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federal Reserve Bank DALLAS. TEXAS of Dallas 75222 Circular No. 80-172 September 12, 1980 PROPOSED PRICING SCHEDULE TO ALL FINANCIAL INSTITUTIONS IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Monetary Control Act of 1980 requires the Board o f Governors o f the Federal Reserve System to begin putting into e f f e c t a schedule of fees for services no later than September 1, 1981, and to make such services covered by the fee schedule available to all depository institutions. Accordingly, the Board seeks com m ent on its proposed pricing principles, the methods employed for determining service fees, and the proposed fee schedules. In preparing the pricing principles and fee schedules, the Board has taken into account the objectives o f fostering com petition, improving the effic ien cy of the payments mechanism, and lowering costs o f these services to so ciety at large. At the same tim e, the Board is cognizant o f and concerned with the continuing Federal Reserve responsibility and n ecessity o f monitoring the integrity and reliability of the payments mechanism. Enclosed is the text of the press release and Federal R egister notice regarding pricing, clearing balances, and float. Also enclosed is a listing of cities in the Eleventh D istrict, classified by type of endpoint, for determining currency and coin shipping costs. Your com m ents must be received by October 31, 1980. Comments, which should refer to Docket No. R-0324, should be addressed to Theodore E. Allison, Secretary, Board of Governors of the Federal Reserve System , 20th and Constitution Avenue, N.W., Washington, D.C. 20551. Questions concerning this circular may be directed to Tony J. Salvaggio, Senior Vice President, Ext. 6224, E. W. Vorlop, Jr., Vice President and Controller, Ext. 6223, or Larry J. Reck, Vice President, Ext. 6337 at the Dallas Office; Robert W. Schultz, Assistant Vice President, (915) 544-4730 at the El Paso O ffice, Sammie Clay, Assistant Vice President, (713) 659-4433 at the Houston O ffice, or Thomas H. Robertson, A ssistant Vice President, (512) 224 2141 at the San Antonio O ffice. Sincerely yours, Robert H. Boykin First Vice President Enclosures Banks and others are encouraged to use the following incoming W A T S 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) CITIES CURRENTLY PROVIDED CURRENCY AND COIN SHIPPING SERVICE SEPARATED BY ZONE ELEVENTH FEDERAL RESERVE DISTRICT DALLAS OFFICE City Endpoints In Texas City of Dallas Banks Suburban Endpoints In Texas Banks located in the following Cities: Carrollton Duncanville Farmers Branch Garland Over-the-Road Endpoints Grapevine Grand Prairie Irving Lancaster Lewisville Mesquite Richardson Zone 1 (Oklahoma) Antlers Atoka Boswell Caddo Coalgate Colbert Durant Hugo Madill Zone 1 (Texas) Alvarado Alvord Anna Arlington Athens Bells Belton Bogata Bonham Bowie Breckenridge Bremond Bridgeport Caddo Mills Cameron Canton Celeste Cisco Clarksvilie Cleburne Clifton Colleyville Comanche Commerce Cooper Copperas Cove Corsicana Dawson Daingerfield Decatur De Leon Denison Denton Deport Dublin Eastland Edgewood Emory Ennis Euless Evant Fairfield Farmersville Ferris Forney Franklin Ft. Worth Gainesville Gatesville GiImer G1adewater Glen Rose Gordon Gorman Graford Graham Granbury Grand Saline Greenvilie Groesbeck Hallsville Hamilton Henderson Henrietta Hico Hillsboro Honey Grove Hughes Springs Hurst Itasca Jacksboro Joshua Kaufman Keene Kemp Killeen -2- Dallas Office Zone 1 (Texas) Continued Kilgore Kosse Ladonia Leonard Lipan Lone Star Longview Mabank Marlin Mart McGregor McKinney Mexia Midlothian Milford Mineola Mineral Wells Moody Mt. Calm Mt. Pleasant Mt. Vernon Teague Naples Newcastle Temple Terrell Nocona Olney Tom Bean Trenton Paris Pilot Point Troup Pittsburgh Tyler Plano Valley Mills Quitman Valley View Ranger Van Alstyne Rhome Waco Rio Vista Waxahachie Weatherford Rockwall Rosebud West Roxton Whitehouse Royse City Whitesboro Saint Jo Whitewright Sanger Whitney Santo Wichita Falls Sherman Wills Point Stephenville Windom Strawn Winnsboro Sulpher Springs Wolfe City Wortham Zone 2 (Louisiana) Arcadia Bossier City Homer Mansfield Minden Ruston Shreveport Zone 2 (Oklahoma) Broken Bow Idabel Zone 2 (Texas) Abilene Albany Anson Aspermont Atlanta Avinger Baird Ballinger Brady Bronte Brownwood Burkburnett Carthage Childress C h i l 1icothe Coleman Colorado City C r o w e 11 Dekalb Eden Eldorado Goldwaithe Holland Hamlin Haskell Iowa Park Jefferson Lampasas Linden Marshall Melvin Memphis Menard Merkel Mertzon Moran Munday New Boston Paducah -3Dallas Office Quanah Rockdale Roscoe Rowena Rotan Rule San Angelo Santa Anna San Saba Seymour Snyder Stanford Sterling City Sweetwater Texarkana Throckmortoi Vernon Waskom Wellington Winters Zone 3 (Louisiana) Bastrop Delhi Lake Providence Monroe Oak Grove Rayvilie Tallulah West Monroe Zone 3 (Texas) Amarillo Amherst Big Lake Big Spring Borger Brownfield Canadian Clarendon Claude Crosbyton Dalhart Darrouzett Dimmitt Dumas Floydada Follett Hale Center Hart Hereford Higgins Kress Lamesa Levelland Littlefield Lockney Lubbock Muleshoe O'Donnell Olton Ozona Pampa Panhandle Perryton Plainview Post Ral Is Rankin Shamrock Sonora Stinnett Sudan Sundown Tahoka Tulia Wheeler CITIES CURRENTLY PROVIDED CURRENCY AND COIN SHIPPING SERVICE SEPARATED BY ZONE ELEVENTH FEDERAL RESERVE DISTRICT EL PASO OFFICE City Endpoints (Combined with Suburban Endpoints) In lexas City of El Paso Banks Suburban Endpoints (Combined with City Endpoints) Over-the-Road Endpoints Zone 1 (New Mexico Alamogordo Anthony Deming Hatch Las Cruces White Sands Missile Range Zone 2 (New Mexico) Artesia Bayard Carlsbad P 1ayas Lordsburg Roswel1 Silver City Truth or Consequences Zone 2 (Texas) Pecos Van Horn Zone 3 (New Mexico) Clovis Hobbs Lovington Portales Santa Rosa Tucumcari Zone 3 (Texas) Alpine Andrews Ft. Stockton Kermit Midland Monahans Odessa Stanton CITIES CURRENTLY PROVIDED CURRENCY AND COIN SHIPPING SERVICE SEPARATED BY ZONE ELEVENTH FEDERAL RESERVE DISTRICT HOUSTON OFFICE City Endpoints (Combined with Suburban Endpoints) In Texas City of Houston Banks Suburban Endpoints (Combined with City Endpoints) Over-the-Road Endpoints Zone 1 (Texas) Alvin Anahuac Angleton Conroe La Marque Liberty Richmond Rosenburg Texas City Tomball West Columbia Zone 2 (Texas) Anderson Bay City Beaumont Bellyille Brenham Bryan Caldwell Clute College Station Eagle Lake El Campo Freeport Galveston Giddings Huntsville Kountze La Grange Lake Jackson Livingston Madisonville Navasota Port Arthur Port Neches Schulenburg Silsbee Snook Trinity Zone 3 (Texas) Crockett Hallettsville Jasper Lufkin Nacogdoches Newton Orange Palestine Port Lavaca Victoria Zone 4 (Texas) Center Cushing Jacksonville San Augustine CITIES CURRENTLY PROVIDED CURRENCY AND COIN SHIPPING SERVICE SEPARATED BY ZONE ELEVENTH FEDERAL RESERVE DISTRICT SAN A NTONIO OFFICE f.itv Fndpoints In Texas Downtown San Antonio Banks Suburban Endpoints In Texas City of San Antonio banks except those banks located in downtown San Antonio Over-the-Road Endpoints Zone 1 (Texas) Bandera Blanco Boerne Falls City Floresville Hondo Karnes City Kenedy Kerrville L a Coste Lulinq New Braunfels Pleasanton Poth San Marcos Seguin Universal City Zone 2 Austin Bastrop Beeville Carrizo Springs Cotulla Fredericksburg Georgetown George West Goliad Gonzales Granger Junction Kingsland Lockhart Mason Mathis Nordheim Refugio Rocksprings Round Rock Taylor Woodsboro Yoakum Yorktown Zone 3 (Texas) Brackettville Corpus Christi Del Rio Eagle Pass Falfurrias Hebbronville Kingsville Laredo Robstown Rockport Taft Zone 4 (Texas) Edinburg Mission Rio Grande City Zone 5 (Texas) Brownsville Harlingen La Feria McAllen Zapata Mercedes Weslaco .• • g f C O W V .. FEDERAL RESERVE press release % ‘ vffSTRE^.• For immediate release August 28, 1980 The Federal Reserve Board today made public a proposed schedule of fees for its services to financial institutions, and the principles underlying the proposed system of charges. The Board also: --Proposed procedures for a depository institution to follow if it maintains low or zero required reserve balances with the Federal Reserve and it wishes to obtain services directly from the Federal Reserve. --Proposed a series of steps designed to reduce Federal Reserve floati^ and a preliminary plan to price remaining float beginning in mid-1982. The Board asked for comment by October 31, 1980. The Board's proposals for pricing its services, and its proposals respecting clearing balances and float, were made in view of provisions of the Monetary Control Act. Under the Act the Board is required to publish for comment by September 1, 1980 a set of pricing principles and a proposed schedule of Federal Reserve fees, dealing with the following: 1. 2. 3. 4. 5. 6. 