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Federal R eserve Bank
OF DALLAS
T O N Y J . S A L V A G G IO
F IR S T V IC E P R E S ID E N T
October 28, 1992
DALLAS. TEXAS 75222
Notice 92-103
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Revisions to the Payments System
Risk Reduction Program
DETAILS
The Federal Reserve Board has issued revisions to
its payments
system risk reduction program. The Board made the changes after receiving
comment on two separate occasions over the last three years.
One key provision of the revised program is the adoption of a fee
for daylight overdrafts that occur in the reserve and clearing accounts of
depository institutions. Another key aspect revises the procedures used to
measure the amount of overdrafts in reserve and clearing accounts during the
day.
Under an amendment to the Bo a r d ’s Regulation J, a paying bank will
be required to settle for checks as early as one hour after
presentment of
those checks from a Federal Reserve Bank. This change is needed to implement
procedures for posting check debits and credits to reserve and clearing
accounts of depository institutions to measure daylight overdrafts more
accurately. This provision as well as the modified measurement procedures go
into effect on October 14, 1993.
A fee of 25 basis points at an annual rate, phased in over a twoyear period, will be assessed against the average daily total daylight
overdraft of a depository. Fees of $25 or less per two-week period will be
waived to reduce administrative burden on affected institutions. The first
phase of overdraft pricing--10 basis points at an annual rate for the current
10-hour Fedwire operating day— will go into effect on April 14, 1994. The fee
will rise to 20 basis points one year later and to 25 basis points a year
after that.
The Board estimated that, when fully phased in, fewer than 300
institutions will be subject to actual payment of the fee under current
conditions.
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 -
ATTACHMENTS
A copy of the B o a r d ’s notices as they appear on pages 47084-104 and
46950-56, Vol. 57, No. 199, of the Federal Register dated October 14, 1992, is
attached.
MORE INFORMATION
For more information, please contact the DFI Monitoring Division at
(214) 922-5584 or 922-5585. If you have any questions concerning the amend
ment to Regulation J, please contact Robert Whitman, (214) 922-6602, 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 B a n k ’s notice, please contact the
Public Affairs Department at (214) 922-5254.
Sincerely,
REVISIONS TO THE PAYMENTS
SYSTEM RISK REDUCTION
PROGRAM
(DOCKETS R-0668 AND R-0721)
47064
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
; Docfccft Mo. R-cOS66j
Modification of the Payments System
Risk Reduction Program; Daylight
Overdraft Pricing
a g e n c y : Board o f Governors of t i e
Federal Reserve System.
a c t io n : Policy s ta te m e n t.
Federal Register // Vol. .57, No. 199 / W ednesday, October T4. 1992 / Notices
47085
would not change the effective fee
because the fee is applied to average
overdrafts which, in turn, would be
deflated by the change in the operating
day. After evaluating the market's
response to pricing, the Board may slow
or accelerate the phase-in, cease the
phase-in at a level below 60 basis
points, or increase the fee above 60
basis points at the end of the phase-in or
at a later date.
The fee will apply to combined funds
and book-entry securities intraday
overdrafts in accounts at the Federal
Reserve. The average daily overdraft
will be calculated by dividing the sum of
the negative reserve or clearing account
balances at the end of each minute of
the scheduled Fedwire operating day
(with credit balances set to zero) by the
total number of minutes in the scheduled
Fedwire operating day.
FOR FURTHER INFORMATION CONTACT:
Summary of Pricing Policy
The Board has provided for a de
Edward C. Ettin, Deputy Director,
minimis level of free overdrafts by
The Board is adopting a new
Division of Research and Statistics (202/ component to its payments system risk
incorporating a deductible into its
452-3368); Florence M. Young, Assistant reduction program, under which Reserve pricing policy. The deductible is an
Director (202/452-3955), Division of
amount equal to 10 percent of qualifying
Banks will charge a fee (adjusted for
Reserve Bank Operations and Payment
capital, i.e., that capital used by the
any future changes in scheduled
Systems; Oliver I. Ireland, Associate
institution in calculating its net debit
Fedwire operating hours, as explained
General Counsel (202/452-3625) or
cap (see the Board’s comprehensive
below) for average daily intraday
Stephanie Martin, Senior Attorney ;(202/ (“daylight”) overdrafts in reserve and
policy statement, 57 FR 40455,
452-3198), Legal Division; for the hearing clearing accounts.'Reserve Banks will
September 3,1992). The gross fee for
impaired only: Telecommunications
daylight overdrafts will be reduced by
deduct from the gross fee an amount
Device for the Deaf, Dorothea
the amount of the deductible, valued at
equal to 10 percent of qualifying capital
Thompson (202/452-3544).
valued at the fee fo ra 10-hour operating the daylight overdraft fee for a 10-hour
SUPPLEMENTARY INFORMATION:
day. Fees of $25 or less in any two-week operating day. The value of the
deductible is kept constant a t Ihe 10interval
will be waived.
Background on .Risk Reduction Program
hour operating d ay rate and will not’be
The overdraft fee will be 60 basis
The Board’s payments system risk
points (annual rate), quoted on the basis affected by any changes to the
reduction program is designed to reduce of a 24-hour day. To obtain the daily
scheduled Fedwire operating day.1
both direct risk to the Federal Reserve
overdraft fee (annual rate) for the
Anticipated Market Responses to Pricing
and systemic risk. Direct irisk to the
standard Fedwire operating day, the
Federal Reserve would result if a
quoted 60 basis point fee will be
A. Funds transfers
depository institution incurred an
multiplied by the fraction of a 24-hour
(1) Delayed Sends
overdraft in its reserve or clearing
day during which Fedwire is scheduled
account at a Reserve Bank and was
to operate. Under the current 10-hour
The cheapest, and hence first,
unable to fund the overdraft by the close Fedwire operating day the overdraft fee reaction to daylight overdraft pi icing'is
of the [business day. Similarly, the
will equal 25 basis points (60 basis
likely to be the delay by depository
failure of a participant on a private
points multiplied by 10/24), the same
institutions and their customers of lesslarge-dollar transfer network to cover a
price as originally proposed by the
time-sensitive payments. Not all
net debit could prevent the creditors of
Board. Daylight overdraft pricing is
payments are equally time-critical.
that participant from settling their own
effective April 14,1994, six months after However, in the current environment of
commitments and could have further
the October 14,1993,.effective date of
free overdrafts and generally non
repercussions in the payments system
the Board:s new overdraft measurement binding caps, there is, at best, little
and the economy in general. The Federal procedures, published elsewhere in
incentive to differentiate among
Reserve has taken a number of steps to
today’s Federal .Register (Docket No. Rinduce risk^reducing behavior by
0721).
1 The pricing deductible ie independent of the
payments system participants on both
The Board plans to phase in the '60
exempt-from-filing test. Depository institutioaa are
Fedwire and private large-dollar
basis point lee (times an operating hour
exempt from filing for a.cap if their peek overdrafts
do not exceed the lesser of 20 percent Of their
networks.
fraction) over a three-year period. On
capital,or $10 million. The.deduCtible (valued at the
In 1985, the Board established a.policy April 14,1994, the fee will be 24 basis
for a 10-hour operating day) isflubtracted from
of capping net intraday debits of
points, rising to 48 basis points on April fee
the gross fee for average overdrafts. An institution
depository institutions (50 FR.21120,
13,1995, and ^60 basis points on April 11, could be exempt from filing’fo ra cap’but be .subject
to pricing because Its average overdrafts-were over
May 22,1985). The Board adopted
1996. Under current iFedwire operating
10 percent.of its;capltal. It ccnild a ls o h a v e to Tilefor
refinements to its policy in 1987 (52 FR
hours, these phase-an -fees .are equal to
cap because its peak overdrafts exceeded the
29255, August B, 1987) and 1990 (55 FR
the proposed phase-in fees-of 10, 20,«nd alesser
of 20 percent of its capital or.$10 million.'but
22087, May ,31,1990). Currently,
25 basis points. A change in the length
be-exempt from pricing because its average
overdrafts
were less’than T O percentdfits'capital.
depository institutions m ay iinour
of the scheduled Fedwire operating'day
As part of its payments
system risk reduction program, the
Board is adopting a policy under which
Reserve Banks will charge a fee for
average daily-intraday overdrafts in
reserve and clearing accounts. A fee of
60 basis points (annual rate) multiplied
by the fraction of the day Fedwire is
scheduled to operate will be phased in
over three years {under current Fedwire
operating hours the fee will equal 25
basis points (annual rate) when fully
phased in). Reserve Banks will.deduct
from the gross fee an amount equal to 10
percent of qualifying capital valued at
the fee for a 10-hour operating day. Fees
of $25 or less in any two-week period
will be waived.The intent of the fee is
to induce behavior that will reduce risk
and increase efficiency in the payments
system.
EFFECTIVE DATE: April 14, 1994.
SUMMARY:
daylight overdrafts in their Federal
Reserve accounts up to a maximum, or
cap, that is a multiple of the institution's
qualifying (risk-based) capital. The cap
multiple iis based on the institution’s
self-assessment of its own
creditworthiness, credit policies, and
operating controls. Since January 10,
1991, the cap has applied to total
overdrafts of Federal Reserve accounts,
with total overdrafts defined as
combined funds overdrafts and
uncollateralized overdrafts caused by
book-entry securities transactions.
The Board requested comment on a
proposal to price intraday Federal
Reserve overdrafts in June 1989 (54 FR
26094, June 21,1989) and has adopted
the pricing proposal with minor changes,
as discussed below. The pricing policy
published today will be applied in
conjunction with the cap policy.
47086
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
Clearing House to distribute their
payments and, at worst, a competition
among depository institutions to send all transfers more evenly throughout the
day in their common interest.
payments with great rapidity.
Some small banks, however, were
The largest participants in the New
concerned that they would have the
York Clearing House Interbank
Payments System (CHIPS) have binding economic power to resist delayed sends
debit caps on that network, yet total net from larger banks and would, as a
debits on CHIPS have increased by only result, be relatively more disadvantaged
by such practices. These concerns may
15 percent, while the value of CHIPS
be valid; however, test data from
payment transfers nearly doubled,
February 1988 and August 1989 indicate
during the six years ending in mid-1991.
that the overdrafts of virtually all small
Banks that approach their caps on
banks would be modest under the
CHIPS delay outgoing transfers until
proposed posting schemes and that most
they have received incoming transfers
small banks would be exempt from both
that reduce their CHIPS net debit
cap filing and pricing. Moreover, a large
position. Fedwire participants have, by
share of the transfers from larger to
and large, not found their Fedwire caps
smaller banks involves the return of
to be as binding as their CHIPS caps
and, as a result, have achieved less than funds from federal funds and repurchase
half the payments efficiency [the ratio of lending, the timing of which is likely to
payment values to reserve balances plus be negotiated and explicitly priced if
overdrafts) of CHIPS participants. If, by daylight overdrafts are priced.
