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Federal Reserve Bank
OF DALLAS
W IL L IA M

H. W ALLACE

FIRST V IC E P R E S ID EN T
AND CH IE F O PER ATING O FFIC ER

DALLAS, TEXAS 75222

January 20, 1988
Circular 88-7

TO:

The Chief Executive Officer of
all financial institutions in the
Eleventh Federal Reserve District
SUBJECT
Measures to reduce risk in the ACH payments system
DETAILS

The Federal Reserve Board of Governors has announced a series of
measures, effective July 18, 1988, to reduce risk in the automated
clearinghouse (ACH) payments system. The new risk reduction measures provide
for monitoring problem institutions that originate ACH credit transactions and
obtaining assurances from those institutions that they can meet their payment
obligations on settlement day. In addition, the measures provide earlier
deadlines for deposit of large-dollar return items and provide revised
procedures for charging originators of ACH credit transactions that settle on
nonstandard holidays or midweek closing days observed by the originator.
The new measures require that Federal Reserve Banks increase
monitoring of problem institutions that originate ACH credit payments.
Additionally, Reserve Banks may require advance funding or other assurances of
payment for ACH credit transactions, or may reject such transactions if it
appears that the originating institution will not be able to fund the payments
on settlement day. The Federal Reserve believes these actions will increase
the level of certainty of funding for all receivers of ACH credit
transactions.
In a significant departure from past return item practices, these
measures will require that debit return items of $2,500 or greater that are
deposited with the Federal Reserve in electronic form must be received
by the local Reserve Bank by the applicable night cycle ACH deposit
deadline on the evening of the banking day following settlement or receipt,
whichever is later. Institutions returning large-dollar items in paper form
must arrange to have those paper returns received by their local
Federal Reserve Bank no later than 7:00 p.m. Central time on the evening of
the banking day following settlement or receipt, whichever is later. Please
note that no longer will dispatch of such items from the financial
institution's premises satisfy the requirements of large-dollar debit returns.

For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).

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

- 2 -

Those returns must be received by the returning institution's local
Federal Reserve Bank by the deadlines mentioned here.
To ensure that Eleventh District institutions remotely located from a
Federal Reserve office are able to meet the required deposit deadlines, the
Federal Reserve Bank of Dallas offers several options for deposit of ACH
return items. There are several electronic connections available to handle
ACH return items, including direct computer-to-computer links, data links and
personal computer links. Through these connections, an institution can
generate return items and transmit them to the Fed as an electronic ACH file,
thereby allowing institutions to meet the ACH night cycle deadlines for
deposit of automated returns. Institutions that do not use a computer
connection to return ACH items can use any Touch-Tone telephone together with
the Dallas Fed's computerized voice-response system, CATIE. CATIE allows
institutions to access the Dallas Fed's ACH history data base via a WATS line
call to the computer-generated voice system. (Institutions with dedicated
terminal connections to the Dallas Fed can also use their terminals to access
the history data base.) Using CATIE, an institution can generate an ACH
return immediately without having to make arrangements for delivery of paper
returns to its local Fed office by 7:00 p.m. Although the surcharge for
submitting a paper return to the Fed is $3.75, the total price for generating
an automated return via CATIE is only $1.25.
The measures also require that Federal Reserve Banks settle ACH
credit transactions on the settlement date with the originating institution,
whether or not that institution is closed to observe a nonstandard holiday or
midweek closing. Institutions will no longer be able to defer settlement for
credit originations and accept an as-of adjustment or pay an explicit fee for
the float caused by such originations. The Federal Reserve believes that
institutions originating credit payments should be aware of their obligation
when the payments are generated to fund such payments on the settlement date.
ATTACHMENTS
The Federal Reserve Board of Governors' notice is attached.
MORE INFORMATION
For more information, please contact Ms. Jonnie Miller at (214)
651-6290 or Mr. Larry C. Ripley at (214) 651-6118.
Sincerely yours,

49086

Federal Register / Vol. 52, No. 249 / Tuesday, December 29, 1987 / Notices

[D o c k e t N o. R -05911

Risks on Large-Doilar Transfer
Systems; Automated Clearing House
Transactions
Board of Governors of the
Federal Reserve System.
a c t i o n : Policy statement.
AGENCY:

Federal Register / Vol. 52. No. 249 / Tuesday. December 29. 1987 / Notices
The Board has adopted the
following measures to reduce risk in the
automated clte.irance house ("ACH”)
service:
(1) Uniform Reserve Bank procedures
to monitor ACH credit payments
originated by depository institutions in a
weak financial position;
(2) Fnarlier deadlines for returns of
ACH debit transactions of $2,500 or
greater; and
(3) Uniform float accounting
procedures for depository institutions
originating ACH credit transactions that
settle on nonstandard holidays.
EFFECTIVE DATE: fuly 18,1988.
su m m ary :

FOR FURTHER INFORMATION CONTACT.

