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l l★K

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

HELEN E. HOLCOMB
FIRST VICE PRESIDENT AND
CHIEF OPERATING OFFICER

July 1, 2004

Notice 04-36

TO: The Chief Operating Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Request for Comment on Proposal to Amend Regulation J
(Collection of Checks and Other Items by Federal Reserve Banks and Funds
Transfers Through Fedwire)
DETAILS
The Board of Governors has requested public comment on a proposed rule that would
amend subpart A of Regulation J to provide for the rights and obligations of sending banks,
paying banks, returning banks, and Reserve Banks in connection with collection of substitute
checks and items that have been converted to electronic form. The proposed changes would
ensure that Regulation J covers the new check processing service options that the Reserve Banks
plan to offer when the Check Clearing for the 21st Century Act becomes effective on October
28, 2004.
The Board must receive comments by July 26, 2004. Please address comments to
Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street
and Constitution Avenue, N.W., Washington, DC 20551. Also, you may mail comments electronically to regs.comments@federalreserve.gov. All comments should refer to Docket No.
R-1202.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

-2The public can also view and submit comments on proposals by the Board and other
federal agencies from the www.regulations.gov web site.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 34086–91, Vol. 69, No. 117 of the
Federal Register dated June 18, 2004, is attached.
MORE INFORMATION
For more information, please contact Donald L. Jackson, Payments Services Department, (214) 922-5431. Paper copies of this notice or previous Federal Reserve Bank notices can
be printed from our web site at www.dallasfed.org/banking/notices/index.html.
Sincerely,

34086

Proposed Rules

Federal Register
Vol. 69, No. 117
Friday, June 18, 2004

FEDERAL RESERVE SYSTEM
12 CFR Part 210
[Regulation J; Docket No. R–1202]

Collection of Checks and Other Items
by Federal Reserve Banks and Funds
Transfers Through Fedwire
Board of Governors of the
Federal Reserve System.
ACTION: Proposed rule.
AGENCY:

SUMMARY: The Board of Governors is
publishing for comment a proposed rule
that would amend subpart A of
Regulation J to provide for the rights
and obligations of sending banks,
paying banks, returning banks, and
Reserve Banks in connection with
collection of substitute checks and items
that have been converted to electronic
form. The proposed changes would
ensure that Regulation J covers the new
check processing service options that
the Reserve Banks plan to offer when
the Check Clearing for the 21st Century
Act becomes effective on October 28,
2004.

Comments on the proposed rule
must be received on or before July 26,
2004.
ADDRESSES: You may submit comments,
identified by Docket No. R–1202, by any
of the following methods:
• Agency Web site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• FAX: 202/452–3819 or 202/452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
DATES:

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All public comments are available
from the Board’s Web site at
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
except as necessary for technical
reasons. Accordingly, your comments
will not be edited to remove any
identifying or contact information.
Public comments may also be viewed
electronically or in paper in Room MP–
500 of the Board’s Martin Building (20th
and C Streets, NW.) between 9 a.m. and
5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jack
K. Walton, II, Assistant Director (202/
452–2660), or Joseph P. Baressi, Senior
Financial Services Analyst (202/452–
3959), Division of Reserve Bank
Operations and Payment Systems; or
Adrianne G. Threatt, Counsel (202/452–
3554), Legal Division; for users of
Telecommunication Devices for the Deaf
(TDD) only, contact 202/263–4869.
SUPPLEMENTARY INFORMATION:
Background
Subpart A of Regulation J governs
collection of checks and other items by
the Reserve Banks. This subpart
includes the warranties and indemnities
that are given to the Reserve Banks by
parties that send items to the Reserve
Banks for collection and return, as well
as the warranties and indemnities for
which the Reserve Banks are
responsible in connection with the
items they handle. Subpart A of
Regulation J also describes the Reserve
Banks’ security interest in the assets of
banks for which they collect items, as
well as the amounts and methods by
which the Reserve Banks may recover
for losses associated with their
collection of items. Subpart A
authorizes the Reserve Banks to issue
operating circulars governing the details
of the collection of checks and other
items and provides that such operating
circulars have binding effect on all
parties interested in an item handled by
a Reserve Bank. The Reserve Banks’
Operating Circular No. 3, ‘‘Collection of
Cash Items and Returned Checks’’ (OC
3), is the operating circular that is most
relevant to the Reserve Banks’ check
collection activities.
Under existing Regulation J, the term
‘‘item’’ is understood to mean a paper
instrument. Although Reserve Banks in
some cases accept, transfer, present, or
return items in electronic form, the
rights and obligations associated with

