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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272

HELEN E. HOLCOMB
FIRST VICE PRESIDENT AND
CHIEF OPERATING OFFICER

October 17, 2003

Notice 03-59
TO: The Chief Operating Officer of each
financial institution using cash services
in the Eleventh Federal Reserve District

SUBJECT
Proposed Changes to the Board’s Cash Services Policy
DETAILS
On October 8, 2003, the Board of Governors of the Federal Reserve System issued a
request for comment on proposed changes to its cash services policy. In brief, the Board
proposes revising its policy by adding two elements:
1) A custodial inventory program that provides an incentive to depository
institutions (DIs) to hold currency in their vaults to meet customers’ demand, and
2) A fee charged to DIs that deposit currency to and order currency from Reserve
Banks within the same week, instead of recirculating currency deposited with
them among their customers.
The proposed policy will change the way certain DIs interact with Reserve Banks in
the area of currency services. Based on current behavior, approximately 100 Federal Reserve
System cash customers—out of approximately 8,000—may incur fees under the proposed policy.
Within a week, potentially affected institutions will receive a letter from the Federal Reserve,
with an order and deposit activity report that shows the probable fee impact on the DI nationally.

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.

-2If you do not receive an order and deposit activity report, your organization is not
currently ordering and depositing currency in a way that would cause you to incur fees.
However, if you would like to receive an electronic report, please go to www.frbservices.org/
Cash/index.cfm and provide your contact information. After your request is received and
authenticated, a copy of the report for your organization will be sent via e-mail within 10
business days.
Reason for Change
The Board of Governors believes that current cash handling practices have led to
overuse of public sector resources. As the central bank, the Federal Reserve accepts deposits
from institutions with a surplus of currency and provides currency to institutions with a shortfall;
these “middleman” services are provided free of charge. Since the mid-1990s, however, an
increasing number of DIs have used the Fed’s services to keep their own inventories and
associated costs as low as possible. Rather than continuing to supply commercial customers,
ATMs, and branches with currency obtained from customer deposits throughout the week, these
DIs have transported—sometimes on a daily basis—their customers’ deposits to the Fed and
filled their customers’ orders with currency received from the Fed. This practice, known as
“cross-shipping,” has expanded the scope of the Federal Reserve’s services beyond those implied
by its central bank role. This expansion imposes a real cost on society. In 2002, the Federal
Reserve spent approximately $35 million to process nearly seven billion cross-shipped $5s, $10s,
and $20s.
Goal of the Policy
The goal of the policy change, therefore, is to improve efficiency and reduce the total
costs associated with cash handling nationwide by encouraging DIs to reduce their overuse of
free Federal Reserve Bank cash services.
Proposed Policy Components
The proposed policy has two components. First, the policy establishes a “Custodial
Inventory” (CI) program, whereby DIs would be allowed, under certain circumstances, to hold
currency in their own vaults but accounted for on the Fed’s books. This program would
compensate DIs for the higher opportunity costs they will incur when they hold currency and
recirculate it among their customers. DIs may qualify to participate in the CI program when they
recirculate 200,000 or more notes (200 bundles) of $5s, $10s, and $20s per week.
Second, the policy would charge DIs a fee for using Federal Reserve currency
services if they could have recirculated the currency among their customers. This fee would
replace the current denial-of-service penalty for cross-shipping contained in the Federal Reserve
Banks’ Cash Services Operating Circular No. 2. The fee would be assessed on all deposits of fit
notes in the $5 to $20 denominations that are followed or preceded by an order of the same
denomination within the same calendar week. The fee would range from $5 to $6 per 1,000
notes, based on the Federal Reserve’s long-run incremental cost of receiving, processing, storing,

-3and paying out this currency. Charging a fee to recover Reserve Banks’ costs, as opposed to
denying service, encourages DIs to choose the least-cost alternative when determining how to
supply currency to their customers.
Please note that the fee will not be assessed on deposits of fit notes in the $5 to $20
denominations if they are not followed or preceded by an order of the same denomination within
the same calendar week. In addition, deposits of unfit notes will not be subject to the fee.
The Board must receive comments regarding the proposed policy changes by January
15, 2004. Please address comments to Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.
However, because paper mail in the Washington area and at the Board is subject to delay, please
consider submitting your comments by e-mail to regs.comments@federalreserve.gov. All
comments should refer to Docket No. OP-1164.
ATTACHMENT
A copy of the Board’s notice as it appears on page 59176–82, Vol. 68, No. 198 of the
Federal Register dated October 14, 2003, is attached.
MORE INFORMATION
For additional information, please contact one of the following at the Board:
Eugenie E. Foster, Project Leader, Cash Section, Division of Reserve Bank Operations and
Payment Systems at 202-736-5603, or Michael Lambert, Manager, Cash Section, Division of
Reserve Bank Operations and Payment Systems at 202-452-3376.
You may also contact Rick Mase at the Dallas Office, 214-922-6531; Jane Pyke at the
El Paso Office, 915-521-8265; C.O. Holt at the Houston Office, 713-652-1530; or Mario Garcia
at the San Antonio Office, 210-978-1300.
Detailed information about the Custodial Inventory program will be available on the
Federal Reserve System financial services web site at www.frbservices.org/Cash/index.cfm
beginning January 29, 2004.
Paper copies of this notice or previous Federal Reserve Bank notices can be printed
from our web site at www.dallasfed.org/banking/notices/index.html.
Sincerely,

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Federal Register / Vol. 68, No. 198 / Tuesday, October 14, 2003 / Notices

FEDERAL RESERVE SYSTEM
[Docket No. OP–1164]

Federal Reserve Bank Currency
Recirculation Policy
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Request for comment; notice.