Julius F. Oreska, Manager (202/4523878). Margaret R. Weimer, Senior
Analyst (202/452-3341), Division of
Federal Reserve Bank Operations;
Elaine M. Boutilier, Senior Attorney
(202/452-2418), Legal.
Division; for the hearing impaired
only , Telecommunications Service for
the Deaf (202/452-3544), Eamestine Hill
or Dorothea Thompson.
SUPPLEMENTARY INFORMATION: On
December 19,1988, the Board of
Governors requested public comment on
several proposals to reduce risk in the
ACH mechanism. Specifically, the Board
proposed the following changes: (1)
Change the posting times for ACH
transactions in the ex post monitoring
system; (2) amend the Reserve Bank
operating circulars concerning the
finality of ACH transactions; (3) reduce
the return times for large-dollar ACH
transactions; (4) charge the accounts of
institutions originating ACH credit
transactions, when such institutions
observe midweek or nonstandard
holiday closings on the settlement date;
and (5) monitor ACH transactions
originated by problem depository
institutions.
In general, favorable comments were
received on the proposal to reduce the
return times for large-dollar ACH debit
transactions, the proposal regarding
treatment of ACH credit transactions
orginated by institutions observing
midweek or nonstandard holiday
closings, and the proposal to monitor
ACH transactions. The other two
proposals, regarding posting for the e,v
post monitor and finality of ACH
transactions, generated considerable
comment and are still being reviewed. It
is expected that recommendations will
be considered by the Board on cx post
monitoring procedures and finality by
mid-1988.
Risks Relating to ACII Transactions
The ACH is a value-dated electonio
payment mechanism, in which

transactions may be originated one or
two days before the settlement date. In
1986, over 700 million payments were
originated with a value of about $2.2
trillion. There are two types of ACH
payments—credit transactions and debit
transactions.
In an ACH credit transaction, the
originator of the payment orders funds
to be credited to the receiver’s account.
Unlike Fedwire transfers, which are
irrevocable to receivers, the Reserve
Banks reserve the right to reverse
credits given for ACH transactions until
the close of business on settlement day.
The risk to the Federal Reserve in
processing ACH credit transactions
arises from the potential failure of an
originating institution before its
obligation has been fully funded and the
Reserve Bank's potential inability to
reverse all payments that were
originated by the closed institution. The
risk faced by depository institutions
receiving ACH credit transactions is due
to the institutions’ typical practice of
making the funds available to their
customers on the day of settlement.
Thus, if payments must be reversed as a
consequence of an originating
institution’s failure, the receiving
institution may suffer a financial loss, or
if the receiving institution has made the
funds available to its customers, the
customers may suffer the loss.
In ACH debit transactions, funds flow
to the originator of the payment from the
receiver. Like checks, ACH debit
transactions are provisional payments
and receiving institutions have the right
to return them. The Federal Reserve's
risk in handling ACH debit transactions
arises from return item processing. The
Reserve Banks must reverse debit
entries when items are returned by
receiving institutions. If the originating
institution has failed and the Reserve
Bank is unable to recover funds from the
originating institution or its customer,
the Reserve Bank would absorb the loss.
Institutions receiving ACH debit
transactions are exposed to very little
risk because they have the right to
return the items if their customers do not
have sufficient funds to cover the
payments. The primary risk faced by the
receiving institutions is the operational
risk associated with missing the return
deadline.
The originators of ACH debit
payments usually release funds to their
customers on the day of settlement.
Returns, however, typically are not
received by originating institutions until
five or six days following the settlement
day. This exposes the originating
institutions to temporal risk directly
related to the return item process.

