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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

February

26 , 1991

d a lle s .te x a s

75222

Notice 91-16
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Comments on Proposed Modifications of
Procedures Used for Measuring Fedwire Daylight Overdrafts
DETAILS

The Board of Governors of the Federal Reserve System has requested
comments on proposed modifications to its Payments System Risk Reduction
Program. The proposed modifications affect the procedures used for measuring
Fedwire daylight overdrafts as part of this program. In issuing this propos­
al, the Board has taken into consideration comments received on an earlier
proposal to change the procedures for measuring daylight overdrafts that was
issued in June 1989 (this Bank’s Circulars 89-41 and 90-41). The request for
comments is in two dockets.
Docket No. R-0721 proposes that the procedures used to measure
daylight overdrafts be based on a modified, real-time approach to accounting
for non-wire transactions. Fedwire funds and book-entry transfers would
continue to be posted, for purposes of measuring daylight overdrafts, as they
are measured throughout the business day. A depository institution’s peak and
average daylight overdrafts would be based on end-of-minute snapshots of each
institution’s account balance. Each institution’s daily average daylight
overdraft would be calculated by dividing the sum of its negative end-ofminute balances by the number of minutes in the official Fedwire operating
day.
Docket No. R-0722 requests comment on a proposed amendment to
Regulation J. The proposed amendment would require paying banks to make the
settlement proceeds of checks presented for payment by a Federal Reserve Bank
available to the Reserve Bank as early as one hour after the paying bank
receives the checks. This amendment is necessary to implement the proposed
method for posting check debits and credits to banks’ reserve accounts in
order to measure daylight overdrafts accurately, as proposed in Docket No.
R-0721.

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 May 31, 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
correspondence should refer to either Docket No. R-0721 or Docket No. R-0722.
ATTACHMENTS

Attached are copies of the Board’s notices as they appear on pages
3098-3109 (Docket No. R-0721) and on pages 3047-50 (Docket No. R-0722), Vol.
56, No. 18, of the Federal Register dated January 28, 1991.
MORE INFORMATION

For further information on Docket No. R-0721, please contact Donna
Matthews, (214) 651-6646; Virginia Rodriguez, (214) 698-4228; or James Smith,
(214) 651-6140.
For further information on Docket No. R-0722, please contact Bob
Whitman, (214) 698-4357, at the Dallas Office; Eloise Guinn, (915) 521-8201,
at the El Paso Branch; Luke Richards, (713) 652-1544, at the Houston Branch;
or Herb Barbee, (512) 978-1402, at the San Antonio Branch.
For additional copies of this Bank’s notice, please contact the
Public Affairs Department at (214) 651-6289.
Sincerely yours,

3098

Federal Register / Vol. 56. No. 18 / Monday, January 28, 1991 / Notices
Comments, which should
refer to Docket No. R-0721, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW, Washington, DC 20551,
Attention: Mr. William W. Wiles,
Secretary; or may be delivered to room
B-2223 between 9 a.m. and 5 p.m. All
comments received at the above address
will be included in the public file and
may be inspected at Room B-1122
between 9 a.m. and 5 p.m.
ADDRESSES:

FOR FURTHER INFORMATION CONTACT:

FEDERAL RESERVE SYSTEM
{D o c k e t N o. R -0 7 2 1 J
RIN 7 1 0 0 -A A 7 6

P roposals To Modify the Paym ents
System Risk Reduction Program;
M easurem ent of Daylight O verdrafts
Board of Governors of the
Federal Reserve System.
ACTION: Request for comment.
agency:

The Board is requesting
comment on a proposed method for
posting debits and credits to depository
institutions' accounts at Federal Reserve
Banks in order to measure daylight
overdrafts accurately. Accurate
measurement of daylight overdrafts will
be necessary in order to assess fees for
daylight overdrafts, which the Board
anticipates implementing in the future as
part of its payments system risk
reduction program. The Board has also
adopted minor modifications to the
procedure it adopted in May 1990 for
measuring book-entry securities
overdrafts.
DATES: Comments must be submitted on
or before May 31,1991,

SUMMARY:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368); Bruce Summers, Deputy
Director (202/452-2231) or Florence
Young, Assistant Director (202/4523926), Division of Reserve Bank
Operations and Payment Systems;
Oliver I. Ireland, Associate General
Counsel (202/452-3625) or Stephanie
Martin, Attorney (202/452-3198), Legal
Division; for the hearing impaired only:
Telecommunicatioins Device for the
Deaf, Dorothea Thompson (202/4523544).
SUPPLEMENTARY INFORMATION: One of
the purposes of the Board's payments
system risk reduction program is to
reduce both direct credit risk to the
Federal Reserve and systemic risk.
Direct credit risk to the Federal Reserve
could be caused by the inability of a
depository institution to settle its
intraday overdraft at a Federal Reserve
Bank before the end of the day. The
banking system would be exposed to
systemic risk if a participant in a private
large-dollar payments network were
unable or unwilling to settle its net debit
position on that network. Such failures
could cause creditors of the failing
institution, in turn, to be unable to settle
their own commitments. Serious
repercussions could, as a result, spread
to other participants in the network, to
other depository institutions outside of
the network, and to the nonfinancial
economy in general. The Federal
Reserves would bear an indirect risk if a
large number off depository institutions
simultaneously faced severe liquidity
constraints. Furthermore, on either
private wire systems or Fedwire,
depository institutions create risk by
permitting their customers, including
other depository institutions, to transfer
uncollected balances over wire systems
in anticipation of their coverage by the
end of the day.
In June 1989, the Board requested
comment on a comprehensive set of
changes to its payments system risk
reduction program (54 FR 26090, June 21,
1989). Those proposed changes included
the pricing of daylight overdrafts in

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices
accounts at Reserve Banks and an
overdraft measurement scheme to
facilitate pricing, the inclusion of bookentry securities overdrafts in the
calculation of total overdrafts, and
various changes regarding the overdraft
cap structure, capital measurement, and
policies pertaining to U.S. agencies and
branches of foreign banks. The Board
adopted policies regarding book-entry
securities, caps, capital, and agencies
and branches of foreign banks in May
1990 (55 FR 22087, May 31,1990). Today,
the Board is publishing for comment a
modified daylight overdraft
measurement scheme. The Board
anticipates that it will implement pricing
of daylight overdrafts after a
measurement scheme is finally adopted.
Current risk reduction program.
Under the Board’s risk reduction
program, depository institutions
establish a maximum amount of
intraday overdrafts (both funds and
book-entry) that they may incur over
Fedwire *. The maximum, or cap, is a
multiple of a depository institution’s
risk-based capital and is based on the
depository institution's self-assessment
of its own creditworthiness, credit
policies, and operational controls. The
guidelines for performing the selfassessment were established by the
Board, and the documentation
supporting each depository institution’s
rating is reviewed by the institution’s
primary supervisory agency examiners.
(See 52 FR 29255, August 16,1987.)
Depository institutions with positive
caps that frequently exceed their caps
by material amounts solely due to bookentry securities activity must fully
collateralize their overdrafts
attributable to book-entry securities
activity. In addition, financially healthy
depository institutions with positive
caps may choose to collateralize all or
part of their book-entry overdrafts, even
if they do not exceed their caps. Such
secured book-entry securities overdrafts
shall not be included with funds or
uncollateralized book-entry securities
overdrafts to determine an institution’s
adhereence to its cap.
Under the current definition of
daylight overdraft, Fedwire funds and
book-entry securities transfers are
posted as they are processed during the
business day. All non-automated
cleaming house (“ACH”), non-wire
transactions are netted at the end of the
banking day; if the net is a credit, that
credit is added to the opening-of-the-day
balance, and if the net is a debit, the
debit is deducted from the end-of-day
1 Before January 10,1991, net debits on the
Clearing House Interbank Payments System
(“CHIPS") were subject to Federal Reserve limits.

position. The net of all ACH
transactions is posted as if the
transactions occurred at the opening of
business, regardless of whether the net
is a debit or a credit. This ex post
measure allows a depository institution
to use all of its non-wire net credits to
offset any wire debits during the day,
but postpones the need to cover non­
wire, non-ACH net debits until the close
of the day.
1989pricing and m easurem ent
proposals. The Board’s June 1989 request
for comment included a proposal to
implement a fee at an annual rate of 25
basis points for average daily total
funds and book-entry securities
overdrafts in reserve or clearing
accounts at Reserve Banks in excess of
a deductible of 10 percent of the
institution’s risk-based capital. The
pricing program w as proposed to be
phased in, with a charge of 10 basis
points the first year, 20 basis points the
second year, and 25 basis points in the
third year and thereafter. The Board
expected that explicit fees for Federal
Reserve daylight credit would create
incentives for depository institutions to
reduce overdrafts at Reserve Banks,
thereby reducing direct Federal Reserve
risk and contributing to economic
efficiency. The Board believes that
payments system participants, as a
result of the market incentives
established by the combination of
daylight overdraft pricing and
settlement finality on CHIPS, would
lower the level and more efficiently
allocate the distribution of Fedwire and
private-sector intraday credit flows.
The Board’s daylight overdraft pricing
proposal would give funds an intraday
value and, therefore, would require
precision in measuring intraday
overdrafts. Such precision would require
fixing the time at which all payment
transactions by Reserve Banks are
recognized to have occurred for daylight
overdraft measurement purposes. The
Board proposed that, for purposes of
measuring daylight overdrafts, a
depository institution's opening balance
at the Reserve Bank be adjusted by (1)
Credits for U.S. Treasury and
government agency book-entry
securities interest payments; (2) credits
for U.S. Treasury and government
agency book-entry securities redemption
proceeds; (3) credits for U.S. Treasury
ACH recurring credit transactions; and
(4) debits for new issues of U.S.
Treasury book-entry securities. During
the day, Fedwire funds and book-entry
securities transactions would be posted
as they occurred. At 2 p.m. local time of
the Reserve Bank, Treasury direct and
special direct investment credits would

3099

be posted. After the close of Fedwire, all
non-wire and commercial ACH
transactions would be posted,
regardless of whether the net of those
transactions were a credit or a debit.
This overdraft measurement proposal
would apply equally to all depository
institutions with Reserve Bank accounts,
including U.S. chartered banks, foreign
banks with U.S. agencies and branches,
thrifts, bankers’ banks, limited purpose
trust companies, nonbank banks,2 and
any other such entities. The current
measurement scheme and the 1989
proposal are summarized in appendix 1.
Status o f pricing proposal. The Board
received 216 comments on the June 1989
pricing proposal. Nearly three-quarters
of the commenters opposed the
proposal, with opposition particularly
intense among nonfinancial corporate
users of the payments system. Banking
organizations were less dramatically
opposed, largely because the alternative
to pricing (cap reduction) w as even less
preferable.
In summary, supporters of the pricing
proposal focused on (1) Their preference
for the use of the price mechanism to
allocate and manage risk, (2) the
associated benefit of structural changes
that will reduce overdrafts, and (3) the
inflexibility of the alternative risk
reduction options. Opponents of the
proposal criticized (1) The potential for
gridlock and the burdens on small
institutions, bokth of which might
accompany delayed sends by larger
institutions seeking to avoid overdraft
fees, (2) the extra cost of control
systems that might be necessary to
monitor customers’ overdrafts, (3) the
difficulties in linking a particular
customer’s payments and overdrafts to
the depository institution's overdrafts
subject to fees, (4) the possibility that
depository institutions would not build
comprehensive customer controls but
instead pass on overdraft fees to all
customers, (5) the inability of depository
institutions and their customers to avoid
book-entry securities overdrafts and
their associated fees, and (6) the
potential impact of such fees on the
operations of the U.S. government
securities markets.
The Board has considered the public
comments and expects to implement a
pricing program for daylight overdrafts
after an appropriate measurement
scheme is adopted, possibly in mid-1991,
to be effective in early to mid-1992.
* The posting changes would not affect the
overdraft restrictions and overdraft measurement
provisions for nonbank banks established by the
Competitive Equality Banking Act of 1987 and the
Board's Regulation Y (12 CFR 5 225.52).

