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Federal Reserve Bank
OF DALLAS
ROBERT

D. M c T E E R , J R .

P R E S ID E N T
AND

C H IE F E X E C U T IV E

O F F IC E R

April 22, 1991

DALLAS, TEXAS 7 5 2 2 2

Notice 91-28
TO:

The Chief Operating Officer of
each financial institution in the
Eleventh Federal Reserve District

SUBJECT
Request for Comments on Services the Federal Reserve Proposes
to Offer in Relation to the Proposed Same-Day Settlement Service
DETAILS
The Federal Reserve Board is requesting comment on proposed new
Federal Reserve Bank services and enhancements to certain current services
related to checks not collected through the Federal Reserve.
These proposed
services may facilitate check collection and payor bank services provided
under a same-day settlement rule, which the Board has also proposed recently.
Specifically, the Board requests comment on
•

a proposed presentment point service;

•

proposed Federal Reserve payor bank services that
would include checks presented by private-sector
presenting banks;

•

enhancements to the Fedwire format to facilitate
settlement for checks presented by private-sector
presenting banks; and

•

whether the Federal Reserve Banks should offer a new
bilateral settlement service.

The Board is also providing its analysis of other Federal Reserve
Bank services related to checks not collected through the Federal Reserve that
were considered but are not being proposed.
Commenters are encouraged to submit their comments on this proposal
separately from any comments they may make on the proposed amendments to
Regulation CC to provide for same-day settlement for checks presented by
private-sector banks.

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.

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

- 2 -

The Board must receive comments by June 28, 1991. Comments should
be addressed to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th and C Streets, N.W., Washington, D.C. 20551. All
comments should refer to Docket No. R-0727.

ATTACHMENT
A copy of the B o a r d ’s notice as it appears on pages 10429-38, Vol.
56, No. 48, of the Federal Register dated March 12, 1991, is attached.

MORE INFORMATION
For more information, please contact Robert L. Whitman, (214)
698-4357, at the Dallas Office; Eloise Guinn, (915) 521-8201, at the El Paso
Branch; Luke E. Richards, (713) 652-1544, at the Houston Branch; or Herb
Barbee, (512) 978-1402, at the San Antonio Branch.
For additional copies of
this B a n k ’s notice, please contact the Public Affairs Department at (214)
651-6289.
Sincerely yours,

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices

10429

Street NW., Washington, DC 20551,
Attention: Mr. William W. Wiles,
Secretary; or may be delivered to room
B-C-223 between 8:45 a.m. and 5:15 p.m.
Commenters are encouraged to submit
their comments on this proposal
separately from any comments they may
provide on the proposed amendments to
Regulation CC to provide for same-day
settlement for checks presented by
private-sector banks (Docket R-0723).
All comments received at the above
address will be included in the public
comments file, and may be inspected at
room B-1122 between 9 a.m. and 5 p.m.
FEDERAL RESERVE SYSTEM
[D o ck et No. R -0727]

Proposed Federal Reserve Bank
Services
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Request for comment.

The Board is publishing for
comment proposed enhancements to
certain Federal Reserve services and
proposed new services related to checks
not collected through the Federal
Reserve. The proposed services are
designed to enable paying banks to
continue to provide timely cash
management information to their
corporate customers and to facilitate a
paying bank’s responsibility to settle for
checks presented by private-sector
presenting banks. Specifically, the Board
requests comment on (1) A proposed
presentment point service; (2) proposed
Federal Reserve Bank payor bank
services that would include checks
presented by private-sector presenting
banks; (3) enhancements to the Fedwire
format to facilitate settlement for checks
presented by private-sector presenting
banks; and (4) whether the Federal
Reserve Banks should offer a new
bilateral settlement service. The Board
is also providing its analysis of other
Federal Reserve Bank services related to
checks not collected through the Federal
Reserve that were considered but are
not being proposed.
DATES: Comments must be submitted on
or before June 28,1991.
ADDRESSES: Comments, which should
refer to Docket No. R-0727 may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
SUMMARY:

1 Doyle Brewer's 01-10-91 pleading was
mistakenly omitted from the listing of petitions for
MM Docket No. 88-140 on the “Petitions for
Reconsideration" public notice. Report No. 1837Corrected, released on February 20,1981. Therefore,
the dates for filing oppositions and replies to those
petitions are extended to correspond to the due
dates for responding to the petitions on this notice.

FOR FURTHER INFORMATION CONTACT:

Louise L. Roseman, Assistant Director
(202/452-3874), Julius F. Oreska,
Manager (202/452-3878), Thomas C.
Luck, Senior Financial Services Analyst
(202/452-3935), or Nalini T. Rogers,
Senior Financial Services Analyst (202/
452-3801), Division of Reserve Bank
Operations and Payment Systems. For
the Hearing impaired only:
Telecommunication Device for the Deaf,
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:

A. Background
The Board has issued for public
comment proposed amendments to
Regulation CC to provide for same-day
settlement by paying banks 1 for checks
presented by private-sector presenting
banks. (56 FR 4743, February 6,1991).
Under the same-day settlement
proposal, a paying bank would be
required to settle for checks presented
by private-sector presenting banks on
the day of presentment, if specified
conditions are met. These conditions
include an 8 a.m. (local time of the
paying bank) presentment deadline for
same-day settlement, and that the check
be presented at a location of the paying
bank designated by the paying bank that
is consistent with the check processing
region associated with the routing
number encoded on the check. Under
the proposal, if a bank presents a check
in accordance with the time and
location requirements for same-day
settlement, the paying bank either must
settle for the check on the business day
it receives the check without charging a
presentment fee or must return the
check prior to the time for settlement.
1 Regulation CC defines bank to include all
depository institutions, including commercial banks,
savings institutions, and credit unions. A paying
bank is a bank, by, at, or through which a check is
payable and to which it is sent for payment or
collection. The Uniform Commercial Code defines
collecting bank as a bank, other than the paying
bank, that handles a check for collection. A
presenting bank is a bank, other than the paying
bank, that presents a check