The Board is requesting
comment on proposed changes to its
cash services policy to reduce
depository institutions’ overuse of
Federal Reserve Bank cash processing
services, which will affect
approximately 100 institutions with
large cash businesses. The Board
proposes revising its policy by adding
two elements: (1) A custodial inventory
program that provides an incentive to
depository institutions to hold currency
in their vaults to meet customers’
demand, and (2) a fee to depository
institutions that deposit currency to and
order currency from Reserve Banks
within the same week instead of
recirculating currency deposited with
them among their customers. The Board
has authorized Reserve Banks to
conduct a proof-of-concept program
during 2004 to provide information
about the proposed custodial inventory
program.
EFFECTIVE DATE: Comments must be
received by January 15, 2004.
ADDRESSES: Comments should refer to
Docket No. OP–1164 and may be mailed
to Ms. Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551. However, because paper mail
in the Washington area and at the Board
of Governors is subject to delay, please
consider submitting your comments by
e-mail to
regs.comments@federalreserve.gov, or
faxing them to the Office of the
Secretary at 202/452–3819 or 202/452–
3102. Members of the public may
inspect comments in Room MP–500 of
the Martin Building between 9 a.m. and
5 p.m. on weekdays pursuant to
§ 261.12, except as provided in § 261.14,
of the Board’s Rules Regarding
Availability of Information, 12 CFR
261.12 and 261.14.
Comments on the collections of
information under the Paperwork
Reduction Act should be sent to the
Secretary, with copies of such
comments sent to the Office of
Management and Budget, Paperwork
Reduction Project (7100—to be
obtained), Washington, DC, 20503.
FOR FURTHER INFORMATION CONTACT:
Eugenie E. Foster, Project Leader (202/
SUMMARY:

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736–5603), or Michael Lambert,
Manager (202/452–3376), Cash Section,
Division of Reserve Bank Operations
and Payment Systems; for the hearing
impaired only: Telecommunications
Device for the Deaf, Dorothea Thompson
(202/452–3544).
SUPPLEMENTARY INFORMATION:
1. Background
The Federal Reserve Banks (Reserve
Banks) supply genuine (new and fit)
currency and coin to depository
institutions throughout the nation to
meet the public’s cash demand.
Historically, Reserve Banks have
removed unfit notes from circulation
and served as intermediaries among
depository institutions, accepting
deposits from those with a surplus of fit
notes and providing currency to those
with a shortfall.1 Depository
institutions, in turn, have acted as
intermediaries among their customers,
recirculating currency from merchant
customers, for example, to meet the cash
demands of households and other
customers.
These traditional patterns have been
changing as depository institutions have
used fewer fit notes deposited by
customers to fill other customers’
orders. Today, depository institutions
often order currency directly from
Reserve Banks to fill their customers’
orders and deposit notes received from
their customers directly with Reserve
Banks. A number of depository
institutions, for example, have
reorganized their businesses to
distribute currency to ATMs separately
from currency distributed to large retail
customers or to the institution’s
branches. Each of these depository
institutions’ business lines withdraws
currency from Reserve Banks without
first exhausting currency that its other
business lines may accumulate from
customer deposits within the same
geographic area.
Further, actions taken by many
depository institutions to reduce their
required reserves may have permitted
them to reduce their holdings of vault
cash.2 Depository institutions with vault
1 Fit notes are of acceptable quality for
circulation, whereas unfit notes are unacceptable.
For example, unfit notes are often soiled, torn, or
defaced. New notes are previously uncirculated
notes that Reserve Banks issue.
2 Depository institutions can satisfy their reserve
requirements with vault cash, or with reserve
balances held at a Reserve Bank either directly or
through a pass-through correspondent. Since the
mid-1990s, however, many depository institutions
have sharply reduced their reserve requirements by
sweeping balances held by retail customers in
deposit accounts that are reservable into deposit
accounts that are not reservable. For some
institutions, the reduction in required reserves left

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cash in excess of that needed to satisfy
reserve requirements have an incentive
to economize on holdings of currency in
their vaults, particularly by increasing
the size and frequency of their deposits
of currency to and orders of currency
from Reserve Banks.3
Reserve Banks’ order and deposit
activity during 2002 indicates that
deposits of nearly 6.7 billion $5 through
$20 notes were followed or preceded by
orders of the same denomination by the
same institution in the same business
week.4 This pattern suggests that some
depository institutions are relying on
Reserve Banks to recirculate a
substantial amount of currency within
the depository institutions’ own
organizations and that this currency
makes up a significant portion of their
cash deposits to Reserve Banks. Further,
this activity is primarily concentrated in
100 depository institutions with large
cash businesses. Underpinning
depository institutions’ decisions to
use—and overuse—Reserve Bank cash
processing services is the fact that
Reserve Banks offer basic currency
processing services without charge.
2. Current Policy
Reserve Banks’ Operating Circular 2,
Cash Services, states:
If you deposit fit currency with us, you
may not order currency of the same
denomination within five business days prior
to or following the deposit of that
denomination. This practice, known as
‘‘cross-shipping,’’ is not permitted at the
depositing office level. When practicable,
cross-shipping should be minimized or
eliminated at the depositing institution
level.5

This policy has proven ineffective in
reducing or preventing cross-shipping
for several reasons. The direction to
depository institutions to minimize
cross-shipping at the institution level
(instead of the branch or business-unit
level) ‘‘when practicable’’ does not
provide sufficient guidance to
depository institutions or Reserve Banks
with respect to the circumstances under
which cross-shipping should not occur.
More fundamentally, the only tool
Reserve Banks currently have to enforce
them with more vault cash than necessary to meet
requirements.
3 Vault cash holdings do not earn interest. If an
institution deposits currency with a Reserve Bank,
it receives credit to its account at the Federal
Reserve. The depository institution can then earn a
positive return on those funds by lending them to
another institution, such as in the federal funds
market.
4 This amounts to 35 percent of notes deposited
in these denominations, or 20 percent of total
deposits in 2002.
5 Federal Reserve Operating Circular 2, January 2,
1998, section 3.3. http://www.frbservices.org/Cash/
index.cfm.