Nonetheless, the larger banks’ response
delaying less-time-critical payments,
to pricing could change the pattern of
Fedwire participants achieved an
customer payments to smaller banks
improvement in payments efficiency
such that more small banks than
equal to only one-half that achieved in
anticipated incur overdrafts subject to
the last six years on CHIPS, daylight
fees.
overdrafts due to Fedwire funds
Due to the concerns associated with
transfers could fall by one-third.
shifts
in the timing of payments, one
Some commenters were concerned
trade association suggested that small
about the impacts of Fedwire payment
banks should be exempt from pricing.
delays. These commenters believed that Under the existing intraday pattern of
gridlock could result if payment system
payments, the deductible already
participants, in order to avoid overdraft
exempts virtually all such institutions
fees, awaited incoming funds before
from pricing. Until there is evidence that
initiating payments. In addition,
delayed sends would disproportionately
commenters were concerned that a
affect smaller banks so as to make them
delay of payments until late in the day
subject to more than de minimis
could overburden the system if the
charges, the Board does not believe such
volume was too high to be handled
an exemption would be necessary. The
within a short processing time frame.
Federal Reserve will monitor and
Commenters raised similar concerns
evaluate the impact of pricing on small
when caps were introduced in 1986 and
banks during the phase-in period.
again were reduced in 1988. Although
these concerns may have some validity, (2) Shifts to CHIPS form Fedwire.
there has been no empirical support for
The second least costly way for larger
any significant change in the intraday
banks to avoid Federal Reserve daylight
pattern of payments for all banks taken
overdraft fees would be to substitute
together. The Board anticipates that
unpriced net debits on CHIPS for priced
banks will delay sends in some cases,
overdrafts in reserve or clearing
but does not believe that gridlock will
accounts. Such shifts substitute CHIPS
become a serious problem. Some
payments, for which the participants
payments will not be time-critical and
absorb the direct and indirect risks of
this will be delayed, but banks will have end-of-day net settlement, for Fedwire
a business incentive to avoid delays for transfers, for which there is no privatethose transfers customers believe to be
sector settlement risk because the
time-sensitive. Thus, there should be
Federal Reserve guarantees final
incentive to avoid delaying all transfers payment. CHIPS’ settlement finality
and assuring that time-critical payments rules, adopted by CHIPS in 1990, provide
are initiated promptly. Moreover,
for collateral liquidity and a loss-sharing
depository institution counterparties
formula that establishes claims against
would be expected to refrain from
the collateral to assure same-day
dealing whenever possible with those
settlement. CHIPS settlement finality
institutions that delayed transfers
will minimize the increase in systemic
excessively in order to shift credit
risk that accompanies the reduction in
exposures to others. For example,
direct Federal Reserve risk when, as
CHIPS participants have been
expected, some Fedwire transfers shift
successful admonished by the New York to CHIPS.
The Board estimates that if all CHIPS
participants shifted all payments to
other CHIPS participants that now are
sent over Fedwire, almost 10 percent of
Fedwire transactions and approximately
one-third of the value of Fedwire
transfers could shift from Fedwire to
CHIPS.2 If the current average
relationship between transfers and
overdrafts continued, Federal Reserve
daylight overdrafts could fall by onethird and CHIPS net debit could
increase by 45 percent as a result of
such shifts, assuming necessary
adjustments in bilateral credit limits
were acceptable to counterparties.
There are, however, three reasons to
believe that the associated reduction in
daylight overdrafts would be smaller
than one-third. First, other market
responses to pricing, such as netting,
will siphon off some of the payments
that might otherwise shift to CHIPS.
Second, with settlement finality, CHIPS
participants are unlikely to be willing to
raise their bilateral credit limits for all
other participants. Third, some users of
payment services may insist that
payments be made to them over Fedwire
in order to assure immediate access to
final funds.
(3) Netting
A significant proportion of daylight
overdrafts do not result from third party
transfers, but rather banks’ funding of
their own daily positions in the
overnight funds and Eurodollar markets.
Such loans are repaid relatively early
each day and the proceeds of new loans,
often from the same lender, are received
later in the day, leading to intraday
overdrafts in the accounts of the
borrowing institution. A relatively cheap
way, perhaps at a marginal cost of 10 to
15 basis points, to avoid such overdrafts
is to use rollovers and continuing
contracts. Instead of repayment and
reborrowing each day, rollovers call for
automatic renewal of the borrowed
amount unless canceled at any time by
either party, and continuing contracts
permit the size of the loan to be changed
each day, with net differences repaid or
added to the loan. Only net principal
amounts (if any) plus interest would be
transferred daily over Fedwire or
CHIPS. The Board estimates that shifts
to such forms of netting could reduce
daylight overdrafts by much as 85
percent.
In 1989, the Board published a policy
statement on rollovers and continuing
2 Such a shift may require increases in both
bilateral credit limits and required collateral from
CHIPS participants to establish a liquidity poo) to
support their additional settlement obligation.
Federal Register ./ Vol. .57, No. 199 / W ednesday, October 14, 1992 ,/ Notices
contracts to reduce daylight .overdrafts
(54 FR 26107, June 21,1989). This policy
statement urges payment system
participants to consider the uses >of such
techniques, after .due .regard to their
benefitsand.risiks. Pricing wilLgreatly
increase the incentive .to rollovers and
continuing contracts.
Banks thaiact as paying agents for
commercial paper issuers-typically ,pay
investors for maturing paper before the
issuing corporation has -funded the bank,
leading to largeoverdrafts. Daylight
overdraft pricing :shauld induce paying
agent banks to (require (compensation -for
the overdrafts associated with
commercial paper. The Depository Trust
Company’s book~erttry commercial
paper system, initiated in lefte 1990,
contributes 'to reduction in some
commercial paper-related overdrafts by
synchronizing inflows and-outflows
associated with commercial pqper
transactions and should continue :to
contribute to further reductions as the
system is expanded.
(4) Intraday Funds Market
‘Daylight overdraft pricing could
ultimately lead'to an intraday funds
market in which borrowers and lenders
transfer funds for short intervals at a
market rate less than the explicit fee
charged by (he Federal Reserve.
However, it 'is .unlikely that .such.a
market will develop .at the outset .of
pricing, especially .given the modest
charges that the Federal Reserve will
impose for daylight overdrafts. Delaying
sends, shifting payments to CHIPS, and
netting are relatively easy-and
inexpensive ways to reduce (daylight
overdrafts -by significant amounts, in
addition, .a true intraday market would
require a new set of controls and
systems .and would be relatively
expensive for banks to ^establish
operationally.
Rather than developing an intraday
funds market, it is more likely that
market participants will structure
transactions'to provide for a timespecific delivery-oTfands in return for a
premium below the Federal Reserve's
daylight overdraft charge. For example,
overnight borrowers of funds could pay
a premium xate for the right tD repay
these funds-in the late afternoon .of the
maturity day and/or the lender could
receive a premium to -deliver the
proceeds afthe borrowing jeariy .on the
day of the loan. Such transactions are
significantly less complex operationally
than 3 fufly-developed intraday funds
market.
47087
determine .the availability of securities
for delivery, .the amount that will be
(1) Return -ofRepurchase Agreement
held overnight (and hence must be
Collateral
financed), and the .methods ,end sources
With’book-entry securities overdrafts
to be used.in funding overnight
subject to fees, the ;major clearing banks, positions. In addition, some specific
which account for approximately 90
issues of securities ("specials") are
percent of all book-entry securities
deliberately held until late in the day
overdrafts, would have a considerable
because of unusual demand and supply
incentive to adjust their book-entry
conditions that may'cause their price to
securities transfers and to induce their
rise as the day progresses. Finally,
dealer customers to do so as well. In a
dealers build positions -during the day in
priced environment, about one-Tialf of
order to deliver their biggest orders first;
aggregate fees, .before any (market
this practice reflects customers’
response, would apply to these clearing
unwillingness to accept partial
banks, whose hook-entry securities
deliveries and the costs to the selling
overdrafts account for 90 to 100-percent
dealer of failing to deliver the full order
of their total overdrafts. The Board
on the due date. 8 Transfer limits,
expects market responses to ,pricing of
disoussed in the next section, have
book-entry .securities overdrafts, which
already helped reduce position-building
account for approximately 60 percent .of
by requiring buyers to take partial
total daylight overdrafts, to be smaller
deliveries of very large orders.
than the response to pricing of funds
overdrafts. However, there are
(2) Adjusting the Timing of Payment
operational limits to the amount of
Currently, clearing banks charge their
book-entry securities netting that can be
dealer customers for overnight credit
achieved, as well as limits to the
extensions, but their intraday fees are
rapidity with a clearing bank or its
dealer customers can fund a book-entry based not on intraday credit.extension
but rather on the number .of transactions
securities transfer after receipt of .the
security. This resulting temporal,gap will processed for the dealer. An important
reason for such fee schedules 'is that the
continue to contribute to book-entry
clearing banks’ own bookrentry
securities overdrafts.
securities .overdrafts are (both free and.
It may be possible for.depository
given collateral-pledged at.Federal
institutions to reduce bodk-entry
Reserve Banks, virtually unconstrained.
securities overdrafts by modifying their
Federal Reserve pricing for book-entry
practices regarding the return<df
securities overdrafts will -likely -cause
repurchase agreement (RP) collateral
clearing banks,to modify their own fee
and the rapidity with which dealers
schedules, probably basing their fees at
choose to rredeliver securities after
least in part on the amount of daylight
receipt. Dealer customers ;of clearing
credit extended to each-dealer by the
banks finance their overnight securities
clearing bank.4 Such an approach could
positions using bank loans and J£Ps
negotiated with iioth bank and non-ibank be expected to induce behavioral
lenders. Under an KR, the [borrowing
changes among dealers.
dealer transfers <U:S. Treasury and
Dealers -would be expected to try to
agency :book-entry securities to itfae
send securities transfers earlier in the
lending bank (or the lender’s bank) late
day and induce their counterparties to
in -the day and :receives the return of the send them later in the day. Dealers have
securities by book-entry transfer early
already shifted some originations df an
the next day. Because funds move in the earlier time a s a result Of both
direction from the,securities, ‘overdrafts
recommendations by the Federal
decrease at the dealer's clearing banks
Reserve Bank of New York and the
late in the first day and increase early
Board’s 1988 policy limiting book-entry
the next day.
securities transfers tto $50 million. The
This pattern of RP collateral transfers transfer limit, ‘in affect, requires that
and the associated payment iflows
large deliveries be accepted in
contribute significantly to the build-up
segments, thus -avoiding some dealer
in book-entry securities overdrafts from position-building to avoid “fails”. Pricing
early in the day through mid-afternoon,
when institutions negotiate their
3 The cost of a “fail" is borne by the selling dealer
overnight position financing. These
and equals the day's accrued interest on th e
delays in sends of collateral for
securities.not.delivered,;plus the-cost df overnight
financing by the Belling.deHteriaf'that part af the
financing purposes until late in the day.
order temainnig.in the dealer's .position because it
as well a s those associated with
intraday .receipt and origination o f book- w as not delivered.