10430

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices

The settlement must be in the form of a
credit to the presenting bank’s account
(or the account of a correspondent
settlement agent) at a Federal Reserve
Bank. Because these rules would be
subject to Regulation CC’s variation by
agreement provision, a paying bank
could agree with a presenting bank to
accept checks for same-day settlement if
the checks are presented by a
presentment deadline other than 8 a.m.
or at an alternate location (such as an
intercept processor). Similarly, a
presenting bank may accept settlement
in another form agreeable to it.
The Federal Reserve Banks currently
provide a variety of services to banks,
including check collection and net
settlement services. The Federal
Reserve assesses fees for its services to
the banks using those services. In light
of the same-day settlement proposal, the
Board is proposing that the Federal
Reserve Banks offer enhanced services
and certain new services related to
checks not collected through the Federal
Reserve. These services, which are
described in section B, include a
presentment point service, new payor
bank services to facilitate the paying
bank’s continued ability to provide
timely cosh management information to
its corporate customers, and
enhancements to the Fedwire service to
facilitate settlement for checks
presented by private-sector presenting
banks.
The Board is considering whether the
Federal Reserve Banks should offer a
new settlement service for banks to
settle for checks presented by privatesection presenting banks through
accounts maintained at the Federal
Reserve Banks. Section C describes such
a bilateral settlement service. The Board
has also considered, and has determined
not to propose, whether Federal Reserve
Banks should provide transportation
and adjustment services related to
checks not collected through the Federal
Reserve. The Board’s analysis is
included in section D,
Section E contains an analysis of the
competitive impact of the proposed
services and of the bilateral settlement
service.
B. Proposed New Federal Reserv e
Services

Presentment Point Service
The Board proposes that the Federal
Reserve Banks offer a new service under
which a paying bank could designate its
local Federal Reserve office as a
presentment point for checks presented
to the paying bank by a private-sector
presenting bank. This new service
would allow a private-sector presenting

bank, with the agreement of the paying
bank, to deliver checks to the paying
bank's local Federal Reserve office, for
subsequent pick-up by the paying bank.
Under this proposed service,
presentment of checks would occur at
the time the checks are delivered to the
Federal Reserve office. Because many
banks currently maintain arrangements
to transport checks to and from their
local Federal Reserve office, and some
banks deliver checks directly to multiple
Federal Reserve offices, this service may
prove convenient and economical for
both presenting banks 8nd paying
banks.
Under the proposed service, paying
banks could agree with presenting
banks to designate the paying bank's
local Federal Reserve office as an
alternate presentment location. The
Federal Reserve office would also
require agreements with paying banks
that are designating the Federal Reserve
office as an alternative presentment
location and with presenting banks that
have agreed with paying banks to
present checks at the Federal Reserve
office. The paying bank would be
required to provide the Federal Reserve
office advance notice before presenting
banks begin to present checks to the
paying bank at the Federal Reserve
office, and to provide advance notice to
the Federal Reserve of a termination of
the agreement. The Federal Reserve
would assume no responsibility to
determine whether a paying bank using
the presentment point service has an
agreement with any specific presenting
bank to present checks at the Federal
Reserve, nor would the Federal Reserve
assume any responsibility to determine
whether the presenting bank has met the
presentment deadline that had been
agreed to by the paying bank aiid the
presenting bank. A presenting bank may
not have made presentment by
delivering checks to a Federal Reserve
office as presentment point for a paying
bank if the necessary agreements
between the presenting bank and the
paying bank and between those banks
and the Federal Reserve office have not
been made.
Under the proposed service, the
Federal Reserve office would accept
cash letters from presenting banks, time­
stamp the incoming deliveries, provide
verification of receipt to the delivery
agent, physically control the cash
letters, and provide copies of the
verification of the time of receipt upon
pick-up by the paying bank or its
designated agent. The service would not
include settlement for the checks.
Presenting banks would be required to
package and label separately all cash
letters presented at the Federal Reserve

office so as to distinguish them from
other checks being deposited for
collection through the Federal Reserve.
The Federal Reserve office would incur
no liability or accountability for the
checks other than that associated with
its duty to exercise ordinary care while
the checks are in the possession of the
Federal Reserve office. The Federal
Reserve office would not provide
transportation of the checks to the
paying bank under this service.
The Federal Reserve’s fees for this
service would reflect the costs to receh e
and tim estam p the cash letters
presented by designated presenting
banks, the costs to physically control
the checks at the Federal Reserve office
until pick-up by the paying bank, and
other administrative costs associated
with providing this service. The Board
proposes that a daily fixed fee, which
may vary by Reserve Bank office and is
estimated to be in the range of $15 to
$25, be charged to the paying bank for
the presentment point service. The
paying bank would be assessed the fee
because it is the bank for which the
Federal Reserve office provides the
service. The Board is proposing a fixed
fee because, within a foreseeable range
of activity, it is expected that the costs
of providing the service would be
predominately fixed rather than variable
in nature. If the comments received
indicate, or if subsequent experience
demonstrates, that the number of
presentments varies substantially
among paying banks that use this
service, the Board may adjust the
proposed fee structure to base the fee, in
whole or in part, on the number of cash
letters handled by the Federal Reserve
office for a paying bank.
The Board requests commen t on the
proposed presentment point service.
Specifically, the Board requests
commenters to indicate whether a
paying bank would find it beneficial to
have its local Federal Reserve office act
as an alternate presentment site for
checks presented by private-sector
presenting banks and whether,
presenting banks would generally agree
to deliver such checks to a Federal
Reserve office rather than directly to the
paying bank. In addition, the Board
requests comment on whether a portion
of the costs of providing the presentment
point service should be recovered
through a fee assessed to the presenting
bank because this service offers the
presenting bank the convenience of a
central presentment location.

Supplemental Payor Bank Services
Same-day settlement for checks
presented by 8 a.m., as provided under

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices
the proposal, may narrow the processing
window for some paying banks’
corporate cash management operations.
Currently, banks provide certain
corporate customers with information
regarding the amount of the
corporation's check payments that have
been presented early enough each day
for the corporation to invest surplus
balances or borrow additional funds, as
necessary, while money markets are still
active. The same-day settlement
proposal may adversely affect paying
banks that currently rely on Federal
Reserve payor bank services to provide
corporate cash management products
because checks presented directly by
private-sector presenting banks would
not be included in the daily transmission
of Federal Reserve payor bank service
data.
The Federal Reserve Banks currently
offer payor bank services with respect
to checks they collect as an option to
paying banks. These services, which
include account totals. MICR capture,
special sort, extended MICR capture,
and truncation 2, are offered (1) To
accelerate availability, in the case of
truncation and extended-MICR capture
services, (2) to assist paying banks in
assembling payment data to facilitate
the provision of corporate cash
management services, and (3) to reduce
the paying bank’s operating costs.
The Board proposes that the Federal
Reserve Banks offer supplemental payor
bank services under which a paying
bank could designate its local Federal
Reserve office as a presentment point
for checks not collected through the
Federal Reserve, or deliver such checks
to the Federal Reserve office, which
would provide payor bank services with
respect to those checks. The Federal
Reserve would not be acting as a
2 The account totals service provides paying
banks with the dollar total and the number of
checks being presented for specific individual
accounts, or for a grouping of accounts. The MICH
capture service provides paying banks, via tape or
transmission, the MICR-line data from checks being
presented to the paying banks. The special sort
service provides paying banks with a specified
subset of its checks, outsorted and presented
separately from the remainder of its checks. The
extended MICR capture service provides paying
banks with MICR-line data from checks presented
to the paying banks. Presentment occurs when the
data are delivered electronically to the paying bank.
The physical checks are retained at the Federal
Reserve office to provide return services and are
subsequently delivered to the paying bank, usually
arriving at the paying bank within four or five days
following presentm ent The truncation service
rovides paying banka with MICR-line data from
checks presented to paying banks. Presentment
occurs when the data are delivered electronically to
the paying bank. The physical checks are not
delivered to the paying bank, and return and
retrieval services are provided.