7. — Transportation of currency and coin, and coin wrapping. Check clearing and collection. Wire transfer of funds. The use of Federal Reserve automated clearing house facilities. Net settlement of debits and credits affecting accounts held by the Federal Reserve. Book entry, safekeeping and other services connected with the purchase or sale of government securities. Noncash collection (the receipt, collection and crediting of accounts of depository institutions in connection with municipal and corporate securities). See page 7 for the definition of Federal Reserve float. -2 8. The cost to the Federal Reserve of float: the interest on items— generally, the dollar value of checks--credited by the Federal Reserve to one depository institution before being collected from another. These requirements of the Monetary Control Act follow upon other provisions of the Act subjecting all financial institutions offering transactions accounts and nonpersonal time accounts to uniform Federal Reserve requirements, and requiring the Federal Reserve to provide nonmember depository institutions with the same services it provides to member banks. The Board said that the proposals are meant to conform to two objectives made clear in the legislative history of the Act: 1. Congress was concerned with the amount of revenue that would be lost to the Treasury under the Act resulting from the lower reserve requirements the Act establishes. Pricing for Federal Reserve services is expected in part to offset that loss. 2. Congress regarded pricing for Federal Reserve services as a means of encouraging competition and efficiency in the provision of such services. At the same time, the Board noted from the legislative history of the Act that Congress did not want to stimulate undesirable banking practices such as non-par payment for checks and circuitous routing of checks. Congress therefore charged the Board with adopting pricing principles that "give due regard to competitive factors and the provision of and adequate level of such services nationwide." -3- ■PRICING- The Board proposed to adopt the following principles required by the Monetary Control Act as the basis for Federal Reserve fees.— ^ 1. All Federal Reserve Bank services covered by the fee schedule are to be priced explicitly. 2. Services covered by the fee schedule are to be available to nonmember depositories at the same prices charged to member banks, except that nonmembers may be subject to any other terms, such as clearing balances, that may apply to member banks. 3. Over the long run, the fees should be based on all direct and indirect costs actually incurred in providing the services, including: --Overhead, and --An allocation of imputed costs, taking into account the taxes that would have been paid and the return on capital that would have been required if the services were provided from the private sector (the Private Sector Adjustment), except that due regard shall be given to competitive factors and to the provision of anadequate level of such services nationwide. 4. Interest on float shall be charged at the current market rate for Federal funds. In addition, the Board proposed to adopt the following further pricing principles, in view of the recognition in the Monetary Control Act and its legislative history of the importance of maintaining a Federal Reserve operational presence in the nation's payments mechanism by encouraging competition and providing for an adequate level of services nationwide. 5. Over the long run, the fee schedule should recover total costs for all priced services. The proposed schedule of fees for Federal Reserve services is shown in Appendix II of the attachment to this release. -4 6. The fee schedule should be structured so as to avoid disruptions in services and to facilitate an orderly transition to pricing. 7. Both the fee schedule and the level of services shall be administered flexibly so as to respond to changing market conditions and demands for the services. 8. Incentives may be provided to improve the efficiency and capacity of the payments system and to induce desirable longer-run changes in it. The Board said that the Federal Reserve might consider eliminating some services if it is determined that a continued Federal Reserve presence is no longer cost effective or otherwise warranted. The Board proposed to use the following price determinants: --A mark-up of 12 percent as the Private Sector Adjustment to the Federal Reserve's cost of providing services. This adjustment would be reviewed annually. --Prices will be based on long-run costs. — Fees would be national for services that are uniform across the Federal Reserve System. These are generally capital intensive items, and would include wire transfer, automated clearinghouse services, net settlement and on-line securities transfer services. --Where there are significant differences in costs among Federal Reserve Districts (or offices) differing District or office schedules would be used. Such prices would include coin wrapping, and securities and noncash collection at the District level and currency and coin shipping at the office level. The Board proposed that the Reserve Banks be given the option of setting fees for check services on either a District or office basis. The Board proposed that prices for services will be levied against the party originating a transaction or requesting a service. However, members of automated clearinghouse associations could have charges for ACH services made through their association. -5The Board proposed the following schedule for implementing pricing: Access to the service and pricing for it Service Wire Transfer Net settlement Check clearing and collection Automated clearinghouse Currency and coin Purchase, sale, safekeeping and transfer of securities Noncash collection Float January 1981 January 1981 April 1981 April 1981 July 1981 October 1981 October 1981 Phase I — In progress Phase II -- September 1981 Phase III — Mid-1982 ___— CLEARING BALANCES— Under provisions of the Monetary Control Act many small depository institutions will maintain with the Federal Reserve zero or small required reserve balances. Many such institutions will satisfy their reserve requirements with their own vault cash; some will hold reserves through pass-through arrangements but may wish to obtain services directly; and during the 8-year phase-in, required reserve balances will slowly rise. Should an institution with no or small reserve balances wish to obtain services directly from a Federal Reserve Bank, three alternatives are proposed: Proposed Clearing Account Alternative 1. The local Federal Reserve Bank would establish the need for a clearing balance, and its size. deficiencies. (See No. 4 below) The size would be set to minimize potential -62. The size of the clearing balance will be fixed in advance of the period daring which it will be maintained. It will be reviewed periodically, but will not be adjusted more frequently than monthly. 3. The maintenance period for clearing balances will be the same as the period during which required reserves must be maintained. 4. Balances held at the Federal Reserve will be allocated first to the required clearing balance and then to required reserves, if any. If the depository institution's total balance is deficient, it will be considered to be deficient first in required reserves. If remaining balances are not large enough to cover required clearing balances, the institution will be considered to have a deficiency in its clearing balance as well. If the total balance--clearing balance and reserve balance--actually maintained exceeds the total of required clearing balances and required reserves, the institution will be regarded as maintaining excess reserves. 5. Deficiencies in required clearing balances will be subject to the same penalty as reserve deficiencies. The Board also proposed that required clearing balances receive an earnings credit equal to the weekly average of the 91-day Treasury bill rate. This earnings credit may only be used to offset the cost of Federal Reserve services. No interest will actually be paid to institutions maintaining required clearing balances. Federal Reserve Banks will implement clearing balance arrangements by January 1, 1981 or as soon as possible thereafter. Proposed Reserve Account Alternative Institutions may, with the prior authorization of all parties concerned, use the reserve account of another institution for the posting of entries arising from the use of Federal Reserve services. -7Proposed Pass-Through Reserve Account Alternative Institutions may, with the prior authorization of the pass-through correspondent and the local Reserve Bank, use the pass-through reserve balance for the purpose of posting entries arising from the use of Federal Reserve services. Institutions holding their reserves on a pass-through basis may also choose to use the clearing balance arrangements described above. — FLOAT— In the process of clearing checks (or transferable checklike instruments such as NOWs) the Federal Reserve may give credit for checks presented to it by a depository institution before it presents the checks to the depositories on which they were written. During the interval, which may be more than one day,Federal Reserve float has been created. The Monetary Control Act calls upon the Federal Reserve to reduce and if possible eliminate the imputed cost (interest on the dollar amount of the float) of Federal Reserve float. To accomplish this the Board proposed a three-phase effort: Phase One: Improvements in System operations