4 in contrast to a bank's determination of the
entry securities transfers far the dealer's cause of-B customerls funds overdraft.'m easurem ent
own an d customer ancourtts, reflect
of a d e a le rs ovBrdmftffiaiBed'iyjBCUiity-deliveries
is.m are^traightfoiw anl.
operational factors. Institutions must
B. Book-erdry Securities Transfers
47088
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
may lead to dealer requests for further
Board-mandated reductions in transfer
limits, and it will certainly bring
economic pressure on dealers to manage
their trade comparisons more closely
and to improve their inventory control to
limit their use of daylight credit.
Dealers could reduce their average
overdrafts by arranging for the return of
RP collateral for the previous night’s
financing later during the day of
maturity, or at least spread out over the
day. Intraday book-entry securities
surpluses are concentrated (over 85
percent of the total) at five banks that
act as custodians for customers who do
a large amount of RP lending. Dealers
could offer a fee to RP lenders (and/or
their banks) to delay the return of RP
collateral (and thus the repayment of the
overnight loan) until later in the day;
such fees could also be offered for RP
lending earlier in the day for those
dealers that can determine their
overnight financing needs and arrange
their collateral earlier in the day.
(3) Netting
Clearing banks already transfer a
considerable amount of book-entry
securities internally across their own
books, and dealers net through the
Government Securities Clearing
Corporation (GSCC). As with funds,
pricing of book-entry securities
overdrafts would create even greater
incentives to net, either by shifting more
transactions into the overnight netting
calculation at GSCC or by developing
better ways to handle collateral
supporting loans to reduce repetitive
intraday transfers.
GSCC will add more transactions to
its net as more dealers move to fullscale “next-day” netting in the system
and as GSCC begins to offer "same-day"
netting services. By early 1992, only
three primary dealers were not yet
participating in the GSCC net for ‘'nextday” trades. Moreover, since 1990,
GSCC has been netting post-auction
"when-issued” trades in Treasury notes
and bonds, thereby minimizing the
number of redeliveries on issuance days.
GSCC is adding non-primary dealers to
the system over time and believes there
is still the potential for significant
additional netting over its network
through this addition of more dealers
and the future addition of "same-day”
transfers.
There may also be further
opportunities for eliminating repetitive
movements of collateral in the course of
the daily repayment of loans that will be
rebooked at the end of the day. In
particular, market participants are likely
to use both term RPs and open RP
contracts (the' latter remain outstanding
until canceled by either party) more
frequently when feasible. Also,
institutions might net RPs with the bulk
of the collateral held by the financing
party on a continuing basis (i.e., only
partially repay the RP each day while
moving only part of the collateral).
Daylight overdraft pricing would
provide the incentive to expand or
develop such arrangements if they
entailed costs below the daylight
overdraft charge.
(4) Shifts to Other Systems
In sharp contrast to a shift of funds
transfers from Fedwire to CHIPS,
options for shifting book-entry securities
transfers from Fedwire to other systems
do not currently exist. A book-entry
system, by its very nature, concentrates
the ownership records in one location. It
is unlikely that the federal agencies
would be willing to stop using the
Federal Reserve as their fiscal agent for
new issuance. Although GSCC can
reduce overdrafts associated with nextday trades through netting, it will not be
able to handle in the foreseeable future
the same-day cash trades that make up
the RP market that cause the bulk of the
book-entry securities overdrafts.
Response to Public Comments
Application o f Picing to Total
Overdrafts
Net debit caps apply to total (funds
and book-entry securities) daylight
overdrafts in reserve and clearing
accounts because book-entry securities
overdrafts present risks to Reserve
Banks similar to those posed by funds
overdrafts. Because of the high
concentration of book-entry securities
overdrafts at the major clearing banks
and the disruption to the government
securities market that could result if
these banks had to keep their total
overdrafts within their current net debit
caps, depository institutions are
permitted to exceed their caps because
of book entry securities overdrafts,
provided that all such overdrafts are
collateralized.5
In June 1989, the Board proposed to
apply pricing to total (funds and bookentry securities) overdrafts in Federal
Reserve accounts. Some commenters,
including the Board’s Large-Dollar
* Depository institutions that exceed their caps
due to book-entry securities overdrafts by frequent
(more than three times in any two consecutive twoweek periods) and m aterial (more than 10 percent)
amounts must collateralize all of their book-entry
securities overdrafts (net of any funds credits).
Other institutions have the option of exempting
their book-entry securities overdrafts in whole or in
part from caps by pledging collateral, depository
institutions may not exceed their caps due to funds
overdrafts by pledging collateral.
Payments System Advisory Group.6
supported this aspect of the proposal,
but other commenters, including clearing
banks and securities dealers, opposed
the application of pricing to book-entry
securities overdrafts and presented
three major arguments in support of
their position.
First, to the extent that book-entry
securities overdrafts would already be
collateralized, as they would be at
virtually all institutions with large bookentry securities overdrafts, the
commenters viewed a Federal Reserve
charge as inequitable. The commenters
argued that the collateral protected the
Federal Reserve against losses. Further,
because there are costs associated with
pledging collateral, the commenters
believed that charging for overdrafts as
well as requiring collateral unduly
penalized book-entry securities
overdrafts. Some of the commenters
suggested that depository institutions
should be given the choice of pledging
collateral or paying an overdraft fee.
The Board notes that collateral is
required for large book-entry securities
overdrafts as an exception that permits
clearing banks and similarly-situated
institutions to exceed their caps because
of the difficulty of controlling book-entry
securities overdrafts.7 Given the
unusually large size of the Reserve
Bank’s credit exposure to clearing
banks, the Board determined that
collateral was prudent and necessary to
secure potential discount window loans
should operational or other problems
make it necessary for daylight credit
extensions to continue beyond the end
of the day. For reasons of equity, all
institutions were given the option of
exempting their book-entry securities
overdrafts from cap limits by posting
collateral.
The collateral requirement is unlikely
to be a constraint on the amount of
book-entry securities overdrafts,
particularly given the depository
institution’s option to pledge in-transit
securities as collateral. With the ready
availability of collateral, such a
requirement provides no. meaningful
incentives for depository institutions or
* This informal advisory group, made up of
private-sector paym ents system specialists, was
formed by the Board in 1985 to assist in the
development of the Board’s paym ents system risk
reduction program.
7 The sender of book-entry securities receives
payment from the Reserve Bank immediately, and
the institution receiving the securities is charged
even if it does not have sufficient funds in its
reserve or clearing account at that time. The
receiver has little control over the timing of the
incoming transfer. In contrast, the originator of a
funds transfer controls the timing, and the
recipient's account is credited rather than debited.
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
their dealer customers to change
procedures to reduce daylight
'
overdrafts. Collateral and pricing serve
two related but separate purposes.
Although collateral limits Reserve Bank
risk, its purpose is to make discount
window loans to book-entry securities
overdrafters feasible during periods of
operational difficulty. Pricing is
designed to create economic incentives
to reduce and allocate more efficiently
the use of daylight credit.
A second group of commenters argued
that the institutions that would bear the
cost of the fees for book-entry securities
overdrafts would not be able to control
the amount of the credit used and that
there would be an irreducible minimum
below which book-entry securities
overdrafts could not decline. These
commenters focused on the operational
constraints that limit the ability of
dealers and clearers to reduce the gap
between the time securities are
delivered and corresponding debits are
made to the recipient’s funds account
and the time the recipient receives funds
from its customer to pay for the
securities. The commenters argued that,
even with improvements in market
mechanisms in response to pricing,
overdraft levels would be high even at
the most efficient dealers and clearers.
The commenters stated that overdraft
fees would be unfair given that daylight,
credit is necessary for the efficient
operation of the government securities
market.
A third group of commenters made a
related argument, stating that pricing
book-entry securities overdrafts would
result in reduced depth in the
government securities market and an
associated increase in the Treasury's
borrowing costs. Specifically, the
commenters argued that, because
dealers would bear the additional cost
of book-entry securities transfers, they
would be less willing to bid both for
new issues and in the secondary market,
and fewer dealers would be able to
participate in auctions or secondary
trades. For these reasons, the
commenters believed that the Treasury’s
borrowing costs would rise.
The Board anticipates that dealers
and clearers will take steps to avoid
fees for book-entry securities overdrafts,
as discussed previously. Nevertheless,
the remaining daylight overdraft fees
will fall initially on the clearing banks.
The Board notes that there are
significant differences in the transfer-tooverdraft ratio among the major clearing
banks. The Board does not believe that
these differences reflect differing
operational efficiencies across the
clearing banks, but rather reflect their
dealer customers’ varying operational
procedures, controls, and trading and
management strategies. All of these
factors are reflected in differing lags
between incoming and outgoing
transfers and the duration that potential
collateral is held by dealers before they
authorize its release for transfer by their
clearing banks.
Board staff discussions with market
participants suggest that overdraft
pricing will induce clearing banks first
to seek additional efficiencies to avoid
charges and second to focus on efforts
to pass the fee on to their dealer
customers. (The extent to which dealers
could, in turn, pass the overdraft fee on
to their customers would be limited to
those cost increases passed on by the
lowest-cost dealers, as any price
increase would, in a competitive market,
result in shifts of business away from
the higher-cost to the lower-cost
dealers.) With comparable efficiency in
their operations, the clearing banks
should be successful in their priceshifting efforts. Clearing banks might
eliminate the current charge per transfer
and shift to a fee structure based mainly
on the extension of credit by banks to
the dealers.8 Charges to customers
based on the value of the transfer would
provide less incentive for dealers to
reduce their overdrafts.®
The Board assumes that, in reducing
the amounts subject to overdraft fees,
dealers would incur costs up to the
overdraft fee. There would be a
tendency for dealers to limit certain
kinds of trades on which there is
virtually no profit margin, but overdraft
fees would probably be too small to
significantly affect the volume of dealer
trading in anticipation of even modest
price swings. Even if each additional
transaction dollar resulted in an
additional overdraft dollar, the overdraft
fee would not exceed $8.94 per million
dollars in trades.10 This cost is modest
8 The banks' own overdrafts at Reserve Banks are
not necessarily related to the position of individual
bank customers.
®Pricing based on the value of the transfer could
induce a reduction in churning trades and a
movement to term or open contract repurchase
agreements, but would provide no incentive to
reduce position building to avoid fails or increase
the rapidity of securities turn-arounds. Pricing by
clearing banks based on overdrafts, however, would
create Incentives to take all of the steps.
10 The fee of 60 basis points (annuel rate) times
the fraction of the day Fedwire is scheduled to
operate (i.e.. 25 basis points currently) is 0.0694
basis points per day ($6.94 per million of
overdrafts). On average, there are approximately $3
of book-entry securities transfers for each $1 of
overdraft, reducing the daily overdraft charge to
0.0231 basis points per transfer or $2.31 per million
dollars of transfer.
47089
relative to a small bid-ask spread of 1/
64 of a percentage point, which is equal
to $156.25 per million in trades.