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handling items electronically currently
are specified in OC 3 and the
appendices thereto, rather than in
Regulation J.
Once the Check Clearing for the 21st
Century Act (the Check 21 Act) takes
effect on October 28, 2004, the Board
expects that the Reserve Banks will offer
a wider variety of services that involve
handling items electronically. In
addition, the Board expects that the
Reserve Banks in some cases will act as
‘‘reconverting banks’’ that create
substitute checks and provide the
associated substitute check warranties
and indemnity in accordance with the
Check 21 Act and subpart D of the
Board’s Regulation CC.1
The proposed amendments to
Regulation J primarily are designed (1)
to cover the Reserve Banks’ handling of
electronic items explicitly under
Regulation J, (2) to acknowledge the
substitute check warranties and
indemnity that Reserve Banks and other
banks will make under the Check 21 Act
and subpart D when handling a
substitute check or a paper or electronic
representation of a substitute check, and
(3) to include new warranties and
indemnities that will apply when
Reserve Banks and other banks send an
electronic item that is not otherwise
covered by the Check 21 Act and
subpart D.2
Section-by-Section Analysis
Section 210.1 Authority, Purpose, and
Scope
The Board proposes to amend this
section to acknowledge the Check 21
Act as a source of authority.
Section 210.2 Definitions
A. Check. The Board proposes to
amend the definition of check by adding
a cross-reference to new subpart D of
Regulation CC.
B. Item. To bring electronic items
under the coverage of Regulation J, the
Board proposes to amend the definition
of item to include an electronic image of
1 The Board has proposed to implement the
Check 21 Act by adding a new subpart D to existing
Regulation CC (69 FR 1470, Jan. 8, 2004). The
comment period for this proposed rule expired on
March 12, 2004, and the Board intends to finalize
subpart D no later than July of this year.
2 The Board expects that the Reserve Banks will
amend OC 3 to address the operational details
associated with new check processing services
following the Board’s adoption of final amendments
to Regulation CC and Regulation J.

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Federal Register / Vol. 69, No. 117 / Friday, June 18, 2004 / Proposed Rules
a paper item, together with information
describing that item, that a Reserve
Bank handles pursuant to an operating
circular. This type of item would be
defined as an electronic item.
C. Paying bank. Regulation J currently
defines a bank whose routing number
appears on the check ‘‘in magnetic
characters or fractional form’’ as a
paying bank. The electronic items that
would be covered by the proposed
expansion of the definition of item
would contain MICR-line information
but would not contain characters
encoded in magnetic ink. The Board
therefore proposes to replace the
reference to ‘‘magnetic characters’’ with
a reference to the information in the
item’s magnetic ink character
recognition (MICR) line or in fractional
form on the front of the check, or in the
MICR-line information that
accompanies an electronic item.
D. Sender. To further clarify the
entities that are senders, the Board
proposes to add Federal Reserve Banks
and U.S. branches and agencies of
foreign banks as entities listed in that
definition. The Board also proposes
technical amendments to streamline the
definition.
E. Undefined terms. The Board
proposes to reformat existing language
explaining that terms that are not
directly defined in § 210.2 of Regulation
J have the meanings set forth in
Regulation CC or the UCC and to add a
cross-reference to new subpart D of
Regulation CC. This reformatted
language would be in a new paragraph
(s).
Section 210.3

General Provisions

The Board proposes to amend
paragraph (b) of this section to state
explicitly that new subpart D of
Regulation CC would be binding on all
parties interested in an item handled by
a Reserve Bank. Although subpart D
would apply even in the absence of this
reference, the Board believes that an
explicit statement in Regulation J
promotes clarity.
Section 210.4 Sending Items to
Reserve Banks
Section 210.4(b) lists the parties that
are deemed to have handled an item
that is sent to a Reserve Bank in the
order in which they are deemed to have
handled it. The Board proposes to add
at the end of that list the Administrative
Reserve Bank of the bank to which a
Reserve Bank sends or presents the
item. This addition clarifies the chain of
parties deemed to have handled an item.