collecting bank with respect to such
checks.
Under the proposed service, a paying
bank that wishes to receive payor bank
services with respect to checks not
collected through the Federal Reserve
generally would agree with the
presenting bank to designate the paying
bank's local Federal Reserve office as
its presentment point. The agreement
would specify the time by which the
presenting bank would be required to
present the checks to the Federal
Reserve office based on established
Federal Reserve deadlines for this
service, and that the Federal Reserve
would effect settlement for the checks.
Delivery of the checks to the Federal
Reserve office in accordance with this
proposed service would constitute
presentment of the checks at the time of
delivery.
The paying bank and presenting bank
would also agree with the paying bank's
Federal Reserve Bank that the Federal
Reserve office would accept
presentment of checks from designated
presenting banks on behalf of the paying
bank and provide the payor bank
services requested by the paying bank.
The paying bank would indemnify the
Federal Reserve for any losses incurred
in connection with the provision of this
service due to the characterization of
the Federal Reserve as a collecting
bank, notwithstanding the Federal
Reserve’s disclaimer of that status with
respect to providing this service.
The paying bank does not have to
designate the Federal Reserve office as
a presentment point in order for the
paying bank to obtain supplemental
payor bank services on checks
presented directly to a location of the
paying bank. However, checks for which
the paying bank desires to obtain
supplemental payor bank services
would have to be delivered to the
Federal Reserve office by the applicable
deadline.
The Board anticipates that Federal
Reserve offices may offer the service in
two forms—regular and premium. Under
the regular service, the presenting bank
or the paying bank would deliver the
checks to the Federal Reserve office,
generally by the latest nonpremium
deadline established by the Federal
Reserve office for the deposit of checks
drawn on the paying bank. Presenting
banks would be required to package and
label separately all cash letters
presented at the Federal Reserve office
so as to distinguish them from checks
being deposited for collection through
the Federal Reserve. The Federal
Reserve office would intermingle checks
received under the regular service with

1043?

checks being collected through the
Federal Reserve that are designated for
playor bank services. The checks would
be processed and reconciled by the
Federal Reserve office. The Federal
Reserve office would credit the
presenting bank and function
adjustments to the presenting bank for
exception conditions found during the
reconcilement process. Delivery of
payor bank service data to the paying
bank for the checks collected through
the Federal Reserve as well as the
checks presented to the paying bank by
private-sector presenting banks would
be made simultaneously. The paying
bank could function adjustments for all
of the checks received in such cash
letters through the Federal Reserve. If
delivery of checks to the paying bank
were delayed beyond the 2 p.m. Federal
Reserve Bank presentment deadline, the
paying bank would still be required to
settle for those checks that the Federal
Reserve office had handled for
supplemental payor bank services
because the paying bank would be
obligated to settle with the presenting
bank for the checks if the presenting
bank presents the checks at the Federal
Reserve office by the agreed upon time.
Under a premium service, at the
option of the' paying bank, Federal
Reserve offices would accept checks
from presenting banks or paying banks
at a later presentment deadline. Under
this service, the later receipt of the
checks would not allow intermingling of
the checks with those being collected
through the Federal Reserve and
separate processing flows at the Federal
Reserve office would be required to
capture the information necessary to
provide payor bank services. In
addition, the processing of these checks
would not be completed in time to be
included in the regular outgoing
shipments of checks to the paying bank.
Accordingly, under the premium service,
the Federal Reserve would assess higher
fees and the paying bank would be
responsible for arranging transportation
to pick-up the checks from the Federal
Reserve office after processing (unless
safekeeping or delayed delivery
services, which are described below, are
provided by the Federal Reserve office).
As they do for checks collected
through the Federal Reserve, paying
banks would authorize the Federal
Reserve office to charge their reserve or
clearing accounts for the checks
presented at the Federal Reserve under
the terms of this service. Credit to
presenting banks would be functioned
by the Federal Reserve in a manner
similar to that used today for fine sort
and direct send cash letters Where th e

10432

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices

presenting bank presents checks subject
to the supplemental payor bank services
at the Federal Reserve office, special
cash letter forms and recap sheets, or
automated input, would be used by the
presenting bank to communicate the
expected amount of credit to its local
Federal Reserve office. Where the
checks subject to supplemental payor
bank services are delivered to the
Federal Reserve offica by the paying
bank, that Federal Reserve office would
provide the appropriate credit
information to the presenting bank's
Federal Reserve office to effect timely
credit to the presenting bank.
The supplemental payor bank services
products would include account total,
MICR capture, and special sort services,
as well as "delayed delivery” and
“safekeeping” services, which would
mirror the current extended MICR
capture and truncation services,
respectively, in all aspects except the
timing of presentment. (Presentment
under the delayed delivery and
safekeeping supplemental payor bank
service products would occur when the
checks are physically delivered to the
Federal Reserve. In contrast, under the
extended MICR capture and truncation
products, which are offered only with
respect to checks collected through the
Federal Reserve, presentment is based
upon the electronic data transmission to
the paying bank.) The timing of
implementation of supplemental payor
bank services at individual Federal
Reserve offices would vary based on
demand for the services by local paying
banks and current resources in each
office.
The proposed price structure for the
supplemental payor bank services
product would differ from the price
structure for payor bank services for
checks collected through the Federal
Reserve. In addition to the capture and
delivery of payor bank data to the
paying bank, the supplemental payor
bank services would encompass four
basic services, i.e., presentment point
service (if the checks are delivered to
the Federal Reserve office by the
presenting bank), settlement service,
adjustment service, and transportation
service. Both the presenting bank and
the paying bank benefit from the
supplemental payor bank services. For
example, settlement and adjustment
services benefit the presenting bank as
well as the paying bank. The presenting
bank also receives the benefit of a
common presentment location. The
Board proposes that a portion of the cost
of providing supplemental payor bank
services generally would be recovered
through a fee to the presenting bank.

