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FEDERAL RESERVE BANK OF DALLAS
DALLAS, TEXAS
75222
Circular No. 82-149
Novem ber 15, 1982
PROPOSED CHANGES IN PROCEDURES
REGARDING ELIMINATION OF FLOAT
TO ALL DEPOSITORY INSTITUTIONS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Federal R ese r v e Board has requested com m en t on proposed changes
that would elim in ate, or subject to pricing, nearly $1 1/2 billion o f daily Federal
R eserve float. A summary o f the proposals are as follows:
1. Allow Federal R eserve Banks to o ffe r depository institutions tw o or
more options for receivin g credit for direct send and consolidated
item s.
2. E lim inate or price Federal R eserve flo a t a sso c ia te d with the return
o f interterritory check s which are not a c c e p te d for paym ent by the
depository institutions on which they are drawn.
3.
Explicitly price holdover flo a t and "other intraterritory float".
A d etailed discussion of each o f th ese proposals is provided in the
e n clo sed Board press r e le a se and Federal R egister notice.
Interested parties are invited to subm it their c o m m e n ts on the proposed
changes should be subm itted to Mr. William W. Wiles, S ecretary, Board o f Governors
o f the Federal R eserve System , 20th S tr e e t and C on stitution Avenue, N.W.,
Washington, D .C ., 20551. C om m en ts should refer to D o c k e t No. R-0433 and must
be r e c e iv e d by D e cem b er 15, 1982.
If you have any questions, please c o n ta c t Mary M. Rosas, (214) 651-6336
at the Head O ffice; Robert W. Schultz, (915) 544-4730 at the El Paso Branch;
Sam m ie Clay, (713) 659-4433 at the Houston Branch; or John A. Bullock,
(512) 224-2141 at the San Antonio Branch.
Additional c o p ies o f this circular will be furnished upon request to the
D ep artm en t o f Com m unications, Financial and C om m unity A ffairs, Extension 6289.
Sincerely yours,
William H. Wallace
First Vice President
Enclosure
Banks and others are encouraged to use the following incoming W ATS numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERA^ESERV^pr^s^^lease
For immediate release
November 1, 1982
The Federal Reserve Board today requested comment on proposed
changes in procedures that would eliminate, or subject to pricing, nearly
$1 1/2 billion dollars of Federal Reserve float.
The Board asked for comment by December 15, 1982.
The Board acted under the directives of the Monetary Control Act
of 1980 which require
the Federal Reserve to charge for its services and to
price float.
Reserve float is the value of checks for which the
Federal
Federal
Reserve has given credit to the institution that gave
theFederal Reserve
for collection, but for which the Federal
the checks to
Reserve has not
yet received payment.
Federal Reserve float averages about $1.8 billion daily.
The measures
on which the Board requests comment are expected to result in the elimination
or pricing of about 80 percent of this amount.
Priced float will be valued at
the federal funds rate.
The Board's
over the past several
proposals follow adoption of a number of measures
years that have substantially reduced float, chiefly
means of improved internal operating procedures.
float averaged $6.7 billion daily.
by
In 1979, Federal Reserve
In 1980, following initial moves by the
Federal Reserve, daily average Federal Reserve float was reduced to $4.2
billion and at current levels is running 73 percent below the 1979 average.
The Board made its proposals after extensive review of suggestions
for additional float reduction and pricing developed under the direction of
the Federal Reserve's Pricing Policy Committee.
Following this review, the
Board settled on several proposals on which it desires to receive comment.
-2-
These proposals represent a combination of changes in Federal Reserve
operating procedures that could further reduce float and subject the remaining
float to pricing.
The proposals —
action —
spelled out in the accompanying notice of the Board
are:
1.
Allow the Federal Reserve banks to offer depository institutions
whose checks they clear two or more options for receiving credit for checks
given to the Federal Reserve for collection.
attached notice.)
