approved the proposals to price these categories

of check float by adding the cost of such float to the cost of the check collec­
tion service.

The addition of these costs to the costs of the check collection

service will begin in October 1983.

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With the implementation of these procedures, all Federal Reserve
check float arising from the provision of check collection services to de­
pository institutions will be eliminated or priced.
The B oard’s notice is attached.

-

Attachment

0-

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FEDERAL RESERVE SYSTEM
[Docket Nos. R-0392, 0433]
Reduction and Pricing of Federal Reserve Float

AGENCY:
ACTION:
float.

Board of Governors of the Federal Reserve System.
Approval of proposals

to reduce and

price

Federal

Reserve

check

SUMMARY:
The Board of Governors has approved procedures to eliminate and
price Federal Reserve check float.
A substantial portion of float arising
from interterritory returned checks will be eliminated by deferring credit
for these returned checks by one day.
Other check float will be eliminated
or priced.
With the implementation of these procedures, all Federal Reserve
float arising from the provision of check collection services to depository
institutions will be eliminated or priced.
EFFECTIVE DATE:
August 1, 1983.
On that date, Reserve Banks will change
availability schedules for interterritory returned checks.
The other
procedures will be implemented on October 1, 1983.
FOR FURTHER INFORMATION CONTACT:
Elliott C. McEntee, Assistant Director
(202/452-2231) or Morgan J. Hallmon, Program Manager, Payments Mechanism
Planning (202/452-3878), Division of Federal Reserve Bank Operations;
Gilbert
T.
Schwartz,
Associate
General
Counsel
(202/452-3625),
Daniel L. Rhoads, Attorney (202/452-3711), or Robert G. Ballen, Attorney,
(202/452-3265), Legal Division, Board of Governors of the Federal Reserve
System, Washington, D. C.
20551.
SUPPLEMENTARY INFORMATION:
The Monetary Control Act of 1980 (P. L. 96-221)
("MCA") requires that fees be established for Federal Reserve Bank
services.
The MCA requires that the Federal Reserve price for Federal
Reserve float that remains after operational means to reduce float are
implemented.1/
On December 31, 1980, the Board determined, in response to comments
received on the Board's proposals to reduce and price float (45 F.R. 58689),
to proceed with internal operational improvements to reduce float.

!7l26 C o ng . R e c .
Senator Proxmire).

S3167

(daily

ed.

March 27,

1980)

(statement

of

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As a method of eliminating a portion of Federal Reserve check
float, the Board requested comment in April 1982 on a proposed amendment to
Regulation J to require a depository institution to pay for checks made
available to it by a Reserve Bank on a weekday that is a banking day for the
Reserve Bank even if the institution is closed on a regular basis during the
business week ("midweek closings").
Comment was also requested on whether
this procedure should apply to checks made available to institutions that
are closed on state or local holidays by Reserve Banks that are open on such
days ("non-standard holidays").
47 F.R. 15349, (April 9, 1982).
The Board also requested comment in November 1982 on a proposal to
charge a depository institution that deposits an interterritory check of
$50,000 or more based on a wire notification by the Reserve Bank when that
check is returned.
Comment was also requested on proposals to price
holdover check float, intraterritory check transportation float, and other
categories of check float as well as interterritory check float.
47 F.R.
50342 (November 5, 1982).
On March 8, 1983, the Board announced a program to reduce and/or
price interterritory check float and check holdover float.
48 F.R. 10753
(March 14, 1983).
Under this program, depository institutions would be
offered two crediting options to reduce interterritory check float and three
methods for paying for remaining interterritory check float.
Additionally,
the Board approved pricing of check holdover float over a six month period
by incorporating the value of this float in the cost of check services to be
recovered in 1983.
The Board has now adopted procedures to reduce and/or
price the remaining categories of Federal Reserve float arising from the
provision of check collection services to depository institutions.
Return Item Float
Float associated with interterritory returned items amounted to
$150 million on a daily average basis in 1982.
This float arises because
current System procedures specify that payor institutions receive immediate
credit for returned items.
Reserve Banks, however, are operationally unable
to debit immediately the original depositing institution's account for
returned items drawn on an institution located in another Federal Reserve
territory.
In order to reduce the float associated with such interterritory
returned items, the Board requested public comment in November 1982 on a
proposal to charge the depositing institution's account for large
interterritory returned items ($50,000 or more) based on receipt of a wire
notification from the returning Federal Reserve office.
As an alternative
to having the institution's account debited immediately, the Board proposed
that a depository institution could compensate for such return item float
through an "as of" adjustment to its account.