involving check clearing and collection. This phase, already started, includes improvement of the Federal Reserve's Interdistrict Transportation System for moving checks, which is expected to reduce float by as much as $1 billion. Additional cost effective operational improvements, which may include special measures for faster collection of large dollar value checks, are being planned. Phase Two: This involves modification of Federal Reserve schedules for making funds available to institutions that have presented checks for clearance. The proposed modification of availability schedules would call for the use of "fractional -8 - availability" to reduce float beyond what can be accomplished by operational improvements. Under the fractional availability system, if experience indicates, for example, that 97 percent of check clearings between two Reserve offices occur in one day and 3 percent in two days, 97 percent of the dollar amount presented by depositories clearing between these two offices would be credited the first day and 3 percent the second day. Thus, the 3 percent of the amount that regularly is not collected until the second day would be eliminated as float. Phase Two would start in September 1981. Phase Three: Float remaining after Phase One and Phase Two would be charged for explicitly. The charges would be computed at the prevailing Federal funds rate and would be reflected in the fees for all check collection services. Such recovery of the imputed cost of float would start by mid-1982, and would be expected to eliminate any remaining cost of Federal Reserve float. The Board's proposals with respect to pricing, the handling of clearing balances and reduction of float are described more fully in the attached Federal Register notice. # # # # * # # # # # # B A D O G V O O TH FEDERAL RESERVE SY O R F O ERN RS F E STEM (DOCKET NO. R-0324) FEDERAL RESERVE B N SERVICES AK PROPOSED FEE SCHEDULES A D PRICING PRINCIPLES N AGENCY: Board of Governors of the Federal Reserve System ACTION: Proposed Fee Schedules and Pricing Principles SU M R : The Monetary Control Act of 1980 (T itle I of Public Law 96-221) re M AY quires the Board to publish for comment a set of pricing principles and a pro posed schedule of fees for Federal Reserve Bank services. Accordingly, the Board seeks comment on i t s proposed pricing principles, the methods employed for determining service fees, and the fee schedules. DATE: Interested parties are invited to submit relevant data, views and other comments. Comments must be received by October 31, 1980. ADDRESS: Comments, which should re f e r to Docket No. R-0324, should be addressed to Theodore E. Allison, 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 received may be inspected in room B-1122 between 8:45 a.m. and 5:15 p.m., except as provided in section 261.6.(a) of the Board's Rules Regarding A vailability of Information (12 CFR 261.6.(a)). FO FU ER INFORM R RTH ATION CONTACT: Lorin S. Meeder, Assistant Director for Federal Reserve Bank Operations (202/452-2738); Earl G. Hamilton, Senior Operations Analyst (202/452-3878); Benjamin Wolkowitz, Section Chief (202/452-2686); David B. Humphrey, Economist (202/452-2556); Myron L. Kwast, Economist (202/452-2686); Gilbert T. Schwartz, Assistant General Counsel (202/4523625); Lee S. Adams, Senior Attorney (202/452-3623); Paul S. Pilecki, Attorney (202/452-3281). SU PPLEMENTARY INFORMATION: I. INTRODUCTION The purpose of t h is announcement is to invite public comment on a proposed schedule of fees for Federal Reserve Bank services and the principles that underlie them. The Monetary Control Act of 1980 requires the Board of Governors of the Federal Reserve System to begin putting into effect a schedule of fees for services no l a t e r than September 1, 1981 and to make such services covered by the fee schedule available to all depository i n s ti tu t io n s . Accordingly, the Board seeks comment on i t s proposed pricing principles, the methods employed for determining service fees, and the proposed fee schedules. In preparing the pricing principles and fee schedules the Board has taken into account the objectives of fostering competition, improving the efficiency of the payments mechanism, and lowering costs of these services to society at large. At the same time, the Board is cognizant of, and concerned with, the continuing Federal Reserve responsibility and necessity for maintaining the in teg rity and r e l i a b i l i t y of the payments mechanism. II. BCGON AKRUD The Monetary Control Act (T itle I of Public Law 96-221) requires the Board of Governors of the Federal Reserve System to publish for comment a set of pricing principles and a proposed schedule of fees for Federal Reserve Bank services not l a te r than September 1, 1980. Federal Reserve Bank services to be priced are: 0) currency and coin transportation and coin wrapping; (2) check clearing and collection; (3) wire tra n s fe r of funds; (4) automated clearing house (ACH); (5) net settlement; (6) sec u ritie s services; (7) noncash collection; (8) Federal Reserve fl o a t; and (9) any new services the Federal Reserve System offers. The le g is la tiv e history of the Act indicates th at Congress had two objectives in establishing a requirement that the Federal Reserve price the services i t provides. F i r s t , Congress was concerned with the amount of revenue -3- l o st to the Treasury as a resu lt of the reduction in the level of aggregate required reserves resulting from the implementation of the reserve requirement provisions of the Act. Pricing for Federal Reserve Bank services will generate revenue that will p a r t i a l l y o ffset the revenue loss associated with reduced required reserves. Second, Congress believed pricing for Federal Reserve Bank services to be a means of encouraging competition in the provision of these services in order to assure th a t they are provided at the lowest aggregate cost to society as a whole. While intending to stimulate the efficiency of the payments system, Congress did not wish to precipitate the reemergence of undesirable banking practices such as non-par checking or circuitous routing of checks which the Federal Reserve System was designated to eliminate. There fore, i t required the Board to ensure an adequate level of services nationwide. Consequently, Congress charged the Board with adopting pricing principles that "give due regard to competitive factors and the provision of an adequate level of such services nationwide". This objective is clearly established in the pricing principles established by the Act. III. PRICING PRINCIPLES The Monetary Control Act sets forth the following principles upon which i t requires the schedule of fees for services to be based: 1. All Federal Reserve Bank services covered by the fee schedule shall be priced e x p lic itly . 2. All Federal Reserve Bank services covered by the fee schedule shall be available to nonmember depository in s ti tu t io n s and such services shall be priced at the same fee schedule applicable to member banks, except that nonmembers shall be subject to any other terms, including a requirement of balances s u f fic ie n t for clearing purposes, that the Board may determine are applicable to member banks. 3. Over the long run, fees shall be established on the basis of all direct and in d irect costs actually incurred in providing the Federal Reserve services priced, including in te r e s t on items credited prior to actual co llectio n , overhead, and an allocation of imputed costs which takes into account the taxes th a t would have been paid and the return on capital th a t would have been provided had the services been furnished by a private business firm, except that the pricing principles shall give due regard to competitive factors and the provision of an adequate level of such services nationwide. 4. Interest on items credited prior to collection shall be charged at the current rate applicable in the market for Federal funds. The Board believes th a t the Monetary Control Act and i t s le g is la tiv e history recognize the importance of the Federal Reserve maintaining an operational presence in the nation's payments mechanism, providing an adequate level of service nationwide and encouraging competition. In the lig h t of these considerations, - 4 - the Federal Reserve has developed additional pricing principles th at build on those of the Act and provide further guidance as to the pricing policies and s tra te g ie s the System proposes to follow. 5. The fee schedule sh a ll, over the long run, be set to recover total costs for all priced services. 6. Fees shall be structured so as to avoid undesirable disruptions in service and to f a c i l i t a t e an orderly t r a n s itio n to a pricing environ ment. 7. The fee schedule, as well as service levels, shall be administered flexibly in response to changing market conditions and user demands. 