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F ederal R eser v e Bank OF DALLAS TONY F IR S T J . S A L V A G G IO vice P R E S ID E N T June 18, 1993 DALLAS, TEXAS 7 5 2 2 2 Notice 93-66 TO: The Chief Operating O f f i c e r of each f i n a n c i a l i n s t i t u t i o n in the Eleventh Federal Reserve D i s t r i c t SUBJECT Adoption of New and Enhanced Federal Reserve Bank Check Services DETAILS The Federal Reserve Board has announced adoption o f new and enhanced Federal Reserve Bank s e r v i c e s to f a c i l i t a t e implementation o f same-day s e t t l e m e n t o f checks. The s e r v i c e s l i s t e d below w il l be implemented by each Federal Reserve Bank. A n o t i c e w il l be s e n t announcing th e a v a i l a b i l i t y o f t h e s e s e r v i c e s w it h in th e Eleventh D i s t r i c t . • Primary and a l t e r n a t e presentment p o in t s e r v i c e s f o r payor banks; • Supplementary payor bank infor ma tion s e r v i c e s f o r checks not c o l l e c t e d through th e Reserve Banks; and • A new Fedwire product code to f a c i l i t a t e s e t t l e m e n t f o r checks p r e s e n te d t o payor banks d i r e c t l y by p r i v a t e - s e c t o r banks. The new Fedwire product code w il l not be a v a i l a b l e f o r use u n t i l Janua ry 3, 1994. The s e r v i c e s are designed t o f a c i l i t a t e a paying bank’ s r e s p o n s i b i l i t y t o s e t t l e f o r checks p re s en te d by p r i v a t e - s e c t o r p r e s e n t i n g banks and to enable paying banks to c on tin u e t o provide ti m e ly cash management infor mation t o t h e i r c o r p o r a t e customers. The fe e s t r u c t u r e s f o r th e presentment p o i n t and infor ma tion s e r v i c e s in c lu d e v a r i a b l e fe e s per d e p o s i t o r s u b j e c t to a d a i l y minimum. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - ATTACHMENTS A copy o f t h e Board’ s n o t i c e as i t appears on pages 31525-32, Vol. 58, No. 105, o f t h e Federal R e g i s t e r dated June 3, 1993, i s a t t a c h e d . Ad di tio n a l documentation e x p l a i n i n g th e same-day s e t t l e m e n t s e r v i c e s is also attached. MORE INFORMATION For more in fo r m a ti o n , p l e a s e c o n t a c t Terry Campbell, (214) 922-6603, a t t h e D a ll a s O f f i c e ; E l o is e Guinn, (915) 521-8201, a t th e El Paso Branch; Luke R ic har ds, (713) 652-1544, a t th e Houston Branch; or Herb Barbee, (210) 978-1402, a t t h e San Antonio Branch. For a d d i t i o n a l c op ie s o f t h i s Bank’ s n o t i c e , p le a s e c o n t a c t th e Pu bli c A f f a i r s Department a t (214) 922-5254. Sincerely, Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices 31525 FEDERAL RESERVE SYSTEM Federal Reserve Bank Services [ D o c k * N o. R -0 7 2 7 ] Board of Governors of the Federal Reserve System. ACTION: Notice. AGENCY: The Board has approved new Federal Reserve Bank services related to checks not collected through the Federal Reserve Banks and enhancements to the Federal Reserve Banks’ funds transfer service. The services are designed to facilitate a paying bank’s responsibility to settle for checks presented by privatesector presenting banks and to enable paying banks to continue to provide timely cash management information to their corporate customers. Specifically, the Board has approved presentment point services that could increase the efficiency of making private-sector presentments, payor bank services for checks not collected through the Reserve Banks, and a new Fedwire product code to facilitate settlement for checks presented by private-sector banks. The Board has not approved development of a Federal Reserve Bank bilateral settlement service because other settlement mechanisms adequately meet the needs of paying banks and presenting banks. DATES: The information in this notice is effective as of May 26,1993. SUMMARY: FOR FURTHER INFORMATION CONTACT: Florence M. Young, Assistant Director (202/452-2745) or Thomas C. Luck, Senior Financial Services Analyst (202/ 452-3935), Division of Reserve Bank Operations and Payment Systems. For the Hearing impaired only: Telecommunication Device for the Deaf, Dorothea Thompson (202/452-3544). 31526 Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices SUPPLEMENTARY INFORMATION: Background The Federal Reserve Banks currently provide a variety of services to banks,1 including check collection and net settlement services. The Federal Reserve Banks assess fees to banks using their services. In March 1991, the Board proposed new and enhanced services that the Federal Reserve Banks could offer in light of the same-day settlement rule that the Board had proposed in January 1991 (56 FR 10429, March 12, 1991). On September 30, 1992, the Board approved amendments to Regulation CC that provide for same-day settlement by paying banks for checks presented by private-sector banks (57 FR 46956, October 14,1992). Under the same-day settlement rule, a paying bank is required to settle for checks presented by private-sector banks on the day of presentment, if specified conditions are met. The amendments provide an 8 a.m. (local time at the place of presentment) presentment deadline for same-day settlement. A check would qualify for same-day settlement if it were presented at a location designated by the paying bank that is consistent with the check processing region associated with the routing number encoded on the check. Under ths amendments, if a bank presents a check in accordance with the time and location requirements for same-day settlement, the paying bank either must settle for the check on the business day it receives the check without charging a presentment fee or must return the check prior to the time for settlement. The settlement must be in the form of a credit to the presenting bank’s account (or the account of a correspondent settlement agent) at a Federal Reserve Bank. Regulation CC permits banks to vary provisions of the regulation by agreement. Thus, a paying bank could agree with a presenting bank to accept checks for same-day settlement at a presentment deadline other than 8 a.m., or a presenting bank may accept settlement in another form agreeable to it. Summary The Board proposed that the Reserve Banks offer several new or enhanced services to facilitate the implementation of the same-day settlement rule. The 1Regulation CC (12 CFR part 229) defines bank to include all depository institutions—commercial banks, savings institutions, and credit unions. A paying bank is a bank, by, at, or through which a check is payable and to which it is sent for payment or collection. The Uniform Commercial Code defines presenting bank as a bank, other than the paying bank, that presents a check. proposal included offering (1) a presentment point service under which a paying bank could designate its local Federal Reserve office as a presentment point for checks presented to it by a private-sector bank, and (2) information services to payor banks that would provide data on checks that are not collected through the Federal Reserve. The Board also proposed that the Reserve Banks make certain enhancements to the Fedwire format to enable banks to identify, on an automated basis, those funds transfers related to settlement for check presentments and associated adjustment activity. Further, the Board requested comment on whether the Federal Reserve Banks should offer a new bilateral settlement service. The Board received 58 comments in response to the proposed services to be offered by the Federal Reserve Banks in a same-day settlement environment.2 The breakdown of commenters is: Commenter Count Commercial Banks/BHCs................ Savings Banks................................ Credit Unions.................................. Trade Associations.......................... Clearing Houses............................. Miscellaneous................................. 36 7 5 4 3 3 Total ........................................ 