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Federal Register / Vol. 68, No. 198 / Tuesday, October 14, 2003 / Notices

3. Proposed Recirculation Policy
The Board believes that to minimize
the societal cost of providing currency
to the public, depository institutions
should resume their traditional role of
supplying fit currency from their
customers’ deposits to meet other
customers’ needs before turning to
Reserve Banks to obtain currency. To
provide incentives for depository
institutions to adopt the least costly
means of recirculating currency to their
customers, the Board proposes to
implement a policy that has two interrelated components: a custodial
inventory program and a fee that would
be assessed on deposits of cross-shipped
currency.

peak-day deposits of unprocessed
currency for handling later in the week.
Custodial inventories also may allow
depository institutions to avoid the
costs of preparing and transporting their
temporarily surplus currency to and
from Reserve Bank cash offices. For
years, central banks in some other G–10
countries have used custodial inventory
programs to increase recirculation by
depository institutions.
While the Board intends for the
custodial inventory program to provide
an incentive to depository institutions
to avoid cross-shipping, institutions
should continue to maintain on their
own books sufficient currency
inventories to meet normal currency
operations and contingency needs.
Depository institutions could transfer to
a custodial inventory no more than 25
percent of the value of their total
holdings in the $5 through $20
denominations. In addition, any
institution that uses a custodial
inventory to circumvent the intent of
the recirculation policy, for example, by
alternating the weeks in which it orders
and deposits currency to a Reserve
Bank, would lose its eligibility to
participate in the program.

Custodial Inventory Program
One reason that depository
institutions engage in cross-shipping is
to avoid incurring opportunity costs of
holding currency, which earns no
interest income. To mitigate these costs
associated with holding currency long
enough to facilitate its recirculation, the
Board proposes to allow the depository
institutions to transfer into custodial
inventories $5, $10, and $20 notes that
they might otherwise cross-ship. A
custodial inventory is currency owned
by a Reserve Bank but located within a
depository institution’s secured facility
and segregated from the depository
institution’s currency. To be eligible to
hold a custodial inventory under the
proposed program, a depository
institution must be capable of, and
commit to, recirculating substantial
amounts of currency in the $5 through
$20 denominations in order to justify
the administrative costs and the risks to
Reserve Banks of allowing depository
institutions to hold Reserve Bank
currency in their vaults. Under the
custodial inventory program, depository
institutions could move to Reserve
Banks’ accounts currency that is
temporarily surplus but that the
institutions expect to pay to customers
within the same business week. The
Board understands that custodial
inventories may facilitate smoother use
of depository institutions’ processing
equipment by allowing them to store

Custodial Inventory Proof-of-Concept
Program
Before undertaking a permanent
custodial inventory program, the Board
has authorized Reserve Banks to
implement during 2004 a one-year
proof-of-concept program. The purpose
of the proof-of-concept program is to
allow Reserve Banks to evaluate how
custodial inventories influence
depository institutions’ patterns of
depositing and withdrawing currency,
while allowing depository institutions
to assess the costs and benefits of
participating in the program. Reserve
Banks also need to evaluate more fully
the costs as well as the operational risks
and risk management procedures for the
custodial inventory program before
undertaking a permanent program.
Reserve Banks would select
approximately 15 proof-of-concept sites
from depository institution applications.
Throughout the proof-of-concept
program, Reserve Banks would monitor
the order and deposit activity of
participating institutions to determine
whether they have recirculated more
currency within their organizations than
they did before the establishment of the
custodial inventory.
Reserve Banks will select proof-ofconcept sites from a cross-section of
depository institutions that are high
volume users of Reserve Bank cash
services. At a minimum, proof-ofconcept program participants must

the policy is to deny currency services
to depository institutions that do not
comply with the operating circular
requirement. Denial of service would be
highly disruptive to the businesses of
both the depository institutions and
their customers. In addition, Reserve
Banks have not had systematic tools for
monitoring the quality of specific
currency deposits, making the process
of identifying cross-shipping
cumbersome and costly.

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59177

demonstrate that they will recirculate at
least 200 bundles of currency per week
in a Reserve Bank zone or sub-zone.6 An
institution that currently cross-ships at
least 200 bundles of currency per week
in a zone or sub-zone would meet the
recirculation threshold for a custodial
inventory proof-of-concept.
Alternatively, an institution could meet
the threshold for a proof-of-concept site
by providing deposit and payment
records demonstrating that it
recirculates at least 200 bundles of
currency weekly among its customers.
After reviewing the results of the proofof-concept program, Reserve Banks will
determine the minimum bundles of
currency a depository institution must
recirculate weekly to qualify for a
custodial inventory. Thereafter, Reserve
Banks would review annually the
minimum bundles required to support a
custodial inventory.
The Board will review and use the
results of the proof-of concept program
to develop an inventory cap formula for
determining the amounts of currency
that depository institutions may transfer
to Reserve Bank books. Each proof-ofconcept custodial inventory will be
subject to an inventory cap of either (1)
25 percent of average closing balances of
currency during the previous week at
that location (including both depository
institution and Reserve Bank balances)
in the $5 through $20 denominations, or
(2) 25 percent of average daily closing
balances of currency for the four
previous same days of the week in the
$5 through $20 denominations at that
location.7 Reserve Banks will test both
formulas to enable the Board to
determine the inventory cap percentage
that allows the proper balance between
providing an incentive to depository
institutions to recirculate and limiting
the transfer of inventory to Reserve
Bank accounts. The Reserve Banks will
also evaluate whether one inventory cap
better promotes efficiency and
administrative convenience for the
6 A bundle of currency is a standard package of
1,000 notes. A zone is the area to which a Reserve
Bank office provides currency services. Under this
proposed policy, Reserve Banks may establish subzones for large metropolitan areas at a significant
distance from the nearest Reserve Bank office.
Deposits and orders by institutions with branches
and vaults in a sub-zone would be assessed crossshipping fees separately from the institutions’
activities in the rest of the zone.
7 For example, under alternative 1, a depository
institution that had daily balances averaging $100
million during the previous week would be subject
to an inventory cap of $25 million. Under
alternative 2, Monday’s cap would be based on the
average of the previous four Mondays, Tuesday’s
cap would be based on the average of the previous
four Tuesdays, and so forth.