The Board received 144 comments on the return itera float proposal.
A substantial number of commenters (68) expressed support for the proposal.
However, a number of commenters, including many who supported the proposal,
raised legal concerns regarding the proposal.
These concerns included:
(1) the impact of the proposal on the midnight deadline for returned items;
(2) whether a Reserve Bank has authority to charge an institution's account
based upon a wire notification; (3) the authority of a depository
institution to charge its customer's account prior to receipt of the
physical item; (4) the depository institution's liability for errors in
account entries, including the possibility of charging an account twice for
the same return or charging an account improperly, which may result in
subsequent wrongful dishonors; and (5) the Federal Reserve's lack of
liability for transmission of erroneous payment data.
In addition, a large
number of commenters also cited considerable operational difficulties such
as reconciling the wire notification with the paper return.
Many commenters suggested that the Federal Reserve consider
alternative methods of recovering return item float.
Twenty eommenters
suggested that return item float be bandied through a modification to the
Federal Reserve's availability schedules.
Cotnmenters suggesting this
deferred availability approach generally stated their belief that such an
approach would more equitably assign float costs associated with returned
items by placing the burden of this cost on the institutions that are
returning the items and their customers.
Sorse commenters suggested that the
Federal Reserve impose an explicit fee for returned items, which would also
cover the float costs.
The Board believes that the cotnmenters raised legal and operational
issues with respect to the proposal that cannot be resolved in a cost
effective manner.
Further, since the proposal would have applied only to
large dollar returned items, procedures for pricing remaining return item
float would still have to be developed.
The Board has therefore decided not
to adopt the proposal regarding interterritory return item float.
Further,
the Board does not believe that adoption of an explicit fee for returned
items as suggested in some of the comments is appropriate at this time since
the System is conducting pilot programs in the Dallas and Kansas City
Districts to determine the effectiveness of return item pricing.
After consideration of the comments received and further analysis,
the Board has decided to adopt an alternative suggested by the commenters.
Under this approach, credit for interterritory returned items would be
deferred one day.
This deferral of credit on interterritory returned items

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would eliminate $130 million of return item f l o a t . 2/ 3 /
Deferring credit
by one day for interterritory returned items will be implemented in August
1983 in order to provide Reserve Banks and depository institutions
sufficient time to make operational c h a n g e s . 4 /
Since this procedure may
affect local clearinghouses that require immediate credit for returned
items, Reserve Banks will consult with local clearinghouses to assure
orderly implementation of the procedures.
Midweek Closings and Nonstandard Holidays
In April 1982, the Board requested public comment on a proposal to
amend Regulation J to require a depository institution to pay for checks
delivered or made available to it on days the institution is closed and on
which the Reserve Bank is open.
Such days consist of "midweek closing
days"— regular weekdays on which a depository institution closes as
permitted by state law and "nonstandard holidays"— days on which the paying
institution is closed because of a state or local holiday.
The proposal was
intended to eliminate the float that results from granting credit’ to the
depositor for checks that could not be charged to the closed paying
institution.
Float resulting from midweek closings was approximately
$160 million,
and
float
resulting
from nonstandard holidays was
approximately $100 million on a daily average basis in 1982.
A total of 150 comments were received on the issue of midweek
closings; 59 commenters favored the proposal, and 91 were opposed.
Most of
those opposed were small institutions and their trade associations.
These
commenters opposed the proposal because they believed that it was unfair to

.£/Some commenters suggested that credit for interterritory returned items
be provided based upon a fixed availability schedule depending upon the
location of the depositing bank.
The Board does not believe that such a
schedule is necessary or appropriate since most returned items are delivered
to the depositing bank's Federal Reserve office within one day.

A / The remaining $20 million of return item float arises
other reasons,
the depositing
the wrong payor.
other holdover
check collection

including when a
institution on a
This "holdover"
float, that is,
service.

Reserve Bank is
timely basis or
float will be
the value is to

from a variety of
unable to return the item to
when it has sent the item to
priced in the same manner as
be added to the cost of the

4/This one-day deferral generally would apply to interterritory and
intraterritory returned
items
that are
commingled.
However,
if
intraterritory returned items are separated by the paying bank, credit for
such items would not be deferred since the items can be returned to the
depositing bank the same day and no Federal Reserve float would be created.
Reserve Banks that are able to process commingled returns in a timely
fashion could give immediate credit for such intraterritory returned items
when no Federal Reserve float would arise from such a practice.