58 The majority of the commenters supported the Federal Reserve’s proposed presentment point service and information services for payor banks. Most commenters also favored the proposed enhancement of the Fedwire format. On the other hand, most commenters indicated that a bilateral settlement service would not be utilized because it was perceived to be cumbersome and costly. Commenters stated that other existing settlement options, including the enhanced Fedwire service, would be adequate to enable paying banks to settle timely for checks presented by private-sector banks. The Board approved the Federal Reserve Banks’ offering presentment point services and certain electronic information services related to checks not collected through the Federal Reserve. These new services are intended to provide an alternate location at which a paying bank may receive check presentments and to facilitate a paying bank’s continued ability to provide timely cash management information to its corporate customers. The Board also 2Two Reserve Banks submitted comments on the Board's proposal. Those comments were not included in the analysis of public comments. approved a new Fedwire product code to facilitate payments and requests for payment for checks presented by private-sector banks under the same-day settlement rule. Because of the high cost and lack of interest from banks, the Board has decided not to implement a Federal Reserve bilateral settlement service for checks presented by privatesector presenting banks. Following is a summary of the comments received on the proposed services, other issues raised by respondents, and a description of the services that the Board approved. New Federal Reserve Services Presentment Point Service. The Board proposed that the Federal Reserve Banks offer a new service under which a paying bank could designate its local Federal Reserve office as a presentment point for same-day settlement checks presented to the paying bank by a private-sector bank. The proposed new service would allow a private-sector presenting bank to deliver checks to the paying bank’s local Federal Reserve office for subsequent pick-up by the paying bank. Under the proposal, presentment of checks would occur at the time the Federal Reserve office received the checks. The paying bank would be responsible for settling with the presenting bank for the checks. The presentment point service, as originally proposed, would have required paying banks to negotiate agreements with presenting banks to designate the paying bank’s local Federal Reserve office as an alternate presentment location. The Board received 53 comments on the proposed presentment point service. While some commenters stated that they would not need such a service, the majority of commenters supported the Federal Reserve’s offering a presentment point service. Many commenters indicated that a paying bank should have the right to designate the place of presentment for its checks. Some commenters indicated that demand for the proposed service would be greater if a paying bank could unilaterally designate the Federal Reserve office as its place of presentment. This position was supported by several commenters who believed that smaller paying banks may find the service beneficial. On the other hand, one commenter stated that the presentment point service would not be beneficial to community banks. In addition, several commenters stated that the service would not appeal to banks that were members of clearinghouse arrangements. The Board believes that some banks would consider designating a Federal Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices Reserve office as the exclusive location for same-day settlement presentments (i.e., the "primary” presentment point). In adopting the same-day settlement rule, the Board approved provisions that allow a paying bank to designate a location, including its local Federal Reserve office, as a presentment point. Thus, if a paying bank designates its Federal Reserve office as a presentment point for same-day settlement checks, any presenting bank must present such checks at that location to qualify for same-day settlement and may also present other checks (i.e., not for sameday settlement) drawn on the paying bank at that location as well. Under the Uniform Commercial Code (UCC), presentments to a designated presentment point may be made by a private-sector presenting bank until the paying bank’s cut-off hour, which is normally 2 p.m. local time. Thus, checks presented after 8 a.m. local time but before the UCC cut-off hour would be subject to the settlement and return provisions of the UCC.3 Of particular concern to a paying bank would be the provisions regarding the time-frame within which checks presented after 8 a.m. must be returned. Because some paying banks may prefer to receive checks that are presented after the sameday settlement deadline at their own facilities, or may wish to vary the sameday settlement rule with certain presenting banks, the Reserve Banks have developed an alternate presentment point service, which would be offered in addition to the primary presentment point service. Under this service, a paying bank would agree with a presenting bank that checks delivered to a particular Federal Reserve office— either the paying bank’s local Reserve office or another Reserve office—would constitute presentment. In such an arrangement, the agreement between the paying bank and the presenting bank would establish, among other things, the time and terms of presentment, settlement arrangements, and the handling of returned checks.4 5 The pre-1990 version of the UCC. In effect In most states, permits settlement for checks by cash, or, if accepted by the presenting bank, by credit to a Federal Reserve or correspondent account or by a remittance draft. The 1990 version permits settlement by cash or credit to a Federal Reserve account as well as other means accepted by the presenting bank. The time of settlement under the UCC is midnight on the day of presentment, rather than the close of Fedwire as provided for same-day settlement checks. 4 A paying bank that uses the Federal Reserve’s alternate presentment point service could also designate another location as its "primary” presentment point for same-day settlement for those presenting banks with whom the paying bank does not have an agreement. If the paying bank does not designate a "prim ary" presentment point, those To facilitate use of the two presentment point services by paying banks, the Reserve Banks developed an optional, enhanced service that would provide information on checks that are delivered to Federal Reserve offices. The information provided to the paying bank would include the identification of the collecting bank, the amount of the checks, and the time the checks were received at the Federal Reserve office. The Board approved the Federal Reserve Banks’ offering two new services, a primary presentment point service and an alternate presentment point service, under which a paying bank could designate its local Federal Reserve office—or, in the case of the alternate presentment point service, agree with presenting banks on any Federal Reserve office—as a place of presentment for checks presented by a private-sector presenting bank. The Board also approved an optional service that could be used in conjunction with the presentment point services that would provide information on checks that are presented at a Federal Reserve office. Some commenters believed that standards should be established for banks using the Federal Reserve's presentment point service. The Board considered the need for standards for checks presented by private-sector presenting banks in adopting the sameday settlement rule. The Board concluded that presenting banks and paying banks could address these issues more effectively within the context of the good faith standard. To use the primary presentment point servico, a paying bank must enter into an agreement with its local Federal Reserve office. The Reserve office will accept cash letters from presenting banks, time-stamp the incoming deliveries, provide verification of receipt to the delivering agent, physically control the cash letters, and provide verification of the time of receipt to the paying bank or its designated agent. The Federal Reserve office will incur no liability or accountability for the checks other than that associated with its duty to exercise ordinary care while the checks are in the possession of the Federal Reserve office. Presenting banks must package and label separately all same-day settlement cash letters presented at Federal Reserve offices to distinguish them from other checks being deposited for collection presenting banks with whom it does not have an agreement could present checks to* same-day settlement at any location identified in $ 229.36(b) of Regulation CC (12 CFR 229.36(b)). 