If all dealers were equally efficient, all
of the additional costs of book-entry
securities overdrafts would be shifted to
investors. Such costs during the August
1989 test period would have been
approximately $20 to $40 million per
year. If these costs were allocated over
all book-entry securities transfers
(approximately $100 trillion per year),
investor yields would have declined by
(or investors would have required a
higher gross yield of) from 0.002 to 0.004
basis points. This estimate of yield
decline is high, though, because there
are differences in efficiencies across
dealers and it is unlikely that a
significant amount of the increased cost
of book-entry securities transfers will be
passed on to investors. Thus, the Board
does not believe that pricing of bookentry securities overdrafts will
significantly affect the cost of the public
debt. Moreover, the Treasury will
benefit (subject to adjustments in the
tax liabilities of dealers and investors)
in that overdraft fees will be returned to
the Treasury with Federal Reserve
profits.
On the other extreme, the dealers
could entirely absorb the annual
aggregate costs of $20 to $40 million. •
These costs represent approximately
2.25 to 4.5 percent of average 1990-mid1992 estimated profits earned by
primary dealers from their U.S. Treasury
and agency securities activities.
Although dealer profits rose sharply in
1990-mid-1992. margins earlier had been
under intense pressure both from the
increase in the number of dealers and
the relative stability of interest rates.
Even with the improvement in profits
over the last two years, dealer
absorption of overdraft charges would
result in some profit reductions and
could, at the margin, accelerate the exit
of primary and other dealers. The
number of primary dealers remaining,
however, would remain high by
historical standards. The Board would
not expect more than a modest
reduction in the number of primary
dealers given the recent changes in
primary dealer standards, and such a
reduction would not be likely to have a
measurable impact on the government
securities market.
Thus, the Board has determined to
apply pricing to total overdrafts (bookentry securities and funds). Book-entry
securities overdrafts would not decline
as much as funds overdrafts under a
pricing regime because the amount and
timing of book-entry securities
overdrafts are not fully under the
47090
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
on overdrafts. However, Congress has
control of the institution incurring the
not authorized the Board to pay interest
overdraft. Nevertheless, both forms of
over draft create risks for Reserve Banks on reserve balances. To offset debits
with credit balances in calculating the
and are being used inefficiently while
average overdraft subject to pricing
they are available without charge. The
would provide an implicit return on
Board does not believe that pricing of
book-entry securities overdrafts would
positive reserve balances, which would
raise the Treasury’s borrowing cost in a be inconsistent with the congressional
measurable way, with increases of much view.11
One commenter suggested that, to
less than one-tenth of a basis point. The
effect of book-entry securities overdraft make reserve management easier in a
pricing regime, the Board should
pricing would more likely be diffused
liberalize its carry forward rule on
mainly among dealers, reducing their
excess or deficient reserve balances.
profits somewhat, and possibly
Prior to September 1992, the rule
contributing to the exit of marginal
restricted such carryovers into the next
dealers from an extremely competitive
maintenance period to the larger of 2
market.
percent of required operating balances
Application o f Pricing to Average
or $25,000. The commenter suggested
Overdrafts
that this quantitative restriction be
In its 1989 request for comment, the
removed, allowing depository
Board proposed to apply daylight
institutions to vary their average reserve
overdraft pricing to the average level of balance in a maintenance period over
total overdrafts. The Board proposed
an extremely wide range and to make up
that overdrafts be measured at equallyfor the implied surpluses or deficiencies
spaced intervals throughout the day,
in the subsequent maintenance period.
with credit balances treated as zero, and
Although the Board has not eliminated
that the average overdraft would be the
quantitative restrictions altogether, it
sum of all the overdraft measurements
has increased the carryover allowance
divided by the number of intervals.
to the larger of 4 percent of required
The Board's test data in its 1989
operating balances or $50,000 (57 FR
proposal used 15-minute intervals from
38415, August 25,1992). Eliminating
&30 a.m. to 6:30 p.m. Eastern time, the
quantitative restrictions would reduce
current official Fedwire operating day.
considerably the predictability of
The 1989 proposal noted that the Federal overall reserve demand in any given
Reserve would review the feasibility of
maintenance period, thereby making it
measuring overdrafts in shorter time
difficult for the Federal Reserve to judge
intervals (e.g., by second or minute) and the appropriate system-wide reserve
whether the averaging period should be
supply and significantly impairing the
fixed (e.g. the hours over which Fedwire effectiveness of monetary policy
is scheduled to be open) or the actual
implementation. In addition, the
period Fedwire is open at each Reserve
commenter* s suggestion would make it
Bank. In 1991, as part of its request for
easier for depository institutions to
comment on revised overdraft
manage their end-of-day positions
measurement procedures (56 FR 3098,
(particularly on the last day of a
January 28,1991), the Board proposed a
maintenance period), but would not ease
one-minute overdraft measurement
the task of managing intraday
interval, measured over the official
overdrafts, which would be subject to
Fedwire operating day.
pricing.
Under current Fedwire operating
Generally, the commenters supported
hours, the average overdraft of large
the Board’s proposal to measure
institutions is approximately one-third
daylight overdrafts on a minute-byof the peak overdraft. The Board
minute basis, but expressed concern
proposed to price average, rather than
regarding the costs of implementing
peak, overdrafts to focus depository
systems to capture positions minute-byinstitutions’ attention on the continuous minute. The Board believes that the
management of their positions and to
number of banks that will change their
provide flexibility for institutions to
internal tracking and posting systems in
adjust to book-entry securities
order to charge customers for their use
overdrafts that are not under their direct of daylight credit will be relatively
control.
The commenters generally supported
11 Banks with net credit balances during the day
the use of daily averages, but some
would b e able to sell those balances to others in net
argued that intraday credit balances
debit positions if the time of day the credits
should be included in the average
occurred had positive value in an informal intraday
m arket. Although the Federal Reserve attaches no
overdraft calculation to offset intraday
to these net intraday credits, others may
debit balances. Some commenters stated value
choose to use such net credits to rearrange, for a
that explicit returns should be paid on
fee. a bank's federal funds position to the advantage
credit balances if fees were to be levied of those with net debit positions.
small. Over 90 percent of the institutions
covered by the risk reduction policy will
not incur daylight overdraft charges, and
thus would not be likely to undertake
costly system changes. A few banks
may incur overdraft charges in amounts
high enough to justify system changes.
Although these banks would face
increased operational costs, most of
their system changes would be
necessary regardless of the
measurement interval. A shorter
measurement interval improves the
accuracy of daylight overdraft
calculations.
The Board has adopted its 1989
proposal, as amended by its 1991
proposal, to apply pricing to average
daily daylight overdrafts. The average
will be calculated by dividing the sum of
the negative reserve or clearing account
balances at the end of each minute of
the scheduled Fedwire operating day
(with credit balances set to zero) by the
total number of minutes in the scheduled
Fedwire operating day.
Size o f Overdraft Fee
The Board requested comment on a
fee of 25 basis points, annual rate, to be
levied on the average amount of total
daylight overdrafts in excess of the
deductible, phased in over three years—
10, 20, and 25 basis points, respectively,
in each year. The proposed fee would be
charged only on business days. The
Board stated that it planned to reserve
the right to (1) terminate the phase-in
before application of the full 25 basis
points, or (2) continue the phase-in to a
level in excess of 25 basis points,
depending on its assessment of the
impact of pricing.
Most commenters did not oppose the
size of the fee, and a small number
believed the fee was too low to have a
significant impact or to eliminate-the
subsidy inherent in daylight overdrafts.
The Board believes that even a low
daylight overdraft price can have a
significant impact because depository
institutions’ costs of avoiding the fee
appear to be modest. Thus, the Board
believes the proposed fee is consistent
with the objective of inducing riskreducing changes without slowing down
payment flows or drastically increasing
the public’s cost of making payments.
The Board recognizes that the fee is
probably not sufficient to eliminate all
of the subsidy resulting from the
provision of daylight credit at belowmarket rates, although the appropriate
market rate is unclear at the present
time. The Board has chosen a relatively
low fee so as not to risk disruption to
the payments system.
Federal Register / Vol. 57, No. 199 / Wednesday, October 14, 1992 / Notices
Some commenters suggested that
higher prices be applied to later-in-theday overdrafts to avoid possible
disruptions caused by delayed sends.
Some of these commenters suggested a
higher deductible and a lower price in
the morning coupled with a lower
deductible and higher price in the
afternoon. Time-of-day pricing would
create an inducement to send payments
earlier, provided that others, or at least
those acting as counterparties to the
earlier-sending institutions, do so as
well. If only one institution sends
earlier, that institution’s costs may
actually rise (it would pay the morning
overdraft fee plus the higher afternoon
overdraft fee if its overdrafts were not
extinguished by then), unless the
morning deductible were large enough to
eliminate the morning fee. For time-ofday pricing to reduce overdrafts, a group
of banks would have to agree to send to
each other earlier in the day to benefit
from the lower overdraft fee, and the
cost of doing so would have to be less
than the price differential between
morning and afternoon overdrafts. This
approach might require disciplining of
uncooperative counterparties by the
coalition of banks. Discipline could take
the form of delayed sends that keep the
disciplined party in overdraft until the
afternoon, when higher fees are charged.
The Board believes that any
inducement to accelerate payments
under a time-of-day pricing plan would
be offset by (1) the administrative
complexity and the associated
uncertainty about the impact on non
coalition payment participants, and (2)
the incentive to accelerate all payments,
regardless of their time sensitivity,
resulting in less efficient resource
allocation and little risk reduction.
The Board has adopted the overdraft
fee at the proposed level; however, the
fee will be quoted at a rate of 60 basis
points (annual rate) for a 24-hour day.
To obtain the daily overdraft fee (annual
rate) for the standard Fedwire operating
day, the quoted 60 basis point fee is
multiplied by the percentage of the 24hour day during which Fedwire is
scheduled to operate. Further, the Board
has adopted a standard 360-day bank
year as the basis for quoting the annual
daylight overdraft fee.
Thus, under the current 10-hour
Fedwire operating day, the fully-phasedin overdraft fee will come to 25 basis
points (60 basis points time 10/24), the
same price as originally proposed by the
Board. Quoting the overdraft fee
independently of the Fedwire operating
day is intended to reduce market
confusion about rates as scheduled
Fedwire hours are changed, to'permit
47091
believes that by implementing the new
measurement procedures one year in
advance of pricing, and by phasing in
the full price over three years,
depository institutions will have
sufficient time to adjust to pricing.