3100

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices

Should the Board adopt a pricing
program, the details of the program and
a full response to the public comments
on pricing would be published at the
time of adoption.
M easurement o f book-entry securities
overdrafts, in connection with the policy
adopted in May 1990 to include bookentry securities overdrafts within the
total overdraft subject to cap, the Board
adopted several measurement rules
relating to book-entry securities,
effective January 10,1991. Specifically,
Treasury and government agency bookentry securities interest payments are
posted to an institution’s funds balance
as of the opening of the business day.
The net effect of new Treasury issues
and Treasury and government agency
redemptions are credited or debited to
an institution’s book-entry securities
balance at the opening of the book-entry
day. New issues of government agency
securities are posted to book-entry
balances as the securities are delivered
over Fedwire.
It was the Board’s intention that these
transactions be posted shortly after the
opening of Fedwire in order to provide
some time for purchasers of original
issues to obtain funding, if needed. The
Board today is clarifying that debits for
original issues of Treasury securities
and credits for interest payments and
redemption proceeds of Treasury and
government agency securities are to be
posted at 9:15 a.m. ET, effective
immediately.
In addition, since the adoption of
these book-entry securities
measurement procedures, the Board has
learned that it would be extremely
difficult for the Reserve Banks to credit
interest payments to depository
institutions’ funds balances. Because
any funds overdrafts will be offset by
credits in book-entry securities
balances, depository institutions would
not be negatively affected if credits for
Treasury and government agency
securities interest payments were
posted to book-entry securities
balances. The Board, therefore, has
approved a modification to the bookentry measurement scheme whereby
such credits will be posted to book-entry
securities balances at 9:15 a.m. ET on
the interest payment date, effective
immediately.
O verview o f public com m ent on
proposed posting rules
A total of 319 commenters discussed
the proposal to modify the procedures
for measuring daylight overdrafts, and
only one commenter supported the
entire proposal. The majority of
commenters, however, concurred with,
the Board’s objective of eliminating the

intraday float that is created by the
current procedures for measuring
daylight overdrafts. The major issues
raised by commenters concerning the
proposal fell into two broad categories:
(1) The effects of the proposal on current
cash management practices and (2) the
effects of the proposal on funds
availability practices.
Effect on Cash M anagement
Practices. Nearly 70 percent of the
commenters believed that the proposal
would disrupt current cash management
practices, without reducing payments
system risk. These commenters
indicated that funds collected through
the check and ACH mechanisms, in
particular, are not inherently risky 3 and
are routinely used on the availability
date to fund investments and to meet
other payment obligations. Commenters
questioned whether disrupting current
cash management practices is
warranted. In addition, several
commenters were concerned that the
proposal would lead to liquidity
problems and, therefore, disrupt
financial markets.
The Board understands that corporate
cash managers typically determine each
day’s funding needs early in the day and
include in their determinations the value
of check deposits becoming available,
ACH debit transactions that are settling,
and checks that must be paid that day. If
additional funds are needed,
investments may be liquidated or funds
may be raised. If excess funds are
available, investment decisions are
made. Corporate cash managers
estimate funding needs or excess
balances on a daily basis, without
considering the intraday timing of funds
becoming available or the time at which
payments must be made.
To the extent that corporate payments
are funded through check deposits or
ACH debit transactions originated by
the corporation and depository
institutions use the measurement
procedures proposed by the Board to
determine their customers’ intraday
account balances, corporate cash
managers would not be able to use such
funds to cover Fedwire funds or bookentry securities transfers. Rather,
corporate cash managers would either
need to borrow funds intraday in order
to cover some payments or to delay
investments of “excess” funds by a day
to avoid borrowing funds. Thus, if
3 From a credit risk perspective, the primary
source of risk in collecting funds through the check
an d ACH debit mechanisms is return items. Because
return items may not be received until four or five
days after funds have been credited to collecting
institutions, delaying credits on the availability date
does not provide a meaningful mechanism for
controlling return item risk.

.corporate cash managers did not modify
their practices, their costs of making
payments would increase due to explicit
charges for the use of daylight credit.
Alternatively, returns on investments
would decline.
Federal Reserve survey data support
those commenters that stated that
eliminating the intraday float provided
through the current procedures for
measuring daylight overdrafts would
reduce intraday liquidity. Based on
survey data for a four-week period
ending August 23,1989, the
measurement scheme proposed in 1989
would have resulted in total funds and
book-entry daylight overdrafts of $144.7
billion, comparea w an total overdrafts
of $119.2 billion under the current
measurement methodology. This
increase of about $25 billion in total
overdrafts may be used as a proxy for
the amount of unpriced or free liquidity
that the proposal would have removed
from the payments system. To put this
figure in perspective. $25 billion
amounts to approximately 3 percent of
daily average Fedwire funds transfer
dollar volume. While reducing intraday
unpriced liquidity by 3 percent is not
insignificant, the reduction or
elimination of float currently created by
the Federal Reserve’s daylight overdraft
measurement procedures should cause
depository institutions to modify their
behavior in an attempt to avoid
increasing their use of intraday credit.
Fund A vailability Practices. Nearly 40
percent of the commenters indicated
that, if the proposal were adopted,
depository institutions would delay
funds availability to their customers for
check deposits and ACH transactions. A
number of other commenters, primarily
corporate credit unions and large
correspondent banks, noted that
adoption of the proposal would prevent
them from making some payments for
their customers and /or investing
"excess” reserve balances.
A few commenters noted that
competitive pressures should prevent
depository institutions from changing
their availability practices for check and
ACH transactions significantly. On the
other hand, adoption of the proposal
might require depository institutions to
use Federal Reserve credit to make
funds available to customers for check
deposits that are treated as next-day
availability items under Regulation CC.4
* Under Regulation CC. depository institutions are
required to make funds available to their customers
for the following types of checks at the opening of
business on the business day following the banking
day of deposit: Treasury checks. Postal money
orders, checks drawn on Federal Reserve Banks and
C on tinu ed

Federal Register / Vol. 56, No. 18 / Monday, January 28. 1991 / Notices
The commenters argued that the
proposal to provide credit to collecting
institutions after the close of Fedwire for
such checks contradicted the objectives
of the Expedited Funds Availability Act
and Regulation CC. These commenters
stated that if depository institutions are
required to make funds from certain
check deposits available to customers at
the opening of business, funds for the
collection of such items should be
available for depository institutions' use
at the opening of business.
Historically, the Federal Reserve has
devoted considerable resources to
improving deposit deadlines in order to
enable depository institutions to collect
more dollars within shorter time frames.
These efforts have focused on improving
interday funds availability, and there
has been little concern about the time of
day that funds were made available.
The lack of focus on intraday funds
availability reflects the facts that (1) no
costs have been incurred when
depository institutions use intraday
credit, (2) the current limits on daylight
overdrafts do not tend to be binding for
most depository institutions, and (3) the
current ex post measurement procedures
permit collecting institutions to use the
net proceeds of check and ACH
transactions at the opening of business.
If fees are assessed for daylight
overdrafts, attention to intraday
availability of funds should increase.
The Board believes that, in a pricing
environment, users of Federal Reserve
payments services will seek not only
improved interday availability, but also
improved intraday availability. Thus,
even if the Board were to aiiopt the
daylight overdraft measurement
procedures proposed in 1989, it is likely
that, over time, there would be strong
pressures on the Reserve Banks to
provide early-in-the-day availability for
check and ACH transactions. Further,
the private sector would likely develop
such alternatives in response to the
changing environment.
Some institutions whose payment
activity would be constrained by their
caps under the proposal stated that they
may face a competitive handicap and a
loss of earnings. The fundamental issue
raised by these commenters is actually a
funds availability issue. The Board has
developed a new measurement proposal
in part to address the issue of intraday
funds availability. The Board was
guided by the following factors: (1) The
use of funds collected through the check
a n d ACH mechanisms is not inherently
risky, (2] in a pricing environment.
Federal Home Loan Banks, and certain cashier's,
tetter's, ce tified. And state and local government
checks.

collecting banks will focus on obtaining
earlier intraday availability, and there
will be strong demand for the Reserve
Banks to modify their operations in cost
effective ways to provide earlier
availability, and (3) some banks may not
be able to provide collection services if
credits for checks they collect through
the Reserve Banks are not available for
use during the business day.
Request fo r Comment on R evised
M easurem ent Schem e
The precise measurement of daylight
overdrafts requires a set of rules to
determine when during the day debits
and credits to a depository institution's
account at a Reserve Bank are
determined to have occurred. “Posting"
for the purpose of measuring daylight
overdrafts is not necessarily
synonymous with the time at which
payments become final nor the time at
which the current rights to receive funds
accrue, although finality of payment is
one of the criteria the Board used to
develop the daylight overdraft
measurement rules. The actual timing of
entering transactions on the Reserve
Banks’ books varies depending on
operational procedures. Fedwire funds
transactions are debited or credited as
they are processed and are considered
to be final payments when the receiver
of funds is advised by the Reserve Bank
of the credit. Non-wire payment
transfers, however, generally are
provisional for some period of time and
refer to a particular “day" as the
measuring unit of availability, without
indicating the time during the day at
which payment participants are either
entitled to the use of the funds received
or have been relieved of their payments
obligation to the Federal Reserve.
Even if the Federal Reserve were not
contemplating pricing Fedwire
overdrafts, it would be desirable to
clarify the time at which the debtorcreditor relationship between a
depository institution and its Reserve
Bank changes as the result of the
recognition of a payment. Independent
of overdraft pricing or cap policies in the
United States, technology and the
globalization of financial instruments
and transactions are increasingly
causing money, securities, and capital
markets to operate on a 24-hour basis. In
such an environment, trading in dollar
instruments and dollar payments in one
part of the world occurs while U.S.
markets and Reserve Banks are closed
In a 24-hour global market, depository
institutions in the United States and
abroad need to know more precisely the
time of day that dollar payments are
recognized to have occurred by the
Federal Reserve. Even if such global

3101

developments were not in progress, a.
clarification would permit depository
institutions to ascertain their intraday
rights and responsibilities vis-a-vis
Reserve Banks and to evaluate their
risks accordingly.
The current transitional system of
posting debits and credits for daylight
overdraft measurement purposes gives
the benefit of doubt to depository
institutions. Two drawbacks of this
system are that it creates intraday float
in the measurement of daylight
overdrafts in that depository institutions
with net credits can use them before
those with net debits are charged, and
many depository institutions are unable
to monitor their overdraft levels
effectively during the banking day.
Because the Board's payments system
risk reduction program is reaching
maturity, the Board believes that the
initial transitional posting procedures
must be modified.
In developing a proposal to establish
the time at which non-wire transactions
would be recognized for daylight
overdraft measurement purposes, the
Board w as guided by a desire to
eliminate the intraday float created by
the current measurement procedures.
Thus, the posting of a payment
transaction should not result in an
increase of one depository institution's
credit balance (or a reduction of its
measured overdraft) before another
depository institution’s credit balance is
reduced (or its daylight overdraft is
increased).
The principle of eliminating aggregate
Federal Reserve intraday float is
independent of the credit risk arising
from the transactions. For example,
there may be only minimal Federal
Reserve risk resulting from granting
early-in-the-day credit for checks
collected through the Federal Reserve,
even if the Reserve Banks do not charge
paying institutions until later on the
presentment day. However, by providing
early-in-the-day credit to the collecting
institution without an offsetting debit to
the paying institution, the Federal
Reserve would be permitting the
collecting institution to use Federal
Reserve credit without regard to that
depository institution’s cap, deductible,
or any Reserve Bank fee. Furthermore, if
explicit fees for overdrafts are adopted
and if the timing of debits and credits
for each transaction were not nearly
simultaneous at Reserve Banks,
depository institutions would have an
incentive to create float by writing
checks to each other to create free
overdraft capacity. As intraday credit
begins to have value, either through
pricing or the evolution to 24-hour global