with the majority of the fee for providing
the service assessed to the paying bank.
The paying bank would be assessed the
entire fee for the service if the
presenting bank presents the checks
directly to the paying bank and the
paying bank delivers the checks to the
Federal Reserve Bank.
The Federal Reserve’s fees would
generally be higher for payor bank
services under the supplemental payor
bank services product than for payor
bank services provided with respect to
checks collected through the Federal
Reserve. The Board estimates that the
total fees to the paying bank and the
presenting bank for the regular
supplemental payor bank services
product would be approximately the
same as the sum of the fees for
providing payor bank services on finesort checks collected by the Federal
Reserve, plus the fine sort collection fee
(which would recover the settlement,
transportation and adjustments costs).
Under the premium service, because
processing the checks in separate payor
bank service runs during peak
processing hours would be necessary,
the costs of providing premium payor
bank information would be higher than
the regular supplemental payor bank
services.
The Board believes supplemental
payor bank services would provide
paying banks with consolidated and
timely delivery of data from checks
collected through the Federal Reserve
and from checks presented by privatesector presenting banks. The Board
anticipates that private-sector
presenting banks, in most instances,
would agree to deliver checks directly to
the Federal Reserve because Federal
Reserve offices offer a convenient
central location for delivery.
The Board requests comment on the
proposed supplemental payor bank
services, which would allow the Federal
Reserve Banks to provide payor bank
services on cash letters presented by
private-sector presenting banks.
Specifically, the Board requests
comment on whether paying banks
perceive a need for Federal Reserve
payor bank services on checks
presented by private-sector presenting
banks. In addition, the Board requests
comment on the following questions:
1. Do paying banks perceive a benefit
in the ability to obtain supplemental
payor bank services from the Federal
Reserve? In which particular payor bank
services, i.e., account totals, delayed
delivery, MICR capture, safekeeping, or
special sorts, would paying banks be
interested?

2. Would presenting banks wish to
present checks at the paying bank’s
Federal Reserve office, even if they had
to agree with the paying bank to present
the checks earlier than 8 a.m. in order to
retain the right to obtain same-day
settlement on these checks?
3. Should the entire fee for the
supplemental payor bank services be
charged to the paying bank, rather than
assessing a portion of the fee to the
presenting bank?
4. Is there an interest among alternate
service providers, including privatesector presenting banks, in offering
payor bank services for checks coile ted
outside the Federal Reserve?

Criteria for Evaluating Proposed
Changes
All new services or major service
enhancements proposed by the Federal
Reserve must meet the criteria described
in the March 1990 policy statement “Th*»
Federal Reserve in the Payments
System.” These criteria are full cost
recovery, clear public benefit, and that
the service be one that other providers
alone cannot be expected to provide
with reasonable effectiveness, scope,
and equity.
With respect to the criterion requiring
full cost recovery, the presentment point
service and supplemental payor bank
services products would be priced to
achieve full recovery of costs over the
long ran. The second criterion requires
that the service yield a clear public
benefit. The Board believes that the
presen tment point service may provide
benefits la both presenting banks and
paying banks. This proposed service
may allow presenting banks to present
checks to many paying banks at a
centra! location to which they have
existing transportation. The presentment
point service may also provide paying
banks that do not process their checks
ai a location of their bank with an
alternate convenient presentment
location that likely would be acceptable
to presenting banks. This service may
decrease the transportation resources
that would otherwise be necessary for
presenting banks to transport checks to
paying banks and for paying banks to
transport checks to their processing
location.
For the supplemental payor bank
services, the public benefits include
support for effective account
management by corporate cash
managers. Facilitating cash management
through payor bank services on checks
presented by private-sector presenting
banks allows for more efficient use of
corporate funds. In addition, the
supplemental payor bank services

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices
would enable paying banks to receive
payor bank service transmissions from
one source, which may facilitate their"
internal corporate cash management
operations.
The Board also believes that the
supplemental payor bank services may
meet the criterion that the service be
one that other providers alone cannot be
expected to provide with reasonable
effectiveness, scope, and equity. Similar
services are not widely offered by the
private sector today, given the
apparently limited demand by paying
banks. Demand is low because some
paying banks currently impose barriers
to presentment by private-sector
presenting banks if such presentments
would impede their ability to provide
cash management services or otherwise
adversely affect their operations. The
Board believes that private-sector
service providers may be reluctant to
offer similar services immediately if a
same-day settlement rule were adopted,
should significant capital investment be
necessary. Without immediate and
widespread response from the private
sector, a level of service that would
allow the product to be available with
reasonable effectiveness, scope, and
equity may not be available without
Federal Reserve participation. The
Board requests comment on whether the
proposed presentment point service and
the proposed supplemental payor bank
services meet the criterion that private
sector providers alone cannot be
expected to provide such services with
reasonable effectiveness, scope and
equity.

Enhancements to the Fedwire Format
To Facilitate Settlement
Under the same-day settlement
proposal, the paying bank must settle
with the presenting bank for checks
presented in accordance with the
regulation by credit to an account of the
presenting bank at a Federal Reserve
Bank or by any other form of settlement
to which the presenting bank agrees. For
example, settlement for checks could be
made by the paying bank transferring
funds to the presenting bank through the
Fedwire funds transfer service, or by the
paying bank and the presenting bank
agreeing to settle through accounts
maintained at one or both of the banks,
or through accounts maintained at a
correspondent bank(s). Generally, a fee
of $0.50 is assessed to both the
originating bank and the receiving bank
for a funds transfer through the Fedwire
service.
The Board requests comment on
whether the existing Fedwire format
could be utilized so that banks could
identify, on an automated basis, those

funds transfers related to settlement for
check presentments and associated
adjustment activity. Those transfers
could then be segregated by the
receiving bank for internal processing.
The designation of certain Fedwire
funds transfers as check settlement or
adjustment transfers could be
accomplished by establishing a new
product code that could be used to
differentiate these transfers from other
funds transfers.
The details of the check settlement
transaction could be conveyed using one
of the existing Fedwire structured
format fields. For example, the 155
character “bank-to-bank information"
field could be designated as the field in
which detailed information related to
the check settlement transfer would be
provided. The paying bank could use the
designated field to explain any
differences between the transfer amount
and the cash letter total. For example, a
paying bank could include in the
designated field the original cash letter
total and the net of all adjustments
applied that day to facilitate the
presenting bank’s reconciliation of the
transfer amount. The paying bank could
provide reference numbers to identify
adjustment activity, so that the
presenting bank could associate the
payment with supporting documentation
sent separately. The paying bank could
also use this field to detail individual
cash letter totals, if the transfer amount
represents settlement for multiple cash
letters.
The Fedwire service currently
provides a "request for credit transfer"
(subtype code 31), which is a nonvalue
message that requests the receiver to
originate a value transfer to the
designated party. This message type
may be useful to a presenting bank in
notifying a paying bank of the amount of
settlement due to the presenting bank.
For example, if the checks are presented
to a service bureau for processing, the
presenting bank may wish to use a
request for credit transfer message to
notify the paying bank of the amount of
the cash letter (although the paying
bank has the responsibility to determine
the amount of its settlement obligation
from its designated agent).
The Board requests comment on
whether enhancements to the Fedwire
message format would facilitate the use
of Fedwire to settle for checks presented
by private-sector presenting banks and
for associated adjusting entries. The
Board also requests the commenters’
views on which particular structured
third-party field should be designated to
convey the detailed information related
to the transfer amount. Comments are