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Section 210.5 Sender’s Agreement;
Recovery by Reserve Bank
In paragraph (a), the Board proposes
adding to the list of warranties made to
each Reserve Bank a new warranty that
the item bears all indorsements applied
by previous parties that handled the
item for forward collection or return.
This amendment would facilitate
compliance with the requirement under
the Check 21 Act that a reconverting
bank preserve all previously-applied
indorsements. This new warranty does
not require senders to obtain missing
indorsements, but rather parallels the
Check 21 Act’s requirement that a
reconverting bank preserve the
indorsements applied by all parties that
previously handled a check in any form.
The proposed new warranty would be of
particular relevance for items that have
been indorsed in electronic form,
because a Reserve Bank (or other
collecting bank) that handles such an
item might convert it to a substitute
check and thus have a duty under the
Check 21 Act to preserve all previouslyapplied indorsements.
The Board also proposes that
paragraph (a) explicitly acknowledge
the warranties and indemnities that a
sending bank makes under Regulation
CC subject to the terms of that
regulation. Proposed paragraph (a)(3)(i)
would list the settlement, encoding, and
offset warranties in § 229.34(c)(2)–(4) of
Regulation CC. Proposed paragraph
(a)(3)(ii) would acknowledge explicitly
that a sender makes the warranties and
indemnity specified in subpart D of
Regulation CC (which implements the
Check 21 Act) when sending an item in
the form of a substitute check or a paper
or electronic representation of a
substitute check. Although senders
would make each of these warranties as
provided in Regulation CC even if the
warranties were not listed in paragraph
(a), the Board believes that the meaning
of the rule is clearer if paragraph (a)
specifically acknowledges these
warranties. These changes also conform
the list of senders’ warranties in
§ 210.5(a) of Regulation J to the list of
the Reserve Banks’ warranties in
§ 210.6(b) of the regulation.
Proposed paragraph (a) would
supplement the warranties that are
given under other law by including new
warranties that a sender would give
only under Regulation J to each Reserve
Bank that handles an electronic item
that is not a representation of a
substitute check and thus is not subject
to the Check 21 Act warranties. The
Reserve Banks anticipate that most
electronic items they will receive will
fall into this category and that the

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34087

Reserve Banks or subsequent parties
might later use such electronic items to
create substitute checks. A recipient of
an electronic item that is not subject to
the Check 21 Act (i.e., an electronic item
created directly from an original check)
would not receive the Check 21 Act
warranties from the sending bank.
However, that recipient would itself
make the Check 21 Act warranties if it
subsequently used the electronic item to
create a substitute check that it
transferred for value. The proposed new
warranties in Regulation J thus are
designed to allow the recipient of an
electronic item to pass back liabilities
incurred under the Check 21 Act but for
which the recipient did not receive
corresponding Check 21 Act
protections. The proposed new
electronic item warranties therefore
closely track the substitute check
warranties contained in the Check 21
Act.
The amendments described in the
analysis of § 210.6(b) would explicitly
acknowledge the Reserve Banks’
responsibility for the new Check 21 Act
indemnity to be implemented in
§ 229.53 of Regulation CC and would
add a new indemnity that Reserve
Banks would give for electronic items
that are not subject § 229.53. The Board
therefore proposes to add two new
paragraphs to newly-redesignated
§ 210.5(a)(5) that would allow the
Reserve Bank in certain circumstances
to pass back to the sender losses the
Reserve Bank incurs in connection with
these indemnities. Specifically, new
§ 210.5(a)(5)(iv) would require a sender
who sent a substitute check (or a paper
or electronic representation of a
substitute check) to indemnify the
Reserve Bank for losses that the Reserve
Bank incurred as a result of an
indemnity that it made under
§§ 210.6(b)(2) and 229.53. Similarly,
new § 210.5(a)(5)(v) would require a
sender who sent an electronic item to
indemnify the Reserve Bank for losses
that the Reserve Bank incurred because
it made an indemnity for that electronic
item under § 210.6(b)(3). The Board also
proposes that newly-redesignated
§ 210.5(c)(3) (currently § 210.5(b)(3))
specify that the Reserve Banks’ recovery
rights under newly-redesignated
§ 210.5(c) extend to any indemnity that
the Reserve Banks provide under
§ 210.6(b).
An undesignated phrase after existing
paragraph (a)(2) currently specifies that
the warranties listed in paragraph (a) do
not limit warranties that a sender gives
under other law. The Board proposes to
move this text to a new paragraph (b)
and to amend the text to cover both
warranties and indemnities provided

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Federal Register / Vol. 69, No. 117 / Friday, June 18, 2004 / Proposed Rules