8. Fee and service level incentives may be established to improve the efficiency and capacity of the present payments system and to induce desirable longer run changes in the payments mechanism. The Federal Reserve believes that pricing and expanded access will have an impact on the types and the volumes of Federal Reserve Bank services provided. The System recognizes th at i t s proposed fees may bring about a decrease in the volume of certain System services. Furthermore, the System may consider elimi nating some services i f i t is determined that a continued Federal Reserve pre sence in providing these services is no longer cost effective or otherwise warranted. In determining the type and level of service to be added or discon tinued, the Federal Reserve will be cognizant of i t s le g is la tiv e responsibility for insuring that the nation maintains an e f f i c i e n t , sound, and competitive payments mechanism. IV. PRICE DETERM INATION The Monetary Control Act of 1980 requires th a t "over the long run fees shall be established on the basis of all direct and indirect costs actually in curred in providing Federal Reserve services priced". The proposed pricing struc ture is based on the Federal Reserve's cost accounting system which provides the basis for calculating the total cost of major services ( e . g ., checks, wire tra n s f e r ) . Reserve Banks have provided the necessary allocations of these to ta l costs to the detailed service categories fo r services to be priced at the D is tric t or office levels. A. Private Sector Adjustment The Act also requires that a private sector adjustment be added to Federal Reserve costs to account for "taxes that would have been paid and the return on capital th a t would have been provided had the services been furnished by a private business firm". A markup of 12 percent has been adopted and incorporated into the fee schedules presented l a t e r in t h is notice. This markup is discussed in further detail in Appendix I. The private sector adjustment factor will be reviewed annually. -5- B. Long run Versus Short run Costs The Act provides for the establishment of fees based upon long run costs. I f , a f t e r the introduction of the schedules of fees there are no substantial changes in the volume of services provided, current costs would approximate long run costs. However, should the volumes of priced services change substantially a f t e r the implementation of pricing, current costs would no longer represent long run costs, since Reserve Banks will require time to adjust t h e i r direct and overhead costs to the new volume levels. Consequently, until Reserve Banks have had time to adjust th e ir overhead costs, i n i t i a l prices will not be modified to re fle c t fully the changes in unit costs associated with large volume changes. This approach minimizes disruptive fluctuations in clearing patterns and is compatible with the requirement that prices be based on long run costs. C. National, D is t r i c t, or Office Pricing National fees are proposed for services which are uniform across the Federal Reserve System. These services are generally capital intensive services having very similar costs across Federal Reserve D is t r i c ts . National fees are proposed fo r wire tra n s fe r , ACH, net settlement, and on-line s e c u ritie s tra n s fe r services. Separate fees for Federal Reserve D is tric ts or offices are proposed fo r services where there are significant cost differences across D is tric ts (or across separate offices within the D istric t) and/or where the market for that service is local in scope. D is tric t or office pricing for these services should encourage competition and promote efficiency. D istrict fees are proposed for coin wrapping, sec u ritie s and noncash collection services while office fees are proposed fo r currency and coin shipping services. The Board proposes th a t Reserve Banks be given the option to set fees for check services on e ith e r a D istrict or office basis. D. Federal Reserve Float Under the Monetary Control Act, the Federal Reserve is required to charge for any flo a t remaining a f t e r the Federal Reserve has imple mented actions to reduce the size of f l o a t . The Federal Reserve plans to implement the phased approach towards reducing and charging for float described below. Phase I: Operational Improvements Federal Reserve f l o a t will be reduced through operational improvements where such reduction can be cost j u s t i f i e d , p articu larly in those instances when substantial f l o a t reductions can be achieved at moderate costs. The System has targeted a reduction in f lo a t on the order of 50% below current levels, and expects the costs for such improvements to increase the unit prices for checks that are shown in th is announce ment by approximately 10% or less. Improvements in the I n t e r d i s t r i c t Transportation System are already under way and further improvements are scheduled. Opportunities to use the Federal Reserve communications system -6- or i t s automated clearing f a c i l i t i e s to speed up the collection of large d ollar items will be pursued as part of t h is e ff o rt. Imple mentation of other flo a t reduction techniques in the Federal Reserve is under way and should continue throughout 1981. Phase II: Changes in A vailability Schedules In September 1981, the System will implement changes in i t s a v a il a b i l i t y schedule to achieve fu rth e r reductions in Federal Reserve f l o a t. Fractional a v a i la b i li ty will be used to vary the a v a i la b i li ty schedule to re f le c t more accurately actual collection experience. For example, i f experience indicates that 97% of check clearings between two Reserve offices occurs in one day, and 3% in two days, 97% of the funds will be passed on to the depositor on day one and 3% on day two. This method is similar to that used by correspondent commercial banks. On average, fractional a v a i la b i li ty is expected to result in not more than a 2%-4% change in current a v a ila b ility schedules, for local items and 6%-10% for o u t - o f - d i s t r ic t items. Obviously the impact on any specific financial i n s t i t u t i o n will depend on the nature of i t s cash l e t t e r deposit. Phase I I I : . Explicit Pricing Subsequent to implementation of operational improvements and modifi cations to a v a i la b i li ty schedules, there may be a small amount of Federal Reserve flo a t s t i l l remaining. Beginning by mid-1982, an e x p lic it charge for t h i s remaining flo a t will be made at the Federal funds rate and incorporated into the price of the function creating the f l o a t. Specific d e ta ils concerning the charging procedure will be announced p rio r to that date. Because residual f l o a t will be small, the impact on prices will also be small. V. INCENTIVE PRICING The Federal Reserve plans to use fee incentives to improve the efficiency and capacity of the payments system. To encourage the development of electronic funds tra n s fe r , the fee schedule proposed for A H services re f le c ts C System costs in a mature volume environment. In the future, incentive pricing may be used to encourage smoother deposit flows at Federal Reserve offices and to f a c i l i t a t e more e f f ic i e n t u t i l i z a t i o n of labor and equipment. For example, to smooth check processing workflows, Reserve Banks might offer a discounted fee on checks deposited several hours before the established cut-off hour. VI. IM PLEM ENTATION O ACCESS A D PRICING F N The Monetary Control Act requires the Federal Reserve to make Federal Reserve Bank services available to nonmember depository i n s titu tio n s as services are priced. The following schedule has been established fo r the implementation of pricing and access. -7- Service Wire Transfer of Funds Net Settlement Check Clearing and Collection Automated Clearing House Currency and Coin transportation and coin wrapping Securities Services (purchase and sale, safekeeping and tran sfer) Noncash Collection Float Access and Pricing January 1981 1 / January 1981 April 1981 April 1981 July 1981 October 1981 October 1981 (see preceding discussion) For all services, the charge will be levied against the party originating a transaction or requesting a specific service. However, depository i n s titu tio n s will be billed through t h e i r respective A H associations for A H services, unless C C a lte rn a tiv e ly , they make arrangements to have such charges assessed d ire c tly . VII. DESCRIPTION O SERVICES F A. Check Clearing and Collection Services Checks and Postal Money Orders) (all checks except U.S. Treasury In the proposed schedule (see Table 1 of Appendix II) there is a single fee for receiving, sorting, reconciling and delivery. These fees do not include charges for special in tra o f fic e deposit arrangements that in dividual Reserve Banks may establish. The proposed per item fees include the costs associated with returns and adjustments. However, consideration i s being given to the estab lishment of separate prices for return items. N charges will be made o for postal money orders or U.S. Treasury checks deposited separately be cause such processing is conducted by the Federal Reserve as part of i t s fisc a l agency r e s p o n s ib ilitie s . W hen such items are not deposited separately they will be assessed the same fee as commercial checks