31527 through the Federal Reserve. If a Federal Reserve office receives checks for a paying bank that does not subscribe to the presentment point service, it would treat those checks as if they were a finesort deposit at the Federal Reserve for the next available fine-sort deadline The Federal Reserve will not be responsible for monitoring any presentment deadline agreed to by the paying bank and the presenting bank. A paying bank will be required to provide the Federal Reserve office advance notice before commencement or termination of the agreement. To use the alternate presentment point service, a paying bank must enter into an agreement with a Federal Reserve office, local or in another territory, and agreements with each presenting bank. Agreements between a paying bank and a presenting bank might specify (1) the time(s) of delivery of checlw to the Federal Reserve office, (2) any restrictions on the types of presentments, and (3) settlement arrangements. The Reserve office would time-stamp and control incoming deliveries. If a Reserve office receives checks for a paying bank that does not have an agreement with a bank attempting to present checks to it, the Reserve office would treat the checks as a fine-sort deposit for collection by the Federal Reserve at the next available deadline. Under the enhanced presentment point service, a paying bank may elect to receive, via voice maii, fax, or telephone, the following information for each presentment made at a Federal Reserve office: (1) The collecting bank identification, (2) the time of delivery, and (3) the dollar amount of the checks. The Board also requested comment on a proposed fee structure for presentment point services. Specifically, the Board proposed that a fixed foe, which was estimated to be in the range of $15 to $25 per day, be charged to the paying bank for the presentment point service. The Board questioned whether a portion of the costs of providing the presentment point service should be recovered through a fee assessed to the presenting bank. Several commenters stated that the proposed fixed daily fee was an appropriate approach. Three commenters discussed alternatives to the proposed fee structure. Two commenters indicated that the fee should be based on the number of packages handled by the Federal Reserve office. One commenter stated that, for an intercept processor, the daily fixed fee should be applied per location, rather than per paying bank. 31528 Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices Thirty-one commenters responded to the Board’s question concerning assessing the presenting bank a portion of the fee. Seventeen commenters indicated that only the paying bank should be charged, eight commenters preferred charging the presenting bank, and six commenters stated that the fee should be shared by the presenting bank and the paying bank. Two commenters, who favored the Federal Reserve’s charging the paying bank, indicated that the paying bank and the presenting bank would negotiate which party would ultimately bear the cost of the settlement. The Board believes it is appropriate that only the paying bank be assessed the fee because under the same-day settlement rule a presenting bank may not have an option as to where it must make presentment. The Reserve Banks have further analyzed the costs of providing presentment point services and have concluded that there are fix=id overhead costs associated with receiving presentments for each paying bank, and there are also variable costs associated with handling presentments received from each presenting bank. As a result, the Board adopted a fee structure that includes a daily minimum fee and a variable fee for each bank presenting checks to a paying bank. The fees for the alternate presentment point service would be higher than the fees for the primary presentment point service, in order to recover the costs of monitoring the source of receipt of presentments. Fees for the enhanced presentment point services would be higher than for the basic presentment point services (primary and alternate) to reflect the cost of providing additional information to payor banks. The following table illustrates the fee structure and expected range of prices for the presentment point services. The actual fees will be announced by each Reserve Bank following the Board’s approval of the Reserve Banks’ 1994 fees for the check service in October 1993. F ee S chedule for P resentment P oint S ervices Service Minimum fee Variable fee5 Basic Primary .. Basic Alternate $5.00-$8.00 $6.00$10.00. $10.00$16.00. $12.00$18.00. $0.50-$1.00 Enhanced Pri mary. Enhanced Alter nate. $1.00-$2.00 s Fee assessed for each bank presenting checks to the paying bank. Supplemental Payor Bank Services. The Federal Reserve Banks currently offer services to payor banks with respect to checks collected through the Reserve Banks. These services, which include account totals, MICR capture, special sort, and electronic presentment,® are offered to (1) accelerate availability, in the case of truncation and extended-MICR services, (2) assist paying banks in assembling payment data to facilitate the provision of corporate cash management services, and (3) reduce the paying bank’s operating costs. The Board proposed that the Federal Reserve Banks offer supplemental payor bank services for checks presented by private-sector banks either at a Federal Reserve office designated by the paying bank as a presentment point, or presented to another designated presentment point and subsequently delivered to the Federal Reserve office. Two types of services were proposed— regular and premium. Under the regular service, the presenting bank or the paying bank would deliver the checks to the Federal Reserve, generally by the latest deadlines established by the Federal Reserve office for the deposit of checks drawn on the paying bank. The Federal Reserve office would intermingle checks received under the regular service with checks being collected through the Federal Reserve that are designated for payor bank services. Under the premium service, the Federal Reserve would accept checks from presenting or paying banks at a later presentment deadline and would provide information to the paying bank based on agreements with that bank. The Board requested comment on whether presenting banks would present checks at the paying bank’s Federal Reserve office, even if they had to agree with the paying bank to present the checks earlier than 8 a.m. Under the proposed premium service, at the option of the paying bank, Federal Reserve • The account totals service provides paying banks with the dollar total and the number of checks being presented for specific individual accounts, or for a grouping of accounts. The MICR capture service provides paying banks, via tape or transmission, the MICR-line data from checks being presented to the paying banks. The special sort service provides paying banks with a specified subset of its checks, outsorted and presented separately from the remainder of its checks. The electronic presentment services, such as extended MICR capture and truncation, provide paying banks with MICR-line data from checks presented to the paying banks through the Federal Reserve. Presentment occurs when the data are delivered electronically to the