under other law. The remaining
paragraphs of § 210.5 would be
redesignated, and where necessary
cross-references would be amended, to
reflect the inclusion of new paragraph
(b).
Section 210.6 Status, Warranties, and
Liability of Reserve Bank
The Board proposes to amend § 210.6
regarding the warranty and other
liabilities of Reserve Banks for items
that they handle.
The Board proposes to amend
paragraph (a) to acknowledge explicitly
the Reserve Banks’ status and liability
when handling substitute checks under
the Check 21 Act and subpart D of
Regulation CC. The Board also proposes
to redesignate existing text from
paragraph (b)(2) regarding the
limitations on a Reserve Bank’s liability
as a new paragraph (c) and to
redesignate existing paragraph (c) as
paragraph (d). Redesignated paragraph
(d) would be amended to include a oneyear statute of limitations for claims
relating to the new supplemental
warranty in paragraph (b)(4) (which
specifies warranties made when
handling electronic items that are not
subject to the Check 21 Act or
Regulation CC) and to specify that
paragraph (d) does not extend the time
for bringing claims under subpart D of
Regulation CC.
The Board proposes to amend
paragraph (b) along the same lines as
§ 210.5(a) so that the protections that the
Reserve Banks give when they handle
an item for forward collection parallel
the protections that the Reserve Banks
receive from senders. Specifically, the
Board proposes to add a new paragraph
(b)(1)(iii), to provide that Reserve Banks
handling an item for forward collection
would make the same warranty
regarding preservation of previouslyapplied endorsements that a sender
would give under proposed
§ 210.5(a)(2)(iii). Similarly, paragraph
(b)(2) would parallel § 210.5(a)(3) by
explicitly acknowledging the Reserve
Banks’ responsibilities under subparts C
and D of Regulation CC, including the
warranties and indemnity that Reserve
Banks would give when handling a
substitute check or a paper or electronic
representation of a substitute check.
Paragraph (b)(3) would parallel the new
warranties in § 210.5(a)(4) that flow
with the transfer of an electronic item
that is not subject to the Regulation CC
warranties. Paragraph (b)(3) also would
add a new indemnity that Reserve
Banks would make if an electronic item
they sent later were converted to a
substitute check that was subject to an

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indemnity claim under § 229.53 of
Regulation CC.
Section 210.12 Return of Cash Items
and Handling of Returned Checks

Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506;
5 CFR 1320 Appendix A.1), the Board
has reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget. The
final rule contains no new collections of
information and proposes no
substantive changes to existing
collections of information pursuant to
the Paperwork Reduction Act.

The Board proposes to amend
paragraph (b) to parallel the proposed
amendments to § 210.4 by including the
Administrative Reserve Bank of the
bank to which a Reserve Bank returns a
check in the chain of parties deemed to
have handled a check. Proposed
amendments to paragraphs (c) and (d)
parallel the proposed amendments to
§§ 210.5 and 210.6 by making the return
warranties and indemnities given by
paying and returning banks and Reserve
Banks correspond to the forward-side
warranties given by senders and Reserve
Banks, respectively, and by including a
returning or paying bank’s
responsibility for indemnifying a
Reserve Bank for indemnities it pays for
returned checks. The proposed
amendments also would move existing
language from § 210.12(c)(2) about
preservation of other warranties and
liabilities to a separate paragraph (d),
paralleling the creation of new
§ 210.5(b) with respect to preservation
of forward warranties and indemnities.

Authority: 12 U.S.C. 248(i), (j), and (o),
342, 360, 464, 4001–4010, and 5001–5018.

Regulatory Flexibility Act

§ 210.1

In accordance with section 3 of the
Regulatory Flexibility Act (12 U.S.C.
605) and for the reasons stated below,
the Board certifies that the proposed
amendments to Regulation J if
promulgated would not have a
significant economic impact on a
substantial number of small entities.
Under section 3 of the Small Business
Act, as implemented at 13 CFR part 121,
subpart A, a bank is considered a ‘‘small
entity’’ or ‘‘small bank’’ if it has $150
million or less in assets. Based on
December 2003 call report data, the
Board estimates that there are
approximately 14,335 depository
institutions with assets of $150 million
or less. The proposed amendments
simply would provide that each bank
that sends an electronic item to a
Reserve Bank for forward collection or
return would make warranties and an
indemnity for that item. The proposed
new warranties and indemnity in
Regulation J are similar to the
warranties and indemnity that apply to
substitute checks under the Check 21
Act. The proposed amendments would
apply to all banks, regardless of size,
that collect checks through a Federal
Reserve Bank but the Board does not
expect these amendments to impose
economic costs on any such bank.

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12 CFR Chapter II
List of Subjects in 12 CFR Part 210
Banks, banking.
Authority and Issuance
For the reasons set forth in the
preamble, the Board proposes to amend
12 CFR part 210 to read as follows:
PART 210—COLLECTION OF CHECKS
AND OTHER ITEMS BY FEDERAL
RESERVE BANKS AND FUNDS
TRANSFERS THROUGH FEDWIRE
(REGULATION J)
1. The authority citation for part 210
is revised to read as follows:

[Amended]

2. In § 210.1, add the phrase ‘‘the
Check Clearing for the 21st Century Act
(12 U.S.C. 5001–5018);’’ between the
phrases ‘‘the Expedited Funds
Availability Act (12 U.S.C. 4001 et
seq.);’’ and ‘‘and other laws’’ in the first
sentence.
§ 210.2

[Amended]