require depository institutions to pay for checks when they are closed as
permitted by state law.
The commenters also stated that the proposal would
make it difficult and more expensive for them to manage their cash positions.
Those in favor of the proposal generally indicated that it is an
equitable way of eliminating float.
Institutions that are the source of the
float would be most immediately affected by the proposal.
These commenters
also indicated that the proposal would eliminate the advantages these closed
institutions may have in not having to bear the cost of such float directly.
A total of 82 comments were received on the issue of nonstandard
holidays.
Of these, 19 were in favor of the proposal, and 63 were opposed.
Those opposed indicated that bank holidays are mandated by state law and it
would be unfair to penalize banks for acting in accordance with state law;
it is inequitable to charge banks that are closed on nonstandard holidays
when Reserve Banks themselves do not follow a uniform holiday schedule; and
the proposal would make it more difficult and expensive for depository
institutions to manage their cash positions.
The Board believes the comments on both midweek closings and
nonstandard holidays raise significant issues.
The major impact of the
midweek closing proposal would be on small institutions in small communities
that are closed during the week.
In some areas the practice has been
widespread for many years.
For example, it is reported that over 70 percent
of the banks in western Tennessee close during the week.
Such institutions
typically prefer to open on Saturdays as a convenience to customers that are
unable to do their banking business during the week.
Adoption of the
proposal could also have a significant effect upon the operations of some
small institutions, particularly since they would be unable to debit their
customers accounts until the following day.
In addition, there is little
evidence to suggest that the bulk of these institutions are closed in order
to avoid paying for checks or to create Federal Reserve float.
Further,
depository institutions closed on nonstandard holidays generally do not have
the opportunity to remain open.
Therefore, the Board has determined not to
adopt the proposed amendment to Regulation J at this time.
The Board believes, however, that it is necessary to adopt
procedures to eliminate or price this float as required by the MCA.
Therefore, Reserve Banks will have three options to deal with float arising
from midweek closings and nonstandard holidays.
First, a Reserve Bank could
modify its availability schedule for local depositors so that credit for
checks drawn on closed institutions would be deferred one additional
d a y .5/
Second, a Reserve Bank could modify its current practice of
posting funds received for the account of the institution on the day the

1/lt would be operationally infeasible for Reserve Banks to delay credit
on interterritory checks drawn on closed banks because each Reserve Bank
would be required to keep track of every bank in the country that is closed.

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institution is closed.
A one day deferral of credits received on the day
the institution is closed would
offset some of the
float arising from
midweek
closings and nonstandard holidays.
Finally, Reserve Banks could
price all or any remaining float arising from midweek closings or
nonstandard holidays in the same manner as holdover float.
The value of
this float would be added to the cost of the check collection service.
The Board intends to monitor float associated with midweek closings
to determine whether it is increasing to any significant extent.
If a
pattern
develops, the Board may reconsider the proposed amendment to
Regulation J.
Intraterritory Transportation Float
In November
1982,
it
was
proposed
that
intraterritory
transportation float be priced in the same manner as holdover float.
Intraterritory transportation float results primarily from the inability of
a Federal Reserve office to make presentment of checks to payor institutions
as a result of transportation delays.
The few commenters expressing views
specifically on this proposal generally were opposed to charging at all for
float that arises from conditions beyond the control of depository
institutions.
Other commenters argued that pricing of intraterritory
transportation float in this manner would not provide Reserve Banks with an
incentive to operate efficiently.
The MCA requires that all Federal Reserve float arising from the
provision of priced services to depository institutions be priced.
Because
of the operational difficulty of allocating intraterritory transportation
float back to specific depository institutions and in view of the small
amount of float involved ($110 million), it would also be inefficient to
attempt to trace the float to individual depositors.
Accordingly, the Board
believes that the value of such float should be added to the cost of the
check collection service.
Reserve Bank performance will continue to be
monitored to ensure that intraterritory transportation float is kept to a
minimum and that Reserve Banks continue to operate efficiently.
All Other Check Float
Only a small amount ($40 million) of check float will remain after
implementation of the above procedures.
This remaining check float arises
primarily from adjustments to the accounts of depository institutions
because of Federal Reserve accounting errors and from the handling of
government agency deposits at Reserve Banks.
The amount of float arising
from adjustments is relatively small ($30 million) and it would not be cost
effective to charge the float to particular depository institutions.
The
Board therefore believes it appropriate to add the value of this float to
the cost of the check collection service.

The Board also believes that it is inappropriate to charge
depository institutions for float arising from deposits by government
agencies ($10 million) since such float does not arise from the provision of
priced services to depository institutions.
Indeed, since such float arises
from the provision of services to government agencies, it is not necessary
to price such float under the Monetary Control Act.
Accordingly, the value
of this float will be attributed to such government agencies.
Implementation Schedule
The one day deferral of credit for interterritory returned items
will be implemented on August 1, 1983, in order to provide Reserve Banks and
depository institutions sufficient time to make the appropriate operational
adjus tments.
Virtually all other categories of check float will be priced by
adding the value of the float to the cost of the check collection «ervice.
Any necessary adjustments to fee schedules will be implemented beginning in
October, 1983, thus providing Reserve Banks with an opportunity to implement
operational adjustments designed to reduce float further and to put into
place and test the systems necessary to implement the adopted procedures.
An October 1983 implementation date also will enable Reserve Banks to
coordinate these change with modifications to fees that may result from the
comprehensive review of their fee schedules planned for this summer.
The
Board believes that piecemeal adjustments to fee schedules at an earlier
time could be disruptive to depository institutions that take Federal
Reserve fee schedules into account in their planning and operations.
After
implementation of these procedures, all Federal Reserve float arising from
the provision of check collection services to depository institutions will
have been eliminated or priced in accordance with the Monetary Control Act
of 1980.
By order of the Board of Governors of the Federal
May 3, 1983.
(signed) James McAfee

Reserve System,

James McAfee
Associate Secretary of the Board

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