de posited in mixed cash l e t t e r s . T7 In order to allow nonmember depository in s ti tu t io n s to adjust t h e i r reserve balances, t h i s service will be made available to in s ti tu t io n s maintaining required reserve balances at the Federal Reserve on a limited non-priced basis beginning in November 1980. -8- The following check services are available: 1. Cash l e t t e r s 1 / deposited d ire c tly at the processing Federal Reserve Office. a. City City checks are drawn on depository i n s titu tio n s located in the same c ity as the processing Federal Reserve office. City check services are available at 43 Federal Reserve offices. W deposited at the collecting Federal Reserve hen offices cred it for city checks is immediate ( i . e . , funds are available on the same dey i f the checks are received prior to the established cut-off hour). b. Regional Check Processing Center (RCPC) RCPC checks are drawn on depository in s ti tu t io n s located in areas designated as RCPC zones. I T RCPC checks drawn on depository i n s titu tio n s in RCPC zones are usually t r a n s ported by courier from the collecting Federal Reserve offices for presentment. There are 44 Federal Reserve offices which offer RCPC check services. W deposited at the collecting hen Federal Reserve o ffic e , cred it for RCPC checks is immediate ( i . e . , same business day) i f the items are deposited by 12:01 a.m. c. Country Country checks are drawn on depository i n s titu tio n s located outside a c ity in which a Federal Reserve office is located and outside an RCPC zone. Country check services are a v a il able at 12 Federal Reserve offices. Credit for country checks is available one day a f t e r timely deposit at the processing Federal Reserve office. d. Mixed Mixed cash l e t t e r s contain unsorted c i t y , country and RCPC checks. These cash l e t t e r s may also contain checks drawn on depository i n s titu tio n s in other Federal Reserve t e r r i t o r i e s . Only depository T7 A cash l e t t e r contains a l is t in g of individual checks and the packaged checks. 2/ RCPC zones are designated areas within the t e r r i t o r i e s of Federal Reserve o ffic e s, but outside Federal Reserve c i t i e s . In these zones the Federal Reserve is able to present checks for payment and collection on the same day. -9- in s ti tu t io n s with less than 5,000 items to be collected each day are e l ig i b le to deposit mixed cash l e t t e r s at t h e i r local Federal Reserve office. These services are available at 27 Federal Reserve offices. Credit for checks in mixed cash l e t t e r s is normally available the day a f t e r deposit i f the deposit is made before the c ity cut-off hour of the processing Federal Reserve office. e. Other Fed Other Fed cash l e t t e r s contain checks drawn on depository i n s ti tu t io n s located in Federal Reserve t e r r i t o r i e s other than the processing Federal Reserve t e r r i t o r y . Prices for collecting these checks r e f le c t the resources required to sort the checks at two Federal Reserve offices and to transport the items between these offices. f. Non-Machineable Non-machineable cash l e t t e r s contain checks which were rejected from the reader-sorter equipment of a depositing financial i n s t i tu tio n , and those checks th a t are mutilated and cannot be computer processed. Fees for non-machineable checks re f le c t the additional manual handling required to process these exception items. Credit for non-machineable checks is generally deferred one day beyond normal a v a ila b ility for the same type check ( e . g ., credit for a c ity non-machineable check would be available the day a f t e r timely deposit at the processing Federal Reserve o ffice). g. Package Sort Each package sort cash l e t t e r contains checks drawn on only one depository in s ti tu t io n and is packaged for delivery to that i n s ti tu t io n . Reflecting the pre-sorting work done by depositing i n s ti tu t io n s Federal Reserve involvement is limited to presentment, settlement, adjustment and return. As a r e s u lt , the proposed fee is lower than the fees for other categories of cash l e t t e r s and l a t e r cut-off hours are applicable to package sort cash l e t t e r s . Credit is passed according to the same a v a ila b ility schedule as for c ity , country, and RCPC items. h. Group Sort Each group sort cash l e t t e r contains checks of a specific type ( c ity , RCPC or country) drawn on two or more depository i n s i t i t u t i o n s . Because the depositing i n s ti tu t io n has already done some sorting t h is Federal Reserve service requires less handling than a regular deposit. Therefore, the proposed fee is lower. Later cut-off hours are applicable to group sort cash l e t t e r s and credit is passed to depositing in s titu tio n s on the same schedule as for c i t y , RCPC, and country items. -10- 2. Cash letters sent to o ther Federal Re se r v e offices a. Consolidated Shipments Consolidated shipment cash l e t t e r s consist of checks of a p a rtic u la r type (c ity , RCPC or country) drawn on depository in s titu tio n s located in another Federal Reserve t e r r i t o r y . Since the items are not processed by the local Federal Reserve office of f i r s t deposit, the proposed fee for these items r e f le c t s only the cost of transporting these checks between Federal Reserve offices and processing them at the collecting Federal Reserve office. b. Direct Shipments Direct shipment (“d irect sends") cash l e t t e r s are those for which transportation to the processing Federal Reserve office is arranged by the depositing i n s t i t u t i o n . Proposed direct shipment fees are the same as local prices for the respective class of items (c ity , RCPC, and country) at the processing Federal Reserve office. B. Automated Clearing House Services A H services are offered in all Federal Reserve D is t r i c ts . C Proposed fees for automated clearing house (ACH) service (see Table 2, Appendix II) r e f l e c t costs based on an expected mature volume and are applicable at all Federal Reserve operated clearing and settlement f a c i l i t i e s . These proposed fees include receiving, sorting, reconciling, s e t tl in g and delivery of both debit and cred it A H transactions. The proposed fee for the Federal Reserve Bank of C New York r e f le c t s the provision of local A H processing by the C private sector with only settlement and transportation provided by the Federal Reserve. 1. Intra-ACH transactions Intra-ACH transactions are payments received from local originating depository i n s ti tu t io n s for delivery to depository i n s titu tio n s located in the same A H service area. C 2. Inter-ACH transactions Inter-ACH transactions are payments received from a private sector A H f a c i l i t y or from originating depository in s ti tu t io n s in one C A H area for delivery to depository in situ tio n s in other A H service C C areas. -1 1 - C. Wire Transfer of Reserve Account Balances Service Wire tra n sfe r services provide for the immediate movement of funds between any two depository i n s titu tio n s which maintain accounts with the Federal Reserve (see Table 3 in Appendix II for proposed fees). Five levels of services are available: (1) on-line origination of a tra n s fe r without telephone advice (notification) to the receiver, (2) on-line origination of a tra n s fe r with telephone advice to the receiver, (3) o f f - li n e origination without telephone advice to the receiver, (4) o f f - li n e origination with telephone advice to the re ceiver and (5) o ff -lin e receiver requiring telephone advice of cred it where none has been requested by the originator (see Table 3 of Appendix II for the proposed fees). The most common wire tra n sfe r transaction is originated from an on-line terminal at a depository i n s ti tu t io n and processed through the Federal Reserve's automated communication f a c i l i t i e s with immediate settlement and transmission of an advice to the receiving depository i n s t i t u t i o n 's on-line terminal f a c i l i t i e s . Off-line origination of a tra n s fe r allows depository in s ti tu t io n s without on-line f a c i l i t i e s to i n i t i a t e wire transfers by telephone request to a Federal Reserve office. Except for i n i t i a t i o n by telephone, o ff -lin e wire t r a n s fers are processed in the same manner as on-line transactions. Tele phone n o tificatio n to an off-lin e receiver provides information con cerning funds credited to t h e i r accounts e a r l i e r than would other wise occur. The originator will be charged for the wire tra n s fe r services including a fee for telephone advice to an o ff -lin e receiver i f re quested by the originator. If the receiver has instructed the Re serve Bank office to provide telephone advice when none has been re quested by the originator, the o ff -lin e receiver will be charged for the telephone advice (see Table 3 of Appendix II for proposed fees). D. Net Settlement Service The net settlement service is the posting of debit and credit ad vices generated bv a th ird party to accounts held on the books of the Federal Reserve. 