paying bank. The physical checks may be retained at the Federal Reserve office for several days in order to provide return services before they are delivered to the paying bank or they may be safekept by the Reserve office. offices would accept checks from presenting banks or paying banks at a presentment deadline later than that established for the regular service. Because of this later receipt, checks would not be intermingled with those being collected through the Federal Reserve. The Board received 47 comments on the proposed supplemental payor bank services. Most commenters supported the Federal Reserve’s offering the proposed services. Many commenters pointed out that these services would be most beneficial to banks offering corporate cash management services. There was no consensus among the commenters as to whether early presentment at a Federal Reserve office would be acceptable, although the responses seemed to focus on the cost effectiveness of such a practice from the presenting bank perspective. For example, one commenter said it would be willing to present earlier in order to take advantage of lower courier costs in presenting to a single location. Another commenter argued that the 8 a.m. deadline should be uniform and, therefore, it would be unwilling to deliver prior to that time. Based on the positive response from commenters and the efficiencies associated with the use of payor bank services, the Board approved the Federal Reserve Banks’ offering supplemental payor bank services to a paying bank for checks presented to its local, or an alternate, Federal Reserve office as a presentment point or for checks delivered to the Federal Reserve office by the payor bank. The supplemental payor bank services that will be offered will include account totals, MICR capture, and special sort services as well as “delayed delivery" and "safekeeping” services. These latter services will mirror the current extended MICR capture and truncation services, respectively, in all aspects except that delivery of the electronic data from checks that have been previously presented to the paying bank (either directly or via the Federal Reserve’s presentment point service) does not constitute presentment to the paying bank by the Federal Reserve Bank. The information from checks that are delivered to a Federal Reserve office up to two hours after the appropriate fine sort deadline for city, RCPC, or country items, respectively, or by 6 a.m., whichever is earlier, will be included in the first transmission. For checks received after this cut-off time, but by 8 a.m. local time, the payor bank service information will be transmitted no earlier than 9:30 a.m. Eastern Time. Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices Payor bank service information on supplemental payor bank services will checks received after 8 a.m. local time be comparable to the fees currently will be transmitted later in the day by charged for payor bank services. special agreement. Because the supplemental payor bank Because the paying bank is services are similar to fine-sort deposits, responsible for settlement with the a per item fee will be assessed to cover presenting bank under the same-day the cost of opening and processing the settlement rule, the Federal Reserve will checks. In addition, the paying bank perform neither settlement nor would pay the current payor bank subsequent adjustment functions service fees associated with the specific involving the checks for which it payor bank products used. Further, if a provides supplemental payor bank paying bank designates the Federal services. A paying bank will receive all Reserve as a presentment point, it the relevant settlement data on the day would be assessed a daily minimum fee checks are presented. Due to the timing equal to the daily minimum fee(s) for of processing, the data provided for a the payor bank product(s) used plus given day’s checks may not include all $1.00 to $10.00, depending upon the adjustment information, which may be type of presentment point service used. provided with reconcilement As with regular payor bank services, information on the next business dav Reserve offices may establish peak and it is important to note that the Feaeral off-peak variable fees for supplemental Reserve would not act as a collecting or bank services. bank with respect to checks for which ome Reserve Banks have received it provides supplemental payor bank requests to provide certain payor bank services. The paying bank, however, services for checks not collected must agree to indemnify the Federal through the Federal Reserve before the Reserve from any losses in connection same-day settlement rule becomes with the provision of this service effective. It is anticipated that because the Federal Reserve may be individual Reserve Bank proposals may characterized as a collecting bank, be submitted to the Director of the notwithstanding its disclaimer of that Division of Reserve Bank Operations status. The timing of implementation of end Payment Systems for approval supplemental payor bank services at under delegated authority. The Reserve individual Federal Reserve offices will Banks will provide a 30-day notice vary based on demand for the product before offering new services. In the by local paying banks and resources majority of cases, Reserve Bank fees for available in each office. these services will be announced by The Board’s proposal estimated that each Reserve Bank following the Board’s the total fees for regular supplemental approval of the Reserve Banks’ 1994 fees payor bank services would be for the check service in October 1993. approximately the same as the sum of Enhancements to the Fedwire Format the fees for providing payor bank to Facilitate Settlement. The Board services on fine-sort checks collected proposed that the Reserve Banks through the Federal Reserve, plus the enhance the Fedwire format so that fine-sort collection fee. Fees for the banks could identify, on an automated proposed premium service were basis, those funds transfers related to estimated to be higher than the fees for settlement for check presentments and the regular service because the checks associated adjustment activity. would have been run during peak Specifically, the Board envisioned that processing times. The Board requested designating certain Fedwire funds comment on whether a portion of the transfers as check settlement or fee for the supplemental payor bank adjustment transfers could be service should be charged to the accomplished by establishing a new presenting bank, or whether the entire product code7 for differentiation of fee should be assessed to the paying those transfers from other funds bank. Twenty-seven commenters transfers. By using the existing Fedwire responded to the Board’s question. “bank-to-bank information” (BBI) field, Twenty favored charging the paying a paying bank could explain any bank, and four indicated that the fee difference between the transfer amount should be shared by the presenting and and the cash letter total, identify paying banks. Three banks believed that adjustment activity, or detail individual the fee should be apportioned based on cash letter totals, if the transfer amount the benefits received. The Board believes that the paying 7A product code is a code which enables the receiver of the message to determine the purpose of bank should be assessed the entire fee the transfer. Currently, the valid product codes are: for the supplemental payor bank Transfer, beneficiary is a bank; CTR/ services because it is the bank receiving BTR/Bank Customer Transfer, beneficiary is a non-bank; DEP/ the benefit of the services. The fees Deposit to Sender’s account; DRW/Drawdown; FFR/ Fed Funds Returned; and FFS/Fed Funds Sold. ssessed by the Reserve Banks for 31529 represented settlement for multiple cash letters. In addition, the Board requested the public’s views on which particular structured third-party field should be used to convey detailed information related to the transfer amount. Similarly, the Board envisioned