(See Pages 2 and 3 of the
In general, the options would permit Federal Reserve banks
to eliminate this type of float by not giving credit for checks until they
are collected, or to charge banks to which credit is given while checks are
being collected.
It is expected that the proposed revised crediting procedures could
reduce daily average Federal Reserve float by some $900 million, or approximately
half of the current amount.
2.
Eliminate or price another important component of Federal Reserve
float associated with the return of interterritory checks which are not
accepted for payment by the depository institution on which they are drawn.
These "return items" generate float because the Federal Reserve gives credit
for them to the returning institution before it collects from the institution
that originally deposited the checks with the Federal Reserve.
The proposal is to debit the account at the Federal Reserve of the
institution which originally deposited the checks with Federal Reserve.
The
debit would be for large ($50,000 or more) interterritory return items and would be
made on the same day the items are received from the returning institution by
the Federal Reserve.
The depositing institution would be advised by wire, not
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later than 3 p.m., of the returns.
It is expected that this would eliminate
some $150 million of the daily average of $200 million in float caused by
returned checks.
3.
Explicitly price two other types of Federal Reserve float —
holdover float, and "other intraterritory float."
Holdover float results when
a Federal Reserve office is unable to process checks it receives on a timely
baoii.
CLhei liitiaLerritory float results from delays in collection of checks
due to severe weather, equipment failure or operational factors.
The first proposed procedure, if adopted, would be implemented after
the Board has made decisions on two outstanding proposals for speeding up
check collecton, involving noon presentment of checks and modification of
deadline for the deposit of checks for collection.
The second proposal would be implemented, if adopted, during the
second quarter of 1983;
the third at the end of that quarter.
Remaining Federal Reserve float —
daily average —
currently about $250 million
arises primarily from noncheck operations such as securities
transfers, wire transfers, and from the operations of automated clearing houses.
These categories of float are being studied further by the System.
It is
expected that the results of these studies and recommendations for pricing
of this type of float will be considered by the Board in 1983.
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A ttac h m e n t
FEDERAL RESERVE SYSTEM
[Docket No. R-0433]
Reduction and Pricing of Federal Reserve Float
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for comment.
SUMMARY: The Board of Governors is requesting public comment on several
proposals to reduce and price Federal Reserve float. Public comment
is requested on proposals to change Reserve Bank crediting procedures
for interterritory check deposits, adopt a new procedure for handling
large dollar return items and explicitly price several float categories.
DATE:
Comments must be received by December 15, 1982.
ADDRESS: Comments, which should refer to Docket No. R-0433, may be
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N. W.,
Washington, D. C. 20551, or delivered to Room B-2223 between 8:45 a.m. and
5:15 p.m. Comments may be inspected at Room B-1122 between 8:45 a.m. and
5:15 p.m., except as provided in § 261.6(a) of the Board's Rules Regarding
the Availability of Information, 12 C.F.R. § 261.6(a).
FOR FURTHER INFORMATION CONTACT: Elliott C. McEntee, Assistant Director
(202/452-2231) or Morgan J. Hallmon, Program Manager, Payments Mechanism
Planning (202/452-3878), Division of Federal Reserve Bank Operations;
or Gilbert T. Schwartz, Associate General Counsel (202/452-3625) or
Daniel L. Rhoads, Attorney (202/452-3711), or Robert G. Ballen, Attorney
(202/452-3265), Legal Division, Board of Governors of the Federal Reserve
System, Washington D. C. 20551.
SUPPLEMENTARY INFORMATION: The Monetary Control Act of 1980 (P. L. 96
221) ("MCA") requires that fees be established for Federal Reserve Bank
services and that the Board shall begin putting into effect a schedule
of fees not later than September 1, 1981. The MCA sets forth specific
services to be priced and requires the Board to establish principles
on which the schedules of fees for priced services are to be based.