1 / The th ird party is typically a provider of financial services to depository i n s titu tio n s ( e . g ., a private sector check clearing house, automated clearing house association, funds tra n s fe r system, e tc .) who normally processes a large number of transactions among i t s member i n s ti tu t io n s . In addition to sorting, delivering or communicating data, the third-party maintains records of these tra n s actions. At the end of a business day, the th ird party sums all tra n s actions for each i n s t i t u t i o n and delivers or transmits to the Federal T7 Gross settlement, that i s , the posting of debits and credits associated with the direct use of other Federal Reserve services, is not charged for separately since i t s cost is of necessity included in the fee for each service. -12- Reserve the e n tries to effect settlement among the participating i n s ti tu t io n s . Charges for the net settlement service will be calculated based on the number of entries in each settlement and will be levied against the th ird party ordering the s e t t l e ment rather than against each i n s t i t u t i o n participating in the settlement (see Table 4 of Appendix II for proposed fees). E. Currency and Coin Transportation and Coin Wrapping Services Transportation services for currency and coin are fully priced (see Table 5 and 6 in Appendix II for proposed fees). However, no private sector adjustment has been added since the cost of imputed capital and taxes is already included in the price the System pays private couriers to provide t h is service. Proposed fees re f le c t both a volume charge (per bundle of currency and/or bag of coin shipped) and a cost per stop. Proposed transportation fees for currency and coin are based on existing armored c a r r i e r contracts and established usage patterns. The Reserve Banks may impose reasonable lim itations on frequency of service, number of offices served and size of orders/deposits. To assure that the public serviced by in s titu tio n s in more remote locations receive an adequate level of service, the proposed prices for transportation to depository in s titu tio n s located in more remote areas (over-the-road endpoints) have a ceiling imposed for the per stop portion of the cash transportation charge. The proposed price to mail endpoints has the same ceiling. In the proposed pricing structure, the ceiling is set at $32. Depository in s ti tu t io n s may pick up or deliver currency and coin free of charge at Reserve Bank docks, since the provision of coin and currency i t s e l f is a government service. However, Reserve Banks may impose reasonable r e s tric tio n s on scheduling of pickups and deliveries when depository in s ti tu t io n s arrange t h e i r own transportation. Currency and coin processing (paying, receiving and verifying both coin and currency, and issuing, processing, canceling and destroying currency) are governmental functions and are not priced. 1. Currency and coin shipping service The shipping service comprises mail shipments and armored c a r r i e r deliveries to and from endpoints within a Federal Reserve c i ty , within suburban areas of the Reserve c ity , and beyond those areas to locations in more remote areas, referred to as "over-the-road" endpoints. -13- a. Mail shipment Mail shipment service involves travel to and from the Post Office to pick up and deliver currency and coin. Actual postage, registered mail fees and insurance costs will be added to the proposed Reserve Bank fee for th is service. b. City endpoint City endpoint transportation includes the shipment of currency and coin by armored c a r r i e r to and from depository in stitu tio n s located within the same city as a Federal Reserve office. c. Suburban endpoint This service is similar to the city endpoint service except that i t is available only to depository in s ti tu t io n s located close to a Federal Reserve city ( i . e . , within a geographic area defined by a Federal Reserve office as suburban). d. Over-the-road endpoint This service is similar to city and suburban endpoint services but is available to depository in s titu tio n s located beyond suburban endpoints. Over-the-road service areas are subdivided into zones based upon distance from a Federal Reserve office. 2. Coin Wrapping Wrapping involves the packaging of coin into r o l l s , and boxing of r o l ls for shipment. Coin wrapping is available in four Reserve Bank D is tric ts (see Table 7 in Appendix II for proposed fee for th is service). F. Securities Services 1. Safekeeping and s e c u ritie s tra n sfe r Proposed prices for t h is service include charges for the estab lish ment, maintenance, and servicing of both d efin itiv e and book-entry safekeeping accounts (see Table 8 of Appendix II for proposed prices) Also included are charges to cover deposits, withdrawals, electronic tran sfers of book-entry s e c u r itie s , and charges to cover account main tenance. 1 / The proposed account maintenance fee re f le c ts the costs 17 No fees will be imposed for: (1) holding, transferring or switching defini tiv e or book-entry s e c u ritie s as collateral for Treasury tax and loan, other Treasury deposits, or borrowings from the Federal Reserve; (2) deposits of book-entry secu rities on original issues; and (3) payment of principal and in te re s t on Government s e c u r itie s , including the withdrawal of matured bookentry s e c u r itie s . These services are provided by the Federal Reserve in i t s capacity as fiscal agent for the U.S. Treasury Department and compensation for such services is provided by the Treasury. - 1 4 - associated with storing s e c u r it ie s , maintaining account instructions, reconciling accounts, notifying the depository of maturing se c u r itie s , and providing periodic account statements. a. Book-entry secu rities This service includes the tra n sfe r of book-entry securities and the maintenance of a customer's account. A Federal Reserve office will electronically tra n s fe r book-entry se cu rities from the custody account of one depository i n s ti tu t io n to the custody account of another depository i n s t i t u t i o n located within the same or another Federal Reserve D is t r i c t. Additionally, a Federal Re serve office will electronically tra n s fe r book-entry secu rities between custody accounts of the same depository in s titu tio n (account switch). All book-entry transfers may be performed on-line or o ff -lin e . This service also includes account main tenance ( e . g ., the maintenance of records reflecting book-entry holdings, account instructions, and periodic statements). b. Definitive secu rities This service includes the receipt or delivery of d efinitive se cu rities by a Federal Reserve office at the direction of a depository i n s ti tu t io n and the processing of related payments. Also included are: (1) the tra n s fe r of secu rities between custody accounts at a Federal Reserve office; (2) the withdrawal of maturing s e c u ritie s from safekeeping and co lla te ra l accounts and the collection and crediting of principal on such s e c u ritie s; (3) detaching maturing coupons from d efin itiv e se cu rities held at a Federal Reserve office and preparing them for delivery to the owner or to the appropriate paying agent; and (4) account maintenance, including storage of s e c u r itie s , maintenance of account in stru ctio n s, account reconcilement, and periodic statements. 2. Purchase and sale of government secu rities This service involves the execution of purchase and sale transactions of Treasury and U.S. Government agency se cu rities at the request of a depository i n s t i t u t i o n . It is proposed that fees will be charged for each transaction handled. G. Noncash Collection Services Noncash collection includes the receipt, collection, and crediting of accounts of depository i n s titu tio n s for deposits of matured municipal and corporate coupons, and called or matured municipal and corporate obligations. (See Table 8 of Appendix II for proposed p rices.) The collection of and crediting fo r maturing coupons detached from d efinitive sec u ritie s held in safekeeping on c o l l a t eral accounts at a Federal Reserve office are also included in t h is service. -15- VIII. CLEA R I N G B ALANCES The Monetary Control Act imposes Federal reserve requirements on all depository in s ti tu t io n s with transaction accounts or non personal time deposits. Nevertheless, a number of member and non-member depository i n s ti tu t io n s will maintain zero or negligible required reserve balances with the Federal Reserve because of the phase in provisions or because of the lower reserve ratio s estab lished by the Act. Such i n s titu tio n s will e ith e r have low required reserves and/or will be able to sa tis fy t h e i r reserve requirement e ith e r in large part or en tirely with vault cash. These i n s ti tu t io n s may want direct access to some or a ll Federal Reserve services. However, t h e i r reserve balances held at Federal Reserve Banks may be considered inadequate for clearing purposes because they could