that use of the "request for credit transfer” (subtype code 31), which is a non-value message that requests the receiver to originate a value transfer to the designated party, could facilitate notification by a presenting bank to a paying bank of the amount of presentments. For example, if the checks are presented to a service bureau for processing, the presenting bank m ay wisn ta“use a request for credit transfer message to notify the paying bank o f the amount of the cash letter. Finally, comments were requested on other changes to the Fedwire funds transfer service that would be desirable to facilitate the settlement of checks. The Board received 46 comments that responded directly to its proposal to enhance the Fedwire funds transfer format to differentiate check same-day settlement transfers from other funds transfers. None of the commenters opposed the use of the funds transfer service to settle check presentments on a same-day basis. Commenters generally indicated that the existing format, w ith enhancements, would facilitate the settlement process and allow efficient automated processing of check settlement transactions. Moreover, several commenters noted that they currently settle cash letters by Fedwire and that they believe it is an effective mechanism. These commenters noted, however, that the proposed enhancements to differentiate checkrelated transfers would be very valuable. A few commenters indicated that, the current funds transfer format could adequately accommodate check settlement transactions without further enhancement, but did not specifically object to any of the proposed enhancements. These commenters also noted that significant increases in the volume of check same-day settlement transfers would increase the need for the proposed enhancements. Commenters overwhelmingly endorsed the Board’s proposal to identify a new product code for check same-day settlement transfers. Several commenters noted that it is easy to modify the product code field and to edit it without extensive automated system changes. Conversely, one commenter was concerned that the existing Fedwire format could not be changed enough to identify check settlement transactions uniquely, particularly if an obsolete code was 31530 Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices reactivated for same-day settlement meet certain criteria and must be subject purposes. That commenter suggested a to a competitive impact analysis based new Fedwire format be developed. on the procedures set forth in that Several commenters noted that adding a policy statement. First, new or enhanced services must new product code would require some meet the following tests: (1) Projected system changes and requested that banks be notified well in advance of the revenues must fully recover the costs of providing the service, (2) the service implementation date. All commenters supported the use of must provide a clear public benefit, and the “bank-to-bank information" field to (3) the service must be one that other convey detailed information related to providers alone cannot be expected to check settlement transactions. Several provide. In its request for comment, the commenters noted that field size Board questioned whether the proposed limitations could be overcome by presentment point and supplemental supplemental messages, facsimiles or payor bank services meet the criterion telephone communication. A few that private-sector providers alone commenters suggested that the field be cannot be expected to provide such structured to facilitate editing. services with reasonable effectiveness, Based on the comments received, the scope and equity. Board believes that the existing Fedwire Most of the 10 commenters addressing format can be used to settle same-day the question agreed that the proposed settlement transactions. The Board services met the Board's criterion. A approved the Reserve Banks’ plans to majority of the commenters believed enhance the Fedwire funds transfer that similar services would be offered by format to provide a new product code, private-sector service providers if there CKS/Check Settlement, so that banks were a demand for the services. Some can identify, on an automated basis, commenters noted that development of those funds transfers related to the a capebility to offer payor bank services settlement of check presentments and would be expensive and that it would associated adjustment activity. The be more economical for the Federal Board also endorses the use of the Reserve Banks to offer such services. existing BBI field to convey the details One commenter stated that the proposed of the dieck settlement transaction. supplemental services again would Structuring of the BBI field will not be place the private sector and the public mandatory, but may be used on a sector in direct competition on a service voluntary basis. The Federal Reserve where the public sector determines the Banks will not reject messages that do rules. The range of fees proposed by the not comply with the voluntary Reserve Banks for the presentment point structuring of the BBI field. Existing services reflects their estimates of the transaction codes also will be used: Check same-day settlement transactions costs of providing the services. should be marked “settlement transfer” Additional cost and usage information should be available when the Reserve (type code 16) with “normal transfer" Banks set 1994 check fees. This (subtype code 00) to remit settlement proceeds, or “request for credit transfer” information will be used to establish specific 1994 fees, with the objective of (subtype code 31) to initiate settlement recovering the costs of providing the requests and the “funds transfer presentment point services. As honoring a request for credit transfer” experience is gained with these services, (subtype code 32) to respond. The fees will be adjusted to reflect actual regular funds transfer fee (currently experience. The proposed fees for the $0.53) will be assessed to both the originating bank and the receiving bank supplemental payor bank services are for a check same-day settlement transfer consistent with the Reserve Banks' through the Fedwire funds transfer current payor bank service fees, which service. The new product code will be are recovering the costs of providing the available when the same-day settlement services. Offering the presentment point rule is effective, January 3,1994.® Evaluation o f Proposed Changes. The services should yield public benefits because the service will permit multiple Board’s March 1990 policy statement, paying banks to use one presentment "The Federal Reserve in the Payments System,” indicates that all new services location. Unlike the locations of other service providers, Reserve Bank or major service enhancements locations currently are served on regular proposed by the Federal Reserve must transportation routes and are convenient “Fedline users will be able to input the new for many presenting banks because they product code by data entry in January 1994; the may also deposit checks at Federal Fedline multiple-choice menu will be updated Reserve offices. As a result, offering the during early 1994. Details concerning use of the services should reduce the new product code will be incorporated in the Reserve Banks' operating circulars. transportation resources that would otherwise be necessary for presenting banks to transport checks to paying banks. In addition, it is likely that other service providers would offer presentment point services, but would most likely offer them only in conjunction with other services. The Board believes, therefore, that it is unlikely that the needs of all banks interested in designating a presentment point will be met by private-sector service providers. Supplemental payor bank services provide public benefits by supporting effective account management by corporate cash managers. Facilitating cash management through payor bank services on checks presented by privatesector presenting banks allows for more efficient use