10433

also requested on other changes to the
Fedwire service that would be desirable
to facilitate the settlement for checks
presented by private-sector presenting
banks.
C. Possible New Federal Reserve
Service

Bilateral Settlement Service
Some banks have indicated that a
bilateral settlement service for making
settlement through Federal Reserve
accounts for checks presented by
private-sector presenting banks would
facilitate efficient settlement in a sameday settlement environment. The Board
is considering whether the Federal
Reserve Banks should offer a new
bilateral settlement service for the
settlement of checks not collected
through the Federal Reserve. The Board
is uncertain whether a Federal Reserve
bilateral settlement service would be
attractive to banks, because alternative
settlement vehicles, such as Fedwire,
may adequately meet banks’ needs.
Based on its preliminary analysis of the
attributes of a bilateral settlement
service, the Board believes that paying
banks may find that settlement through
Fedwire would provide more control of
the timing of payments, and that
presenting banks may find such a
bilateral settlement service to be
cumbersome and costly compared to
alternatives that are available. In
addition, banks may determine that the
risks associated with participating in a
bilateral settlement service are
unacceptable. The Board, however, is
providing the following description of
how a Federal Reserve bilateral
settlement service might be designed in
order to determine whether banks have
sufficient interest in its use to warrant
development of a new service and to
obtain the commenters’ views regarding
the risks associated with this potential
service.
If a Federal Reserve bilateral
settlement service were implemented,
the paying bank and the presenting bank
could authorize the Federal Reserve to
settle for checks presented by the
presenting bank and for subsequent
adjustments by the presenting bank and
the paying bank through accounts
maintained at the Federal Reserve.
Settlement could be made through the
accounts of the presenting bank and the
paying bank or through the accounts of
their correspondent settlement agents.
The Board believes that the bilateral
settlement service, if adopted, should oe
an all-electronic service, in which both
the presenting bank and paying bank
send and receive settlement payments

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Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices

through an electronic connection to the
Federal Reserve. An all-electronic
service would provide greater efficiency
and control, and would minimize the
time needed for communication of data,
thus providing more time for
participants to review settlement data.
The Board proposes, if it adopts a
bilateral settlement service, that there
would be two settlement cycles as
follows:
DeadSnes (ET)
p.m.
Input to tfi<< Federal Reserve.........
Advise of ponding charges.............
Reversals........................................ .
Post entries, or advise of reversal ..

9:00
9:30
10:30
11:00

2:00
2:30
3:30
4:00

Both settlements and adjustments to
prior settlements could be made through
the bilateral settlement service.3
Presenting banks could obtain
settlement for checks presented, and
presenting banks and paying banks
could obtain settlement for adjustments,
either at 11 a.m. Eastern Time (ET), or at
4 p.m. ET. The second settlement cycle
would allow sufficient time for data to
be submitted for checks presented to
west coast banks and to accommodate
presentments made by agreement after
the proposed 8:00 a.m. local time
presentment deadline.
The presenting bank initiating the
settlement entry or the bank initiating
an adjustment entry would transmit
payment information to the Federal
Reserve by the applicable input
deadline.4 The data would be edited
and, where necessary, would be
transmitted to the Federal Reserve office
serving the receiving bank. The Federal
Reserve would make information
available to the presenting bank and
paying bank pertaining to pending
settlement and adjustment entries 30
minutes after the input deadline. A bank
may reverse a pending charge to its
account if, for example, the checks
represented by a settlement entry had
not been presented by the specified
3 The Federal Reserve would not handle the
accompanying adjustment documentation. (See
discussion in Section D.)
* The data elements for entries would consist of
the presenting bank's routing number, the paying
bank’s routing number, the dollar amount of ihe
entry, a transaction code identifying the transaction
as a settlement transaction or an adjustment
transaction, and optionally, in the case of settlement
transactions, the dollar amount of the cash lett«r,
the net amount of any adjustments to prior
settlements, and a reference number assigned by
the presenting bank. Banks may choose to
summarize the settlement for adjustments in one
entry to minimize fees, or may choose to make
separate entries for each adjustment to provide
control.

deadline. The paying bank could also
reverse a portion of a pending
settlement charge to adjust for a largedollar error, such as an encoding error
or a missing bundle, found in the cash
letters being settled. Reversals would
have to be made within one hour
following the time the banks are advised
of the pending charges.
Data concerning reversals would be
made available to affected banks at the
scheduled posting time, which would be
30 minutes following the reversal
deadline. At the scheduled posting time,
the banks’ accounts at the Federal
Reserve would be credited and debited,
as applicable, and the entries would be
reflected in the account balance
monitoring system. Payments would be
final at the end of the day.5 If the bank
subject to the charge either reversed the
pending charge or the Federal Reserve
decided not to post the transaction, the
presenting bank and the paying bank
would ba notified at the scheduled
posting time that the transaction had not
been posted. A daily summary of
settlement charges and credits would be
provided to the banks participating in
the settlement service.
The bilateral settlement service would
not be used to function “as-of ’ 6
adjustments to correct bank errors
resulting from the settlement process.
The Board believes that it would be a
time-consuming and costly
administrative effort for the Federal
Reserve to verify that both parties
approved the “a s - o f adjustment, that
the “a s - o f adjustment was being made
for valid reasons, and that it was being
made to the appropriate reserve periods.
The Federal Reserve would function
" a s -o f adjustments to compensate for
its errors in functioning settlement
service transactions.
The Board requests comment on the
number of daily cycles that should be
provided in a bilateral settlement
service and the optimal time(s) of the
cycle(s). Under the proposed same-day
settlement amendments to Regulation
CC, the paying bank is not obligated to
settle for checks until the close of
Fedwire. The Board requests comment
on whether one cycle late in the day
would adequately address the needs of
paying banks and presenting banks. The
6 Finality of settlement does not affect the paying
bank’s right to return a check or to process a
subsequent adjustment to the settlement amount.
* "As-of* adjustments are memorandum items
that are applied to the cumulative deposit position
of a bank to correct the Impact of an error. The
cumutative deposit position is the base from which
required reserves, are calculated. These
adjustments affect the amount of a bank's required
reserve or clearing balance, but do not directly
affect the balance in the account.