3102

Federal Register / Vol. 56, No. 1 8 . / Monday, January 28, 1991 / Notices

markets, intraday Federal Reserve float
becomes a subsidy.
In addition to eliminating intraday
float, the new daylight overdraft
measurement procedure should allow
effective control of intraday overdrafts.
If depository institutions are to be
charged a fee for incurring a Fedwire
overdraft, the procedures for measuring
overdrafts should facilitate their ability
to control their positions and determine
their intraday balances accurately.
Measurement procedures under which
transactions are posted retroactively
after the transaction day is complete do
not meet this test.
It is important to acknowledge that
any daylight overdraft measurement
scheme designed to eliminate intraday
float will create “winners” and “losers.”
(See the discussion below on the effects
of the proposal on depository
institutions.) The Board requests
comment on whether the measurement
scheme described below is an equitable
balance between the positive and
negative effects of the posting rules on
depository institutions and their
customers.
The Board requests comment on the
proposed daylight overdraft
measurement scheme described below
(and outlined in Appendix 2). The main
differences between the new proposal
and the 1989 proposal are that, under the
new proposal, government and
commercial ACH credit transactions
would be posted at the opening of
business, ACH debit transactions would
be posted at 11 a.m. Eastern Time
(“ET"), and commercial check
transactions and currency and coin
deposits would be posted throughout the
day, starting at 11 a.m. ET and hourly
thereafter.
The features of the proposed
measurement scheme are discussed in
detail below:
Commercial Check Transactions.
Commenters suggested many
alternatives for posting non-wire
transactions. About one-third of the
commenters proposed maintaining the
current ex po st system for posting check
transactions, and 85 percent of the
commenters wanted to retain the current
treatment of ACH debit and credit
transactions. More than half of the
commenters believed that check
transactions should be posted during the
morning on the availability or settlement
day. The Board’s Large-Dollar Payments
System Advisory Group 5 suggested
* The Advisory Group, made up of private-sector
payments system specialists, w as formed by the

posting check transactions between
10:30 and 11:30 a.m. ET to permit
depository institutions and their
customers to manage their payment
activity and to take advantage of a full
range of investment opportunities. The
Advisory Group believed that payor
institutions should not be charged
before checks were presented to them,
but suggested that electronic
presentment might be an acceptable
alternative to physical presentment. At
the same time, the Advisory Group
ackowledged that information on certain
checks could not be made available to
payor institutions be the posting times it
proposed and suggested that charges
either be posted retroactively or the
small amount of float that would be
created by absorbed by the Federal
Reserve. Approximately 6 percent of the
commenters suggested that credits and
debits for check transactions be posted
throughout the day, based on the time
zones of the Federal Reserve Districts
on which the items are drawn.
To gain a better understanding of
commenters’ concerns regarding
investment opportunities, the Board
reviewed current investment practices.
The Board found that, depending on the
type of investment purchased, the
investor may be required to render
payment from a few minutes after the
transaction is completed to the end of
the business day. For example,
deliveries of U.S. Treasury and agency
securities take place throughout the
morning and are completed by midafternoon. Because sellers initiate the
delivery of these securities over Fedwire
and the purchasers’ account is charged
when the securities are delivered,
payment could be required minutes after
the trade is negotiated.
On the other hand, for money market
instruments, such as commercial paper,
certificates of deposit (“CDs"), and
banker's acceptances, payments are
typically expected to be made in
available funds by 4 p.m. ET, although
most payments are made well before
this deadline. In the case of Eurodollar
CDs, payments normally must be made
by 11 a.m. ET on the day of delivery.
While payment for some instruments
must be made early in the day, it is not
required for all types of investments.
Nevertheless, the Board has developed
an alternative measurement scheme that
would provide credit for check deposits
as early in the day as possible, because
assessing fees for daylight overdrafts

Board in 1985 to assist in the development of the
Board's paym ents system risk reduction program.

will create demand for early-in-the-day
availability.
Under the proposed measurement
scheme, depositing institutions would be
credited and payor institutions would be
debited intraday, based on the Reserve
Banks’ ability to present the checks
physically to payor institutions and to
obtain settlement. Under Subpart A of
the Board's Regulation J (12 CFR part
210), depository institutions currently do
not have an obligation to settle for
checks presented by a Reserve Bank
until the close of the banking day on
which the checks are presented. The
Board has proposed amendments to
Regulation J that would allow posting of
check debits to payor institutions during
the day. (See Docket R-0722, elsewhere
in today’s Federal Register.) Under the
proposed amendments to Regulation J,
payor institutions would be debited for
checks by the end of the clock hour after
the hour during which presentment
takes place. For example, checks
presented at 12:30 p.m. ET would be
posted at 2 p.m. ET. This would allow a
payor institution at least one hour to
inspect incoming cash letters and to
notify its Reserve Bank of any
discrepancies before the Reserve Bank
posted a charge to its account.
Under this approach, Reserve Banks
would begin debiting payor institutions
and crediting collecting institutions at 11
a.m. ET and continue posting until 6 p.m.
ET. (The last presentment to payor
institutions in the Pacific Time (“PT")
zone is at 2 p.m. PT, 5 p.m. ET.) This
range of times was selected both to
provide credit for a substantial fraction
of collecting institutions' cash letters
early enough in the day to allow
collecting institutions to participate in
financial markets and to reflect the time
the Reserve Banks present checks to
west coast payor institutions.6
Because checks are drawn on a large
number of institutions, the Reserve
Banks would base the proposed
crediting scheme on the average of the
actual physical presentment times for
each Reserve office's availability zones,
such as New York city, Boston RCPC,
and Kansas City country. (High-Dollar
Group Sort (“HDGS”) deposits would be
treated as separate availability zones.)
These date would be accumulated in a
matrix. The columns of the matrix would
indicate the posting times, and the rows
would consist of the availability zones.
* The Board considered and rejected a second
alternative under which all check credits would be
posted a t 12 noon ET and check debits posted one
hour after presentm ent but no earlier than 12 noon
ET. This alternative would have resulted in intraday
float, and thus would have been inconsistent with
the Board's objectives.

Federal Register / Vol. 56. No. 18 / Monday. January 28. 1991 / Notices
Thus, the matrix would reflect the
fractional availability that would be
granted for each availability zone. The
appropriate fractions would then be
applied to the dollar amount of each
collecting institution’s deposits to
establish the times at which fractional
credit would be posted for the purpose
of measuring daylight overdrafts.
The following example of a HDGS
cash letter illustrates the proposed
crediting approach: The group sort has
six endpoints, each receiving $10 ,000,000
in its daily Federal Reserve
presentment. The presentment time
would be determined for each endpoint
based on scheduled courier deliveries.
Two institutions in the group sort
receive their presentments before 10
a.m. ET, three institutions receive
presentments between 10 a.m. ET and 11
a.m. ET, and the remaining institution
receives its presentment between 12
noon ET and 1 p.m. ET. Thus, the
collecting institution would receive
credit for 33.3 percent of its cash letter
at 11 a.m. ET ($20,000,00 of the
$60,000,000 being presented was
presented by 10 a.m. ET); another 50.0
percent of its deposit at 12:00 noon ET:
and the remaining 16.7 percent at 2 p.m.
ET. Each collecting institution that
deposited into this HDGS program
would receive the same intraday
availability, regardless of the mix of
items contained in its cash letter.
In a similar fashion, fractional credits
would be determined for regular city,
RCPC, and country deposits. Generally,
fine sort and group sort cash letters
would receive the fractional availability
for the availability zone in which the
payor institution(s) is (are) located.
However, if the presentment schedules
to payor institutions contained in these
deposit categories differ significantly
from the availability zone schedules and
the dollar value of these deposits is
substantial, different fractions might be
developed for some fine sort and group
sort deposits.
For mixed and other Fed deposits,
collecting institutions would receive
interday availability just as they do
today. Each Federal Reserve office
would calculate intraday fractional
availability schedules for its mixed and
other Fed deposits. In the case of other
Fed deposits, the local Reserve Bank
office would develop its fraction based
on its ability to receive credit from other
Reserve Banks, which in turn would
grant availability based on their ability
to present checks to payor institutions.
The amount of a mixed o r an other Fed
cash letter that would become available
on each day would be credited to the
collecting institution during the day in

the same manner as credits for other
types of check deposits.
It is anticipated that the fractions
would be revised semiannually or when
major changes in presentment schedules
occurred. Once the fractions were
developed, they would then be applied
through the use of an automated system
to the credits due to collecting
institutions to calculate the amount of
credit the institution would receive at
each posting time on the scheduled
availability day. To assist depository
institutions in managing their intraday
reserve/clearing account positions,
information concerning the value of
check credits posted at each posting
time would be reflected in the Reserve
Banks’ Account Balance Monitoring
system (“ABMS") and would be
available to depository institutions in
real time. Similarly, charges to payor
institutions would be reflected in the
ABMS at the time the payor institution's
account is scheduled to be charged.
Further, for those institutions that
deposit checks in all Federal Reserve
availability zones, the Reserve Banks
would provide the fractional availability
matrix in automated form.
While this measurement scheme is
operationally complex for the Reserve
Banks, the Board believes that it
satisfies its objectives as well as the
concerns raised by commenters. In
addition, it represents a meaningful step
toward more timely account balance
information. Under this approach, nearly
50 percent of the value of all check
deposits at the Federal Reserve would
be made available to collecting
institutions by 12 noon ET and about 78
percent would be available by 1 p.m. ET.
Given the significant value of check
deposits that would be available for use
early in the day, it appears that the
proposal would address, for the most
part, the settlement needs of investors.
At the same time, because funds would
be made available using fractional,
intraday availability schedules, cash
managers may need new information
systems that reflect intraday availability
schedules to avoid incurring daylight
overdrafts, which could increase their
operating costs. Because, on average,
credits for check deposits would not be
posted until payor institutions had been
charged for check presentments, this
mesurement procedure would not create
intraday flo at
The Board estimates that, if this
proposal is adopted, a large collecting
institution could be subject to 150 to 200
different sets of fractions that would be
used to provide intraday availability.
The Board requests comments on
whether there are steps that could be

3103

taken to reduce the complexity of its
proposal and also requests comment on
the following questions:
1. Under the proposal, sets of fractions
would be developed for each Reserve
Bank availability zone. i.e.. city. RCPC,
and country. In addition, each Reserve
office would develop sets of fractions
for its mixed and other Fed deposits.
Could the number of sets of fractions be
reduced by increasing the territory
covered by each fraction, such as
including city and RCPC endpoints in
the same set of fractions?
2. Under the proposal, credit for a
cash letter, e.g., an other Fed cash letter,
could be passed at eight different times
during the day. Would it be preferable to
reduce the number of times during the
day at which credit would be made
available? For example, the Reserve
Banks could limit the number of
crediting times by only crediting
collecting institutions if at least 5 or 10
percent of the value of a cash letter
could be credited a t the posting time.
3. In addition to providing information
through the ABMS and providing the
fractional availability matrix to
depository institutions, w hat steps could
the Reserve Banks implement to reduce
the potential operational burden faced
by collecting institutions in determining
the times at which check credits would
be posted?
N ext-day availability item s. Under
Regulation CC, depository institutions
are required to make funds available to
their customers for certain check
deposits at the opening of business on
the business day following the banking
day of deposit. Currently, the Reserve
Banks provide same-day credit for
deposits of separately sorted Treasury
checks, Postal money orders, and checks
drawn on Federal Reserve Banks that
are received by late afternoon deposit
deadlines, typically 4 p.m. local time.
Under the June 1989 proposal,
depository institutions would receive
credit for these checks after the close of
Fedwire on the day of deposit and the
funds would be available for
withdrawal at the opening of business
on the following business day. The
Reserve Banks’ current deposit
deadlines, however, can typically be
met only by institutions located close to
Federal Reserve offices. Most other
institutions must rely on couriers to
deliver their check deposits, and
couriers are generally scheduled to
arrive at Federal Reserve offices during
the night in time to meet commercial
check deposit deadlines. Thus, these
institution* would not have received
credit for “next day" availability items
until after the close of Fedwire the day