The Board has made a revision in the
deductible calculation to take into
account the possibility of longer Fedwire
operating days. A change in the length
of the operating day could alter the
value of the deductible, and, as with the
fee, an adjustment is necessary in the
algorithm for the deductible to account
for the effect of such change. If the
fraction of the 24-hour day accounted for
by the official Fedwire operating day is
applied to both the nominal 24-hour rate
and the net average overdrafts subject
to pricing (i.e.. average overdrafts less
the deductible), those institutions that
incur no additional overdrafts during an
extended Fedwire operating day could
Deductible
benefit from an effective increase in
their deductible.12 The percentage
The Board proposed to allow a de
increase in the deductible would be
minimis level of free overdrafts by
authorizing a deduction from the amount equal to the percentage increase in the
operating day.
subject to pricing equal to 10 percent of
qualifying capital. The deductible would
Thus, it is necessary to multiply the
(1) provide liquidity to the payments
deductible by a factor to ensure that the
system, recognizing the lack of
value of the deductible does not vary
payments synchronization, especially
with the length of the scheduled Fedwire
for book-entry securities overdrafts; (2)
operating day. Therefore, the Reserve
compensate depository institutions, on
Banks will calculate the gross daily fee
average across all depository
on average daily overdrafts (based on
institutions over time, for Reserve Bank
the fraction of the 24-hour day that
periodic computer down-time; and (3)
Fedwire is scheduled to operate, which
contribute to operational simplicity by
could increase in the future) and reduce
exempting from pricing a very large
that amount by the fee that would apply
number of depository institutions that
to the deductible, based on a 10-hour
account for a very small amount of total Fedwire operating day. This calculation
overdrafts.
will provide the same result as that
Commenters strongly supported the
originally proposed for public comment
concept of the deductible, but some
(25 basis point annual rate on a 10-hour
believed it should be higher than 10
operating day) and will produce that
percent to address all of the objectives
same result for any other length of the
of the deductible and to offset the
treatment of intraday credit balances.
Assume a bank with $10 billion in capita! and
However, a higher deductible would not $6 14
billion in daily average overdrafts over the
only increase the amount of overdrafts
current 10-hour operating day. Its daily fee under
exempt from pricing, but would also
the pricing procedure proposed for comment would
be the daily 25 basis point (annual rate) fee times
increase both the incentive and the
the average daily overdrafts less the deductible (10
capacity of institutions that do not
percent of capital), or (0.0025/360) (6—
1) billion
themselves need or incur overdrafts at
dollars = $34,722. The daily price would be the
the Federal Reserve to sell their
same using the pricing algorithm adopted by the
Board, which incorporates the fraction of the day
overdraft capacity to institutions that
Fedwire is scheduled to operate: (.0060/360) (10/24)
have exhausted their deductible and
(6-1) billion dollars = $34,722. However, if the
would otherwise have to pay a Federal
Fedwire operating day is increased to 12 hours, the
Reserve fee. A deductible of 10 percent
bank's fee would fall to (.0060/360) (12/24) (5-1)
billion.dollars = $33,333. Daily average overdrafts
of capital exempts virtually all small
fall from 6 to 5 because the operating day used to
overdrafters.
calculate the average haB been increased by 20
Some commenters suggested that the
percent. However, while the effect of the reduction
pricing program begin with a higher
in average overdrafts from 6 to 5 is offset by the
increased fraction from 10/24 to 12/24. the
deductible and phase down to the
increased fraction is applied to the same deductible,
proposed 10 percent level over time in
which has the effect of increasing the value of the
order to provide depository institutions
deductible and thus reducing the overdraft charge,
time to adjust to pricing and the new
provided that overdrafts do nol rise proportionally
to the extended operating hours.
measurement procedures. The Board
the overdraft charge per minute to
remain constant in the event of changes
in scheduled Fedwire operating hours,
and to prevent price biases from
influencing a depository institution's
choice of whether or not to use a longer
operating day.
The Board plans to phase in the 60
basis point fee (times an operating hour
fraction) over a three-year period. On
April 14,1994, the fee will be 24 basis
points, rising to 48 basis points one year
later, and 60 basis points the following
year. These phase-in fees are equal to
the proposed 10, 20, and 25 basis point
fees under current Fedwire operating
hours. After evaluating the market’s
response to pricing, the Board may slow
or accelerate the phase-in, cease the
phase-in at a level below 60 basis
points, or increase the fee above 60
basis points at the end of the phase-in or
at a later date.
47092
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
with the Federal Reserve in providing
similar services.
The Board does not believe that
daylight overdraft pricing will adversely
affect the ability of private-sector
payments system participants to
compete with the Reserve Banks in
providing payments services. Privatesector correspondent banks have the
ability to charge for intraday credit
extended to their customers, either
explicitly (as will the Reserve Banks
Incidence of Pricing and Economic
under the pricing policy), or implicitly as
Burden
part of overall service fees. In fact,
Federal
Reserve daylight overdraft
Although daylight overdraft pricing
will increase costs for those institutions pricing may benefit private-sector
payments systems, such as CHIPS, if
subject to pricing, the Board believes
that overall impact on the economy will institutions shift payments from the
Federal Reserve to private systems to
be modest. Most depository institutions
avoid overdraft fees. Although there are
will be exempt from pricing, given the 10
aspects of the Board's risk reduction
percent deductible. During a 20-day test
program that could adversely affect the
period ending August 23,1989, and
ability of others to compete with the
without any market responses to pricing, Federal Reserve (see the Competitive
285 banks (representing 220 bank
Impact Analysis regarding the Board’s
holding companies) would have been
overdraft measurement procedures,
subject to pricing, and over 6,000 banks
Docket R-0721, elsewhere in today’s
would have been exempt from pricing.
Federal Register), the Board does not
Over 80 percent of all fees would have
believe that pricing in itself has an
been collected from the ten institutions
adverse effect on competition.
paying the largest fees in the test period.
Policy Statement
The Board expects that depository
institutions will take actiorts to avoid
The Board has adopted the following,
Federal Reserve overdraft fees, resulting to be inserted as part (I)(B) in its
in a lower incidence of pricing than was “Federal Reserve System Policy
projected in the test period.
Statement on Payments System Risk”
In light of the 10 percent deductible, it under the headings “I. Federal Reserve
is unlikely that delayed sends and other Policy” and “B. Pricing.”:
responses to pricing by large banks will
Each Reserve Bank will charge a fee
shift payment patterns so as to cause
for average daily daylight overdrafts in
many more small banks to become
Federal Reserve accounts. Reserve
subject to pricing. During the test period, Banks will deduct from the gross fee an
over 42 percent of those banks that
amount equal to 10 percent of qualifying
would have been subject to pricing
capital valued at the fee for a 10-hour
would have paid annual fees of less
operating day. Fees of $25 or less in any
two-week interval will be waived.
than $1,000, and many would have paid
The overdraft fee is 60 basis points
annual fees of less than $500. Because
(annual rate), quoted on the basis of a
the Board anticipates that a large
24-hour day. To obtain the daily
number of banks will incur small fees,
overdraft fee (annual rate) for the
the Board has determined to waive any
fee of $25 or less per two-week period to standard Fedwire operating day, the
quoted 60 basis point fee is multiplied
reduce the administrative burden on
by the fraction of a 24-hour day during
Reserve Banks and affected depository
which Fedwire is scheduled to operate.
institutions.
For example, under a 10-hour scheduled
Competitive Impact Analysis
Fedwire operating day, the overdraft fee
equals 25 basis points (60 basis points
The Board assesses the competitive
multiplied by 10/24). Daylight overdraft
impact of changes that have a
pricing is effective April 14,1994.
substantial effect on payment system
The 60 basis point fee (times an
participants.13 Under this analysis, the
operating hour fraction) will be phased
Board determines whether the change
in over a three-year period. On April 14,
would have a direct and material
1994, the fee will be 24 basis points,
adverse effect on the ability of other
service providers to compete effectively rising to 48 basis points on April 13,
1995, and 60 basis points on April 11,
1996, Under a 10-hour scheduled
13 These assessm ent procedures are described in
Fedwire operating day, these phase-in
the Board's policy statem ent entitled “The Federal
fees are equal to 10, 20, and 25 basis
Reserve in the Payments System" (55 FR 11648,
March 29.1990).
points, respectively. A change in the
operating day. Maintaining a constant
deductible is consistent with the goals of
providing payments system liquidity,
compensating for Reserve Bank down
time, and operational simplicity, but
avoids building into the pricing
algorithm a mechanism for
automatically increasing the value of
free credit permitted to depository
institutions if operating hours are
extended.
length of the scheduled Fedwire
operating day would not change the
effective fee because the fee is applied
to average overdrafts which, in turn,
would be deflated by the change in the
operating day. After evaluating the
market’s response to pricing, the Board
may slow or accelerate the phase-in,
cease the phase-in at a level below 60
basis points, or increase the fee above
60 basis points at the end of the phase- in
or at a later date.
The fee applies to combined funds
and book-entry securities daylight
overdrafts in accounts at the Federal
Reserve. The average daily overdraft is
calculated by dividing the sum of the
negative Federal Reserve account
balances at the end of each minute of
the scheduled Fedwire operating day
(with credit balances set to zero) by the
total number of minutes in the scheduled
Fedwire operating day.
The gross fee for daylight overdrafts
will be reduced will be reduced by the
amount of a deductible, valued at the
daylight overdraft fee for a 10-hour
operating day. The deductible is an
amount equal to 10 percent of qualifying
capital, i.e., that capital used by the
institution in calculating its new debit
cap. (See section (I)(C), “Capital.”)
Because the fee applicable to the
deductible is kept constant at the 10hour operating day rate, any changes to
the scheduled Fedwire operating day
will not affect the value of the
deductible.
The pricing deductible is independent
of the exempt-from-filing test under the
net debit cap policy. (See section
(I)(D){3), “Exemption From Filing.”)
Depository institutions are exempt from
filing for a cap if their peak overdrafts
do not exceed the lesser of 20 percent of
their capital and $10 million. TTie
deductible (valued at the fee for a 10hour operating day) is subtracted from
the gross fee for average overdrafts. An
institution could be exempt from filing
for a cap but be subject to pricing
because its average overdrafts were
over 10 percent of its capital. It could
also have to file for a cap because its
peak overdrafts exceeded the lesser of
20 percent of its capital and $10 million,
but be exempt from pricing because its
average overdrafts were less than 10
percent of its capital.
By order of the Board of Governors of the
Federal Reserve System, October 8.1992
William W. Wiles,
Secretary of the Board.
[FR Doc. 92-24666 Filed 10-13-92; 8:45 am)
BILLING COOt MIO-Ot-M
Federal Register / Vol. 57, Ho. 199 ,/ W ednesday, October 14, 1992 / Notices
47093
principles: (1) To the extent possible, the
that they may incur m their accounts at
measurement procedures should not
the Reserve Banks. This maximum, <or
Modification o1 the Payments System
provide intraday .credit to payments ■
net debit cap, is a multiple of a
Risk Reduction Program;
depository institution’s risk-based
system participants; (2) the procedures
Measurement of Daylight Overdrafts
capital and is based on the institution's
should recognize the legal rights and
assessment of its own credit-worthiness, responsibilities of both parties to a
a g e n c y : Board o f Governors of the
credit policies, and operational controls. transaction and, in particular, should
Federal Reserve System.
The
guidelines for the self-assessment
reflect the time at which payor
ACTION: Policy statement.
were established by the Board, and the
institutions are obligated to pay fora
documentation supporting each
SUMMARY: A s part Df its payments
transaction; (3) users of payments
depository institution’s rating is
system risk reduction program, the
services should be able to control their
reviewed by the institution’s primary
Board is adapting new procedures for
use of intraday credit; and (4) to the
supervisory agency examiners. (See 52
posting debits and credits to depository
extent possible, the Reserve Banks
institutions' accounts at Federal Reserve FR 29255, August 6,1987.)
should not obtain any competitive
Currently, daylight overdrafts are
Banks in order to measure daylight
advantage from the measurement
measured on an ex post basis. Fedwire
overdrafts accurately. Accurate
procedures.
funds and book^entiy securities
measurement of daylight overdrafts is
To accomplish these objectives, the
necessary in order to assess fees for the transfers are posted as they are
Board proposed to continue to post
processed during the business day. The
use of Federal Reserve intraday credit.