3. In § 210.2(h), in the second
sentence remove the phrase ‘‘subpart C’’
and add the phrase ‘‘subparts C and D’’
in its place.
4. In § 210.2(i):
A. Redesignate paragraphs (i)(1),
(i)(2), and (i)(3), as paragraphs (i)(1)(i),
(i)(1)(ii), and (i)(1)(iii), respectively, and
designate the text after the phrase ‘‘Item
means’’ as paragraph (i)(1);
B. Remove the period at the end of
newly-redesignated paragraph (i)(1)(iii)
and add a semicolon followed by the
word ‘‘and’’ in its place; and
C. After newly-redesignated
paragraph (i)(1)(iii), add a new
paragraph (i)(2) to read as follows:
*
*
*
*
*
(i) Item means—
*
*
*
*
*
(2) An electronic image of an item
described in paragraph (i)(1) of this
section, together with information
describing that item, that a Reserve
Bank handles pursuant to an operating

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circular. This type of item is referred to
in this subpart as an electronic item.
*
*
*
*
*
5. In § 210.2(i), after paragraph (2),
designate the undesignated paragraph
with the word ‘‘Note’’ followed by a
colon.
6. In § 210.2(l), revise paragraph (3) to
read as follows:
*
*
*
*
*
(l) Paying bank means—
*
*
*
*
*
(3) The bank whose routing number
appears on a check in the MICR line or
in fractional form (or in the MICR-line
information that accompanies an
electronic item) and to which the check
is sent for payment or collection.
*
*
*
*
*
7. Revise § 210.2(n) to read as follows:
*
*
*
*
*
(n) Sender means any of the following
entities that sends an item to a Reserve
Bank for forward collection—
(1) A depository institution, as
defined in section 19(b) of the Federal
Reserve Act (12 U.S.C. 461(b));
(2) A clearing institution, defined as—
(i) An institution that is not a
depository institution but that maintains
with a Reserve Bank the balance
referred to in the first paragraph of
section 13 of the Federal Reserve Act
(12 U.S.C. 342); or
(ii) A corporation that maintains an
account with a Reserve Bank in
conformity with § 211.4 of this chapter
(Regulation K);
(3) Another Reserve Bank;
(4) An international organization for
which a Reserve Bank is empowered to
act as depositary or fiscal agent and
maintains an account;
(5) A foreign correspondent, defined
as any of the following entities for
which a Reserve Bank maintains an
account: A foreign bank or banker, a
foreign state as defined in section 25(B)
of the Federal Reserve Act (12 U.S.C.
632), or a foreign correspondent or
agency referred to in section 14(e) of
that act (12 U.S.C. 358); or
(6) A branch or agency of a foreign
bank maintaining reserves under section
7 of the International Banking Act of
1978 (12 U.S.C. 347d, 3105).
*
*
*
*
*
8. Remove the undesignated
paragraph after § 210.2(o).
9. In § 210.2, add a new paragraphs (s)
to read as follows:
*
*
*
*
*
(s) Unless the context otherwise
requires—
(1) The terms not defined herein have
the meanings set forth in § 229.2 of this
chapter applicable to part 229, subpart

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C or D of this chapter, as appropriate;
and
(2) The terms not defined herein or in
§ 229.2 of this chapter have the
meanings set forth in the Uniform
Commercial Code.
§ 210.3

[Amended]

10. In § 210.3(b) remove the phrase
‘‘subpart C’’ and add the phrase
‘‘subparts C and D’’ in its place; and
§ 210.4

[Amended]

11. In § 210.4(b)(1), remove the word
‘‘and’’ at the end of paragraph (iii),
remove the period and add a semicolon
followed by the word ‘‘and’’ at the end
of paragraph (iv), and add a new
paragraph (v) to read as follows:
(b) Handling of items.
(1) * * *
(v) The Administrative Reserve Bank
of the bank to which a Reserve Bank
sends or presents the item.
*
*
*
*
*
§ 210.5

[Amended]

12. In § 210.5(a):
A. Remove the word ‘‘and’’ at the end
of paragraph (a)(2)(i);
B. Redesignate paragraph (3) as
paragraph (5);
C. Revise paragraph (a)(2)(ii) and add
new paragraphs (a)(2)(iii) through (a)(4)
to read as follows:
(a) Sender’s agreement. * * *
(2) * * *
(ii) The item has not been altered; and
(iii) The item bears all indorsements
applied by parties that previously
handled the item for forward collection
or return;
(3) Subject to the terms of part 229 of
this chapter—
(i) Makes the applicable warranties set
forth in § 229.34(c) of this chapter; and
(ii) If the item is a substitute check or
a paper or electronic representation of a
substitute check, makes the warranties
and indemnity set forth in §§ 229.52 and
229.53 of this chapter;
(4) If the item is an electronic item
that is not a representation of a
substitute check, warrants to each
Reserve Bank handling the item that—
(i) The item accurately represents all
of the information on the front and back
of the original check as of the time that
the original check was truncated;
replicates the MICR line of the original
check, except for any changes required
or permitted by part 229, subpart D of
this chapter for substitute checks; and
meets the technical requirements for
sending electronic items to a Reserve
Bank as set forth in the operating
circulars; and
(ii) No party will receive a transfer,
presentment, or return of, or otherwise