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Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices

following the business day of receipt by
the institution.
Although most customers withdraw
the proceeds of such deposits by check,
which would not affect an institution’s
intraday reserve/clearing account
balance until the check has cleared,
customers depositing large-value checks
typically use the funds for investment or
other payments, withdrawing the
proceeds by wire. In addition,
depository institutions that receive
large-value deposits frequenly invest
any excess funds overnight.
Under the Board’s proposal, the
Reserve Banks would establish a new
deposit deadline for separately sorted
deposits of Treasury checks, Postal
money orders, and Federal Reserve
Bank checks. This deposit deadline
would be set at a time that corresponds
to the commercial check deposit
deadlines that are used by the majority
of depositors in each check clearing
zone. Treasury checks, Postal money
orders, and Federal Reserve Bank
checks received by these new deposit
deadlines would be credited to
depositors’ accounts at the opening of
business on the morning following
deposit. For example, if the deposit
deadline were 12:01 a.m., institutions
depositing such checks would receive
credit for them at the opening of
business that day. The Reserve Banks
would continue to offer their late
afternoon deposit deadlines for sameday availability and would credit
depository institutions' accounts one
hour after the deposit deadline.7
The Reserve Banks are not able to
identify and segregate cashier's, teller’s
and certified checks nor state and local
government checks from the other
checks drawn on the payor institutions.
Moreover, even if the Reserve Banks
were able to segregate these checks, as
they can checks drawn on Federal
Home Loan Banks, the debit could not
necessarily be effected at the opening of
business because the checks generally
would not have been presented to the
payor institution by that time. The
proposal to post credits for commercial
check deposits on the availability day
using an intraday availability schedule
should provide early-in-the-day
availability for a large number of these
items and, thus, should alleviate some
concerns raised by commenters. It
should also be noted that Treasury
checks, Postal money orders, and checks
7 Paid savings bonds deposited under the EZClear program are processed in much the same way
as Treasury checks. The Board, therefore, proposes
that separately sorted deposits of paid savings
bondB, deposited under the EZ-Clear program,
should be treated in the same way that the Board
proposes to treat Treasury checks.

drawn on Federal Reserve Banks that
are included in deposits with
commercial checks would typically be
included in the credit posted at the first
check posting time, that is, at 11 a.m. ET.
ACH Transactions. More than 90
percent of the commenters opposed the
Board’s proposal to post commercial
ACH credit and debit transactions after
the close of Fedwire. Commenters were
particularly concerned about the
different treatment that would be
accorded commercial ACH credit
transactions and Treasury ACH credit
transactions, which would be posted at
the opening of business. Commenters
also indicated that the proposal would
have a detrimental effect on the growth
and acceptance of the ACH mechanism.
Further, several commenters noted that
the proposal contradicted the Federal
Reserve’s efforts to improve the ACH
mechanism by encouraging the
conversion to an all-electronic network.
These commenters reasoned that, if
funds would not be available for use
during the settlement day, there would
be little incentive for institutions to
incur the expense necessary to install
electronic connections in order to obtain
payment data early on the settlement
day. Over 85 percent of the commenters
suggested that all ACH credit and debit
transactions be posted at the opening of
business on the settlement day.
Because information concerning ACH
transactions is available to all receiving
institutions no later than 7 a.m. ET, it is
possible to post ACH transactions early
on the settlement day without creating
intraday float. Further, there are no legal
obstacles that would prevent the
Reserve Banks from charging originators
of credit transactions or receivers of
debit transactions during the settlement
day. Moreover, as in the case of the
check collection mechanism, the risks
faced by users of the ACH mechanism
are interday risks that cannot effectively
be controlled by delaying depository
institutions’ use of funds on the
settlement day.8
In developing the proposal that was
issued for public comment in 1989, the
Board w as concerned that charging
originators of ACH credit transactions
at the opening of business might
discourage use of the ACH, especially if
* In the case of ACH credit transactions, the
Reserve Banks are exposed to the risk that the
originating depository institution will not be able to
fund transactions on the settlement day that it
originated one or two days before that day. The
Reserve Banks have the right, however, to reverse
credits granted to receiving institutions if originating
institutions do not fund their payments.
In the case of ACH debit transactions, the
Reserve Banks are exposed to the risk created by
return items, which is comparable to the return
items risk faced In the check collection service.

fees were assessed for daylight
overdrafts. Based on the responses
received on the proposal, however, it
appears that continued use of the ACH
for credit transactions, such as payroll
and pension payments, would be
affected more by funds availability
issues than by the potential overdrafts
that might be created by charging
originators early on the settlement day.
Based on survey data for the four-week
period ending August 23,1989, modifying
the Board's original proposal to post all
ACH credit transactions (both debits to
originating institutions and credits to
receiving institutions) at the opening of
business would result in a slight
reduction in the total number of
institutions incurring daylight
overdrafts.
In the case of ACH debit transactions,
cash concentration debits account for
the majority of dollars collected. For the
most part, cash concentration
transactions are funded through check
deposits that become available on the
same day that the ACH debit
transactions settle. By posting ACH
debit transactions at 11 a.m. ET, funds
would be available on a timely basis for
investments and other payment
obligations.
Thus, the Board proposes that both
Treasury and commercial ACH credit
transactions be posted at the opening of
business on the settlement day. The
Board also proposes that ACH debit
transactions (credits to originating
institutions and debits to receiving
institutions) should be posted at the first
check posting time, i.e., 11 a.m. ET. ACH
return items and check truncation items
are processed during the day for sameday availability and are normally
delivered to receiving institutions in the
late afternoon at approximately 4 p.m.
ET. The Board proposes that these
transactions be posted at 5 p.m. ET.
N et settlem ent transactions. The
Reserve Banks provide net settlement
services to about 200 private clearing
arrangements.® The majority of net
settlement arrangements enable
members of local check clearinghouses
to settle the checks exchanged by
members through their reserve or
clearing accounts. Net settlement
services are also provided to members
of privately operated ACH networks,
automated teller machine and point-ofsale networks, and credit card
processing arrangements. In addition,
the Federal Reserve Bank of New York
* This discussion does not include clearing
arrangem ents that use Fedwire to complete
settlement, such as the Clearing House Interbank
Payments System and Participants Trust Company.

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices
provides net settlement service to
members of the New York Clearing
House Association that have agreed to
exchange maturing commercial paper.
Forty-six commenters discussed
issues related to the time at which net
settlement entries should be posted for
purposes of measuring daylight
overdrafts. The majority of commenters
indicated that net settlement entries for
check and commercial ACH net
settlement arrangements should be
posted at the same time that the Reserve
Banks post entries for the check and
ACH transactions they process. Several
commenters suggested that net
settlement entries be posted at a time
mutually agreed upon by the Federal
Reserve and members of the clearing
arrangement.
Nine commenters discussed the
proposal to post net settlement entries
for commercial paper transactions after
the close of Fedwire. These commenters
were particularly concerned about the
impact the proposal would have on the
commercial paper market. At least one
of these commenters questioned
whether the proposed Depository Trust
Company (“DTC”) book-entry
commercial paper clearing and
settlement system would significantly
reduce daylight overdrafts created by
commercial paper activity. This
commenter noted that only the highest
grades of commercial paper would be
eligible for DTC’s system. Some
commenters encouraged the Board to
post net credit entries at the opening of
business and net debit entries at the
close of business, while another group of
commenters proposed that both net
credit and net debit entries be posted
between 10:30 a.m. and 12 noon ET.
The Board agrees with the
commenters that net settlement entries
for check and ACH clearing
arrangements should, to the extent
possible, be posted at a time that would
permit the clearing group to provide
effective services. To post offsetting net
settlement entries at different times
during the day, as some commenters
suggested, would be inconsistent with
the fundamental characteristics of the
service and would create intraday float.
The Board believes that the most
equitable approach to addressing the
issues associated with the time at which
net settlement entries should be posted,
for purposes of measuring daylight
overdrafts, would be to permit the
members of each private-sector clearing
arrangement to determine the time at
which the net settlement entries for its
clearing arrangement would be posted.
The implement such a proposal, the
Reserve Banks would agree to accept

multiple settlement statements and
would post net settlement entries one
hour after the data were received from
the agent for the clearing arrangement.
Discount window loans. In the Board's
June 1989 proposal, both credit for
extensions of discount window loans
and debits for their repayment would be
posted after the close of Fedwire. The
Board believes that, in a pricing
environment, the discount rate.should
be made a true 24-hour rate by matching
the 24-hour maturity of a discount
window loan with that of a 24-hour
extension of credit in the federal funds
market. In response to the introduction
of daylight overdraft pricing by the
Federal Reserve, participants in the
federal funds market presumably would
begin to price 24-hour credit extensions
differently from overnight extensions. In
this event, the Board believes that the
24-hour federal funds rate would be
most relevant to the determination of
term funds and other money market
rates and, hence, of most interest in the
implementation of monetary policy. The
anchor to the federal funds rate stems in
part from the interaction of the System’s
intended level of adjustment plus
seasonal borrowing with the willingness
of institutions to tap the discount
window at the prevailing discount rate.
Hence, it would seem most appropriate
to link the level of borrowing to a 24hour federal funds rate by having the
maturities of discount window loans be
24 hours or multiples thereof.
Commenters on the proposal
suggested that some discount window
borrowers may need funds before the
close of business, but may not have
access to market sources of intraday
credit. The Board proposes that discount
window loans and repayments normally
be posted after the close of Fedwire. The
Board recognizes, however, that there
occasionally may be circumstances that
would justify permitting a depository
institution to use funds advanced
through the discount window during the
day on which the loan is granted.
Therefore, the Board proposes that, on
an exception basis, if a depository
institution does not have ready access
to money markets and has to make
unanticipated payments during the day,
the Reserve Bank may post the credit for
the discount window loan before the
close of business and post the
repayment 24 hours later.
Treasury' investm ents. Two
commenters indicated that the proposal
to post Treasury investments at 2 p.m.
local time would limit depositories'
investment options and may cause some
institutions to withdraw from the
program. Treasury direct investments