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Federal Register / Vol. 68, No. 198 / Tuesday, October 14, 2003 / Notices

depository institutions and Reserve
Banks.
Reserve Banks will select proof-ofconcept program participants to include
depository institutions that:
(1) Deposit more than they order,
order more than they deposit, and
deposit and order in roughly balanced
amounts;
(2) Are located a range of distances
from the nearest Reserve Bank office;
(3) Serve differently sized markets;
and
(4) Use a range of currency processing
equipment and engage in a variety of
currency handling practices, including,
for example, outsourced or consortium
arrangements.
The Board will begin to evaluate the
results of the proof-of-concept program
after six months of operation and will
measure the success of the program to
the extent that:
(1) Proof-of-concept participants
significantly reduce cross-shipping or
recirculate significant amounts of
currency within the Reserve Bank zone
or sub-zone in which the proof-ofconcept site is located; and
(2) Deposits received from proof-ofconcept participants contain a higher
proportion of unfit notes than the
average for all deposits in the same
denominations in the Reserve Bank
zone or sub-zone in which the proof-ofconcept site is located.
Based on the public comments and
the results of the proof-of-concept
program, the Board will determine
whether to implement a permanent
custodial inventory program. If a
program is implemented, proof-ofconcept participants will have the
opportunity to continue operating
custodial inventories consistent with
the final requirements.
Proof-of concept applications and the
custodial inventory contract will be
accessible through the Federal Reserve
System Financial Services Web site,
http://www.frbservices.org, beginning on
January 29, 2004. Reserve Banks expect
to accept applications between January
29, 2004, and March 15, 2004, for proofof-concept sites located in the areas
currently served by the following
Federal Reserve offices: Boston;
Charlotte; Chicago; Cleveland; Denver;
Detroit; East Rutherford; Houston;
Kansas City; Los Angeles; Miami;
Minneapolis; Nashville; Oklahoma City;
Philadelphia; San Francisco; Seattle;
and St. Louis.
Recirculation Fee
Because the Board expects that
custodial inventories alone will not
substantially reduce cross-shipping, it
proposes to establish a recirculation fee

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to provide further incentive for
depository institutions to recirculate
currency. Based on current levels of
Reserve Bank costs, the fee would be $5
to $6 per bundle of cross-shipped
currency. Depository institutions would
pay the fee when they deposit fit
currency and order the same
denomination within the same business
week in a Reserve Bank zone or subzone. The fee would not be assessed on
deposits of unfit or surplus fit currency,
where surplus is defined as currency
that is not needed by the depository
institution within the business week of
its deposit. The fee also would not be
assessed on deposits of $50 and $100
notes because these notes are a
relatively minor component of crossshipped currency and, more
importantly, because of the risk that
depository institutions might recirculate
high-denomination counterfeit notes.
The Reserve Banks estimate that the
recirculation fee would affect
approximately 100 of the Reserve Banks’
largest cash customers.
The Board proposes initially to
exclude one-dollar notes from the
recirculation policy. Because of the
relatively low incidence of
counterfeiting and the low value of onedollar notes, depository institutions
handle them differently from higher
denominations in various ways that
minimize costs. The incremental costs
to depository institutions of sorting and
recirculating fit one-dollar notes instead
of ordering them from Reserve Banks
would likely be greater than the costs
for higher denomination notes. Reserve
Banks are working with the banking
industry with the goal of achieving net
savings comparable to those that
Reserve Banks could realize by
including one-dollar notes in the
recirculation policy. If this collaborative
effort fails to yield comparable savings
to those achieved by Reserve Banks
through implementation of this policy
within two years of the effective date of
the permanent custodial inventory
program, the Board proposes to apply
the recirculation policy to one-dollar
notes.
The Board proposes to set the
recirculation fee to recover Reserve
Banks’ costs that vary with the quantity
of currency that they process. The
recirculation fee would not be subject to
the pricing requirements of the
Monetary Control Act (MCA). The MCA
applies to currency and coin services
such as transportation and coin
wrapping, but not to services ‘‘of a
governmental nature, such as the
disbursement and receipt of new or fit