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34089

be charged for, the electronic item, the
original item, or a paper or electronic
representation of the electronic item
such that the party will be asked to
make payment based on an item it
already has paid; and
*
*
*
*
*
13. In newly-redesignated
§ 210.5(a)(5):
A. In the first sentence remove the
word ‘‘of’’ between the words ‘‘loss’’
and ‘‘expense’’ and add the word ‘‘or’’
in its place; and
B. Remove the word ‘‘or’’ between
paragraphs (ii) and (iii);
C. Remove the period at the end of
paragraph (iii) and add a semicolon in
its place; and
D. Add two new paragraphs (5)(iv)
and 5(v) to read as follows:
*
*
*
*
*
(iv) Any indemnity made by the
Reserve Bank under § 229.53 of this
chapter, as described in § 210.6(b)(2)(ii)
of this subpart, if the sender sent a
substitute check or a paper or electronic
representation of a substitute check to
the Reserve Bank; and
(v) Any indemnity made the Reserve
Bank under § 210.6(b)(3)(ii) of this
subpart, if the sender sent an electronic
item that was not a representation of a
substitute check to the Reserve Bank.
*
*
*
*
*
14. In § 210.5, redesignate paragraphs
(b), (c), and (d) as paragraphs (c), (d),
and (e), respectively, and add a new
paragraph (b) to read as follows:
*
*
*
*
*
(b) Preservation of other warranties
and indemnities. Nothing in paragraph
(a) of this section limits any warranty or
indemnity by a sender (or a party that
handled an item prior to the sender)
arising under state law or regulation or
other federal law or regulation.
*
*
*
*
*
15. In paragraph (3) of newlyredesignated § 210.5(c), add the phrase
‘‘or indemnity’’ between the words
‘‘warranty’’ and ‘‘made.’’
16. In newly-redesignated § 210.5(d):
A. In paragraph (1) remove the phrase
‘‘paragraph (b)’’ and add the phrase
‘‘paragraph (c)’’ in its place;
B. Designate the last sentence of
paragraph (d)(2) as newly designated
paragraph (d)(3);
C. In paragraph (d)(2) and newlydesignated paragraph (d)(3), remove the
phrase ‘‘paragraph (c)’’ wherever it
appears and add the phrase ‘‘paragraph
(d)’’ in its place; and
D. In newly-designated paragraph
(d)(3) remove the phrase ‘‘paragraph
(a)(3)’’ and add the phrase ‘‘paragraph
(a)(5)’’ in its place.

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§ 210.6

Federal Register / Vol. 69, No. 117 / Friday, June 18, 2004 / Proposed Rules
[Amended]

17. In § 210.6(a):
A. Redesignate paragraph (a)(2) as
paragraph (a)(3);
B. Designate the third sentence of
paragraph (a)(1) as paragraph (a)(2) and
add the heading Limitations on Reserve
Bank liability.; and
C. Redesignate paragraphs (a)(1)(i),
(a)(1)(ii), and (a)(i)(iii) as paragraphs
(a)(2)(i), (a)(2)(ii), and (a)(2)(iii),
respectively;
D. In newly-designated paragraph
(a)(2)(iii), remove the phrase ‘‘subpart
C’’ and add the phrase ‘‘subparts C and
D’’ in its place.
18. Revise § 210.6(b) to read as
follows:
*
*
*
*
*
(b) Warranties and liability. The
following provisions apply when a
Reserve Bank presents or sends an
item—
(1) The Reserve Bank warrants to a
subsequent collecting bank and to the
paying bank and any other payor that—
(i) The Reserve Bank is a person
entitled to enforce the item (or is
authorized to obtain payment of the
item on behalf of a person who is either
entitled to enforce the item or
authorized to obtain payment on behalf
of a person entitled to enforce the item);
(ii) The item has not been altered; and
(iii) The item bears all indorsements
applied by parties that previously
handled the item for forward collection
or return;
(2) Subject to the terms of part 229 of
this chapter, the Reserve Bank—
(i) Makes the applicable warranties set
forth in § 229.34(c) of this chapter; and
(ii) If the item is a substitute check or
a paper or electronic representation of a
substitute check, makes the warranties
and indemnity set forth in §§ 229.52 and
229.53 of this chapter; and
(3) If the item is an electronic item
that is not a representation of a
substitute check, the Reserve Bank—
(i) Warrants to the bank to which it
transfers or presents the item that—
(A) The item accurately represents all
of the information on the front and back
of the original check as of the time that
the original check was truncated;
replicates the MICR line of the original
check, except for any changes required
or permitted by part 229, subpart D of
this chapter for substitute checks; and
meets the technical requirements for
sending electronic items to a Reserve
Bank as set forth in the operating
circulars; and
(B) No party will receive a transfer,
presentment, or return of, or otherwise
be charged for, the electronic item, the
original item, or a paper or electronic