of corporate funds. In addition, the supplemental payor bank services would enable paying banks to receive payor bank service transmissions from one source, which may facilitate their internal corporate cash management operations. Similar services are not widely offered by the private sector today because some paying banks currently impose barriers to presentment by private-sector presenting banks, if such presentments would impede their ability to provide cash management services or would otherwise adversely affect their operations. The Board believes that private-sector service providers may be reluctant to offer similar services immediately since significant capital investment may be necessary. Without immediate and widespread response from the private sector, a level of service that would allow the product to be available with reasonable effectiveness, scope and equity may not be available without Federal Reserve Bank participation. The Board believes that, initially, the supply of the services that the private-sector firms would offer would not be sufficient to satisfy the demands of payor banks. The Board, therefore, believes that the Reserve Banks should offer payor bank information services. In assessing the competitive impact of the presentment point and supplemental payor bank services, consideration was given to whether the services would have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services and, if they did, whether the effects are due to legal differences or to a dominant market position deriving from such legal differences. The comments received on the Board's proposal did not raise any issues that indicated that private-sector service providers would be unable to Federal Register / Vol. 58, No. 105 / Thursday, June 3, 1993 / Notices compete effectively with the Federal Reserve. The Board believes that the Federal Reserve’s offering presentment point services would not affect adversely private-sector entities that could be designated as presentment points by paying banks. The Federal Reserve’s services do not rely on the existence of legal differences between the Federal Reserve Banks and other service providers. Typically, a paying bank would designate as a presentment point the location of a data processing firm or a correspondent bank that performs demand deposit accounting for the checks drawn on the paying bank. The Federal Reserve Banks do not provide demand deposit accounting services and do not have any inherent advantages in providing presentment point services, with the possible exception of the convenience of a location where checks are already delivered and picked up by collecting banks and paying banks. Although the Federal Reserve is currently a dominant provider of payor bank services, the implementation of the same-day settlement rule, which provides private-sector banks the right to obtain same-day settlement for checks directly presented to paying banks, should enable private-sector banks to compete effectively with the Federal Reserve. There are, however, no legal differences that would prevent privatesector banks from providing services to paying banks that are similar to the services provided by the Reserve Banks. Generally, a presenting bank, because it has possession of the checks, would have an advantage in offering timely and cost-effective payor bank services to the paying bank. The Federal Reserve service would allow the paying bank to incorporate checks collected through private-sector channels with the checks that are eligible for the Federal Reserve’s current payor bank services. Because of the requirement for timeliness of the data by the paying bank, and in light of the current base of payor bank services being performed by the Federal Reserve Banks, paying banks may choose the Federal Reserve as the supplier of payor bank services for all of the checks on which a paying bank desires to receive payor bank services. authorize the Federal Reserve to settle for checks presented by the presenting bank and for subsequent adjustments through accounts maintained at the Federal Reserve. The presenting bank would initiate the settlement entry by transmitting payment information to the Federal Reserve. Under the proposal, the Federal Reserve would function settlement entries to specified reserve accounts during two cycles each day, with provision for reversal of erroneous entries. The Board received 40 comments on the bilateral settlement service. The proposed service was viewed by nearly all of the commenters as costly, complicated, and more risky than other available forms of settlement. Twentysix of the 31 commenters that addressed the demand for a Federal Reserve bilateral settlement service believed that such a service would not be useful to banks and that existing alternative settlement mechanisms were adequate to meet same-day settlement requirements. For example, several commenters stated that the proposed service offered few additional benefits and that current options are adequate to meet the needs of banks. One commenter concluded that the proposed service was too cumbersome, costly, and entailed unacceptable risks. Three check clearinghouses indicated that the bilateral settlement service was unnecessary and unlikely to be utilized extensively. These commenters recommended that the Federal Reserve propose a multilateral settlement service under which a presenting bank would provide a settlement agent, such as a clearinghouse, with settlement data for each paying bank to which a presenting bank had presented checks. The settlement agent would prepare a file containing a net debit or net credit for each participating bank and notify the Federal Reserve of the settlement amounts. The Federal Reserve would function the settlement entries, much as it does for local settlement arrangements. The commenters envisioned that the multilateral settlement arrangements could be local, regional or nationwide. Four commenters supported further development of a bilateral settlement service. One commenter believed that a bilateral settlement service could be Services Not Approved by the Board superior to Fedwire funds transfer Bilateral Settlement Service. The settlement, and that an effective, Board requested comment on whether reasonably priced settlement system is the Federal Reserve Banks should offer required to achieve more balanced a new bilateral settlement service for the competition between private collecting settlement of checks not collected banks and the Federal Reserve Banks. Based on the comments received, it through the Federal Reserve. Under a appears that the demand for a bilateral bilateral settlement service, the paying settlement service would be limited. bank and the presenting bank could 31531 Because the potential cost of developing the service are high, it is unlikely that the Reserve Banks would be able to recover the costs of providing such a service. The Board, therefore, believes the bilateral settlement service should not be pursued further at this time. The Board notes that the Federal Reserve Banks currently provide multilateral net settlement services to over 100 check clearing arrangements. Conceptually, a settlement agent, such as a clearinghouse, could obtain any necessary agreements from the participants in the settlement arrangement and arrange with the Federal Reserve Bank to function net entries to the accounts of the participants at the Federal Reserve. The Reserve Banks would consider requests for new check settlement arrangements proposed by groups of banks interested in improving the efficiency of settling for checks cleared in the private sector. Other Potential Federal Reserve Services. In its request for comment, the Board discussed several new or enhanced services that the Reserve Banks might offer in a same-day settlement environment but that the Board rejected, at this time, for a number of reasons. Following is a summary of the comments received by the Board on those services. Transportation Services. The Board considered whether three types of transportation services might