Board also requests comment on
whether modifications to the timing and
number of settlement cycles should be
made if the Board adopts a same-day
settlement rule with a requirement that
the paying bank settle for checks earlier
on the day of presentment. The Board
recently proposed amendments to
Regulation J (12 CFR part 210) that
would require a paying bank to settle for
checks presented by a Reserve Bank by
a specified time during the day of
presentment, shortly after presentment.
(56 FR 3047, January 28,1991) The Board
also requested comment, in its recent
proposal to amend Regulation CC to
provide for same-day settlement, on
whether the time by which a paying
bank must settle for checks under the
same-day settlement rule should
conform to the time by which a paying
bank must settle for checks with its
Federal Reserve Bank under any future
Regulation J amendment. Such a
regulatory change would not mandate a
change to the settlement service,
because the settlement service would be
used only by the agreement of the
presenting bank and paying bank; by
agreeing to use the settlement service,
the participating banks would be
agreeing to accept settlements by a
time(s) provided under that service.
All fees for the bilateral settlement
service would be paid by the presenting
bank. The fee structure would have both
a fixed and variable component. A fixed
fee would be assessed for each
transmission by the presenting bank,
except for transmissions consisting
solely of adjustment entries or of a
reversal of a pending charge. The fixed
fee would cover the fixed costs
associated with processing the data in
the transmission, the amortized
software development and maintenance
costs, and the costs of handling
transmissions of adjustment entries by a
paying bank. A per transaction fee
would be assessed to cover the costs of
functioning each settlement or
adjustment entry or of reversing a
pending charge. The presenting bank,
rather than the paying bank, would pay
the per transaction fee for adjustment
entries initiated by the paying bank.
The Board estimates that the per
transmission fee would be in the range
of $5.00 to $10.00, and that the per
transaction fee would be approximately
$1.00. The relatively high fees projected
for the bilateral settlement service,
compared to the fees for other Federal
Reserve electronic payments services,
reflects the anticipated small number of
presenting banks from which such costs
would be recovered.

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices
Firm cost projections cannot be made
a* this time because the final system
design would be contingent upon an
assessment of the public comments
received. The estimated fees reflect
♦hose that would be assessed if the
Hlateral settlement service were
implemented as described above with
»lptively few users of the service. The
actual per transmission fee could be less
if there were a substantial number of
users, or could be significantly higher if
the number of users is very low. If a high
volume of settlement transactions and
service users evolves, a fee structure
consisting solely of per transaction fees,
similar to the Fedwire service, could
become feasible. The Board requests
comment on the price structure of the
proposed bilateral settlement service.
The Board is concerned that a bank
participating in the bilateral settlement
service described above may incur
significant risk due to the ability of
another bank to instruct the Federal
Reserve to charge its account While the
bank subject to the charge would have
some opportunity (i.e., one hour) to
instruct the Federal Reserve to reverse
the pending charge, this time may not be
adequate in all cases. If the bank did not
reverse the pending debit to its account,
it generally would be able to function an
adjustment in a subsequent settlement
cycle to recoup the improper charge to
its account. Despite this capability, the
bank might incur a loss, (1) if the bank
receiving the debit adjustment reversed
the pending charge, or (2) if the Federal
Reserve were unable to post the
adjustment due to the failure of the bank
receiving the debit adjustment, or
because the bank receiving the debit
adjustment did not have sufficient funds
in its account. The Board requests
comment on the risks associated with
the bilateral settlement service and
whether these risks can be minimized by
modifying the design of the proposed
service.
In addition to the issues raised above,
the Board requests commenters to
consider and address the following
issues with respect to the bilateral
settlement service:
1. Do existing settlement options
adequately meet the settlement needs of
presenting banks and paying banks? If
not, would a bilateral settlement service
as described above adequately meet
these settlement requirements?
2. Would paying banks and presenting
banks use the bilateral settlement
service?
3. To what extent would the decision
to use, or not use, the bilateral
settlement service be based on the fees
assessed for the service?

4. Would the service be used for
settling adjustment differences? If the
bilateral settlement service were used io'
settle adjustments, how would the
participants exchange documentation
related to the adjustments?
5. Would additional data elements,
other than those described above, be
necessary to meet the informational
requirements of paying banks and
presenting banks?
6. Should a portion of the fees for the
bilateral settlement service be assessed
to the paying bank, rather than
assessing all fees on the presenting
bank. If so, how should the fees be
allocated between paying banks and
presenting banks?
7. How could the bilateral settlement
service be modified to make it more
attractive to presenting banks and
paying banks?

Criteria for evaluating proposed
changes.
The bilateral settlement service, if
adopted, would be priced to achieve full
cost recovery over the long run. The
bilateral settlement service generally
would yield a number of the same public
benefits as settlement via Fedwire. The
bilateral settlement service would
provide an alternative means of
settlement that may encourage direct
presentment of checks where such
presentments are more efficient than
collection through intermediaries. The
bilateral settlement service also could
yield a public benefit by providing an
additional mechanism through which
banks could settle for checks through
accounts maintained at the Federal
Reserve Banks. The use of Federal
Reserve accounts for settlement
minimizes the correspondent balances
banks would otherwise have to maintain
in order to settle payment transactions.
However, as described above, the
bilateral settlement service may impose
additional risk on the participants in the
service.
The Board believes that the bilateral
settlement service meets the criterion
that the service be one that other
providers alone cannot be expected to
provide with reasonable effectiveness,
scope and equity. The Federal Reserve
currently provides net settlement
services for numerous check
clearinghouses, and the Fedwire system
is an effective vehicle that can be used
for settlement of payment transactions
between banks. The proposed bilateral
settlement service is an alternative to
the Fedwire service for banks wishing to
use balances maintained at the Federal
Reserve Banks to settle for checks not
collected through the Federal Reserve.

10435

Other service providers currently
provide, and are expected to continue to
provide, settlement services to banks.
However, a large number of banks are
unlikely to establish and maintain new
accounts at a central depository, in
addition to those accounts already
maintained at the Federal Reserve, in
order to provide the basis for a major
new private-sector alternative
settlement system.

D. Other Potential Services Evaluated
But Not Proposed
The Board evaluated several services
that certain banks requested that the
Federal Reserve provide in a same-day
settlement environment, which it has
determined not to propose to adopt.

Conjunctive Business on Federal
Reserve Intradistrict (Local)
Transportation Networks.
The Board evaluated whether the
Federal Reserve Banks should be
required to permit couriers hired by the
Federal Reserve to seek conjunctive
business on all intradistrict
transportation routes. Conjunctive
business means that the courier could
carry goods for other customers on
routes on which they transport checks
for the Federal Reserve. Currently,
Federal Reserve offices allow
conjunctive business on nearly 90
percent of the local courier routes that
deliver checks to banks in the region
served by the Federal Reserve office. On
those routes where conjunctive business
is not allowed, the Federal Reserve
offices have exclusive-use contracts
because of the time-critical nature of the
route. The preponderance of Federal
Reserve contracts permitting
conjunctive business indicates that
presenting banks should encounter few
problems in arranging courier services
with private couriers for presentment of
checks.
The Board believes that the Federal
Reserve Banks currently allow
conjunctive business on intradistrict
transportation networks when it is
operationally feasible and does not
jeopardize the expeditious collection of
checks by the Federal Reserve. Based on
this evaluation, the Board does not
propose to change the current policy
with respect to the intradistrict
transportation networks.