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representation of the electronic item
such that the party will be asked to
make payment based on an item it
already has paid; and
(ii) Agrees to indemnify the bank to
which it transfers or presents the item
for the amount of any losses that the
bank incurs under § 229.53 of this
chapter for an indemnity that the bank
was required to make under § 229.53 in
connection with a substitute check later
created from the electronic item.
*
*
*
*
*
19. In § 210.6, redesignate paragraph
(c) as paragraph (d) and add a new
paragraph (c) to read as follows:
*
*
*
*
*
(c) Limitation on Reserve Bank
liability. A Reserve Bank shall not have
or assume any liability to the paying
bank or other payor, except as provided
in paragraph (b) of this section or for the
Reserve Bank’s own lack of good faith
or failure to exercise ordinary care.
*
*
*
*
*
20. Revise newly-redesignated
§ 210.6(d) to read as follows:
*
*
*
*
*
(d) Time for commencing action
against Reserve Bank. (1) A claim
against a Reserve Bank for lack of good
faith or failure to exercise ordinary care
shall be barred unless the action on the
claim is commenced within two years
after the claim accrues. Such a claim
accrues on the date when a Reserve
Bank’s alleged failure to exercise
ordinary care or to act in good faith first
results in damages to the claimant.
(2) A claim that arises under
paragraph (b)(3) of this section shall be
barred unless the action on the claim is
commenced within one year after the
claim accrues. Such a claim accrues as
of the date on which the claimant first
learns, or by which the claimant
reasonably should have learned, of the
facts and circumstances giving rise to
the claim.
(3) This paragraph (d) does not
lengthen the time limit for claims under
section 229.38(g) (which include claims
for breach of warranty under § 229.34 of
this chapter) or part 229, subpart D of
this chapter.
§ 210.12

[Amended]

21. In § 210.12(b)(1), remove the word
‘‘and’’ at the end of paragraph (iii),
remove the period and add a semicolon
followed by the word ‘‘and’’ at the end
of paragraph (iv), and add a new
paragraph (v) to read as follows:
*
*
*
*
*
(b) Handling of returned checks.
(1) * * *

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(v) The Administrative Reserve Bank
of the bank to which a Reserve Bank
returns the returned check.
*
*
*
*
*
22. In § 210.12(c), redesignate
paragraph (c)(3) as paragraph (c)(5),
redesignate paragraph (c)(2) as
paragraph (c)(3), revise newlyredesignated paragraph (c)(3), and add
new paragraphs (c)(2) and (c)(4) to read
as follows:
*
*
*
*
*
(c) Paying bank’s and returning
bank’s agreement. * * *
(2) Warrants to each Reserve Bank
handling a returned check that the
returned check bears all indorsements
applied by parties that previously
handled the returned check for forward
collection or return;
(3) Subject to the terms of part 229 of
this chapter—
(i) Makes the applicable warranties set
forth in § 229.34 of this chapter; and
(ii) If the returned check is a
substitute check or a paper or electronic
representation of a substitute check,
makes the warranties and indemnity set
forth in §§ 229.52 and 229.53 of this
chapter; and
(4) If the returned check is an
electronic item that is not a
representation of a substitute check,
warrants to each Reserve Bank handling
the item that—
(i) The returned check accurately
represents all of the information on the
front and back of the original check as
of the time that the original check was
truncated; replicates the MICR line of
the original check, except for any
changes required or permitted by part
229, subpart D of this chapter for
substitute checks; and meets the
technical requirements for sending
electronic items to a Reserve Bank as set
forth in the operating circulars; and
(ii) No party will receive a transfer,
presentment, or return of, or otherwise
be charged for, the electronic item, the
original item, or a paper or electronic
representation of the electronic item
such that the party will be asked to
make payment based on an item it
already has paid; and
*
*
*
*
*
23. In newly-redesignated
§ 210.12(c)(5), revise paragraph (iii) and
add new paragraphs (5)(iv) and (5)(v) to
read as follows:
*
*
*
*
*
(iii) Any warranty made by the
Reserve Bank under paragraph (e) of this
section;
(iv) Any indemnity made by the
Reserve Bank under § 229.53 of this
chapter, as described in § 210.12(e)(1)(ii)
of this subpart, if the returned check