Fedwire funds and book-entry securities
net of all automated clearing house
(See Docket No. R-08G8 elsewhere in
transfers as they are processed during
(ACH) transactions is posted as if the
todays Federal Register.) Appendix 2
the business day and to post all
transactions occurred at the opening of
summarizes the final version of the
commercial ACH and non-wire
Board's modifications to the procedures business. All non-wire transactions are
transactions after the close of business.
netted a t the end of the business day; if
for measuring daylight overdrafts and
Commenters raised serious concerns
includes the major types of transactions the net is a credit, that credit is added to about the effect of this proposal on
affecting depository institutions’ Federal the opening-of-day balance, and i f the
current cash management practices and
net is a debit, the debit is deducted from questioned the equity of charging for the
Reserve accounts. The intent of
overdraft measurement and pricing is to the end-of-day position. Dehits for
intraday use of funds collected through
original issues of U.S. Treasury
induce behavioral changes that will
the check and ACH mechanisms.
securities as well as credits lor
reduce risk and increase efficiency m
1991
Measurement Proposal
redemptions
and
interest
payments
on
the payments system.
Treasury
and
government
agency
EFFECTIVE DATE: October 14, 1993.
In light of the serious concerns raised
securities are posted at 9:15 a.m„
by commenters, in 1991 the Board
FOR FURTHER INFORMATION CONTACT:
Eastern Time (ET). This -ex post measure requested public comment on a revised
Florence M. Young, Assistant Director
allows a depository institution to use its approach to modifying the measurement
1202/452-3955), or,MyriamY. Payne,
non-wire,
net credit to offset Fedwire
procedures (56 ER 3098, January 28,
Senior Financial Services Analyst (202/
debits during the day, but postpones the 1991). The Board proposed to account
452-3219), Division of Reserve Bank
need to cover a non-wire; non-ACH net for non-wire transactions on a xjuasiOperations and Payment Systems;
debits until after the close of business.
real-time basis. (Appendix 1 outlines the
Oliver I. Ireland, Associate General
Counsel (202/452-3625) or Stephanie
1989 Pricing and Measurement Proposals details of this proposal.) Under this
approach, Fedwire funds and book-entry
Martin, Senior Attorney (202/452-^3198),
In 1989, the Board issued for public
securities transfers would have
Legal Division; for the bearing impaired
comment a comprehensive package of
continued to be posted as they were
only: Telecommunications Device for
proposals to reduce payments system
processed. Credit lor non-wise
the Deaf, Dorothea Thompson (202/452- risk (54 FR 26090, June 21,1989). The
3544).
transactions, such as checks, would
centerpiece of this package w as a
have been posted, on average, when
SUPPLEMENTARY INFORMATION: One of
proposal to assess fees for depository
debits would have been posted to the
the purposes of the Board’s payments
institutions’ use of Federal Reserve
accounts of paying institutions.
system risk reduction program is to
intraday credit. Before fees can be
The 1991 proposal was
reduce the Federal Reserve's direct
assessed for the use of intraday -credit, it
straightforward for the majority of
credit risk. This risk is created when
is necessary to have in place a rational
payment transactions, such as ACH
Reserve Banks extend intraday credit to and reasonable methodology for
transactions, because debits to payor
depository institutions as payments are
determining the amount of intraday
institutions and credits to collecting
processed. Tf an institution is unable to
credit used by depository institutions.
institutions can be posted at the same
settle its intraday overdraft at a Reserve The current ex post measurement
time easily. The proposal for posting
Bank before the end of the day, the
procedures were designed to provide
credits for checks collected through the
Reserve Bank could incur a loss.
depository institutions some intraday
Reserve Banks, however, was fairiy
Furthermore, depository institutions
credit, as a means of easing their
complex because checks are paper
create risk by permitting their
adjustment to the payments system risk
instruments that must be presented
customers, including other depository
reduction program when it was
physically to payor institutions.
■institutions, to transfer uncollected
implemented in 1986. While the current
measurement procedures have eased the Presentment times, which are typically
balances over •wire systems in
dependent on courier delivery
anticipation of their coverage by the End transition, they do not provide a
schedules, range from early m the day
of the day.
satisfactory basis for determining a
until 2 p-m. Pacific Time (PT) or 5 p.m.
depository institution's use -of intraday
Current Risk .Reduction Program
ET. To provide credit as early as
Federal Reserve credit.
Under the Board's ‘current program,
possible during the business day, Ate
The Board's proposal to modify the
depository institutions establish a
Board proposed to post credits based on
procedures used to measure daylight
maximum amount of intraday overdrafts overdrafts was based on the foU&wing
the Reserve flanks' ability te present
[ D o ck et 'No. R -0 7 2 1J
47094
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
checks to and obtain settlement from
payor institutions. This conceptual
approach resulted in the development of
a unique set of crediting fractions for
each of the.Federal Reserve’s 141
availability zones. The sets of fractions
would have been used as the basis for
posting check credits hourly during the
business day, beginning at 11 a.m. ET
and concluding at 6 p.m. ET.
A total of 209 commenters responded
to the Board’s 1991 measurement
proposal. Comparing the 1991 proposal
with the 1989 proposal, many
commenters commended the Board for
addressing their concerns about early
intraday funds availability and current
cash management practices.
While commenters expressed
concerns about the proposed times for
posting many types of payment
transactions, their most significant
concerns centered on the proposal to
credit the accounts of institutions
collecting checks through the Reserve
Banks using the fractional availability
methodology. Over 35 percent of the
commenters specifically supported the
concept of posting check transactions
during the business day. Most
commenters, however, viewed the
proposal as exceedingly complex. These
commenters indicated that its adoption
would cause depository institutions to
incur implementation and ongoing
operating costs that would exceed any
benefits directly related to the reduction
of payments system risk.
The industry’s concerns about the
complexity and the cost of implementing
the proposed methodology for posting
check transactions were reinforced in an
August 1,1991, meeting between Board
and Reserve Bank staff and industry
representatives at which alternative
check posting methodologies were
discussed.
A. Commercial Check Transactions
Approximately 130 commenters
specifically addressed the treatment of
check transactions. As noted, the most
significant concern raised by these
respondents dealt with the complexity
of the fractional availability
methodology proposed for posting check
credits intraday.
Commenters indicated that they
would incur substantial costs to modify
their systems for monitoring customers’
intraday account balances, if they were
to make funds available to their
customers in the same way that they
received credit from the Reserve Banks.
Further, the commenters stated that
attempting to emulate the proposed
approach to granting intraday credit for
checks would require very complex
systems to calculate customers’ daylight
overdrafts in order to charge them for
their use of intraday credit. Commenters
estimated that one-time implementation
costs would range from $200,000 to $3
million and that ongoing operating and
maintenance costs would range from
$100,000 to $3.0 million annually, per
institution.
Several commenters were also
concerned about the costs they would
incur to determine the value of their
customers’ check presentments, in order
to obtain payment from their customers
by the time the institution would be
charged by the Federal Reserve.1 These
commenters indicated that they would
either need to (1) purchase payor bank
services from the Federal Reserve Banks
or (2) expand their operating capacity
for processing customer checks to
determine customer presentment totals
in order to obtain paysient by the
proposed posting times. One respondent
indicated that the cost of obtaining
additional payor bank services would
amount to $180,000 per year and another
respondent indicated that its ongoing
operating expenses would increase by
30 to 40 percent.
To address their concerns,
commenters suggested that: (1) The
number of intraday posting times be
reduced, (2) check credits, or check
credits and debits, be posted at one time
per day, or (3) the current measurement
scheme be retained. Some of the
respondents who urged the Board to
retain the current measurement scheme
recommended that the value of the
intraday float created by the current
posting methodology be recovered
through Federal Reserve service fees.
The Board believes that the responses
received on the 1991 measurement
proposal reflect depository institutions’
concerns about the combined effects of
the proposals to modify the
measurement procedures and to charge
for daylight overdrafts. In assessing
commenters’ concerns, the Board
believes that depository institutions can
be expected to make rational business
decisions before changing the systems
currently used to monitor their
customers' intraday account balances or
developing systems to charge their
customers for intraday credit
extensions. Thus, institutions whose
daylight overdrafts would not exceed
their net debit caps as a result of
changes to the measurement procedures
{over 93 percent of institutions covered
1 In most cases, customers using controlled
disbursement services and payable-through banks
m aintain zero or very low overnight balances and
fund daily check presentments late in the day after
they have been advised of the value of the day’s
presentments.
by the policy) and institutions that
would not be subject to Federal Reserve
daylight overdraft charges (about 96
percent of institutions covered by the
policy) would not be expected to
undertake costly system changes.2
Further, depository institutions would
not incur costs to recover daylight
overdraft charges from their customers,
if those costs exceed either the charges
imposed by the Federal Reserve or the
income they expect to derive through
charging customers over some
reasonable time frame.
The types of changes that depository
institutions would need to make to
check processing and customer
monitoring systems if they choose to
emulate the Federal Reserve’s 1991
proposal for posting check transactions
indicates that the costs of such system
changes could vary considerably,
depending upon the sophistication of an
institution’s existing system. Institutions
with very sophisticated systems might
be able to accomplish the task at a fairly
low cost. Institutions with less
sophisticated systems, however, could
find the undertaking extremely costly
and could incur expenditures in the
ranges estimated by commenters. For
the few institutions that the Board
expects might undertake such changes,3
developing systems to charge customers
for their use of daylight credit would be
very expensive, requiring fundamental
changes in depository institutions’
demand deposit accounting and
customer monitoring systems.
Discussions with representatives of
depository institutions have indicated
that, even if the current ex post
measurement scheme were retained, the
daylight overdraft pricing may
necessitate significant changes in the
systems that are used to monitor their
customers’ intraday positions in order to
charge them for the use of daylight
credit.
It is not possible to estimate with any
degree of accuracy the costs that the
industry might bear under the Board’s
1991 proposal for posting check credits
intraday. It is reasonable to assume,
however, that the majority of the costs
would be borne by the few large
institutions subject to substantial
2 Thi9 analysis is based on survey data for a fourweek period ending August 23,1909. Because this
analysis could not assess the results of potential
behavioral changes, the potential number of
institutions affected by the proposal could be
somewhat overstated or understated.
3 The Board estimates that only 30 institutions
would be charged fees amounting to more than
$120,000 per year, if a fee equal to an annual rate of
25 basis points were assessed for daily average
daylight overdrafts.
federal Register / VoL 57, No. 199 ./ W ednesday, Octaber 14, 1992 / Notices
d a y lig h t o v e r d r a f t c h a r g e s .