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coin and currency.’’ 8 The Board
determined, in the development of its
pricing principles, that ‘‘currency and
coin processing (paying, receiving, and
verifying both coin and currency, and
issuing, processing, canceling, and
destroying currency) are governmental
functions and would not be considered
priced services subject to MCA.’’ 9 The
proposed recirculation fee is not for
priced cash services subject to MCA;
rather, it is a recovery of costs intended
to encourage private-sector behavioral
changes that would lower the overall
societal costs of cash processing and
distribution by curtailing overuse of a
free governmental service.
De minimis Exemption
The Board proposes to exempt de
minimis levels of cross-shipped
currency from the recirculation fee.
Depository institutions would not pay a
recirculation fee for the first 1,000
bundles of currency cross-shipped in a
zone or sub-zone each quarter for three
reasons.10 First, the exemption would
compensate for minor differences
between currency fitness determinations
made by depository institutions and
Reserve Banks in processing these
notes.11 Second, the exemption would
limit the effect of the policy on
institutions whose small scale of
currency operations may not justify
investments in sorting equipment.
Third, the exemption would allow
depository institutions experiencing
unanticipated swings in customer
demand to order or deposit currency
without incurring a fee. The proposed
exemption would not have a material
effect on Reserve Bank processing
volumes, but would reduce or eliminate
the cost of the policy for a large number
of depository institutions.
A Reserve Bank would apply the de
minimis exemption to currency that a
depository institution cross-ships in a
zone or sub-zone during each quarter.
Depository institutions could not
transfer a de minimis exemption from
one zone or sub-zone to another. All or
part of an exemption that a depository
institution did not use during a quarter
would expire at the end of that quarter.
Reserve Banks would apply the
exemption against depository
8 126 Cong. Rec. S3168 (March 27, 1980)
(statement of Senator Proxmire).
9 45 FR 56893, September 4, 1980.
10 Reserve Banks will review the level of the de
minimis exemption annually. The 1,000-bundle
exemption excludes one-dollar notes.
11 Because Reserve Banks would assess the
recirculation fee for all fit notes deposited above the
de minimis exemption, depository institutions
would have an incentive to ensure that their fitness
determinations are comparable to those of Reserve
Banks.

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Federal Register / Vol. 68, No. 198 / Tuesday, October 14, 2003 / Notices
institutions’ total volumes of crossshipped currency, not against each
individual denomination.
Cost Analysis of the Recirculation Policy
During 2002, Reserve Banks processed
34.2 billion notes, with total costs of
approximately $342 million. This
number includes 19.4 billion $5 through
$20 notes, 6.7 billion of which
depository institutions cross-shipped.
Curtailing current cross-shipping and its
expected future growth would reduce
Reserve Banks’ expenses by enabling
them to scale down currency processing
operations and delay future capital
investments in equipment and facilities.
The Board estimates that by
implementing the proposed
recirculation policy, Reserve Banks
could avoid currency processing costs of
up to $35 million per year based on
2002 expense data.12
Custodial Inventory Program
Reserve Banks would incur
approximately $400,000 per year in
operating costs to administer the
proposed custodial inventory program,
including auditing the custodial
inventories, managing the overall
program, and amortizing an investment
to develop software to monitor Reserve
Bank currency in custodial inventories.
The Reserve Banks estimate that during
the first year of the program their costs
would total approximately $600,000
because of one-time charges for training
and site evaluations.
The Board believes that depository
institutions also may incur some
additional costs in operating a custodial
inventory. For example, depository
institutions may have to modify their
facilities to segregate Reserve Bank
currency or to enhance their physical
security, perhaps by installing
surveillance equipment. They may also
have to enhance physical- and
procedural-access controls and engage
in additional sorting and other handling
of the notes held in a custodial
inventory.
Recirculation Fee
Most of the depository institutions
with the largest cash operations have
reported that, whether or not the Board
12 This estimate includes costs that vary with the
volume of currency processed, including labor,
materials, and equipment. The amount by which
Reserve Banks are able to reduce costs would
depend on the actual decline in volumes because
of this proposed policy. This decline would depend
on the extent to which: (1) Depository institutions
elect to pay the fee instead of recirculating; (2)
depository institutions take full advantage of the de
minimis exemption; and (3) depository institutions
alter their handling of denominations not covered
by the proposed policy.

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adopts this recirculation policy, by 2006
they will use medium- or high-speed
sorting equipment to process much of
the currency deposited to Reserve
Banks. Most of these depository
institutions would need only
inexpensive modifications to their
processing equipment to recover fit
currency for recirculation. The Board
estimates that the total annual
incremental expense would be
approximately $2 million for all
institutions using automated equipment
to identify notes that are fit to
recirculate.13
With the recirculation fee at $5 to $6
per bundle of cross-shipped currency,
the Board projects that depository
institutions would incur up to $18
million in fees annually where it is not
economical for them to install currency
fitness sorting equipment.14 Instead of
paying a recirculation fee to cross-ship
this currency, however, the Board
would expect depository institutions to
explore lower-cost alternatives, such as
having tellers manually sort currency at
the point of receipt, paying currency to
customers without fitness sorting when
a range in the quality of notes is
acceptable to customers, or obtaining
currency processing services from other
local institutions or armored carriers
able to offer pricing that reflects
economies of scale.15 The Board would
expect, therefore, that altogether
depository institutions would incur
total costs of approximately $20 million
annually for recirculating most of the $5
through $20 denomination notes they
currently cross-ship.
Conclusion
The Board projects that the societal
benefits of implementing the
recirculation fee would outweigh the
societal costs by up to $15 million per
year.16 For the most part, the benefits
would accrue from avoided operating
expenses at Reserve Banks. Greater
recirculation by depository institutions
13 The Board assumes that depository institutions
that use or acquire medium- or high-speed sorting
equipment would use it to process all but onedollar notes for quality. This estimate also assumes
that under the proposed policy those depository
institutions would process most of the $5 through
$20 notes that they deposited with Reserve Banks
during 2002.
14 This is the total estimated recirculation fee that
depository institutions would incur if they crossshipped 50 percent of $5 through $20 notes.
15 Depository institutions indicate that their
customers are willing to accept a wider range in the
quality of $5 notes than for the higher
denominations.
16 The incremental costs to Reserve Banks to
implement the recirculation fee will be minimal—
primarily costs associated with amortizing a $600
thousand software development investment that
will allow Reserve Banks to track cross-shipping
systematically.