49087

/. Monitoring ACH Originations
The commentors on the ACH risk
proposals agreed with the concept of
real-time monitoring of ACII
transactions and noted that they would
prefer risk control measures that would
minimize the disruption to the ACI I
payments mechanism and would be
focused primarily on those problem
participants that pose the greatest risk.
Accordingly, the Board has adopted
monitoring procedures developed
specifically for problem ACH
originators, that is, those institutions in
greatest risk of failing.
Each Reserve Bank will be
responsible for identifying the problem
ACH originators in its district. Each
problem depository institution that
originates ACH credit transactions will
be required to notify the payment
system risk monitoring staff at its
account-holding Reserve Bank of the
value of the payments that it plans to
originate before submitting them for
processing. The institution must specify
the value of the credit payments it plans
to originate both in the aggregate and by
settlement date.
The Reserve Bank will maintain a
cumulative total of ACH transactions by
processing date and by settlement date.
After the ACH payments are processed
and delivered to receiving institutions,
the value of the credit payments
reported by the problem institution will
be compared to the actual transactions
that were processed. Any discrepancies
will be reviewed with the institution’s
management immediately. In Districts
where private ACH processors perform
the processing, the details of monitoring
the problem institutions’ credit
originations still will be addressed by
the Reserve Banks which may require
the private processors to provide
additional information to facilitate the
monitoring.
The risk monitoring staff will assess
the Federal Reserve’s exposure resulting
from the ACH credit payments
originated by the problem instititution.
When necessary, the Reserve Bank wili
require advanced funding or other
assurance of payment to cover the value
of the payments at the time of deposit as
a surety against the inherent risk. If the
institution fails to provide adequate
funding or other assurance, then the
Reserve Banks may refuse to process
the ACH transactions.
Debit transactions originated by
problem institutions pose little risk to
the recipients. This is because debit
payments are provisional payments and
the receivers are protected by legal
rights to return the debit transactions

49088

Federal Register / Vol. 52, No. 249 / Tuesday, December 29. 1987 / Notices

within specified time frames.
Consequently, no special monitoring
procedures are necessary for debit
originations. Nevertheless, there may be
special concerns that a problem
originator will fail with little likelihood
that the institution will be merged with
or absorbed by a healthy institution.
Accordingly, the Board has determined
that the Reserve Bank may defer the
availability of some or all of the credit
from the debit payments the institution
has originated. This would parallel
§ 210.10(b) of Regulation J, which
permits Reserve Banks to defer credit
for checks. It should be noted, however,
that this provision would not fully
address the risk to Reserve Banks in
instances where the receiving institution
returns a debit adjustment entry as late
as 45 days after settlement to a failed
originating institution. This issue will be
considered by the Board together with
the recommendations on finality and ex
post monitoring.
For institutions that are not classified
as problem institutions, the Federal
Reserve is still exposed to the risk that
an institution might unexpectedly be
closed or suspended. Consequently, the
Reserve Banks continue to reserve the
right to reverse credit payments if the
originating depository institution fails.
In order to increase their knowledge
about ACH originators’ activity and to
identify unusual trends in ACH
originations, the Reserve Banks will
review all ACH originations over a twoweek reserve accounting period at least
once quarterly. This may be done via
exception reports that can be generated
when average and peak-day origination
volumes and dollar value of individual
originating institutions exceed a
predetermined range, based upon actual
origination patterns for each originator.
It is expected that this range will be
revised at least semiannually.
2. ACH Return Items
To reduce risk to originators of largedollar debit transactions, the Board
changed the deadline for depositing
automated ACH debit return items of
$2,500 or more at the Reserve Banks
from the current deadline of midnight of
the business day following settlement or
receipt, whichever is later, to the deposit
deadlines for the night processing cycle
on the business day following settlement
or receipt, whichever is later.1 Presently,
1 Presently the night cy c le deposit d ea d lin es v a n
depending on w hether the paym ents are
interregional or local, unsorted or presorted by
receiving R eserve office. They range b etw een 8:00
p.m. for interregional unsorted d ep o sits (with
provision for a file remake) to the local deposit
d ead lin e o f 1:30 a.m. (for files w ithout remake
capability). Mo6t files are d ep sotied by the