3105

are processed in two ways: In some
cases, depositories are advised of the
investment to be placed by the Treasury
on the day preceding the investment
date, and, in other cases, depositories
are not notified until the day the
investment is made. The Board proposes
that Treasury investments that are
known in advance be posted at the
opening of business on the investment
date, and that same-day Treasury
investments be posted at 2 p.m. local
time in order to provide the Reserve
Banks sufficient time to process the
transactions.
Currency and Coin Transactions. One
commenter indicated that the proposal
to post currency and coin deposits after
the close of Fedwire would cause the
commenter's institution to incur an
overdraft if it continued to invest funds
received for cash deposits as it does
today. Essentially, the issue raised by
this commenter is similar to the funds
availability issues that were raised by
commenters concerning check and ACH
transactions.
Unlike the intraday posting of check
transactions, the intraday posting of
currency and coin transactions could be
accomplished easily without creating
float. Further, as in the case of check
and ACH transactions, the risk faced by
the Reserve Banks in granting credit for
currency and coin deposits is not a risk
that can be controlled through an
intraday posting system. Rather, the risk
is associated with potential differences
in deposit amounts that can be
discovered only when deposits are
verified by means of piece counts, which
are generally performed several days
after deposits are received.
The.'e are some differences between
currency and coin deposits and check
and ACH transactions. The dollar value
of currency and coin deposits is
relatively smal compared with the dollar
value of check and ACH transaction. As
a result, the time at which currency and
coin transactions are posted is less
important to many depository
institutions than the time at which
checks and ACH transactions are
posted. Depository institutions do not
generally deposit currency and coin
daily, but rather deposits are made
approximately once a week. As a result,
posting currency and coin deposits
during the business day would not have
a significant effect on average
overdrafts.
While the benefits of posting currency
and coin deposits during the business
day on the day of deposit does not
appear to be significant in absolute
terms, several hundred institutions’
overdrafts could be measurably reduced

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Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices

if currency and coin deposits were
posted during the business day.
Additionally, granting credit for
currency and coin deposits during the
business day would substantially
address the concerns of the commenters,
especially smaller depository
institutions, about the equity of Federal
Reserve policies. The Board, therefore,
proposes to post credits for currency
and coin deposits on a flow basis on the
day of deposit. Credits would be posted
beginning at 11 a.m. ET and hourly
thereafter until all credits had been
posted.
Because the time at which currency
and coin shipments reach depository
institutions cannot be easily predicted,
the Board proposes that debits for
currency and coin shipments be posted
after the close of Fedwire on the day the
shipment is dispatched.
Letters o f C redit The Reserve Banks
act as fiscal agents for government
agencies in processing draw-downs for
certain government grants. The majority
of this activity is processed over
Fedwire and, as a result, credits are
posted to recipients’ accounts when the
funds transfers are processed. Some
government grants, however, are
processed manually by the Reserve
Banks.
In many cases, the payments
associated with these transactions are
very large amounts, which would
typically be invested on the day of
receipt. Depository institutions,
therefore, expect to have access to these
funds on the day of receipt. From the
Reserve Banks' perspective, there is no
credit risk associated with handling
these transactions because government
agencies are obligated to fund their
commitments and credits to recipients
are considered final. Because payments
associated with government grants are
considered final payments, the Board
proposes that manual letters of credit be
posted to depository institutions’
accounts during the business day. Under
the proposal, all letters of credit that
have been processed by 2 p.m. ET would
be posted by that time and all
transactions processed after that time
would be posted by 5 p.m. ET
State and local government series—
Treasury securities ( “SLGs"). SLGs
were not explicitly addressed in the
Board’s 1989 proposal. At least one
commenter, however, questioned
whether transactions in SLGs would be
posted at the same times as book-entry
securities transactions.
SLGs are nonmarke table securities
issued by the Treasury Department to
state and local governments. All records
of ownership are maintained on the
books of the Treasury Department SLGs

may not be transferred as a result of
sale or exchange nor may they be
assigned or pledged.
While SLGs are not issued frequently,
the dollar value of new issues tends to
be quite large. Payments for new issues,
therefore, have the potential to create
significant overdrafts in certain
depository institutions’ accounts. Under
Treasury Department procedures,
purchasers must pay for new issues of
SLGs either by means of a reserve
account debit or a federal funds check
by the close of business on the issue
day.
Because the securities cannot be
pledged, the collateralization policy that
was implemented on January 10,1991, to
reduce the risk the Reserve Banks face
in handling book-entry securities
activity could not be applied to SLGs.
On the other hand, because SLGs cannot
be sold or transferred, they do not
present the same risk to Reserve Banks
as do marketable government securities.
Presumably, if payment for a new issue
of SLGs had not been received by the
close of business on the issue day, the
Treasury could reverse the subscription.
In light of the limited risk faced by the
Reserve Banks and the Treasury
Department, the Board proposes to post
debits to the accounts of depository
institutions for new issues of SLGs after
the close of Fedwire on the issue date.
Interest and principal payments for
SLGs are made via the ACH, reserve
account credit, and Treasury check. In
the case of reserve account credits, the
Treasury informs the Reserve Banks of
payments to be made at least one
business day prior to the payment date.
Because payments are known in
advance, the Board proposes that
principal and interest payments for
SLGs be posted to depository
institutions’ accounts at the opening of
business on the interest payment and
redemption dates. Payments that are
made via the ACH would be posted at
the same time that other ACH credit
transactions are posted.
M easurem ent intervals. Currently, the
ex post monitoring system calculates
depository institutions* daylight
overdrafts based on shapshots of their
balances a t 15 minute intervals from 8:00
a.m. until 7:00 p.m. ET. The Board is
proposing modifications to the
measurement intervals for two reasons:
(1) The use of 15 minute snapshots of
depository institutions' intraday
balances does not accurately reflect
many institutions' actual use of Federal
Reserve credit, and {2) the time over
which daylight overdrafts are measured
is not consistent with Fedwire operating
hours.

If it is determined to assess fees for
daylight overdrafts, the accuracy of
daylight overdraft calculations will take
on added importance. The most accurate
method of calculating daylight
overdrafts would be to capture
depository institutions’ balances after
every transaction that affects their
balances. Because of the high volumes
of transactions initiated and received by
many institutions, this approach would
be very costly to implement. Shortening
the interval over which daylight
overdrafts are measured would also
improve the accuracy of the
calculations. Based on an analysis of
daylight overdraft patterns in several
Federal Reserve districts, the Board
proposes that depository insitutions*
daylight overdrafts be monitored based
on snapshots of depository institutions’
account balances at one minute
intervals.
Because the current ex post
monitoring system begins measuring
daylight overdrafts 30 minutes before
Fedwire opens and continues measuring
daylight overdrafts for 30 minutes after
Fedwire closes, it is possible for the
system to overstate or understate a
depository institution’s daily average
overdraft because negative or positive
balances during these periods would not
normally change. The Board believes
that this practice is inequitable. On the
other hand, Fedwire hours are extended
beyond the official closing time
periodically, Simulations of depository
institutions' Fedwire activity during the
extensions indicate that posting all
Fedwire transfers sent and received
during the extension at 6:30 pjn. ET
would not significantly change
depository institutions' average daylight
overdrafts. The Board proposes that
daylight overdrafts be measured over
the official Fedwire operating hours,
which are now 8:30 a.m. until 6:30 p.m.
ET.
Under the Board's June 1989 pricing
proposal, fees would be applied to each
institution’s daily average daylight
overdraft, after reducing that average by
a deductible. Based on the preceding
discussion, if the Board determines to
apply fees to daily average daylight
overdrafts, the Board proposes that
daily average daylight overdrafts be
calculated by totalling each depository
institution’s negative account balances
at the end of each minute and dividing
the sum of these negative balances by
the number of minutes in the official
Fedwire operating day. Under this
approach, only negative balances would
be included in the calculation; all
positive balances would be s e tlo zero

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices
Effect o f Proposal on D epository
Institutions. Any modification to the
current ex post monitoring system that
eliminates intraday float will increase
the level of daylight overdrafts and,
most likely, the number of depository
institutions incurring overdrafts, unless
those institutions modify their behavior.
Based on survey data for the four weeks
ending August 23,1989, under the
current measurement procedures,10
approximately 4,435 depository
institutions would have incurred a
daylight overdraft on at least one day,
and daily average total Fedwire funds
and book-entry overdrafts would have
amounted to $119.2 billion. Under the
June 1989 proposal, about 5,627
institutions would have incurred a
daylight overdraft on at least one day,
an increase of-nearly 1,200 institutions,
and total Fedwire daylight overdraft
would have amounted to $144.7 billion,
an increase of $25.5 billion. The Board's
1989 proposal tended to increase
overdrafts at depository institutions that
are net collecting institutions because
all non-wire credits would be posted
after the close of Fedwire. Thus, if these
institutions did not change their
behavior, their overdrafts would have
increased because they would have had
to use Federal Reserve credit to
continue to fund their payment activity.
The Board’s new proposal for
measuring daylight overdrafts would
provide intraday credit to collecting
institutions, but it would also charge
payor institutions during the business
day. Thus, a different group of
institutions, i.e., net payor institutions,
would be most affected by this proposal.
In the aggregate, 6,565 institutions would
have incurred a daylight overdraft on at
least one day during the survey period,
an increase of more than 2,000
institutions when compared with the
current measurement procedures.1* In
addition, daily average total Fedwire
overdrafts would have amounted to
about $152.0 billion, an increase of
about $33 billion over the current
measurement procedures.12
10 The current measurement procedures were
adjusted to reflect the changes adopted by the
Board to standardize the way that the Reserve
Banks post book-entry securities transactions.
11 The increase in the number of institutions
incurring daylight overdrafts under the new
proposal compared with the fune 1989 proposal is
partially due to the fact that more institutions
receive check presentments from the Reserve Banks
than use the Federal Reserve's check collection
services directly.
11 The Board believes that the increase in
overdraft level* and theMtumber of institutions
incurring overdrafts under the new proposal is
overstated due to limitations in the simulation that
allowed only a single time for posting check debits.
The Board believes a more accurate range for

A considerably larger number of
institutions would be subject to the
Board’s risk reduction policies under the
Board’s new proposal than are now.
About 5,000 13 of these institutions,
however, would incur relatively small
overdrafts, would quality for the new
exempt-from-filing status (see 55 FR
22092, May 31,1990), and, as a result of
the deductible, would be exempt from
pricing under the 1989 pricing proposal.
The daily average total overdrafts
incurred by these institutions amount to
only $2.0 billion, averaging about
$400,000 per institution. Moreover, the
Board believes that these simulated
results overstate the level of daylight
overdrafts that would result from
implementation of this proposal. Further,
institutions could reduce the potential
overdrafts that they might incur under
the proposal by delaying some non-time
critical funds transfers until check
credits are posted and by arranging to
fund check presentments before Federal
Reserve charges are posted. In the case
of funding check presentments, the
Large-Dollar Payments System Advisory
Group has stated that it would be easier
to require customers to fund check
presentments during the day than to
prevent customers from using funds
from check and ACH transactions on
the availability/settlement day. The
Board, therefore, believes that many of
these institutions could adjust their
practices to reduce or eliminate the
majority of overdrafts projected in the
simulations.
Clearly, the institutions most
negatively affected by the proposal are
the 447 that would exceed 100 percent of
their capacity. While this number is
greater than the number of institutions
that would have exceeded their caps
under the June 1989 proposal, the
number is overstated because (1) 111
institutions that currently have zero
caps are eligible for either a de m inim is
or a positive cap, (2) 129 institutions that
currently have positive caps would be
eligible for higher caps, and (3) many
institutions would not be charged for
checks until later times than were used
in performing the simulation upon which
this analysis is based.
The daily average total overdrafts of
all institutions that exceeded their caps
amounted to about $74 billion or 48
percent of daily average total overdrafts
during the survey period. Of this amount
overdrafts under the new measurement proposal is
$142 to $152 billion and the number of institutions
incurring an overdraft should be between 6,000 and
6,500.
13 Of the 5.133 institutions that would be exempt
from filing, over 100 are considered problem
institutions that would not be permitted to incur
daylight overdrafts.