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would reduce the growth of Reserve
Bank currency receipts and processing,
and delay expansion of publicly owned
and operated currency-processing
infrastructure. Depository institutions
may incur increased costs if they elect
to participate in the custodial inventory
program, take actions to avoid paying
fees, or choose to pay fees. Any costs
incurred by depository institutions are
estimated to be significantly smaller
than the costs that Reserve Banks will
avoid if the institutions reduce or cease
cross-shipping currency.
Phased Implementation
The Board proposes to implement the
recirculation policy in phases. If the
Board approves implementation of the
custodial inventory program following
the proof-of-concept program, the first
phase will expand the program to all
eligible participants. In the second
phase, which will begin approximately
one year after the effective date of the
permanent custodial inventory program,
Reserve Banks will begin assessing the
cross-shipping fee.17 In the third phase,
which will begin two years after the
effective date of the permanent
custodial inventory program, the Board
would extend the recirculation policy to
one-dollar notes if the Reserve Banks’
net savings from collaborating with
depository institutions is not
comparable to those resulting from the
implementation of this policy for $5
through $20 notes.
5. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (PRA) 18, the
Board reviewed the proposed rule under
the authority delegated to it by the
Office of Management and Budget
(OMB). The proposed rule contains
requirements that are subject to the PRA
and required to obtain a benefit. The
respondents/recordkeepers are for-profit
financial institutions. The Board may
not conduct or sponsor, nor is an
organization required to respond to, this
information collection unless it displays
a currently valid OMB control number.
The Board will obtain an OMB control
number.
In 2003, the Board authorized Reserve
Banks to implement a one-year proof-ofconcept program starting in 2004. The
proof-of-concept program would allow
Reserve Banks to evaluate how custodial
inventories influence depository
institutions’ patterns of depositing and
withdrawing currency, while allowing
17 If the Board decides not to implement the
custodial inventory program, it will implement the
recirculation fee one year after termination of the
proof-of-concept program.
18 44 U.S.C. 3506; 5 CFR 1320 Appendix A.1.

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depository institutions to assess the
value of participating in the program. To
initiate the proof-of-concept program,
Reserve Banks would select 15
depository institution sites from
applications submitted via the Internet.
The Board estimates that it would take
a depository institution, on average, 12
hours (ranging from 8 and 16 hours) to
complete and submit an application.
The application would request
information such as: A description of
the vault and vault security; contact
person information; prior year’s loss
history for the proposed vault; volume,
amount, and daily averages of vault
holdings; personal computer availability
and Internet access; and certification of
insurance coverage. After being
accepted into the proof-of-concept
program, depository institutions would
be required to use an Internet-based
inventory tracking system that would
take each institution approximately 15
minutes per day (excluding weekends
and holidays) to track cash inventory.
The Board would begin to evaluate
the results of the proof-of-concept
program after six months of operation.
Based on the public comments and the
results of the proof-of-concept, the
Board would determine whether to
implement a permanent custodial
inventory program.
If the Board implements a permanent
program, the 15 proof-of-concept
participants would have the opportunity
to continue operating custodial
inventories, and Reserve Banks would
select up to 135 additional sites. These
new participants would be required to
submit an application and, if accepted
into the program, use the Internet-based
inventory system.
The Board will review and, if needed,
revise the following burden estimates
after the first six months of the proof-ofconcept program:
(1) Number of proof-of-concept
program sites: 15.
(2) Number of custodial inventory
sites: 150.
(3) Response time: 12 hours per
application submitted; 15 minutes per
day for inventory tracking; estimated
total annual burden: 11,175 hours.
The Board requests comment on how
many depository institutions will
complete and submit the application to
partake in the proof-of-concept program
or the custodial inventory program,
including:
(1) Whether the proposed collection
of information is necessary for the
proper performance of the Board and
Reserve Banks’ functions; including
whether the information has practical
utility;

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(2) The accuracy of the Board’s
estimate of the burden of the proposed
information collection, including the
cost of compliance;
(3) Ways to enhance the quality,
utility, and clarity of the information to
be collected; and
(4) Ways to minimize the burden of
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology.
6. Comments
The Board requests comments on all
aspects of the proposed recirculation
policy as described below, on the
benefits and drawbacks of implementing
it, and, in particular, on the following
questions:
(1) How effective will the proposed
custodial inventory program and the
recirculation fee be in reducing or
eliminating cross-shipping? What are
the major benefits and drawbacks of
custodial inventories and the
recirculation fee?
(2) Are there effective alternate
approaches that the Board should
consider to increase depository
institutions’ recirculation of currency?
(3) Are there factors not described in
this notice that would affect a
depository institution’s decision to pay
a recirculation fee or undertake greater
recirculation of currency within its
organization? What are the benefits and
drawbacks of allowing a de minimis
exemption of 1,000 bundles of currency
per depository institution per quarter for
a zone or sub-zone? Is there an
alternative approach to administering
the de minimis exemption that would
address identified drawbacks and still
achieve the intended objectives of
reducing the burden of complying on
depository institutions with small
currency operations while ensuring that
most cross-shipping activity is governed
by the policy?
(4) Under what circumstances would
it be reasonable and practical for
depository institutions to adopt lowercost alternatives to the recirculation fee,
such as having tellers manually sort
currency at the point of receipt, paying
currency to customers without fitness
sorting when a range in the quality of
notes is acceptable to customers, or
obtaining currency processing services
from other local institutions or armored
carriers able to offer prices that reflect
economies of scale?
(5) Are there alternative approaches
that could be used to improve the
efficiency of handling one-dollar notes
other than applying the cross-shipping
fee? What savings would an institution