Nevertheless, the Board has modified
the 1991 proposal, as explained below,
to reduce the relative complexity of the
check posting process and to facilitate
•the industry s adjustment to the new
measurement procedures.
Check Debiting—As noted above,
several commenters indicated that
debiting payor institutions
approximately an hour after
presentment takes place would increase
operating expenses. The Board believes
that the majority of payor institutions
could adjust to intraday debiting for
check presentments fairly easily. Por
example, depository institutions could
require their controlled disbursement
and payable-through-draft customers to
fund their accounts based on estimated
presentments rather than expending real
resources to determine the value of
checks to be paid by each customer
before the time the institution would be
debited by the Federal Reserve.
Several industry representatives have
also indicated that beginning to post
debits for check presentments at 11 a.m.
ET would place east coast institutions at
a competitive disadvantage compared
with institutions located on the west
coast. These individuals argue that the
majority of east coast institutions would
be charged for check presentments by 12
noon ET, which would cause the
institutions to incur daylight overdrafts
starting at that time. Conversely, they
argue, institutions located on the west
coast would not be debited until !ate in
the day. As a result, the duration of their
intraday overdrafts would be shorter
than the duration far east coast
institutions.
While it is true that over 70 percent of
the value of checks drawn on
institutions located in the Eastern Time
zone would be chained to payor
institutions by 12 noon ET, the majority
of checks collected by these institutions
is drawn on eastern institutions. Thus,
these institutions would likely receive
credit for a substantial percentage of the
checks they collect through the Reserve
Banks by 12 noon ET. Moreover, the
staff believes that providing early-inthe-day credits to institutions using
Federal Reserve check collection
services provides benefits that more
than offset the earry-in-the-day debits to
payor institutions.
Furthermore, depository institutions
located in the Eastern Time zone
currently have a competitive advantage
in offering controlled disbursement
services to corporate customers,
compared with institutions located in
the Pacific Time xone. Charging for
check presentments during the business
47095
presentments will be posted hourly
day may reduce some o f the current
thereafter until all debits are posted at 6
competitive differences.
Several commenters suggested posting p.m. ET. Table 1 illustrates the
relationship between the time of
check credits and debts simultaneously
presentment and the posting time of
so that depository institutions could
debits for check presentments.
continue to benefit from the netting of
check transactions. Conceptually, such
T a b l e 1 .— C h e c k D e b i t i n g T i m e s
an approach would be simple for both
depository institutions and the Reserve
[AD times ere Eastern Time]
Banks to implement. Its adoption,
•Posting Time
Presentm ent time
however, would T e s u i t in either (1) payor
institutions being debited before
11:00
presentment or '(2) collecting institutions 10:01 a.m. to 11:00 .a.m__________ _ 12:00
noon
being credited very late in the day. The
t.’OO
2:00 p.m.
Board believes th at absent voluntary
1:01 p.m. to 2:00 p.m........................ 3:00 p.m.
participation in other arrangements,
such as electronic presentment
3:01 p.m. to 4:00 p.m........................
arrangements, checks should be
6:00 ;p m
presented physically to payor
institutions before their Federal Reserve
Depository institutions may receive
accounts are charged io provide an
multiple
check presentments from the
opportunity for the payor institution to
Federal Reserve each day. For example.
verify receipt of checks. In addition,
Federal Reserve Banks make two daily
late-in-the-day crediting is inconsistent
presentments to depository institutions
with the public’s desire to use the
in the High Dollar Group Sort JTIDGS]
proceeds of check deposits to fund
program. HDGS institutions typically
investments and other payments.
receive a regional check processing
Finally, several commenters requested center (RCPC) presentment and an
that the current measurement
HDGS presentment. The Federal
procedures be retained and suggested
Reserve will debit these institutions no
that the value of intraday float be
earlier than one hour after each
recovered through the Reserve Bank’s
presentment. In the case of city
check collection fees. The Board
institutions, the Federal Reserve may
believes that retaining the current
present some checks at the established
clearing house exchange to those city
procedures for posting checks and
banks that participate in the exchange,
including the value of intraday float in
the Reserve Banks’ check collection fees and present the remainder of the checks
at approximately noon. For city banks,
could promote inefficiencies in the
debite will be posted at two times: {1]
payments system. Such an approach
Checks presented by 10 a.m. ET will be
would contribute to cross-subsidies
posted at 11 a.m. ET, and [2] checks
among users of the Federal Reserve’s
presented after 10 a jn. ET will be posted
check collection services and, thus,
on the next clock hour that is a t least
would not ensure that the parties
one hour after the last physical
benefiting from intraday float bore its
presentment.
costs.
The Federal Reserve presents checks
The Board, therefore, has determined
to some depository institutions
that debits for check presentments
electronically. Debits for electronic
should be posted on the next clock hour presentments will also .be posted on the
that is at least one houT after
next dock hour that is a t least one hour
presentment takes place, beginning at 11 after the time of presentment 6—but not
a.m. ET.4 6Debits for check
earlier than 11 a.m. ET and no later than
3 pjn. local time. Depository institutions
that receive presentments o f checks in
4 Currently, -subpart A of Regulation j requires a
both electronic and paper form will be
paying bank to settle for .checks presented by a
Reserve Bank by the ok>#e of Ms baakiag day o r the
charged separately for their electronic
close of the Reserve Bank’s hanking day whichever
and paper presentments.
is earlier. The Board has adopted amendments to
The Reserve Banks will determine the
Regulation J to a Row Reserve Banks to <Jebit for
actual time(s) that checks are presented
check presentments o n Cite nesct clock ho ar lhait is a t
least -one boor after presentm ent takes piece. (See
to each paying institution to establish
Docket No. R-0722. elsewhere In today's Federal
the initial debit-posting timers).
Register)
6 It shooM be noted that, if there w ere *a
significant demand for early-in-the-day funds
availability, the Board might consider allowiqg the
Reserve Banks to debit p ayor institutions before i l
a.m. ET. so long a s the earlier debiting time were
consistent with Regulation ] 112 CFR p art 210).
6 The presentm ent o f electronic item s is -defined
in Ike agreement betw een the pacing baak a n d the
Federal Reserve, A s in the case o f p ap er checks, a ll
electronic presenim auts w ill b e a i d e by 2 p.m. Jocal
time.
47096
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
Depository institutions will receive
notification of their debiting time(s)
during 1993.
The debit for returned checks
presented to a depositary bank will be
posted at the same time as the debit for
forward collection checks presented to
that bank as paying bank. The posting
time will be the same even if the
returned checks are presented at a
location and at a time different from the
presentment of the forward collection
checks.7
The Federal Reserve will adjust the
debit posting time for checks if all of the
following conditions exist: (1) Check
presentments are made after the
scheduled delivery time; (2) a depository
institution reports that checks were
presented either less than one hour
before the scheduled posting time or
after the scheduled posting time; and (3)
the institution would have either
incurred a daylight overdraft charge or
exceeded its net debit cap if the debit
were posted according to the regular
schedule. In addition, the Federal
Reserve will post debits for checks that
were presented after the close of the
paying bank’s banking day at the
institution’s scheduled debiting time on
the following business day.
Check Crediting Alternatives—The
Board evaluated numerous check
crediting alternatives after the 1991
proposal was issued for public comment.
Each crediting alternative evaluated
below is based on the Board’s
determination that debits for check
presentments should be posted on the
next clock hour that is at least one hour
after presentment takes place, beginning
at 11 a.m. ET.
The following three alternatives were
the least complex options considered:
(1) Post check credits at one national
float-weighted time; (2) post check
credits at one float-weighted time for
each of the four U.S. time zones; and (3)
post check credits based on a unique set
of fractions per time zone.
The concept underlying alternative 1
(one national posting time) and
alternative 2 (one posting time per time
zone) differs from the 1991 proposal in
that it involves the creation of intraday
float. Aggregate net intraday float,
however, would be close to zero
because the amounts of intraday credit
and debit float created for brief periods
would offset one another. For example,
if half of the dollar value of all checks
were charged to payor institutions at 12
noon ET and the other half were
charged at 1 p.m. ET, a float neutral
crediting time of 12:30 p.m. ET could be
established. Because payor institutions
would be charged at noon fore half of
the dollar value of checks, but credit
would not be granted until 12:30 p.m.,
credit float would exist for 30 minutes.
Likewise, debit float would exist for 30
minutes after the 12:30 p.m. crediting
time because the remaining payor
institutions would not be charged until 1
p.m. Thus, some intraday credit and
debit float would be created, but net
intraday float would be zero.
Alternative 1—Under one nationwide
crediting time, survey data collected by
the Reserve Banks in April 1992 indicate
that all check credits could be posted at
12:15 p.m. ET. Adoption of a single
crediting time would significantly
simplify the intraday posting of check
credits. Although it would result in later
availability than the original proposal,
several industry representatives who
attended a meeting on August 1,1991, at
which check posting issues were
discussed expressed a preference for
this approach. Twenty-five percent of
the commenters on the Board's January
1991 proposal also expressed a similar
preference.
A single float-weighted posting time
also has several disadvantages. First, a
single crediting time might increase
daylight overdrafts at institutions where
debits for check presentments would be
posted at 11 a.m. ET, but credits for
check deposits would not be posted
until 12:15 p.m. ET. Second, some
deposits in the Central, Mountain, and
Pacific time zones are very close to or
after 12:15 p.m. ET. As a result, the
Reserve Banks’ Account Balance
Monitoring System (ABMS), which
many institutions use to manage their
intraday Federal Reserve account
positions, could not reflect the
institutions’ balances based on the
posting rules.8 This disadvantage is
largely offset by the fact that check
depositors are aware of the value of
their deposits, that is, their credits.
Third, because credits for checks drawn
on payor institutions located in the
Pacific Time zone would be made
available to collecting institutions
before the majority of the checks can be
presented to payor institutions, it could
be difficult for correspondent banks to
7 A Reserve Bank has the right to deliver returned
checks to a depositary bank at the sam e location as
it presents forward collection checks to that bank
(12 CFR 229.32(a)(1)). If a bank requests that the
Reserve Bank deliver returned checks to a different
location than its presentment location for forward
collection checks, the Reserve Bank will generally
• The Daylight Overdraft and Pricing System
do so if the bank agrees to accept the debit for the
(DORPS) would calculate daylight overdrafts for
returned checks at the same time as its debit for
purposes of assessing charges after the fact and
forward collection checks.
would post check credits at the designated times.
compete with the Federal Reserve in
providing intraday availability in this
region. Conversely, the majority of east
coast presentments is made to payor
institutions before 11:00 a.m. ET, making
a 12:15 p.m. ET crediting time
unattractive for checks drawn on east
coast institutions. Finally, west coast
institutions might be able to inflate their
intraday Federal Reserve account
balances artificially be exchanging
large-dollar checks. Institutions
depositing such checks with the Federal
Reserve would receive credit at 12:15
p.m. ET, but the payors would not be
charged until later in the day. The Board
believes that the disadvantages of this
alternative outweigh its simplicity.