3107

about $55.8 billion reflect overdrafts in
excess of cap. The majority of the
excess overdrafts, $49.2 billion, were
book-entry related overdrafts incurred
by securities clearing banks that must
be collateralized and are exempt from
cap constraints. Another $1.0 billion of
the overdrafts were due to book-entry
activity and could also be collateralized
and be exempted from cap constraints.
The remaining $5.6 billion in excess
overdrafts appear to be attributable to a
number of factors. The majority of these
excess overdrafts appear to be caused
by commercial paper net settlement
entries. In performing the simulations,
commercial paper net settlement entries
were posted at 11 a.m. ET. Thus,
institutions in net credit positions
received their credits later than they
currently do, and institutions in net
debit positions received their net debits
earlier. The Depository Trust Company’s
clearing and settlement 14 system
should reduce some of these overdrafts
because new issues of commercial paper
are netted against redemptions,
reducing, to some extent, the aggregate
amount of the current payment flows
associated with commercial paper
activity. Additionally, institutions in net
credit positions could delay payments
that are funded by the proceeds of
maturing commercial paper.
Alternatively, the New York Clearing
House participants could agree to a
different posting time that might result
in fewer overdrafts. The remaining
excess overdrafts are spread among a
relatively large number of institutions
and appear to be due largely to the
somewhat later posting time for checks
credits than would be the case under the
current ex post monitoring procedures
as well as posting check debits during
the business day. As noted previously,
the Board believes that depository
institutions could modify the timing of
certain funds transfers and could require
their customers to fund check
presentments earlier in the day than
they do now.
In summary, implementation of this
proposal would require depository
institutions to make adjustments, which
would be necessary under any proposal
that eliminates the intraday float that is
created by the current measurement
scheme. The Board believes that the
book-entry collateralization policy that
was implemented on January 10,1991,
will ease the adjustment. Under the
policy, any depository institution may
choose to collateralize its book-entry
14 The Depository Trust Company began pnasmg
in its book-entry commercial paper system in early
October 1990.

3108

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Notices

overdrafts and will be able to continue
to invest in government securities on
their own behalf or on behalf of their
customers without experiencing cap
constraints. In the case of other
payments funded by check deposits and
non-wire transactions, it appears that
institutions could delay many payments
until funds are made available without
significantly affecting payment flows.
Further, because cash managers
generally have fairly good information
about check presentments early in the
day, depository institutions could
require their customers to fund check
presentments before the time that the
Federal Reserve charge would posted.
Finally, it can be argued that it is more
equitable for payors to bear the burden
associated with the elimination of
intraday float because they are the
parties that are responsible for making
payments. If check payments were
converted to electronic payments,
payors would be required to have cover
for payments when they were made or
to pay any potential charges for
extensions of intraday credit.
The Board believes that depository
institutions could adjust their cash
management operations in order to
control the use of Federal Reserve
credit. The Board requests comment on
the costs depository institutions would
incur on (1) A one-time basis to modify
their operating systems and procedures
and (2) an ongoing basis to handle daily
payment activity.
Competitive Impact Analysis:
The Board recently formalized its
procedures for assessing the competitive
impact of changes that have a
substantial effect on payments system
participants.15 Under these procedures,
the Board will assess 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
due to differing legal powers or
constraints or due to a dominant market
position of the Federal Reserve deriving
from such legal differences.
The Board believes that portions of
the proposed daylight overdraft
measurement scheme, specifically the
posting scheme for check and ACH
transactions, may have a direct and
material adverse effect on the ability of
other service providers to compete
effectively with the Reserve Banks’
payments services. In the case of the
*• 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 11848, March 29,1990).

Reserve Banks’ check collection service,
the proposed check posting procedure
(and accompanying amendment to
Regulation J) will enable Reserve Banks
to obtain settlement in immediately
available funds for checks presented to
paying banks as early as one hour after
presentment. In turn, Reserve Banks
would be able to give credit for checks
they collect earlier in the day without
incurring intraday float. Private-sector
collecting banks ordinarily cannot
obtain settlement within a comparable
time or in a comparable form without
entering into an agreement with the
paying bank or paying presentment fees
or both.
In the case of the Federal Reserve's
ACH service, the availability of funds to
receivers of ACH credit transactions
would be slightly more favorable than
the terms of the national ACH net
settlement service offered by the
Reserve Banks to participants in privatesector ACH clearing arrangements. On
the other hand, institutions originating
ACH credit transactions through the
Reserve Banks would be charged earlier
that they would be under the terms of
the private-sector national ACH net
settlement service.
The Board believes that the proposed
posting procedures should be considered
within the context of the entire
payments system risk reduction program
and the Board’s anticipated proposal
regarding same-day settlement. The
anticipated same-day settlement
proposal would grant private collecting
banks rights to receive settlement from
paying banks that would be closer to the
rights the Reserve Banks have under
Regulation J and would mitigate the
adverse competitive effects of the
proposed check posting procedures. The
Board believes that the advantages of
the posting procedures in facilitating
any future daylight overdraft pricing
program and in enabling Reserve Banks
to accelerate availability of check
deposits outweigh the adverse effects of
those procedures.
Furthermore, many of the adverse
effects on the Federal Reserve’s
competitors in the check collection
system would be mitigated by the
benefits of the proposed overdraft
measurement scheme. For example,
under the proposed procedures,
depository institutions participating in
private clearinghouses would be able to
establish the time at which net
settlement entries for the checks
exchanged among participants would be
posted to reserve and clearing accounts.
Thus, the participants would be able to
control the time at which credits and
debits would be posted to their

accounts. Correspondent banks that
clear checks on behalf of respondents
would be able to make payments to
their respondents for any checks
collected through the Federal Reserve
on the settlement day without incurring
daylight overdrafts, provided that the
timing of payments to respondents
followed the receipt of credit from the
Federal Reserve.
The Board’s goal of achieving
accurate measurement of daylight
overdrafts without incurring intraday
float could be met by posting credits and
debits for check and commercial ACH
transactions after the close of business,
as originally proposed in June 1989. The
June 1989 proposal for overdraft
measurement would not have caused
the adverse competitive effects
described above. Many of the
commenters to the June 1989 proposal,
however, including the Large-Dollar
Payments System Advisory Group,
requested the check and ACH credits
and debits be posted earlier in the day
to allow intraday use of funds by
collecting banks. The Board requests
comment, in light of the other
modifications to the payments system
risk reduction program proposed today
and the anticipated same-day settlement
proposal, on whether the ability to use
check and ACH credits during the day
outweighs the negative competitive
effects of being charged for check and
ACH transactions intraday under the
proposed posting scheme.
By order of the Board of Governors of the
Federal Reserve System, January 22,1991.
William W. Wiles,
Secretary of the Board.
Appendix 1—Procedures for Measuring
Fedwire Daylight Overdrafts (1989
Proposal and Current)
1989 Proposal
Opening Balance (Previous day’s
closing balance).
Post at Opening of Business
+ U.S. Treasury and Government
Agency Book-Entry Interest and
Redemption Payments.
— U.S. Treasury Book-Entry Original
Issues.
+ U.S. Treasury ACH Credit
Transactions.
Post Throughout Business Day.
+ / — Fedwire Funds Transfers.
+ / — Fedwire Book-Entry Securities
Transfers.
Post at 2:00 p.m. (local time).
-f / — Treasury Investments (Direct and
Special Direct).
Post after close of Fedwire.

Federal Register / Vol. 56, No. 18 / Monday, Januaiy 28, 1991 / Notices
+ / — All Other Non-Wire Transactions,
Including Commercial ACH and
Check Transactions
Equals
Closing Balance.
Current
Opening balance (Previous day’s
closing balance).
Post at Opening of Business
+ / — U.S. Treasury and Commercial
ACH Transactions.
+ Net credits (if any) from All Other
(Non-Wire) Transactions
Post Throughout Business Day
+ / — Fedwire Funds Transfer.
+ / — Fedwire Book-Entry Securities
Transfers.
Post after close of Fedwire
— Net Debits (if any) from All Other
(Non-Wire) Transactions
Equals
Closing Balance.
Appendix 2—Modified Proposal For
Measuring Daylight Overdrafts
Opening Balance (Previous Day's
Closing Balance).
Post at Opening of Business.
+ / — Government and Commercial
ACH Credit Transactions.
+ Advance Notice Treasury
Investments.
+ Treasury State and Local
Government Series (SLGs) Interest
and Redemption Payments.
+ Treasury Checks, Postal Money
Orders, Federal Reserve Bank Checks,
and EZ-Clear Savings Bond
Redemptions Deposited the Previous
Night.
Post Throughout Business Day
+ / — Fedwire Funds Transfers.
+ / — Fedwire Book-Entry Securities
Transfers.
+ / — Net Settlement Entries.1
Post at 9:15 a.m. Eastern Time
— Original Issues of Treasury
Securities.*
+ U.S. Treasury, Government Agency
Interest and Redemption Payments.
Post at 11 a.m. Eastern Time
+ 1 — ACH Debit Transactions.
Post at 11 a.m. Eastern Time and
Hourly Thereafter:
+ / — Commercial Check Transactions,
Including Return Items
+ Currency and Coin Deposits.
Post at 2 p.m. Eastern Time
+ Processed Manual Letters of Credit.8
1 Net settlement entries would be posted one hour
after settlement date were received by the Reserve
Bank.
2 Original issues of Government agency securities
are delivered as book-entry securities transfers and
would be posted when the securities are delivered
to the purchasing institutions.
3 Letters of credit transactions are draw-downs of
government grants.

Post at 2 p.m. Local Time
+ Same-Day Treasury Investments.
Post One Hour After Deposit Deadline
4-5 p.m. Local Time)
+ Same-Day Treasury Checks, Postal
Money Orders, Federal Reserve Bank
Checks, and EZ-Clear Savings Bond
Redemptions.
Post at 5 p.m. Eastern Time
+ Processed Manual Letters of Credit.4
+ / — Same-Day ACH Transactions.®
Post After the Close of Fedwire
+ / — All Other Non-Wire Transactions
(such as Noncash Items, Government
Coupons, TT&L Calls, Subscription for
SLGs, Discount Window Loans and
Repayments,® and Currency and Coin
Shipments).
Equals.
Closing Balance.
[FR Doc. 91-1904 Filed 1-25-91; 8:45 am)
BILLING CODE (210-01-M

3109

3047

Proposed Rules

Federal Register

Vol. 56. No. 18
Monday, January 28, 1991

This section of the FEDERAL REGISTER
contains notices to the public of the
proposed issuance of rules and
regulations. The purpose of these notices
is to give interested persons an
opportunity to participate in the rule
making prior to the adoption of the final
rules.

FEDERAL RESERVE SYSTEM
12 CFR Part 210
[R eg u la tio n J; D o c k e t N o. R -0 7 2 2 ]

Collection of C hecks and O ther Items
by Federal R eserve Banks and Funds
Transfers Through Fedwire
AGENCY: Board of Governors of the
Federal Reserve System.
a c t i o n : Proposed rule.