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expect to realize from these alternative
approaches?
(6) What costs would a depository
institution anticipate incurring for
operating a custodial inventory? How
should Reserve Banks calculate the cap
on the amount of currency that a
depository institution may deposit in a
custodial inventory? How many bundles
of currency should Reserve Banks
require a depository institution to
recirculate per week to qualify for a
custodial inventory?
(7) What would be the effects of the
program, if any, on depository
institutions’ customers, on armored
carriers, or on other parties?
7. Proposed Federal Reserve Cash
Recirculation Policy
The Board proposes the following
policy to promote depository institution
recirculation of currency.
Policy
Reserve Banks’ role in the distribution
of currency is to make available to
depository institutions a supply of
genuine (new and fit) currency
sufficient to meet the public’s cash
demand. Reserve Banks remove unfit
notes from circulation and act as
intermediaries between depository
institutions, accepting notes from those
that have a surplus and providing
currency to those with a shortfall.
Depository institutions act as
intermediaries to recirculate fit currency
among their customers. Cross-shipping
occurs when an institution deposits fit
currency and orders currency of the
same denomination, above the de
minimis exemption, within the same
week, in a Reserve Bank zone or subzone.
Custodial Inventory Program
The Board proposes to establish a
custodial inventory program to promote
currency recirculation by reducing
depository institutions’ opportunity
costs for holding currency. Participants
in the custodial inventory program
would hold, in their vaults, currency on
the books of the Reserve Banks that they
otherwise might have shipped to, and
then ordered from, Reserve Banks
during a business week. This program
would include the following elements.
(1) Only depository institutions are
eligible to participate in the custodial
inventory program; however, depository
institutions that outsource their
currency vault(s) to a third party would
also be eligible.
(2) A depository institution must be
able to recirculate among its customers
a substantial volume of eligible
denominations of currency in the zone

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Federal Register / Vol. 68, No. 198 / Tuesday, October 14, 2003 / Notices
or sub-zone of a proposed custodial
inventory site. If the Board approves
implementation of a permanent
custodial inventory program, Reserve
Banks will determine the minimum
bundles of currency that depository
institutions must be able to recirculate
on a weekly basis to qualify for the
custodial inventory program. Thereafter,
Reserve Banks will review annually the
minimum bundles required for
depository institution participation in
the custodial inventory program.
(3) Depository institutions may
deposit into custodial inventories notes
that they sort by denomination, count,
and package in bundles. Depository
institutions may deposit notes of any
denomination that is subject to the
recirculation fee.
(4) Depository institutions may
deposit currency into or withdraw
currency from custodial inventories at
any time during the local Reserve
Bank’s business day.
(5) Depository institutions may
maintain currency in custodial
inventories on the Reserve Bank’s books
during fitness sorting or re-packaging.
(6) After reviewing the results of the
proof-of-concept program, the Board
will establish the inventory cap for
currency that depository institutions
may deposit into custodial inventories.
(7) Depository institutions that
operate custodial inventories may
continue to order currency from and
deposit currency to Reserve Banks,
which will monitor the activity for
cross-shipping.
(8) Reserve Banks will require
depository institutions to account for
custodial inventory transactions via a
Reserve Bank-provided, Internet-based
accounting and inventory tracking
system, to allow both Reserve Banks and
the depository institutions to monitor
the Reserve Bank-owned currency.
(9) Depository institutions that
operate custodial inventories must agree
to requirements that mitigate the risks
that Reserve Banks incur by allowing
the institutions to hold their currency.
These measures include the following:
(a) A depository institution that
operates a custodial inventory must
indemnify the Reserve Bank against
theft or loss of Reserve Bank currency.
As provided in Reserve Banks’
Operating Circular 1, Account
Relationships, any such obligation is
secured by all of the institution’s assets
in the possession of, or maintained

with, any Reserve Bank, including its
Federal Reserve account.
(b) Potential custodial inventory sites
must comply with Reserve Bank
physical security guidelines for vaults,
access control, and camera coverage.
(c) Depository institutions proposing
potential custodial inventory sites must
agree to operate their facilities in
accordance with Reserve Bank
guidelines for access and control.
(d) Depository institutions that
operate custodial inventories must
segregate Reserve Bank currency from
other currency.
(e) Depository institutions that
operate custodial inventories must
allow full access to Reserve Banks, the
Board, the General Accounting Office,
and their agents for unannounced audits
of Reserve Bank currency.
(f) To qualify for a custodial
inventory, a depository institution must
be financially sound, as determined by
its administrative Reserve Bank.
(10) Any depository institution that
uses a custodial inventory to circumvent
the intent of the recirculation policy
will lose its eligibility to participate in
the program.
Recirculation Fee
(1) Fee. Reserve Banks will charge
depository institutions a recirculation
fee to recover currency processing costs
for every 1,000 fit notes that a
depository institution cross-ships, above
a de minimis exemption. A Reserve
Bank will assess a recirculation fee if a
depository institution deposits fit
currency and orders the same
denomination within the same business
week, within a Reserve Bank zone or
sub-zone. This policy does not apply to
$50 and $100 notes.19 Based on current
costs, Reserve Banks project that the
recirculation fee will be in the $5 to $6
range for every 1,000 notes of currency
that a depository institution cross-ships.
Reserve Banks will announce the
amount in the quarter before
implementing the fee.
(2) Recirculation fee components. The
recirculation fee will be based on those
Reserve Bank costs that vary with the
quantity of currency processed. Such
costs include personnel, materials, and
equipment. The fee will not include
overhead costs such as facilities, legal,
business development, audit, and
protection services that Reserve Banks
incur to meet their central bank cash
services responsibilities.