On December 31, 1980, the Board adopted a set of pricing principles
and fee schedules for certain Federal Reserve services. Subsequently,
the Board adopted fee schedules for virtually all Reserve Bank services
in accordance with the MCA. In its December 31, 1980 action, the Board
determined, in response to comments received to the Board's proposals
to reduce and price float (45 FR 58689), to proceed with internal operational
improvements with high benefit/cost ratios to reduce float before initiating
-2 -
changes in availability schedules and explicit pricing of float. The
Board directed the staff to continue studying methods of changing availa
bility schedules as an alternative to explicit pricing of float and
report back to the Board.
For several years, the Federal Reserve System has been taking
action to reduce float. Since passage of the Monetary Control Act of
1980, float reduction efforts have been intensified. In 1979, daily
average Federal Reserve float was $6.7 billion. In 1980, daily average
Federal Reserve float decreased to a level of $4.2 billion. During
the second quarter of 1982, Federal Reserve float averaged $1.8 billion
daily— 73 percent below 1979 levels.
After review of proposals to implement additional float reduction
efforts and pricing, the Board has determined to solicit comment on
three proposals which, collectively, could result in the elimination
or pricing of about 80 percent of the $1.8 billion daily average float.
The proposals represent a combination of operational changes to reduce
Federal Reserve float and explicit pricing of such float remaining after
operational improvements are implemented. It is expected that these
proposals, if adopted, would be implemented during the second quarter
of 1983. The value of Federal Reserve float would be calculated on
the basis of the Federal funds rate published in the Board's H.15 (519)
release titled "Selected Interest Rates."
The Board believes these proposals are: 1) consistent with
the MCA and previous Board decisions, 2) reasonable in their impact
on depository institutions, and 3) operationally feasible for the Reserve
Banks. Moreover, these proposals, together with steps taken previously,
should contribute to the efficiency of the payments mechanism.
The largest component of Federal Reserve float is associated
with the shipment of checks (cash items) between Federal Reserve offices.
This interterritory float is created when a Reserve Bank credits, on
the basis of a fixed availability schedule, the institution that deposits
the checks, but the checks are not received by the paying institution's
Federal Reserve office on a timely basis and thus the charge to the
paying institution is delayed. Interterritory float arises from checks,
including checks contained in "Other Fed" cash letters, shipped on Federal
Reserve arranged transportation as well as those shipped on transportation
arranged by depository institutions. The Board is requesting comment
on a proposal to eliminate or price this category of float by permitting
Reserve Banks to modify their crediting practices for interterritory
check shipments. The Board expects these crediting procedures, if adopted,
to reduce daily average Federal Reserve float by approximately $900
million. Specifically, each Reserve Bank would offer depository institutions
in its district a choice between two or more of the following crediting
options:
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1. Credit would be given on the day the checks are received
on a timely basis by the collecting Federal Reserve Bank ("actual availa
bility") ;
2. Credit would be given on the basis of a fixed availability
schedule (unique to each institution) so that part of an institution's
credit for a deposit are deferred an additional day, and, on average,
float is zero ("fractional availability"); and
3. Credit would be given on the basis of a fixed availability
schedule, with compensation for float being made through either
a. "as of" adjustments to correct for float after it occurs
("fixed availability with 'as of' adjustments"), or
b. earnings credits on a clearing balance maintained by the
depository institution, with the value of float determined
at the Federal funds rate, which is the same rate used to
compute the earnings credits.
Actual availability would be implemented through an interterritory
cash letter monitoring system whereby a Reserve Bank and the depositing
bank would know early in the day which cash letters arrived timely at
the processing Federal Reserve office. Since the Reserve Banks would
be passing credit when charges are made to payor institutions, no float
would be created. With fractional availability, a depositing institution
would receive partial availability for its interterritory check shipments
on the basis of a fixed schedule. This availability would be based
on the Reserve Bank's actual experience during a prior period in collecting
items for that institution. On average, Federal Reserve float under
this procedure should be about zero during the course of a year. Under
the fixed availability with "as of" adjustments crediting procedure,
the Federal Reserve office in whose territory the depositing institution
is located would give provisional credit, based on fixed availability
schedules, for check deposits (both direct and consolidated shipments)
sent to other Federal Reserve offices. Float incurred by a depositing
institution during a reserve maintenance period (Week one) would be
calculated by a Federal Reserve office during the following reserve
maintenance period (Week two). An "as of" adjustment would then be
made to the depositing institution’s account to be effective during
the next reserve maintenance period (week three). More detailed descriptions
of the four options may be obtained from the Reserve Banks.