generate an excessive incidence of daylight, and possible overnight, overdrafts. Consequently, the Board will provide two a ltern ativ e methods whereby depository i n s ti tu t io n s maintaining zero or negligible required reserve balances with Federal Reserve Banks will s t i l l be able to receive Federal Reserve Bank services d ire c tly , in accordance with the access provisions of the Act. The f i r s t method is for a depository i n s t i t u t i o n with zero or low reserve balances to arrange with a correspondent i n s ti tu t io n or with i t s reserve pass-through correspondent to post all of i t s Federal Reserve credits and charges arising from i t s use of System services to the correspondent i n s t i t u t i o n 's or pass-through corres pondent's Federal Reserve account. Such arrangements must comply with the requirements of the Federal Reserve Bank involved. The second method is for the depository i n s ti tu t io n with zero or low reserve balances, regardless of whether or not i t s reserves are held through a pass-through correspondent, to establish a clearing balance with i t s Reserve Bank to which Federal Reserve credits and charges may be posted. I f the depository i n s t i tution chooses the clearing balance method, i t is proposed that the following procedures apply: A. Clearing Balance Procedure 1. The need for and size of a clearing balance will be set by each Reserve Bank on a case-by-case basis. The size of the clearing balance will be set so as to minimize the expected incidence of daylight and possible overnight overdrafts. 2. In order to ensure that clearing balances do not in te r f e r e with the conduct of monetary policy, the size of the required clearing balance will be fixed in advance of the period during which th at balance must be maintained. Required clearing balances may be adjusted on the f i r s t Thursday of each month to r e f le c t changes in the level of transactions. Notice of such adjustments will be made two weeks prior to the change. 3. In order to minimize the potentially disruptive e ffects clearing balance requirements could have upon the con duct of monetary policy, the maintenance period for required -16- clearing balances will correspond to the maintenance period for required reserve balances. Each depository i n s t i t u t i o n will have to maintain a required weekly average total balance—required clearing balances plus, i f applicable, required reserve balances. At the end of each maintenance period any balances held with the System will f i r s t be allocated to the clearing balance require ment and the remainder will apply to the required reserve balance. Thus, i f a depository i n s t i t u t i o n holds an average to tal balance with the System during the maintenance period th at is less than the required balance—required clearing balances plus required reserve balances—the depository i n s t i t u t i o n will be considered to be deficient in reserves. If the deficiency in average total balances is greater than required reserves, the remaining shortfall will be considered deficient clearing balances. I f the maintained to tal balance exceeds the required balance, the i n s ti tu t io n will be considered to be holding excess reserves. However, in the case where a depository i n s t i t u t i o n elects to pass-through i t s required reserves and in addition maintains a required clearing balance d ire c tly with the Federal Reserve, the required clearing balance will be administered separately from the required reserve balance. 4. If a depository i n s t i t u t i o n is deficient in require reserves i t will be subject to a penalty [12CFR§204.7]. The same penalty will apply to a deficiency in required clearing balances, whether or not that i n s t i t u t i o n must maintain any required reserve balances with the Federal Reserve. However, while reserve carry over provisions will apply to required reserve balances, they will not apply to required clearing balances. In addition, Federal Reserve Banks will meet with depository in s ti tu t io n s that demon s t r a t e an in a b ility to maintain required balances or that incur repeated penalties to discuss how to b e tte r manage required total balances. B. Earnings Credits on Clearing Balances 1. The Monetary Control Act provides th a t Federal Reserve services should be provided on a competitive basis. Since fees for competitive services offered by commercial banks are often in the form of balances maintained by the users of the services the Board believes t h a t , in order to f u l f i l l the objective of providing services on a competitive basis, i t is appropriate to permit fees for services to be offset by an earnings credit on required clearing balances j u s t as is the practice of the private sector. Thus, Federal Reserve Banks will provide earnings on the lesser of required clearing balances or the actual clearing balances maintained. These c red its can only be used to offset charges a depository i n s t i t u t i o n incurs in i t s use of System services. Explicit in te re s t will not be paid to depository i n s t i tutions maintaining required clearing balances. -17- 2. The earnings credit rate to be used by Reserve Banks is a weekly average of the 91-day Treasury Bill rate. This average will be computed based on U.S. Treasury auction averages and daily closing bid prices. 3. If during a given b illin g period the earnings credits granted a depository i n s ti tu t io n exceed the charges i t incurs for the use of System services, the depository i n s ti tu t io n may carry over the excess credits and apply them to i t s use of System services in subsequent months. A p a rtic u la r b illin g period's carryover may be maintained for up to 12 months. At the end of 12 months such c red its expire. For example, excess c red its earned in January th at are unused during the following 12 months would expire the next January 31, while excess credits earned in February th at are unused during the following 12 months would expire on the l a s t day of the next February. C. Implementation Dates for Clearing Balances 1. Federal Reserve Banks will implement clearing balances by January 1, 1981 or as soon th e re a fte r as possible. 2. In those D is tric ts in which Reserve Banks are unable to implement clearing balances by January 1, 1981, a depository i n s ti tu t io n with zero or low required reserve balances that wishes to receive System services d irectly will be limited to the f i r s t method previously discussed. Thus, affected deposi tory i n s titu tio n s will need to arrange with a correspondent i n s t i tution or other reserve pass-through correspondent to have all i t s Federal Reserve credits and charges posted to the correspondent i n s t i t u t i o n 's or pass-through correspondent's Federal Reserve Bank account. Once clearing balances become available, depository i n s ti tu t io n s may switch to the clearing balance procedure. By order of the Board of Governors of the Federal Reserve System, August 28, 1980. (signed) Theodore E. Allison Theodore E. Allison [SEAL] A PPE N D I X I THE PRIVATE SECTOR ADJUSTM ENT FA R CTO In accordance with the Monetary Control Act of 1980 the Federal Reserve is required to price i t s services to re f le c t i t s actual costs plus the financing and tax costs that a private sector supplier would incur. Since the System's cost accounting information does not include these private sector costs, i t is necessary to derive an adjustment factor or markup to apply to the System's cost accounting data. The f i r s t step in deriving the private sector adjustment requires a determination of the value (at h isto ric a l cost) of the System's assets employed in the production of priced services. The value of assets used by the System to execute i t s central bank functions, supervisory and regulatory r e s p o n s ib i li ti e s , and duties as the Treasury's fiscal agent have been excluded. The asset base for priced services is shown in Table 1 and t o t a l s $284.9 million. The capital structure was assumed to approximate that of a private business firm solely providing payments function services: 53% debt (32% short term, 21% long-term) and 47% equity. W hen the average debt, equity, and tax costs of a selected sample of large banks are applied to th is capital stru c tu re , an average cost of capital of 13.1% is derived. This cost of capital was used to determine the 12% private sector adjustment facto r, described in detail in Table 2. 1-2 T ABLE 1 Assets Employed in the Production of Priced Services ($ millions, 1979) $409.3 Bank Premises, Net Difference & Suspense Act., Net 134.3 Furniture & Equipment, Net 85.1 Other Real Estate 27.4 Deferred Charges 3.4 $659.5 Total Assets Assets of Priced Services: $659.5 (.432) J / = $284.9 V Those assets which could be e x p lic itly identified as supporting a nonpriced service are not included in Table 1. Other assets which supported both priced and nonpriced services required different treatment. The cost of priced services (less shipping expenses) represented 43.2% of to tal System costs (less note issue and shipping expenses). This ra tio is applied to the total asset base of $659.5 million (which supports both priced and nonpriced services) to determine the value of assets allocable to the priced services alone. Shipping and note issue expenses represent "passed through" private sector or U.S. Treasury costs and are excluded from the ratio since l i t t l e or no Federal Reserve assets are involved in t h e i r production. 