Conjunctive Business on the Federal
Reserve’ Interdistrict Transportation
s
System (ITS).
The Board evaluated whether the
Federal Reserve Banks should allow
conjunctive business on the ITS
network. The ITS network is currently

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Federal Register / Vol. 66, No. 48 / Tuesday, March 12, 1991 / Notices

an exclusive-u.se, largely air, delivery
system connecting Federal Reserve
offices, through a hub-and-spoke
arrangement, for the transportation of
checks coliected by the Federal Reserve
as well as other Federal Reserve
materials. Close coordination and timing
among the various air couriers under
contract to the Federal Reserve is
essential for the network to operate
smoothly.
The Federal Reserve System
experimented with conjunctive business
on the ITS network during She lute 1870s.
As a direct result of ITS couriers serving
the differing needs of other business
clients, the Federal Reserve was unable
to obtain reliable delivery of its checks
at scheduled times. Delays in delivering
checks among Federal Reserve offices
caused debit float to rise to high levels.
Because of the difficulties in
forecasting accurately the daily level of
debit float, management of the Federal
Reserve’s open market operations was
made more difficult.
Based on this past experience, the
Federal Reserve prohibited conjunctive
business on ITS beginning in 1980 in
order to retain control over the network.
Because of its many interdependent
connections under tight deadlines, the
ITS network cannot operate effectively
under decentralized decision-making by
parties with divided loyalties. In order
to ensure the efficiency of its check
collection system, the Federal Reserve
must retain control over the nightly
decisions (e.g., when to hold a plane or
instruct it to leave) and the network
design decisions (e.g., when to change a
scheduled departure time).
The Board believes that the only way
to ensure control over the ITS network
is to employ couriers that are
responsible solely to the Federal
Reserve Based on past experience, and
the time-critical nature of the
interdistrict check collection system, the
Board has concluded that the Federal
Reserve Banks should not allow
conjunctive business on the ITS
network.

Transportation Services
The Board evaluated whether the
federal Reserve Banks should offer a
new transportation service, under which
banks could pay the Federal Reserve to
arrange the delivery of checks to paying
banks. Currently, the Federal Reserve
Banks arrange transportation of only
those checks for which the Federal
Reserve is acting as a collecting bank or
returning bank.1 A Federal Reserve
7 One proposed exception is me provision of
outgoing transportation from the paying bank's
Federal Reserve office to the paying bank for checks

Bank assumes certain duties and rights
with respect to checks it collects, incurs
assets and liabilities on its balance
sheet during the collection process, and
provides warranties as an indorser of
the check. Arranging for transportation,
both intradistrict and interdistrict, is a
function necessary for the collection of
checks deposited with the Federal
Reserve Banks. If the Federal Reserve
Banks were to introduce a new priced
transportation service that was not
integrally related to the Federal
Reserve's check collection
responsibilities, the Federal Reserve
Banks could be considered “common
carriers,” potentially subject to
applicable Federal and state regulations.
Private-sector couriers can and do
deliver checks for presenting banks and
banks generally have adequate access
to couriers in their local transportation
markets. In addition, some
correspondent banks maintain extensive
networks to transport checks and other
materia! to and from branches and
respondents, which could be used by
presenting banks to present checks to
paying banks.
The Board has determined that the
Federal Reserve Banks should not offer
a priced check transportation service,®
Because of the ready availability of
courier services to presenting banks, a
transportation service would not meet
the criterion that new Federal Reserve
services should be ones which other
service providers cannot be expected to
provide with reasonable effectiveness,
scope and equity. On balance, it appears
that there would be no clear public
benefit if the Federal Reserve Banks
were to offer a check transportation
service.

Adjustment Service
The Board evaluated whether the
Federal Reserve Banks should offer a
new priced adjustment service to handle
not collected through She Federal Reserve for whic>.
the Federal Reserve provides payor bank services
under the proposed regular supplemental payor
bank service. These checks would be intermingled
with checks collected through the Federal Reserve
that are designated for payor bank services. The
Federal Reserve would have to provide
transportation for those checks collected through
the Federal Reserve in order to fulfill its
presentment obligation. It would not be
operationally practical for the Federal Rese;ve to
provide regular supplemental payor bank services
on all of these checks and provide transportation for
only those checks collected through the Federal
Reserve.
8 Cash transportation provided by four Federal
Reserve Banks is the sole priced transportation
service currently provided by the Federal Reserve.
This cash transportation service is offered only with
respect to cash for deposit to o r withdrawal from a
Federal Reserve Bank. The Federal Reserve does
not provide cash transportation between privatesector hanks.

adjustments for checks not collected
through the Federal Reserve. Currently,
the Reserve Banks handle adjustments
only for checks collected or returned
through the Federal Reserve.9 A new
adjustment service could be limited to
providing a clearinghouse for exchanges
of claims for adjustments by paying
banks and presenting banks, or the
Federal Reserve Banks could play the
role of resolving disputes between
paying banks and presenting banks.
As a clearinghouse, a Federal Reserve
office would receive documentation of
an alleged error from one party involved
in a presentment of checks, record and
edit the documentation, and forward it,
via mail or electronic transmission, to
the other party involved in the
presentment. The second party would
respond either by accepting the reported
error or by refuting the allegation in
writing. The Federal Reserve Bank
would serve as an intermediary handler
of documentation until the two parties
either resolved the issue or sought
resolution through some other means
outside of the Federal Reserve (e.g., the
courts).
In the alternate case, a Federal
Reserve office not only would serve as 8
clearinghouse for adjustment
documentation, but also would resolve
any dispute between the two parties to
the check presentment. This form of an
adjustment service raises the issue of
whether it is appropriate for the Federal
Reserve to make a decision involving a
check which the Federal Reserve itself
did not handle.
The Board has determined that the
Federal Reserve Banks should not offer
a priced adjustment service to handle
adjustments for checks not collected or
returned through the Federal Reserve, or
otherwise processed by the Federal
Reserve. Other service providers would
be able to serve as intermediaries in
exchanges of adjustment documenta tion
or as arbiter for check adjustments.
Because (1) it appears that there would
be no clear public benefit if the Federal
Reserve Banks were to offer an
adjustments service, and (2) other
entities alone could provide this servio?
with reasonable effectiveness, scope,
and equity, the Board believes it would
be inappropriate, under its criteria for
offering new services, for the Federal
Reserve Banks to offer an adjustment
service.
* Under the proposed supplemental payor bank
services, ihe Federal Reserve would also handle
adjustments for checks processed by the Federal
Reserve in order to provide the payor bank services;
even though the checks were not collected through
the Federal Reserve.

Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices
E. Competitive Impact Analysis

Supplemental Payor Bank Services

The Board recently formalized its
procedures for assessing the competitive
impact of changes that have a
substantial effect on payments system
participants.10 Under these procedures,
the Board assesses whether the
proposed change would have a direct
and material adverse effect on the
ability of other service providers to
compete effectively with the Federal
Reserve in providing similar services
and if such effects are due to legal
differences or due to a dominant market
position deriving from such legal
differences. Following are the
competitive impact analyses for the
proposed new services and for the
bilateral settlement service.

The proposed supplemental payor
bank services would allow a paying
bank to designate its local Federal
Reserve office as a presentment point
for checks not collected through the
Federal Reserve, or to deliver to its
Federal Reserve office checks that it has
received directly, and instruct the
Federal Reserve office to provide payor
bank services with respect to those
checks. The Federal Reserve Banks
currently offer payor bank services as
an option to paying banks for checks
collected through the Federal Reserve.
The provision of supplemental payor
bank services should not adversely
affect the provision of similar services
by private-sector providers due to legal
differences between the Federal Reserve
Banks and other service providers or
due to a dominant market market
position deriving from such legal
differences. Generally, a presenting
bank, because it has possession of the
checks, would have an advantage in
offering timely and cost-effective payor
bank services to the paying bank. Thus,
the Federal Reserve's market position
does not provide an advantage in the
provision of the proposed supplemental
payor bank services.

Presentment Point Service
The proposed presentment point
service would allow a paying bank to
designate its local Federal Reserve
office as a presentment point for checks
presented to the paying bank by a
private-sector presenting bank. Because
many banks currently maintain
arrangements to transport checks to and
from their local Federal Reserve office
and some banks deliver checks directly
to multiple Federal Reserve offices, this
service may prove convenient and
economical for both presenting banks
and paying banks.
It does not appear that private-sector
entities that could be designated as
presentment points by paying banks
would be adversely affected by the
proposed Federal Reserve presentment
point service. The Federal Reserve’s
proposed service does not rely on the
existence of legal differences between
the Federal Reserve Banks and other
service providers, nor does it rely on the
dominant market position of the Federal
Reserve Banks in the provision of check
collection services deriving from such
legal differences. Typically, a paying
bank would designate as its
presentment point the location of a data
processing firm or a correspondent bank
that performs demand deposit
accounting for the checks drawn on the
paying bank. The Federal Reserve Banks
do not provide demand deposit
accounting services and do not have any
inherent advantages in providing a
presentment point service, with the
possible exception of the convenience of
a location where checks are already
delivered and picked up by collecting
banks and paying banks.
10 These procedures are described in the Board's
policy statement, "The Federal Reserve in the
Payments System," which w as revised in March
1990. (55 FR 11648, March 29,1990)

Bilateral Settlement Service
The proposed same-day settlement
rule requires the paying bank to settle
with the presenting bank by credit to an
account of the presenting bank at a
Federal Reserve Bank. Settlement may
also be in any other form to which the
presenting bank and the paying bank
agree. While other private-sector service
providers may offer bilateral settlement
services, most banks either hold
accounts directly with the Federal
Reserve Banks or have established
relationships with correspondent banks
that have accounts at the Federal
Reserve. These accounts serve to
maintain reserves and/or to permit
participation in Federal Reserve
payment services. The current base of
accounts, especially the account
relationships with all major participants
in the payments system, provides the
Federal Reserve Banks with an inherent
advantage in providing settlement
services. Private-sector providers of
settlement services would have to hold
account relationships with both parties
to the settlement. In addition, a
presenting bank would be more likely to
agree to participate in a bilateral
settlement service if the service could be
provided with respect to multiple
bilateral relationships, increasing the
number of account relationships that a
private-sector service provider might

10437

have to maintain. Attaining these
account relationships for the explicit
purpose of providing settlement services
would likely be difficult.
Thus, a potential private-sector
provider of bilateral settlement services
would be adversely affected if the
Federal Reserve Banks offered a
bilateral settlement service. It is unclear,
however, whether such adverse effects
would be material. Settlement
participants may choose to function
entries from the Federal Reserve’s
bilateral settlement service through
accounts held at correspondent banks,
which are the primary private-sector
service providers of settlement services.
If this option is chosen by service users,
the adverse effects of a bilateral
settlement service on private-sector
providers might be minimized. The
Board requests comment on whether the
potential effects of a bilateral settlement
service are material.
If the effects are determined to be
material, the Board must determine
whether the adverse effects are due to
legal differences or due to a dominant
market position deriving from such legal
differences. Because the Federal
Reserve has account relationships with
most banks in its roles both as central
bank and payments system service
provider, the adverse effect would be
both due to legal differences between
the Federal Reserve Banks and privatesector service providers and due to a
dominant market position deriving from
legal differences.
The objective of a bilateral settlement
service would be to provide banks an
alternative means of settlement for
checks presented by private-sector
presenting banks. Provision of an
alternate means of settlement should
facilitate direct presentments in cases
where the direct presentment and the
settlement service are less costly or
more efficient than collection through
intermediaries. The Board believes that
provision of a settlement service through
Fedwire, and possibly also through a
bilateral settlement service, may
enhance competition in the provision of
check collection services by making it
easier for private-sector presenting
banks to obtain settlement for checks
presented to paying banks. The Board
requests comment on whether the
provision of a bilateral settlement
service, in addition to a Fedwire
settlement alternative, would provide
greater incentives for direct
presentments to occur.
It does not appear that the service can
be modified to lessen or eliminate any
adverse effect on private-sector
providers of settlement services. The

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Federal Register / Vol. 56, No. 48 / Tuesday, March 12, 1991 / Notices

service would allow paying banks and
presenting banks to have their entries
made through a correspondent
settlement agent. Because
correspondent banks are the primary
private-sector providers of settlement
services, the fact that such providers
can participate within the context of the
service should lessen the potential
adverse effects of the proposal. The
Board requests comment on whether
any other modifications cun be made to
the service to lessen or eliminate the
adverse effect on private-sector
providers of settlement services.
By order of the Board of Governors of the
Federal Reserve System, March 8.1991.
Jennifer J. Johnson,

Associate Secretary of the Board.
[FR Doc. 81-5763 Filed 3-11-61; 8:45 amj
BILLING CODE 8213-01-41