(3) Recirculation fee de minimis
exemption. Reserve Banks will allocate
recirculation de minimis exemptions to
depository institutions for each zone or
sub-zone where they do business.
Reserve Banks will apply the
exemptions to depository institutions’
total cross-shipped volume; exemptions
will not be denomination specific. De
minimis exemptions may not be
transferred from one zone or sub-zone to
another. Unused de minimis exemptions
will expire at the end of each quarter.
Initially, the de minimis exemption
would be 1,000 bundles per quarter.
Reserve Banks will review the level of
the de minimis exemption annually.
(4) One-dollar notes. Initially, Reserve
Banks will not assess a recirculation fee
for one-dollar notes. Reserve Banks will
work with the banking industry to
achieve, within two years of the
effective date of the permanent
custodial inventory program, Reserve
Bank net savings comparable to those
that could be realized by including onedollar notes in the policy. Reserve
Banks will review one-dollar
recirculation annually for the duration
of the collaborative program. If this
collaborative effort fails to yield savings
comparable to those achieved by
Reserve Banks through implementing
this policy to the $5 through $20
denominations, the Board will include
one-dollar notes under the recirculation
policy.
(5) Reserve Bank zones and
monitoring. Reserve Banks will monitor
currency orders and deposits for all
endpoints of depository institutions in
each Reserve Bank office service area
(‘‘zone’’) for recirculation. Reserve Bank
zones with large metropolitan areas
located at a significant distance from a
Reserve Bank office may be divided into
smaller service areas (‘‘sub-zones’’).
Reserve Banks will monitor together
endpoints located in and near a subzone under the recirculation policy.
Reserve Banks will monitor endpoints
in other parts of a zone as a group
separate from the endpoints in the subzone. Customers may choose the zone or
sub-zone in which to include border
endpoints. The criteria for establishing
sub-zones balance the size of a
metropolitan area against its distance
from the Reserve Bank office. The table
below outlines proposed sub-zone
criteria, as well as the cities that would
currently qualify. Reserve Banks will
review sub-zone criteria annually.

19 Initially, Reserve Banks will also not assess a
recirculation fee for one-dollar notes.

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Federal Register / Vol. 68, No. 198 / Tuesday, October 14, 2003 / Notices
TABLE 1.—RESERVE BANK SUB-ZONES
Distance from
reserve bank
office

MSAs > 1000 miles from RB with population >
250,000.
MSAs > 250 miles & with population > 500,000 ..........

MSAs > 125 miles & with population > 1,000,000 .......
MSAs > 100 miles & with population >1,500,000 ........

2,387
1,448
275
270
270
278
260
125
168
156
114
111

Metropolitan statistical area (MSA)
Honolulu, HI ..................................................................
Anchorage, AK .............................................................
Las Vegas, NV .............................................................
Albuquerque, NM ..........................................................
Sarasota—Bradenton, Orlando, Tampa, FL ................
McAllen—Edinburg—Mission, TX ................................
Charleston, SC .............................................................
San Diego, CA ..............................................................
Raleigh—Durham—Chapel Hill, NC .............................
Grand Rapids, MI .........................................................
Indianapolis, IN .............................................................
Columbus, OH ..............................................................

Population 20
876,156
260,283
1,563,282
712,738
4,630,517
569,463
549,033
2,813,833
1,187,941
1,088,514
1,607,486
1,540,157

20 Census Bureau Ranking Tables for Metropolitan Areas: Population in 2000, and Population Change from 1990 to 2000, number PHC–T–
3.http://www.census.gov/population/www/cen2000/tablist.html.

(6) Weekly monitoring. Reserve Banks
will monitor depository institutions’
order and deposit activity weekly for
cross-shipping (Monday through
Friday). If a depository institution
circumvents the recirculation policy, for
example, by alternating the weeks in
which it orders and deposits currency,
Reserve Banks will apply the
recirculation fee to fit notes in such
deposits.
(7) Monthly reports. Beginning
February 2004, each Reserve Bank will
make available to any depository
institution, upon request, a monthly
report showing that institution’s order
and deposit activity, and an estimate of
recirculation fees in each Reserve Bank
zone and sub-zone where it does
business in that district.
(8) Zone quarterly average fitness rate.
To calculate an institution’s
recirculation fee for a zone or sub-zone,
Reserve Banks will determine the
number of fit notes deposited as a
percentage of total notes deposited
during each quarter. Reserve Banks will
then apply this quarterly average fitness
rate by zone or sub-zone to an
institution’s deposits during the
following quarter to determine how
much currency it cross-shipped.21
(9) Fitness criteria. By December 31,
2003, Reserve Banks will provide fitness
sorting guidelines and equipment
calibration standards.
21 For example, if an institution’s deposits in a
zone or sub-zone included 80 percent fit currency
during the period January through March, the
Reserve Bank would apply an 80 percent zone or
sub-zone quarterly average fitness rate to deposits
from that depository institution during the April
through June period. The Reserve Bank would
apply the depository institution’s zone or sub-zone
quarterly average fitness rate for second-quarter
deposits of each denomination in determining the
recirculation fee for its third-quarter deposits, and
so forth.

By order of the Board of Governors of the
Federal Reserve System, October 7, 2003.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 03–25901 Filed 10–10–03; 8:45 am]
BILLING CODE 6210–01–P