As an alternative to changing crediting procedures, it has
been suggested that Reserve Banks could explicitly price interterritory
check float by charging payor institutions directly for "actual" float
or by folding the value of float into check prices. Charging payor
institutions directly for float entails complex technical, administrative,
accounting, and legal issues. With respect to folding the value of
-4 -
float into check prices, the Federal Reserve does not believe that a
consensus exists within the banking industry with respect to the best
approach to be taken. The Federal Reserve believes further that to
explicitly charge for this float category in an equitable manner would
necessitate keeping track of the float created by each individual check.
This would be operationally burdensome and would increase costs to
depository institutions using Federal Reserve check services.
Another significant component of float is associated with
return items. Return item float generally occurs with interterritory
shipments when a Reserve Bank office receives from a payor institution
within its territory a returned check deposited originally by an institution
outside its territory ("depositing institution"). Current System procedures
specify that payor (returning) institutions receive immediate credit
for return items. Float arises since current interterritory accounting
procedures do not provide for immediate debiting of the depositing institu
tion's account for return items prior to receipt of the items by the
depositing institution's local Federal Reserve office. The Board is
requesting comment on a proposal to eliminate or price this float by
charging the depositing institutions' account for large interterritory
return items ($50,000 or more) based on receipt of a wire notification
from the returning Federal Reserve office. The depositing institution
whose account was being charged would receive from its Reserve Bank
the wire notifications as they become available, but in no event later
than 3:00 p.m. As an alternative to having its account debited immediately,
a depository institution could compensate for return item float through
an "as of" adjustment to its account. The accounting notification would
reduce return item float by permitting Reserve Banks to make same-day
debits and credits. It is contemplated that the notification would
contain information concerning the returned item; for example, the notification
may state the name of the drawee bank, dollar value of check, payee,
reason for return, etc. The dollar cut-off for the wire notification
would be reviewed periodically to determine the feasibility of lowering
the cut-off value. This proposal would eliminate approximately $150
million of the $200 million in return item float and, if adopted, would
be implemented during the second quarter of 1983. Remaining return
item float would be valued at the average Federal funds rate and be
added to the overhead costs for the check collection service.
Public comment is also requested on a proposal to explicitly
price two additional categories of float: holdover float and other
intraterritory float. During the first two quarters of 1982, these
two categories averaged $390 million daily. Holdover float, resulting
when a Federal Reserve office is unable to process for collection check
deposits received on a timely basis, would be valued at the average
Federal funds rate and added to the overhead costs for the check collection
service. Other intraterritory float, resulting primarily from the inability
of a Federal Reserve office to make presentment of checks to payor institutions
as a result of severe weather, transportation equipment failure, or
operational delays, would be priced in the same method as holdover float.
-5-
Comment is also requested on operational difficulties that
depository institutions may encounter as a result of the anticipated
implementation of these proposals, if they are adopted, during the second
quarter of 1983.
Further study will be done on the pricing of two other categories
of float; float associated with non-check activities such as wire transfers,
securities transfers, automated clearing house items and other miscellaneous
items ("non-check float"), and float incurred by the System incident
to the maintenance of an efficient and reliable payments system during
times of a natural disaster and other extraordinary circumstances ("residual
float"). It is expected that the results of these further studies and
recommendations for pricing these categories of float will be presented
to the Board in 1983.
By order of the Board of Governors, November 1, 1982.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
[SEAL]
@FedFRASER