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Federal Register / Vol. 69, No. 117 / Friday, June 18, 2004 / Proposed Rules
sent to the Reserve Bank was a
substitute check or a paper or electronic
representation of a substitute check; and
(v) Any indemnity made the Reserve
Bank under § 210.12(e)(1)(iii) of this
subpart, if the returned check sent to the
Reserve Bank was an electronic item
that was not a representation of a
substitute check.
*
*
*
*
*
24. In § 210.12, redesignate
paragraphs (d) through (i) as paragraphs
(e) through (j), respectively, and add a
new paragraph (d) to read as follows:
*
*
*
*
*
(d) Preservation of other warranties
and indemnities. Nothing in paragraph
(c) of this section limits any warranty or
indemnity by a returning bank or paying
bank (or a party that handled an item
prior to that bank) arising under state
law or regulation or other federal law or
regulation.
*
*
*
*
*
25. Revise newly-redesignated
§ 210.12(e) to read as follows:
*
*
*
*
*
(e) Warranties by Reserve Bank. (1)
The following provisions apply when a
Reserve Bank handles a returned check
under this subpart—
(i) The Reserve Bank warrants to the
bank to which it sends the returned
check that the returned check bears all
indorsements applied by parties that
previously handled the returned check
for forward collection or return;
(ii) Subject to the terms of part 229 of
this chapter, the Reserve Bank—
(A) Makes the returning-bank
warranties in § 229.34 of this chapter;
and
(B) If the returned check is a
substitute check or a paper or electronic
representation of a substitute check,
makes the warranties and indemnity set
forth in §§ 229.52 and 229.53 of this
chapter; and
(iii) If the returned check is an
electronic item that is not a
representation of a substitute check, the
Reserve Bank—
(A) Warrants to the bank to which it
sends the returned check that—
(1) The item accurately represents all
of the information on the front and back
of the original check as of the time that
the original check was truncated;
replicates the MICR line of the original
check, except for any changes required
or permitted by part 229, subpart D of
this chapter for substitute checks; and
meets the technical requirements for
sending electronic items to a Reserve
Bank as set forth in the operating
circulars; and
(2) No party will receive a transfer,
presentment, or return of, or otherwise

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be charged for, the electronic item, the
original item, or a paper or electronic
representation of the electronic item
such that the party will be asked to
make payment based on an item it
already has paid; and
(B) Agrees to indemnify the bank to
which it sends the returned check for
the amount of any losses that the bank
incurs under § 229.53 of this chapter for
an indemnity that the bank was required
to make under § 229.53 in connection
with a substitute check later created
from the returned check.
(2) A Reserve Bank shall not have or
assume any other liability to any person
with respect to a returned check
except—
(i) As provided in paragraph (e)(1) of
this section;
(ii) For the Reserve Bank’s own lack
of good faith or failure to exercise
ordinary care as provided in subpart C
of part 229 of this chapter; or
(iii) As provided in part 229, subpart
D of this chapter.
*
*
*
*
*
26. In newly-redesignated
§ 210.12(f)(3), remove the phrase ‘‘Any
warranty made by the Reserve Bank
under 12 CFR 229.34,’’ and add the
phrase ‘‘Any warranty or indemnity
made by the Reserve Bank under
paragraph (e) of this section,’’ in its
place.
27. In newly-redesignated § 210.12(g):
A. In paragraph (g)(1) introductory
text, remove the phrase ‘‘paragraph (d)’’
and add the phrase ‘‘paragraph (e)’’ in
its place; and
B. Designate the last sentence of
paragraph (g)(2) as paragraph (g)(3);
C. In paragraph (g)(2) and newlydesignated paragraph (g)(3), remove the
phrase ‘‘paragraph (f)’’ wherever it
appears and add the phrase ‘‘paragraph
(g)’’ in its place;
D. In newly-designated paragraph
(g)(3), remove the phrase ‘‘paragraph
(c)(3)’’ and add the phrase ‘‘paragraph
(c)(5)’’ in its place.
§ 210.13

[Amended]

28. In § 210.13(b), remove the citation
‘‘§ 210.9(a)(5)’’ and add the citation
‘‘§ 210.9(b)(5)’’ in its place.
By order of the Board of Governors of the
Federal Reserve System, June 4, 2004.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc. 04–13147 Filed 6–17–04; 8:45 am]
BILLING CODE 6210–01–P

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