ACH returns take five or six days, on
average, to reach the originating
institutions. Upon implementation of the
earliar deadlines, it is expected that the
returns will reach the originating
institutions by the morning of the second
business day following settlement or
receipt of the original transaction,
whichever is later.
With regard to debit returns of $2,500
or more submitted to the Reserve Banks
in paper form, where Reserve Banks
must convert the items to electronic
form, the Board proposed a return
deadline of between 5:00 p.m. and &00
p.m. eastern time. This deadline
provides the Reserve Bank time to
convert the returns in time for
processing at night, with delivery to the
originating institutions the following
morning.
Most of the commenters believed that
setting earlier return item deadlines
would reduce risk in the ACH
mechanism. Therefore, the Board has
adopted an 8:00 p.m. (eastern time)
deadline for the paper returns and the
regular night deposit deadlines for the
automated returns.
For those institutions that cannot meet
the paper return item deadline, the
Board proposed that a telephone return
item service be offered at a fee of $6.00
per return item. Most commenters
supported the proposal to offer this
service, but questioned the fee, believing
it should be lower. The costs of
implementing this service were
reviewed and the Board has determined
that the $6.00 fee is appropriate to cover
the cost of staff time and equipment that
would be needed to implement the
service. Therefore, the telephone return
service will be implemented for largedollar return items and the fee will be
set initially at $8.00 per return item.
Two other improvements in the return
item area proposed by the Board were
not well received: (1) To require
notification by 3:00 p.m. eastern time, on
the business day following settlement or
receipt, of any return items of $100,000
or more, and (2) to offer an optional
service to segregate return items from
regular transactions being delivered to
originating institutions that have
electronic access to the Reserve Banks.
The commenters’ concerns with the
large-dollar notification requirement
centered primarily on the use of a
uniform time nationwide. West Coast
institutions believed that the deadline
was too early, while a later notification
may be too late in the day to be useful to
East Coast originating institutions. Also.
interregional dead lin e for unsorted d eposits
(w ithout remake)— 11:00 p.m.

commenters disagreed on the
appropriate dollar cutoff for such a
notification requirement. In view of
these concerns, and the likelihood that
the notification requirement would be of
marginal benefit to the originators, the
Board did not implement this proposal.
The proposal to provide an optional
service to segregate return items from
regular transactions and deliver the
returns earlier received only 30
comments. In view of the limited
response to this proposal, and the
automation expense of providing such a
service, the Board did not adopt this
proposal.

3. Midweek and Nonstandard Holiday
Closings
Under current procedures, originators
of ACH credit transactions that are
closed on the settlement day, because of
a nonstandard holiday or midweek
closing, are charged for the transactions
on the next business day. The cost of the
float from crediting the reserve or
clearing accounts of the receiving
institutions but not charging the closed
originating institution is recovered from
the originating institution through an as
of adjustment or an explicit fee. Because
Reserve Banks can reserve ACH credit
payments only until the entries are
posted on the settlement day, the
current procedure of delaying charges to
originators of ACH credit transactions
increases the Reserve Banks' exposure
to the risk of loss compared with
settlements occurring on days that the
originator is open.
The Board proposed that originating
institutions that will be closed on the
day credit transactions that they have
originated are scheduled to settle be
charged for the transactions on the
settlement day as though they were
open. This policy w’ould apply to both
voluntary and mandatory holiday
because the institutions making these
payments are aware of their obligations
one or two days before the settlement
date.
A majority of the commenters
concurred with this proposal. Most of
the commenters agreed with the Board s
views that the proposal was equitable,
because the originators are aware of
their obligation to fund the credit
payments in advance of the settlement
date. Most of the commenters opposing
the proposal wanted the option of being
charged on the holiday or deferring the
debit and paying for the consequent
fioat through explicit fees. Deferring the
debit, however, creates risk for the
Federal Reserve because the Reserve
Banks may not be able to reverse the
credit transactions after they have been

Federal Register / Vol. 52, No. 249 / Tuesday, December 29, 1987 / Notices
posted to the receivers’ accounts on the
settlement day. Therefore, the Board has
adopted the proposal that originating
institutions be charged on the settlement
date as if they were open.
By order of the Board of Governors of the
Federal Reserve System. December'22.1987.
|am es McAfee,

Associate Secretary of the Board.
[FR Doc. 87-29691 Filed 12-28-87; 8:45 amj
BILLING

CODE 6210-01-M

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