be offered by the Reserve Banks in conjunction with implementing the same-day settlement rule: (1) Requiring Reserve Banks to permit conjunctive business on intradistrict transportation networks, (2) permitting conjunctive business on the Federal Reserve Banks’ Interdistrict Transportation System (ITS), and (3) arranging transportation for the delivery «f same-day settlement checks to paying banks. In each case, the Board determined that no significant public benefit would be realized from offering these services. In the first case, couriers are permitted to seek conjunctive business when it is operationally feasible and does not jeopardize the expeditious delivery of checks by the Federal Reserve Banks. In the second case, the Board believed that the timecritical nature of the interdistrict check collection system required the Federal Reserve Banks to maintain control of ITS. Five commenters discussed transportation services. Four commenters indicated that the Federal Reserve Banks should offer local transportation services for checks processed by private-sector banks. These commenters reasoned that the Federal Reserve Banks would continue 31532 Federal Register / Vol. 58, No. 105 / Thursday. June 3, 1993 / Notices and another commenter suggested that a to transport checks they collect and, thus, were in a good position to offer the priced adjustment service is necessary service to private-sector banks. One because the good faith standard is not commenter stated that the Federal sufficient for resolving all adjustment Reserve Banks’ experience with the issues. Another commenter suggested issue of transportation services was that the Federal Reserve should offer an outdated and the concerns raised by the adjustment service, at least during the Federal Reserve Banks no longer exist. initial implementation of same-day Another commenter suggested that the settlement. One commenter, however, Federal Reserve request comment on an stated that there is no need for a Federal interdistrict delivery service because the Reserve Bank adjustment service if the decade-old experience may not be settlement service is adequate to handle relevant now. This commenter also adjustments. suggested that the Federal Reserve The Board attempted to incorporate authorize a pilot project to test such a procedures for handling adjustments new transportation service. During the between private-sector banks in the late 1970s, the Federal Reserve Bulks design of the bilateral settlement experimented with conjunctive business service. The commenters on that service on the ITS network and the delays found the procedures to be complicated experienced in delivering checks caused and cumbersome, and believed that float to rise to high levels. Because of alternative settlement arrangements the divided loyalties of couriers and the were adequate. As a result, the Board inherent decentralized decision-making, did not approve implementing an the Federal Reserve Banks were unable adjustment service at this time. to obtain reliable delivery of their By order of the Board of Governors of the checks at scheduled times. The Board Federal Reserve System, May 27,1993. believes that the Reserve Banks’ William W. Wiles, experience with conjunctive business Secretary o f the Board. on the ITS network during the 1970s is [FR Doc. 93-13027 Filed 6-2-93; 8:45 am) likely to be indicative of the control problems that would become evident in BILLING CODE < 210-01-* the current environment. The Board continues to believe that no clear public benefit would be realized by offering conjunctive business on the Federal Reserve’s ITS network nor in offering other transportation services at this time. Moreover, these services are readily available and do not require Federal Reserve involvement to ensure banks are able to obtain services. Adjustment Service. The Board evaluated whether the Federal Reserve Banks should offer a new priced adjustment service to handle adjustments for checks not collected through the Federal Reserve. Currently, the Reserve Banks handle adjustments only for checks collected or returned through the Federal Reserve. Because there appear to be no significant public benefits associated with the Federal Reserve Banks’ offering a new adjustments service and because other providers can serve as intermediaries in exchanges of adjustment documentation or as arbiters for check adjustments, the Board determined that the Federal Reserve Banks should not offer such a service. Several commenters stated that the Federal Reserve should offer an adjustment service. They saw the existence of a structured, automated, Fed-administered system as critical to the success of same-day settlement. One commenter stated that a priced adjustment service merits further review FEDERAL RESERVE SERVICES TO FACILITATE SAME DAY SETTLEMENT Presentment Point Services All Federal Reserve offices will offer two presentment point services: 1.) Primary Presentment Point Services A paying bank may designate its local Federal Reserve office as a place of presentment for all collecting banks, which may deposit forward and/or return checks. The paying bank must have a contractual agreement with its Federal Reserve office for this service. The Reserve office accepting same day settlement (SDS) checks from collecting banks will receive the checks, time stamp their receipt, and store them in an appropriate facility allocated to the paying bank. The paying bank will have the responsibility for the arrangements for transportation of these items from the Reserve office. Paying banks will settle for these same day settlement items directly with the collecting banks, and make any necessary adjustments. If a Reserve office receives checks designated as SDS items directed to a payor bank with which it does not have an agreement, it will treat such items as a fine sort deposit for collection by the Federal Reserve at the next available deadline. It also will treat SDS checks that the collector has not labelled according to Federal Reserve specifications as a fine sort deposit. • Pricing Reserve offices will charge the paying bank a variable fee per depositor, subject to a daily minimum. (As an example, a paying bank receiving 9 SDS packages at $0.50 per depositor would receive a charge of $5.00, the daily minimum, which is higher than $4.50 (9 x $0.50). 'as defined by Regulation CC. 2.) Alternate Presentment Point Service A paying bank may designate a Federal Reserve office, local or in another territory, as an alternate presentment point for collecting banks with which it has established a mutual agreement. For example, a paying bank might designate its location as the primary presentment point, but designate a Fed office as an alternate point for certain collecting banks. It would have a contractual agreement with the collecting bank on the time(s) of delivery of SDS items at the Fed office and on any other conditions pertaining to this presentment. For example, a paying bank could restrict presentments to forward items only. The paying bank also would have a contractual agreement with its Reserve office in order to designate it as an alternate presentment point. The Reserve office would have to know which collecting banks could deliver checks to it in its capacity as an alternate presentment point. The Reserve office would monitor such presentments. If a Reserve office were to receive SDS items from a collecting bank destined to a payor that does not have an agreement with that collecting bank, it would treat these items as a fine sort deposit for collection by the Federal Reserve at the next available deadline. Also, it would treat incorrectly labelled (SDS) checks as a fine sort deposit. The Reserve office will receive SDS items from collectors who have agreements with paying banks, time stamp their receipt, and store them in an appropriate facility allocated to the paying bank. The paying bank will have the responsibility for the arrangements for transportation of these items from the Fed office. Paying banks will settle for the SDS checks directly with the collecting banks, and make any necessary adjustments. • Pricing For the alternate presentment point service, Reserve office will charge the same fee per depositor that it charges for the primary presentment point service, but 2 subject it to a higher minimum fee to reflect the monitoring required. As an example, the Reserve office might charge $0.50 per depositor subject to a daily minimum of $5.00 for the primary presentment point service and $0.50 per depositor subject to a $7.00 daily minimum for the alternate service. 