The Board is requesting
comment on a proposed amendment to
its Regulation J (12 CFR part 210),
Collection of Checks and Other Items by
Federal Reserve Banks and Funds
Transfers through Fedwire. The
proposed rule would require paying
banks that receive presentment of
checks from a Federal Reserve Bank to
make the proceeds of settlement for
those checks available to the Reserve
Bank by as early as one hour after
receipt of the checks. This amendment
to Regulation J would be necessary to
implement the proposed method for
posting debits and credits to banks’
reserve accounts in order to measure
daylight overdrafts accurately under the
Board’s Payments System Risk
Reduction Program, as proposed in
Docket No. R-0721, elsewhere in today’s
Federal Register.
OATES: Comments must be submitted on
or before May 31,1991.
ADDRESSES: Comments, which should
refer to Docket No. R-0722, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551,
attention: Mr. William W. Wiles,
Secretary: or may be delivered to room
B-2223 between 9 a.m. and 5 p.m. All
comments received at the above address
will be included in the public file and
may be inspected at room B-1122
between 9 a.m. and 5 p.m.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Oliver I. Ireland, Associate General
Counsel (202/452-3625), Stephanie
Martin, Attorney (202/452-3198), Legal

Division; or Louise L. Roseman,
Assistant Director, Division of Reserve
Bank Operations and Payment Systems
(202/452-3874); for the hearing impaired
only: Telecommunications Device for
the Deaf, Dorothea Thompson (202/4523544).
SUPPLEMENTARY INFORMATION: In )une
1989, the Board issued for comment
proposed modifications to the Federal
Reserve’s payments system risk
reduction program (54 FR 26090, June 21,
1989). As part of the proposed program,
Federal Reserve Banks would charge
banks 1 for intraday overdrafts. To
establish a framework for implementing
overdraft pricing and to establish the
time of day at which non-wire
transactions, such as check payments,
give rise to a right to receive funds or a
duty to settle for the payments, the
Board proposed a posting scheme
whereby credits and debits associated
with various transactions would be
posted to accounts at specific times
during the day. In developing this
posting scheme, the Board w as guided
by certain policy objectives: To
eliminate intraday Federal Reserve float
(i.e., to post debits and credits
associated with the same transaction at
the same time), to develop a posting
scheme that would allow banks to
control their use of Federal Reserve
credit effectively, and to reflect the legal
rights associated with each transaction.
Under the June 1989 proposal, Fedwire
funds transfers and book-entry
securities transfers would be posted as
they occur, certain U.S. Treasury
transactions would be posted during the
day, and all other non-wire transactions,
including check debits and credits,
would be posted after the close of
Fedwire. The proposed posting scheme'
for checks differed from the current ex
p o st method for measuring overdrafts
under the risk program. Under the
current rule, if a bank has a net credit
for all non-wire transactions (other than
ACH) for the day, it is posted as of the
opening of business, and if the
institution has a net debit, it is posted at
the end of the day.

Many of the commenters on the risk
reduction proposals requested that the
Board revise the proposed posting
scheme so that banks could use check
credits earlier in the day without risking
a charge for incurring a daylight
overdraft. For example, the Board’s
Large-Dollar Payments System Advisory
Group 2 suggested that check debits and
credits be posted between 10:30 and
11:30 a.m. Eastern Time (ET) and that
appropriate amendments be made to the
Board's Regulation J to accommodate an
earlier posting time. According to these
commenters, making check credits
available earlier in the day would
increase their investment opportunities
and therefore the yield on the proceeds
of check deposits.
The Board has requested comment
today on a new proposal under which
reserve and clearing accounts would be
debited and credited for check
transactions earlier in the day than the
time proposed by the Board in 1989 (see
Docket No. R-0721, elsewhere in today’s
Federal Register). Under the proposal, a
paying bank’s account would be debited
on the hour, based on the value of
checks that had been presented to the
paying bank an hour earlier, beginning
at 11 a.m. e.t. A collecting bank’s
account would be credited according to
a fractional intraday availability
schedule, beginning at 11 a.m. e.t., based
on the Reserve Banks’ ability to present
the checks to paying banks. Adoption of
this proposal would require an
amendment to Regulation J to allow
Reserve Banks to debit reserve and
clearing accounts earlier in the day for
presented checks.
Current Law
Subpart A of Regulation J governs the
collection of checks by Federal Reserve
Banks and applies to “all parties
interested in an item handled by any
Reserve Bank." Subpart A of Regulation
J provides for deferred posting of
checks, i.e., that a paying bank can wait
until the day after presentment of a
check to decide whether to pay the
check if it settles for the check on the
day of presentment.8 Deferred posting

1 Under Regulation J, bank includes all depository
institutions, including commercial banks, savings
and loan associations, and credit unions. Regulation
] defines paying bank as the bank by, at, or through
* The Advisory Group, made up of private-sector
which an item is payable or collectible and to which
payments system specialists, w as formed by the
it is sent for paym ent or collection or the bank
Board in 1985 to assist in the development of the
whose routing num ber appears on the item and to
Board’s payments system risk reduction program.
which it is sent for payment or collection. (12 CFR
•1 2 CFR 2103(b).
210.2 (b) and (j)).

3048

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Proposed Rules

allows banks more time to process
checks internally than they would have
if the checks were presented over the
counter for immediate payment in cash
and is essential to the methods currently
used by paying banks in determining
whether to pay checks.
Section 210.9(a)(1) of Regulation}
provides that a paying bank becomes
accountable for a check presented by a
Reserve Bank at the close of the paying
bank's banking day on which it receives
the check, unless it returns the check or
settles with the Reserve Bank for the
check by a debit to an account on the
books of the Reserve Bank, by cash, or
by another form of payment agreed to
by the Reserve Bank. Section
210.99(a)(2) of Regulation) specifies that
“the proceeds of any payment shall be
available to the Reserve Bank by the
close of the Reserve Bank's banking day
on the banking day of receipt of the item
by the paying bank." Under these two
provisions, it appears that a paying bank
must settle for a check presented to it by
a Federal Reserve Bank by the earlier of
the close of its banking day or the close
of the Reserve Bank’s banking day. As a
practical matter, in many cases this time
is likely to be mid-afternoon, when the
paying bank closes its lobby.
Although the Uniform Commercial
Code (“UCC”), as currently adopted by
the states, also provides for deferred
posting of checks, the time by which
settlement must be made by paying
banks under the UCC differs from the
time for paying banks to settle for
checks presented to them under the
provisions of Regulation J. Section 4-302
of the UCC provides that a paying bank
becomes accountable for a check unless
it settles for or returns the check before
midnight on the banking day it receives
the check. USS § 4-301 provides that if a
paying bank settles for a check by
midnight on the banking day of receipt,
it may revoke that settlement if it
returns the checks or sends notice in lieu
of return by midnight of the banking day
following the banking day of receip t4
Thus, Regulation J requires the paying
bank to settle for a check presented by a
Reserve Bank at an earlier time (the
d o se of the paying bank’s or the
Reserve Bank's banking day) than does
the UCC (midnight on the banking day
of receipt * if it wishes to retain the right
4 See also 55 4-301 and 4-302 of the 1990 Official
Text of the UCC as approved by the National
Conference of Commissioners on Uniform State
Law* a a d the Am erican Law Institute.
• JUsguiation } also limits the w a n s o f settlemejrt
that e paying bank may use to meet this obhgeiion.

to return the check on the next banking
day.®
Reserve Banks may enter into
agreements with paying banks to alter
this time of payment, and the Board has
the ability to make further changes
regarding the collection of checks under
the authority of the Federal Reserve Act
("FRA”). Section 16(14) of the FRA
authorizes the Board to adopt
regulations concerning the transfer of
funds among Reserve Banks and to
require Reserve Banks to act as clearing
houses for other Reserve Banks and for
depository institutions. Section 13 of the
FRA authorizes Reserve Banks to
engage in check collection on behalf of
member banks and non-member
depository institutions, and section 11
grants the Board general supervisory
and rule-making authority over Reserv e
Bank activities.
Proposed Regulation J Amendment to
Implement Check Posting Scheme
The Board is requesting commcnt on a
proposed amendment to Regulation J
that would revise 5 210.9(a)(2)' to require
a paying bank to settle for or return
checks presented by a Reserve Bank in
immediately available funds by the end
of the clock hour after the hour during
which presentment takes place,7 or one
hour after the scheduled opening of
Fedwire, whichever, is later, or by such
later time as is provided in the Reserve
Bank’s operating circular. The proposed
amendment provides that if the
proceeds of the settlement are not
available within the designated time
frame, unless the check is returned, the
paying bank would be subject to any
applicable overdraft charges.
Under proposed $ 210.9(a)(1), as long
as either the proceeds of the settlement
are available to the Reserve Bank by the
close of Fedwire on the day the paying
bank received the check or the paying
bank returns the check before the close
of its banking day, the paying bank
would no be accountable for the check
and would be able to exercise deferred
posting. (The Board is also proposing a
* The Board's authority to set the time and form
of settlement for checks presented by Federal
Reserve Bank has been upheld by the coarts on two
occasions. See Community Bank v. Federal Reserre
Bank o f Son Francisco, 500 F.2d 282 (9th Cir. 1874J,
and Independent Banks Association c f America v.

Board o f Governors o f the Federal Reserve System.
500 F.2d 812 p .C . Cir. 1974).
7 For example, checks presented at 12:30 p.m. e.t.
must be settled for by 2 p.m. e.1 Generally, paying
banks authorize Reserve Banks, through an
autochuge agreement, to debit their reserve or
clearing accounts for the amount o f checks
presented. This authorization n a y constitute
settlement for the checks even if the Reserve Bank
does not peat the charge to the paying bank’s
a c o o u t until after the time at which the settlem ent
obligation arises.

technical revision to the definition of
"banking day” to correspond to the
definition in UCC § 4-104(l)(c).) 8
Under the proposal, if the Reserve
Bank is closed on the day the paying
bank receives presentment of a check,
the paying bank will become subject to
any applicable overdraft charges unless
it either returns the check by midnight
on the day of presentment or settles for
the check in immediately available
funds by one hour after the scheduled
opening of Fedwire on the Reserve
Bank’s next banking day or by such
later time as is provided in the Reserve
Bank’s operating circular. In addition, if
the Reserve Bank is closed on the day
the paying bank receives presentment of
a check, the paying bank will become
accountable for the check unless it
returns the check by midnight or settles
for the check in immediately available
funds by the close of Fedwire on the
Reserve Bank's next banking day.
If the paying bank voluntarily closes,
either for the entire day or before it
receives its check presentment from the
Reserve Bank, on a day the Reserve
Bank is open, the paying bank must
either (1) return or settle for checks
presented by the end of the next clock
hour after the hour during which the
checks would ordinarily be received by
the paying bank, or one hour after the
scheduled opening of Fedwire,
whichever is later, or by such later time
as is provided in the Reserve Bank's
operating circular, or (2) settle by one
hour after the scheduled opening of
Fedwire on the next day on which both
the paying bank and the Reserve Bank
are open, or by such later time as is
provided in the Reserve Bank's
operating circular, and compensate the
Reserve Bank for the flo at Failure to
settle by these times could result in the
imposition of overdraft charges.®
• The citation to the 1990 Official Text is 5 4104(a)(3).
• The Board’s proposed policy for institutions
without discount window access, specifically
bankers' banks that do not hold reserves. Edge
corporations, and institutions with imposed zero
caps, would provide that these institutions may not
incur overdrafts. Under the proposal, issued for
comment in May 1990, in the event one of these
institution* incurred an overdraft, the Reserve Bank
would charge it an amount equal to the overnight
overdraft penalty fee (currently the federal funds
rate plus 2 percent) levied against the maximum
daylight overdraft level, in the event A e overdraft is
not folly repaid by the end of the day, the Board
proposed that the institution would be charged an
additional amount equal to the overnight overdraft
penalty fee and would be required to hold excess
balances in its reserve/clearing account on
subsequent days to make ap for the shortfall. If tfce
May 1990 proposal’s overdraft provisions are
adopted by the Board, certain bankers’ banks. Edge
corporations, and itnposed-zero-cap institutions
Cwttwaed

Federal Register / VoL 56, No. 18 / Monday. January 28. 1991 / Proposed Rales
Generally, all checks bow presented
by the Federal Reserve for same-day
settlement are received by the paying
bank by 2 p jn . local time. Although the
UCC and Regulation ] generally provide
an opportunity for the paying bank to
examine the checks to decide whether to
settle for or return them by the close of
business, this time period permits only
limited verification of cash letters. For
example, a paying bank could verify
that a cash letter had been received, but
could not examine individual checks
prior to settling for the cash letter. This
limited verification, however, is
consistent with the theory and practice
of deferred posting of checks under the
UCC. Paying banks generally do not
examine checks individually until after
the do se of business on the day of
presentment or during the following day.
Under the proposed Regulation J
amendment, paying banks will continue
to have at least one hour to verify the
receipt of a cash letter before settling for
it or to return the cash letter and avoid
having to settle for it.
In addition, earlier debiting of reserve
and clearing accounts for presented
checks will benefit collecting banks and
their customers by enabling the Federal
Reserve to credit their accounts for
cheeks earlier in the day without
incurring intraday flo at This earlier
availability will facilitate the prompt
investment of cheek deposits, as
suggested by the commenters to the
Board’s June 1989 proposal, and is
consistent with the purposes of the
Expedited Funds Availability Act.
Section 609(b)(1) of the Expedited
Funds Availability Act provides that the
Board shall consider requiring by
regulation that banks be charged based
upon notification that a check or similar
instrument will be presented for
payment. The Board may consider this
option in the future but believes that, at
this time, it is appropriate to require
settlement only after physical
presentment.
Proposed Amendment to Subpart B of
Regulation J to Implement Pricing
In order to accommodate the
possibility of pricing of overdrafts, the
Board is also proposing an amendment
to subpart B of Regulation J, Wire
Transfers of Funds. Under the proposed
amendment, an account at a Federal
Reserve Bank would be subject
explicitly to any applicable overdraft
charges resulting from funds transfers.
would be expected to pre-fund all account debits far
presented checks. If a debit for checks created an
overdraft for one of these institutions, the institution
would b e cbaiged w hatever penalty fee the Board
ultimately adopts.