1-3 TABLE 2 The Calculation of the Private Sector Adjustment Factor V ($ millions; 1979 Factor annual data) Asset Base 284.9 Capital Structure Short-term Debt Long-term Debt Equity (32%) (21%) (47%) 91.7 58.0 135.2 Financing Cost Short-term Debt (@ 6.91%) Long-term Debt (@ 7.98%) Equity (@ 19.5%: before taxes) 6.3 4.8 26.1 Total Assumed Financing and Tax Expenses 37.2 Cost of System Services to be Marked up 310.7 Private Sector Adjustment Factor (37.2 * 310.7) l j ]J The average in te re s t cost of long-term debt in 1979 while the average in te re s t cost of The average a f t e r tax return on equity was tax rate of 26%, yields a before tax equity 2J The average cost of capital (before taxes) 12.0% at 12 large banks was 7.98% short-term debt was 6.91%. 14.4% and, with aneffective return of 19.5%. is 13.1%. A PPENDIX II PROPOSED FEES The following tables contain the proposed services. fees for Federal Reserve - I 1-2 - TABLE 1 PROPOSED FEE SCHEDULE COMMERCIAL CHECK SERVICES ( c e n t s p e r it e m ) FEDERAL RESERVE OFFICE BOSTON LEWISTON WINDSOR LOCKS C ity ) ) CASH LETTERS DEPOSITED DIRECTLY AT PROCESSING F .R . OFFICE Co un try RCPC O the r NonPackage Group & Mixed Fed Sort Mac h in e a b le Sort CASH LETTER CONSOLIDATED WITH SHIPMENTS SENT FROM OTHER F .R . OFFICES TO PROCESSING F .R . OFFICE C ity 1. 4<t 1.74 3.84 4.2 4 0.5 4 NEW YORK BUFFALO JERICHO CRANFORD UTICA 2.5 1.5 5.1 3.9 0.2 0.6 0.6 0.6 0 .6 - - 7.0 3.9 4 .8 4.5 4.6 - - 2.9 1.7 2.0 2.2 2.0 1.7 PHILADELPHIA 1.9 2.2 4.6 4 .8 0 .6 1.8 0.9 1.9 3.4 3.7 0.5 1.6 1.6 1.1 1 .4 1.9 1.8 1.3 1.6 1.8 4.0 4.1 3.4 3.9 3.8 4 .1 3 .8 3 .2 3 .6 3 .7 0.6 0.6 0.5 0 .6 0 .6 1.2 1.5 3.3 3 .8 0 .4 1.9 1.2 1.3 1.2 1.5 2.5 1 .8 1.7 1.2 1.3 4.3 4.5 3.4 3.5 3.8 4.1 5.5 4 .3 3.4 5.1 0.5 0 .4 0 .4 0 .4 0 .3 1.7 2.1 3.8 4 .0 0 .3 1.4 1.9 4 .4 4 .8 0.5 1.7 1.0 1.5 1.3 2.4 1.3 1.7 1.9 3.9 3.3 3.8 3.7 4 .0 3.8 3.9 3.6 1.4 1.9 3.8 1.5 1.6 3.8 CLEVELAND CINCINNATI PITTSBURGH COLUMBUS - ) ) ) ) RICHMOND BALTIMORE CHARLOTTE COLUMBIA CHARLESTON ATLANTA BIRMINGHAM JACKSONVILLE NASHVILLE NEW ORLEANS MIAMI ) ) ) ) ) ) CHICAGO DETROIT DES MOINES INDIANAPOLIS MILWAUKEE ST. LOUIS LITTLE ROCK LOUISVILLE MEMPHIS ) ) ) ) MINNEAPOLIS HELENA ) ) KANSAS CITY DENVER OKLAHOMA CITY OMAHA DALLAS HOUSTON SAN ANTONIO EL PASO ) ) ) ) SAN FRANCISCO LOS ANGELES PORTLAND ) ) ) SALT LAKE CITY SEATTLE ) ) _ Co un try & RCPC 1.84 2 .14 3.0 1.9 - 3.4 2.1 2.5 2.7 2.4 2.3 2.7 1.3 2.3 2.0 2.0 1.5 1.8 2.4 2.2 1.7 2.0 2.2 1.6 1.9 2.4 1 .6 1 .7 1.6 1.9 2.9 2.3 2.1 1.6 1.7 2.1 2.6 1.4 1.9 2.4 0.5 0.5 0 .5 0 .5 1 .0 2.1 1 .4 1 .9 1 .7 2.8 1.8 2.1 2.3 4 .5 0.6 1.5 1 .8 2.3 5.9 0 .2 2.0 2.1 1.64 _ - _ - _ - - - 11-3 TA BLE 2 PROPOSED FEE SCH U ED LE A TO A U M TED CLEARING H U SERVICES O SE (cents per item) Federal Reserve D istric t Intra-ACH Items Inter-ACH Items 1.0* 0.3 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.5* 1.2 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dal las San Francisco TA BLE 3 PROPOSED FEE SCH U ED LE W TRANSFER O RESERVE A CO N BA N IRE F C U T LA CES SERVICE TELEPHONE ADVICE TO RECEIVER Y ES N O ORIGINATOR ON-LINE $0.70 $2.30 ORIGINATOR OFF-LINE 3.15 4.75 - 1.60 RECEIVER OFF-LINE TA BLE 4 PROPOSED FEE SCH U ED LE NET SETTLEM ENT SERVICE BASIC SETTLEM ENT C A G PER EN Y HRE TR $0.70 SU A ES PER ENTRY: RCH RG SETTLEM ENT ORIGINATED OFF-LINE 2.45 TELEPHONE ADVICE REQUESTED 1.60 - II-4 - TABLE 5 PROPOSED FEE SCHEDULE CURRENCY AND COIN SHIPPING SERVICE FEDERAL RESERVE OFFICE MAIL . SHIPMENT (DELIVERY TO OR FROM POST OFFICE) BOSTON NEW YORK BUFFALO PHILADELPHIA ' $1.82 1.82 2.74 - CITY ENDPOlNY VOLUME SHIPPED "*PER PER BUNDLE OF BAG OF CURRENCY COIN - . PER STOP (PICKUP AND/OR DELIVERY) PER STOP (PICKUP AND/OR DELIVERY) - - - - . m - . . - - - - - $.2 0 $.26 $ 2 0 .9 6 .1 0 .15 6.39 .10 .10 .14 .14 4.96 1.00 $.40 .40 - .60 - CLEVELAND CINCINNATI PITTSBURGH 1.82 2.74 1.82 RICHMOND BALTIMORE CHARLOTTE 2.74 1.82 2.74 .20 _ .24 - .1 0 .23 13.66 . 6.65 ATLANTA BIRMINGHAM JACKSONVILLE NASHVILLE NEW ORLEANS MIAMI 2.52 2.74 2.74 1.90 2.74 1.91 .20 .20 .10 .10 .20 .2 0 .31 .33 .24 .15 .16 .13 7.06 8.4 1 13.23 1.12 6.13 6.45 CHICAGO DETROIT 2.74 2.74 .10 .4 0 .13 .6 2 9.86 20.80 ST. LOUIS LITTLE ROCK LOUISVILLE MEMPHIS 1.82 2.38 1.82 1.82 .10 .1 0 .20 .20 .14 .12 .28 .14 MINNEAPOLIS HELENA 1.89 1.82 .2 0 .2 0 KANSAS CITY DENVER OKLAHOMA CITY OMAHA 1.82 1.82 2.06 2.13 DALLAS HOUSTON SAN ANTONIO EL PASO SAN FRANCISCO LOS ANGELES PORTLAND SALT LAKE CITY SEATTLE ]_/ Cost o f one-way t r i p SUBURBAN ENDPOINt VOLUME SHIPPED PER PER BUNDLE OF BAG OF CURRENCY COIN $.39 .57 - $ 1 1 .0 2 11.96 . .55 - 18.00 - _ _ .20 .30 .60 .3 0 .34 .70 2.86 5.32 15.85 .30 - .34 - fi.3 4 - 4.9 7 1 .05 6.42 2.19 .60 .10 - .75 .12 - 11.49 2.10 - .2 0 .33 10.35 5.45 .40 - .76 - 12.84 - .1 0 .10 .1 0 .20 .14 .14 .16 .20 7.11 3.22 1.95 5.67 .20 .10 .20 - .26 .14 .33 - 2.74 4.0 1 2.80 - 1.82 1.97 2.74 2.74 .2 0 .10 .1 0 .1 0 .12 .14 .15 .1 9 1.88 6.17 6.83 5.99 .40 .1 0 - .40 .15 - 10.57 3.48 - 2.74 2.74 1.82 2.74 2.74 .05 .20 .10 .10 .2 0 .14 .24 .16 .19 .19 10.08 10.40 12.56 6.50 18.64 .30 .30 .60 .70 .50 .74 .78 .78 2.67 11.50 5.37 22.00 to o r from U .S . *1,000 notes or 10 straps Post O f f i c e . Ac tua l postage and in s u ra n c e costs w i l l be added. - I I -5 - TABLE 6 PROPOSED FEE SCHEDULE CURRENCY AND COIN SHIPPING SERVICE Weft-fHE-ROAD En d p o in t s VOLUME SHIPPED FEDERAL RESERVE OFFICE PFr B£ft BUNDLE OF CURRENCY BAG OF COIN BOSTON $ .6 0 S I . 51 S 7.85 NEW YORK BUFFALO .6 0 .6 0 1.36 .90 PHILADELPHIA .6 0 CLEVELAND CINCINNATI PITTSBURGH PER STOP (PICKUP AND/OR DELIVERY) ZONE ZONE ZONE 4 3 2 ZOn E " 5 $1 5.71 $ 2 3 .5 4 $ 3 1 .3 8 - 14.14 12.00 19.13 1 3 .3 9 24.11 14.80 29.09 16.19 . $ 1 7 ,5 9 1.35 13.00 15.00 18.50 - - .6 0 .6 0 .60 .85 .81 .33 12.36 13.84 8 .86 14.06 18.78 13.78 1 5 .7 7 23.72 18.70 17.47 28.67 23.62 - 1.00 .6 0 1.10 1.35 1.28 1.61 14.70 25.30 22.02 21.00 27.50 27.97 25.20 29.70 32.00 - - .60 .7 0 .6 0 .6 0 .60 - 1.15 1.02 8.49 7.40 9.35 9.24 19.11 19.75 14.27 20.79 - 13.81 13.57 11.81 15.02 4.2 8 - 1 6 .7 3 • 8.55 - - CHICAGO DETROIT 1.30 .6 0 1.76 1.58 27.04 17.39 30.69 22.02 32.00 26.66 - “ ST. LOUIS LITTLE ROCK LOUISVILLE MEMPHIS 1.40 2.00 1.90 1.20 1.93 2.27 2.65 1.63 26.52 28.60 27.50 25.64 31 .80 31.50 31.80 31.80 32.00 32.00 32.00 32.00 ■ ■ MINNEAPOLIS HELENA 1.50 2.10 1.9 1 2.39 27.53 26.61 32.00 27.62 32.00 32.00 32.00 32.00 KANSAS CITY DENVER OKLAHOMA CITY OMAHA 1.30 .70 .70 1.20 1.74 1.20 .94 1.59 21.86 15.69 10.95 9.09 25.39 20.59 1 7 .0 3 12.53 28.92 25.49 14.61 32.00 30.40 * • DALLAS HOUSTON SAN ANTONIO EL PASO 1.20 .6 0 1.30 1.70 1.38 .82 1.77 1 .9 5 22.44 13.57 15.38 27.25 25.70 17.81 17.71 31.50 29.04 22.06 20.04 32.00 26.30 22.38 24.70 SAN FRANCISCO LOS ANGELES PORTLAND SALT LAKE CITY SEATTLE .60 .70 1.00 1.30 1 .30 1.00 1.24 1.60 1.6 2 1.82 10.84 10.16 11.68 11.22 19.91 19.77 16.48 - - • * • RICHMOND BALTIMORE CHARLOTTE ATLANTA BIRMINGHAM JACKSONVILLE NASHVILLE NEW ORLEANS MIAMI .69 .38 .73 - 7D n £ " i 2 .1 4 ” 6.41 - - - - • 11-6 TABLE 7 PROPOSED FEE SCH LE EDU COIN W RAPPING SERVICE FEDERAL RESERVE DISTRICT CENTS PER RO LL BO N STO 2.8* CLEV N ELA D 2.8 ST. LOUIS 3.5 KA S CITY NSA 2.8 TABLE 8 PROPOSED FEE SCHEDULE SECURITIES SAFEKEEPING AND NONCASH COLLECTION SERVICES FEDERAL RESERVE DISTRICT BOSTON DEFINITIV E SECURITIES BOOK-ENTRY SECURITIES_______ ACCOUNT ACCOUNT COUPON DEPOSIT ACCOUNT TRANSFER SECURITIES MAINTENANCE SWITCH CLIPPING OFF-LINE MAINTENANCE WITHDRAWAL BASIC PER MILLION $ PER PER SURCHARGE PER REDEMPTION PRICE PER PAR AMOUNT*** ISSUE TRANS. PER TRANS.** ACCOUNT*** PER TRANS.* TRANSFER $1.80 7.00 PURCHASE AND SALE PER MARKET TRANSACTION $ 6 0 .0 0 $ 38.00 $ 13.50 $9.50 $ 6 7 .0 0 $15.00 COUPON OR BOND COLLECTION PER PER ENVELOPE $1,000 OR BOND . COUPON PROCESSED' VALUE SHIPPED $2.20 $1.00 NEW YORK 1.80 6 .75 60.00 3 3.50 12.50 9 .25 34.00 22.50 1 .40 1.00 PHILADELPHIA 1.80 4 .5 0 60.00 29.00 10.00 4 .50 34.00 15.50 2.20 1.00 CLEVELAND 1.80 5 .5 0 60.00 29.00 12.50 4 .50 4 5.00 21.75 2.20 1.00 RICHMOND 1.80 7 .0 0 60.00 37.00 12.50 7.25 63.00 22.50 2.00 1.00 ATLANTA 1.80 5 .50 60.00 35.00 11.25 7.2 5 63.00 18.50 2.00 1.00 CHICAGO 1.80 4 .50 60.00 33.50 12.50 9.2 5 34.00 12.25 1 .40 1.00 ST. LOUIS 1.80 6 .75 60.00 19.00 11.25 5.00 45.00 1.60 1.00 MINNEAPOLIS 1.80 4 .7 5 60.00 19.00 11.75 5 .25 45.00 9.5 0 1.80 1.00 KANSAS CITY 1.80 4.0 0 60.00 19.00 10.00 4 .25 34.00 16.75 1 .80 1.00 DALLAS 1.80 5.25 60.00 19.00 10.00 4.50 34.00 16.75 2.00 1.00 SAN FRANCISCO 1.80 5.2 5 6 0.00 1.70 1.00 nsurance f e e s and f ee s assessed by o t h e r F e d e ra l Reserve Banks 1 f a n y . * For bonds, add o u t - o f - p o c k e t s h i p p i n g expen ses, * * Assessed f o r o f f - l i n e o r i g i n a t i o n and o f f - l i n e r e c e i p t . * * * Pe r annum assessed on a q u a r t e r l y b a s i s .
@FedFRASER