3.) Enhanced Presentment Point Services To facilitate use of these presentment point services, Reserve offices will offer an information enhancement. At the option of the paying bank, the Reserve office will provide the paying bank the following information for each SDS deposit: 1.) the collecting bank ID; 2). the time o f delivery; 3.) and the dollar amount o f SDS checks. It will charge a variable fee, applying it to each depositor that is higher than that for the basic presentment point services (primary and alternate) and subject it to higher minimum fees. Reserve offices will deliver this information via voice mail, fax, or telephone. Reserve offices would not expect paying banks to perform settlement on the basis of this information. The following table illustrates the pricing structure and proposed ranges: Pricing Schedule for Presentment Point Services Basic Service Minimum Fee • Primary • Alternate $5.00 - $8.00 $6.00 - $10.00 Variable Fee { $.50 - $1.00 Enhanced • Primary • Alternate 4.) $10.00 - $16.00 $12.00 - $18.00 Same Day Settlement - Payor Bank Services (SDS-PBS) Reserve offices currently offer a range of Payor Bank Services (PBS) such as MICR detail, Account Totals, Extended MICR, Truncation, etc., on checks collected through the 3 Federal Reserve. Federal Reserve offices also will offer essentially the same services, with the exception of settlement and adjustments, for Same Day Settlement checks. SDS checks may include those presented to the Fed as a presentment point or delivered to the Fed after presentment directly to the paying bank. Currently, Reserve offices will handle only forward collection items for SDS-PBS. At the request of the paying bank, Reserve offices will open SDS packages and process them to capture MICR information to provide PBS services to paying banks. Since the paying bank is responsible for settlement with the collecting bank under the Same Day Settlement rule, and for subsequent adjustments, the Federal Reserve will not perform any settlement or adjustment services involving the crediting/debiting of collectors/payors engaged in SDS presentments. However, Reserve offices will provide all the relevant reconcilement data to the paying bank necessary for its settlement with the collecting bank. This data may not include all adjustment information for a given day’s SDS deposits. Reserve offices may provide adjustment information on a lagged basis with subsequent SDS reconcilement information. • Pricing Pricing for SDS payor bank services will follow the same structure of variable fees for the basic service subject to a daily minimum as exists for regular payor bank services. If a payor uses payor bank services, but not presentment point services, Fed offices will charge the regular PBS variable fees subject to the appropriate daily minimum plus a fee for opening and processing SDS packages equal to, or above, the appropriate peak or off-peak fine sort inclusion fee. The following fee structure will apply if a paying bank uses payor bank services in conjunction with a presentment point service (primary or alternate): 4 1.) A Reserve office may charge a combined daily minimum for these services used jointly.The combined daily minimum will range from a low equal to the regular PBS daily minimum (for MICR, E-MICR, Truncation, or Account Totals, etc.) plus $1.00 to a high equal to the sum of the presentment point service daily minimum plus the regular PBS daily minimum. Example: If a Reserve office’s regular Truncation service daily minimum is $10.00 and its primary presentment point service minimum is $5.00, the range of its combined daily minimum equals $11.00 (low) to $15.00 (high). 2.) A Reserve office will subject the regular PBS MICR/Account Total variable fees plus the presentment point service per depositor variable fees to the combined minimum to determine the total fees paid for the combined services. 3.) Reserve offices also will charge a fee for opening and processing SDS packages equal to, or above, the appropriate peak or off-peak fine sort inclusion fee. Timing of SDS-PBS transmissions If a Reserve office receives SDS items by a time 2 hours after the universal fine sort deadline for city, RCPC, or country items, respectively, or by 6:00 a.m., whichever is earlier, it will include payor service information for these items in the first transmission. For items received after this cut-off time, but before 8:00 a.m., it will include payor information no earlier than the 9:30 a.m. (ET) transmission. The Reserve office will transmit information on SDS items received after 8:00 a.m. later in the day. 5 4.) Fedwire Format Changes to Support Same-Day Settlement (SDS) The Federal Reserve will facilitate the settlement for SDS presentments by providing a new Fedwire code. Use of the new product code is at the option of the paying bank. Fedwire transfers for check settlements will incur the standard funds transfer fees (ie., $0.53 to sender and receiver). Settlement specifications are as follows: • A new product code, CKS, to identify check settlement messages. • Type code 16 recommended for all CKS transfers; type code 10 is also applicable, but Reserve offices will accept only type 16 wires after the close of the third-party window (normally 6:00 p.m. ET) until Fedwire closing time (normally 6:30 p.m. ET). Off-line hours may vary from on-line hours, as defined by Reserve Bank operating circulars. • Information pertaining to settlement for SDS cash letters may appear in the BBI field. The provisions for this information will include: code CL- for current cash letter settlements, including adjustments to current cash letters. code AD- to indicate adjustments to previous cash letters. Adjustments may be negative or positive. these codes should follow the BBI= field tag to indicate to the receiver the use of this structure. a series of subfields containing cash letter information within the BBI field. A paying bank should indicate omitted subfields by consecutive slashes, except for that (those) at the end of a cash letter (ie., adjustment amount(s)) which does (do) not need to have their space held by a slash, subfields are: Cash Letter ID; Cash Letter Date; Presenting Bank Account Number; Current Cash Letter Amount; Adjustment Amount. (An example 6 of the use of the BBI field and the above subfields is: BBI = CL - Cash Letter ID/Cash Letter Date/Account Number/Current CL Amount/Adjustment Amount/CL - Cash Letter ID/.../AD-Cash Letter ID/Cash Letter Date/Account Number/Original CL Amount/Adjustment Amount, use of the ORG = field tag for the paying bank and the BNF = field tag for the presenting bank in the cases where they do not represent the receiver or the sender of the cash letter, respectively. the OBI = (originator to beneficiary) field tag and the RFB = (reference for beneficiary) will accommodate other information the paying bank may want to include. Presenting banks may send wires with subtype code 31 to request payment for cash letter presentments. Subtype 31 wires will use the CKS product code and any other field tags that are appropriate. Paying banks need to be careful not to pay both on a request for payment wire, via a responding subtype 32 wire, and also on the physical cash letter or receipt of reconcilement/settlement information from the Federal Reserve. The Federal Reserve encourages the use of the new product code and related structure for SDS payments. However, it will not edit or reject messages based on adherence with the recommended structure for information in the BBI field.