Initial Regulatory Flexibility Analysis
The Regalatory Flexibility Act (5
U.S.C. 601-612) requires an agency to
publish an initial regulatory flexibility
analysis with any notice of proposed
rulemaking. Two of the requirements of
an initial regulatory flexibility analysis
(5 U.S.C. 603(b)), a description of the
reasons why action by the agency is
being considered and a statement of the
objectives of, and legal basis for, the
proposed rale, are contained in the
supplementary material above. The
proposed rules require no additional
reporting or recordkeeping
requirements, nor are there any other
relevant federal rules that duplicate,
overlap, or conflict with the proposed
rule.
Another requirement for the initial
regulatory flexibility analysis is a
description of and, where feasible, an
estimate of the number of small entities
to which the proposed rule will apply.
The proposal will apply to all banks that
receive presentment of checks from
Federal Reserve Banks, regardless of
size. Should the Board implement
pricing of daylight overdrafts and allow
a perceirt-of-capital deductible, the
small overdrafts incurred by many small
banks would be covered by the
deductible and exempt from pricing.
Thus, the Board does not believe that
small banks that incur small overdrafts
would b ear a significant burden under
the proposed amendments to Regulation
I-

Competitive Impact Analysis
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 will assess 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
due to differing legal powers or
constraints or due to a dominant market
position of the Federal Reserve deriving
from such legal differences.
The Board believes that, when
considered alone, the proposed
amendment to Regulation J may have a
direct and material adverse effect on the
ability of other service providers to
compete effectively with the Reserve
Banks' payment services. The proposed
amendment will enable Reserve Banks
to obtain settlement in immediately
10 These procedure* ace described n the Boaid's
policy statem ent "The Fedw al Reserve in the
PaymenSs System," which w as revised in March
1990. (55 FR 11648, March 29,1990).

3849

available funds for checks presented to
'paying banks as early as one hour after
presentm ent in turn. Reserve Banks
would be able to give credit for checks
they collect earlier in the day without
incurring intraday float. Private-sector
collecting banks ordinarily can not
obtain settlement within a comparable
time or in a comparable form without
entering into an agreement with the
paying bank or paying presentment fees
cw both.
The Board believes, however, that
when the proposed Regulation J
amendment is considered within the
context of the proposed payments
system risk reduction program
modifications (see Docket No. R-0721,
elsewhere in today’s Federal Register)
and the Board’s anticipated proposal
regarding same-day settlement for
private-sector collecting banks, the
benefits of the Regulation J amendment
in facilitating the payments system risk
reduction program and enabling Reserve
Banks to accelerate availability of check
deposits outweigh the adverse effects.
Many of the advance effects on the
Federal Reserve's competitors in the
check collection system would be
mitigated by the benefits of the
proposed overdraft measurement
scheme. For example, under the
proposed overdraft measurement
scheme, depository institutions
participating in private clearinghouses
would be able to establish Are time at
which net settlement entries for the
checks exchanged among participants
would be posted to reserve and clearing
accounts. Thus, the participants would
be able to control the time at which
credits and debits would be posted to
their accounts. Correspondent banks
that clear checks on behalf of
respondents would be able to make
payments to their respondents for any
checks collected through the Federal
Reserve on the settlement day without
incurring daylight overdrafts, provided
that the timing of payments to
responents followed the receipt of credit
from the Federal Reserve.
The Board expects to request
comment in the near future on a sameday settlement proposal that would
grant private collecting banks rights to
receive settlement from paying banks
that would be closer to the rights the
Reserve Banks have under Regulation ].
The same-day settlement proposal
would further mitigate any adverse
competitive effects caused by the
proposed Regulation J amendment.
The Board’s goal of achieving
accurate measurement of dayhght
overdrafts without incurring intraday
float could be met by posting credits and

3050

Federal Register / Vol. 56, No. 18 / Monday, January 28, 1991 / Proposed Rules

debits for checks presented by Reserve
Banks after the close of business, as
originally proposed in June 1989. The
Board’s June 1989 proposal for overdraft
measurement would not have required
an amendment to Regulation J and
therefore would not have caused the
adverse competitive effects described
above. Many of the commenters to the
June 1989 proposal, however, including
the Board’s Large-Dollar Payments
System Advisory Group, requested that
check credits and debits be posted
earlier in the day to allow intraday use
of funds by collecting banks. The Board
requests comment, in light of the other
modifications to the payments system,
risk reduction program proposed today
and the anticipated same-day settlement
proposal, on whether the ability to use
check credits during the day outweighs
the negative effects of being charged for
checks intraday under the proposed
Regulation J amendment.
List of Subjects in 12 CFR Part 210
Banks, Banking, Federal Reserve
System.
For the reasons set out in the
preamble, 12 CFR part 210 is proposed
to be amended as follows:
PART 210—REGULATION J
(COLLECTION OF CHECKS AND
OTHER ITEMS BY FEDERAL RESERVE
BANKS AND FUNDS TRANSFERS
THROUGH FEDWIRE)
1. The authority citation for part 210
continues to read as follows:
Authority: Federal Reserve Act, sec. 13 (12
U.S.C. 342), sec. 11 (i) and (j) (12 U.S.C. 248 (i)
and (j)), sec. 16 (12 U.S.C. 248(o) and 360), and
sec. 19(f) (12 U.S.C. 464); and the Expedited
Funds Availability Act (12 U.S.C. 4001 et seq.)

2. Section 210.2 is amended by
revising paragraph (d) and adding a new
paragraph (n) to read as follows:
§ 2 1 0 .2

*

D efin itio n s.

* * * *
(d) "Banking day” means the part of a
day on which a bank is open to the
public for carrying on substantially all of
its banking functions.
* * * * *
(n) "Fedwire” has the same meaning
as that set forth in § 229.26(e) of this
part.
* * * * *
3. Section 210.9 is amended by
revising paragraph (a) to read as
follows:
S e ttle m e n t a n d Payment.
(a) Cash item s. (1) A paying bank
becomes accountable for the amount of
a cash item received directly or
indirectly from a Reserve Bank as of the
§ 2 1 0.9

close of the paying bank's banking day
on which it receives 2 the cash item if it
retains the cash item after the close of
that banking day, unless it settles for the
cash item by:
(1) Debit to an account on the Reserve
Bank's, books;
(ii) Cash; or
(iii) In the discretion of the Reserve
Bank, any other form of settlement;
so that the proceeds of the settlement
are available to the Reserve Bank by the
close of Fedwire on the day the paying
bank receives the item.
(2) A paying bank shall settle with a
Reserve Bank for the amount of a cash
item received directly or indirectly from
the Reserve Bank so that the proceeds of
the settlement are available to the
Reserve Bank by the end of the next
clock hour after the hour during which
the paying bank receives the cash item,
or one hour after the scheduled opening
of Fedwire, whichever is later, or by
such later time as is provided in the
Reserve Bank’s operating circular,
unless the paying bank returns the cash
item prior to the time for settlement
specified by this paragraph (a)(2). If the
item is not returned and the proceeds of
any settlement are not available to the
Reserve Bank as required by this
paragraph (a)(2), the paying bank will be
subject to any applicable overdraft
charges.
(3)(i) If a paying bank receives a cash
item directly or indirectly from a
Reserve Bank on a banking day that is
not a banking day for the Reserve Bank:
(A) The paying bank will be subject to
any applicable overdraft charges unless
it returns the cash item by midnight of
the banking day of receipt, or settles for
the cash item so that the proceeds of the
settlement are available to the Reserve
Bank by one hour after the scheduled
opening of Fedwire on the Reserve
Bank's next banking day, or by such
later time as is provided in the Reserve
Bank’s operating circular; and
(B) The paying bank becomes
accountable for the cash item unles it
returns the item by midnight of the
banking day of receipt, or settles for the
cash item so that the proceeds of the
settlement are available to the Reserve
Bank by the close of Fedwire on the
Reserve Bank’s next banking day.
(ii) If a paying bank closes voluntarily
on a day that is a banking day for a
Reserve Bank, and the Reserve Bank
makes a cash item available to the
2 A paying bank is deemed to receive a cash item
on its next banking day if it receives the item:
(1) On a day other than a banking day for it; or
(2) On a banking day for it, but after a “cut-off
hour” established by it in accordance with state
law.

paying bank on that day, the paying
bank will be subject to any applicable
overdraft fees, unless it:
(A) Settles for the cash item, so that
the proceeds of the settlement are
available to the Reserve Bank by the
end of the next clock hour after the hour
during which the paying bank ordinarily
would have received the items, or one
hour after the scheduled opening of
Fedwire, whichever is later, or by such
later time as is provided in the Reserve
Bank’s operating circular;
(B) Settles for the cash item on the
next day that is a banking day for both
the paying bank and the Reserve Bank,
so that the proceeds of the settlement
are available to the Reserve Bank by
one hour after the scheduled opening of
Fedwire on that day, or by such later
time as is provided in the Reserve
Bank’s operating circular, and
compensates the Reserve Bank for the
value of the float associated with the
items in accordance with procedures
provided in the Reserve Bank’s
operating circular; or
(C) Returns the cash item by the time
designated in paragraph (a)(3)(ii)(A) of
this section.
If a paying bank closes voluntarily on a
day that is a banking day for a Reserve
Bank, and the Reserve Bank makes a
cash item available to the paying bank
on that day, the paying bank is not
considered to have received the item
until its next banking day.
* * * * *
3.
Section 210.28 is amended by
adding a new paragraph (b)(5) to read as
follows:
§ 210 .2 8

A g ree m en t o f se n d e r .

*

*

*

*

*

(b) * * *
(5) If a sender, other than a
government sender described in
§ 210.25(d) of this subpart, incurs an
overdraft in its account as a result of a
debit to the account by a Federal
Reserve Bank under paragraph (a) of
this section, the account will be subject
to any applicable overdraft charges,
regardless of whether the overdraft has
become due and payable. A Federal
Reserve Bank may debit a sender's
account under paragraph (a) of this
section immediately on acceptance of
the payment order.
* * * * *
By order of the Board of G overnors of the
Federal Reserve System, January 22,1991.
W illiam W . W iles,

Secretary o f the Board.
[FR Doc. 91-1902 Filed 1-25-91; 8:45 am]
BILLING CODE 6210-01 -M