Alternative 2—If check credits were
posted based on one float-weighted time
per time zone, depository institutions
would face no more than six crediting
times.9 Compared with the 143 sets of
fractions,10 which some depository
institutions would have faced under the
1991 proposal, this alternative should be
considerably easier for depository
institutions to implement. Further, many
smaller institutions deposit only mixed
cash letters and would face only one
crediting time.
This alternative would result in
somewhat later posting times than the
Board's 1991 proposal. Credit for checks
drawn on payor institutions located in
the Eastern Time zone (about 60 percent
of all checks collected through the
Reserve Banks), however, could be
posted at about 11:45 a.m. ET, based on
April 1991 survey data.
As with the one float-weighted
posting time, no credit would be
9 Institutions depositing separately sorted
deposits drawn on payor institutions located in ail
four time zones would receive credits at four times
during the day. Institutions depositing mixed cash
letters would receive credit at one tin\e during the
day, based on the mix of checks deposited at
Federal Reserve offices in each time zone. Similarly,
institutions depositing other Fed cash letters would
receive credit at one time during the day. If an
institution deposited checks in all four time zones
and deposited a mixed and an other Fed cash letter
with its Local Reserve office, it would receive credit
at six different times.
Separately sorted cash letters consist only of
checks drawn on payor institutions located in a
specific availability zone. Mixed cash letters consist
of checks draw n on any institution, other than the
depositing institution. Oiher Fed cash letters consist
of checks drawn on institutions located outside of
the availability of the depositing institution's local
Federal Reserve office.
10 Sophisticated collecting institutions frequently
deposit separately sorted checks in each o f the
Federal Reserve’s 141 availability zones a n d also
deposit mixed a n d other Fed cash letters with their
local Reserve offices. Under the 1991 proposal, a
separate set of crediting fractions would have been
developed for each of the 141 availability zones and
for each Reserve office's mixed an d other Fed
products.
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
available to collecting institutions at 11
As with the other two alternatives, all
a.m. ET. Thus daylight overdrafts at
credits could not be reflected in the
institutions debited for check
ABMS by the first posting time. The
presentments at 11 a.m. ET might
Reserve Banks estimate that from 5 to 19
increase somewhat. The timing
percent of the dollar value of check
difference between the first debiting
deposits would not be reflected in the
time and the first crediting time,
ABMS at 11 a.m. ET. As indicated
however, is 45 minutes, rather than the
previously, delays in ABMS posting
one hour and 15 minutes difference
should not cause significant problems
under the one-posting-time alternative.
for collecting institutions.
Additionally, granting credit based on
Posting check credits based on a
float-weighted posting times for each
unique set of fractions per time zone
offers availability that is comparable to
time zone would result in credit for
some check deposits not being reflected the fractional availability approach
originally proposed, but collecting
in the ABMS by the posting times
institutions would face no more than six
because some deposit deadlines are
sets of fractions, rather than the 143 sets
very close to or later than the floatweighted posting times. As noted
of fractions that they would have faced
under the 1991 proposal. If depository
earlier, this situation should not cause
significant problems for collecting
institutions chose to emulate this
crediting alternative in their customer
institutions because they know the
monitoring systems, their
value of their check deposits.
The Board believes that this
implementation costs should be lower
alternative addresses commenters'
than if they attempted to emulate the
concerns about the complexity of the
1991 proposal.
Crediting Alternatives Adopted by the
January 1991 proposal. At the same time,
Board—Both the float-weighted posting
this alternative might tend to increase
daylight overdrafts somewhat more than time per time zone and the unique set of
crediting fractions per time zone are
the increase estimated under the
original proposal.
basically consistent with the Board's
Alternative 3—The alternative under
guiding principles. Because some
which check credits would be posted
depository institutions might be
based on a unique set of fractions per
negatively affected if no credit for check
time zone would permit collecting
transactions were provided by 11 a.m.
institutions to receive some credit for
ET, the Board has determined to permit
check deposits beginning at 11 a.m. ET.
depository institutions to choose to
This option would appeal to those
receive credits for checks collected
institutions that are more concerned
through the Reserve Banks based on (1)
about intraday availability than
one float-weighted posting time per time
complexity. Under this alternative,
zone, or (2) a unique set of fractions for
based on April 1991 survey data,
each of the four U.S. time zones. Further,
collecting institutions could receive
the Board indicated that a depositing
credit for about 50 percent of the checks institution may select only one crediting
collected through the Federal Reserve at option for all of its check deposits.
11 a.m. ET, assuming the composition of Finally, the crediting option selected by
their check deposits reflects the national a correspondent bank will apply to
averages.
check credits posted by the Reserve
47097
Banks for all of its respondent
institutions.
Under the float-weighted posting time
per time zone option, a depository
institution would receive credit at one
time for all separately sorted, group
sorted, and fine sorted deposits made to
any Federal Reserve office located in
the respective time zone. The credit
posting time for checks that are
transported (either by transportation
arranged by the Federal Reserve, that is.
consolidated shipment, or by
transportation arranged by the
depositor, that is, direct send) from one
Federal Reserve office territory to
another Federal Reserve office, will
depend on the time zone of the
destination Federal Reserve office, not
the location of the paying bank. Table 2
illustrates the posting times that might
apply to deposits at Federal Reserve
offices in each time zone.
T ab le 2 .— S e p a r a t e l y S o r t e d F lo a t W e ig h t e d P o s t in g T im e s 1
[All limes are Eastern Time]
Posting time
Time zone
11:45
12:15
1:00
2:00
a.m.
p.m.
p.m.
p.m.
1 These data are preliminary and are based on an
April 1991 survey. The actual posting times will be
calculated using updated survey data on the actual
debiting times for paying banks. Banks will be noti
fied of the final posting times by July 1993.
Under the fractional posting option, a
depository institution would receive
credit for check deposits according to an
intraday availability schedule with
credits posted beginning at 11 a.m. ET
and hourly thereafter. Table 3 estimates
the credit percentages that would apply
to each clock hour in each time zone.
T ab le 3 — S e p a r a t e l y S o r t e d D e p o s it F r a c t io n a l P o s t in g T im e s 1
Percentage of total dollars credited (ET)
Time zone
11:00
Central............ ...........................................
Mountain.............................................................................
Pacific............... .................................................................
Percent of total dollars................................................
12:00
59
48
34
13
50
13
10
18
10
12
22
16
7
6
18
4:00
3:00
2:00
1:00
6
22
12
29
13
4
29
10
3
32
4
1 Preliminary data, se e footnote 1 to Table 2.
M ixed and Other Fed Check
Deposits—The Federal Reserve Banks
will post credits for deposits of mixed
and/or other Fed cash letters in
accordance with the crediting option
selected by the depositing bank, or its
correspondent institution. The
procedures and the available options
parallel the crediting procedure for
deposits of separately sorted checks.
The Federal Reserve Banks will
calculate credit posting times that are
float-neutral, based on the mix of checks
generally contained in mixed and other
Fed deposits at all Federal Reserve
offices in each of the four U.S. time
zones. Table 4 provides estimated credit
posting times that would apply under
the one posting time per time zone
option for deposits of mixed and other
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
4709b
Fed cash letters at Federal Reserve
offices in each time zone.
T a b l e 4.— M ix e d a n d O t h e r F e d F l o a t W e ig h t e d P o s t in g T im e s 1
[AW times are Eastern Time]
Posting time
Time zone
Mixed
E astern.................. 12:00 noon
Central.................... 12:15 p.m.
Mountain...... ......... 12:45 p.m.
Pacific___ _______ 2:00 p.m.
Other Fed
12:00
12:00
12:45
12.30
noon
noon
p.m.
p.m.
for mixed and other Fed deposits
according to an intraday availability
schedule with credits posted beginning
at 11 a.m. ET and hourly thereafter.
Tables 5 and 6 estimate the credit
percentages that would apply to each
clock hour in each time zone for mixed
and other Fed deposits.
For example, the credit posting time
for mixed cash letters deposited at the
Los Angeles Branch (Pacific Time)
would be 2 p.m. ET, and the credit
posting time for other Fed cash letters
deposited at this office would be 12-JO
p.m. ET. These float-weighted times
reflect the location of the payor banks
on which the checks that are deposited
at Federal Reserve offices in the Pacific
Time zone are drawn.
Under the fractional posting option, a
collecting institution will receive credit
' Preliminary data, se e footnote 1 to Table 2.
T a b l e 5. — F r a c t io n a l P o s t in g T im e s
fo r
M ix e d D e p o s it s 1
Percentage of total dollars credited (ET)
Time zone
1100
Eastern...............................
Central................................
56
48
37
16
Mour-iain........................
Pacific________________
2:00
1 00
12:00
20
16
10
7
13
11
15
10
3:00
4:00
3
4
18
10
8
19
15
28
2
5
29
* Preliminary data, se e footnote 1 to Table 2.
T a b l e 6.— F r a c t io n a l P o s t in g T im e s
fo r
O t h e r F e d D e p o s it s 1
Percentage of total dollars credited (ET)
Time zone
11:00
Eastern. .................................................
....................
Central.....................
Mountain.... ........................................................ ...................... ................... .. _
Pacific. „ .. .
..._ .......................................................................... .. _
12:00
53
51
39
42
13
12
12
13
1:00
18
18
14
14
4:00
3:00
2*0
11
13
18
14
5
6
6
9
11
8
1 Pretimtnary data, s e e footnote 1 to Table 2.
The Reserve Banks will provide the
check crediting times that will be
effective October 14,1893, to depository
institutions during July 1993. Depository
institutions will receive credit for check
deposits at the single posting time per
time zone unless an institution notifies
its local Federal Reserve office no later
than September 14,1993, that it wishes
to use the fractional crediting option. An
institution may change its crediting
option with 30-days advance notice to
the Federal Reserve. The Federal
Reserve will update the credit schedule
semiannually based on changes to the
times that debits are posted and the mix
of checks received for collection.
Other Check Transactions—The
Federal Reserve’s implementation of a
quasi, real-time approach to posting
non-wire transactions will change the
way a number of other check
transactions are posted.
a. U.S. Treasury Checks, Postal
M oney Order, U.S. Savings Bonds
Deposited Under the EZ-Clear Program,
and Checks Drawn on Local Federal
Reserve Banks.—Deposits of these items
currently receive same-day credit when
deposited in separately sorted cash
letters by deadlines that typically range
from 3 p.m. to 4 p.m. local time.11 In
order to provide credit for these checks
early in the day, the Board’s 1991
proposal indicated that the Federal
Reserve Banks would establish new
deposit deadlines at 12:01 a.m. or later
(local time) for separately sorted
deposits of these items. Credit for
separately sorted deposits received by
the new deadline would have been
posted at the opening of Fedwire,
currently 8:30 a.m. ET.
Several commenters requested that
the Federal Reserve post credits for such
deposits one hour after they are
delivered to the Federal Reserve or one
hour after the opening of Fedwire,
whichever is later. Based on the
experience of Reserve Bank personnel,
these types of deposits are typically
received with other check deposits on
regularly scheduled check courier
deliveries. As a result, it is unlikely that
significant dollar volumes of these items
*' Refer to the Reserve Banks’ operating circular
for details on current deposit rules and deadlines.
would be deposited throughout the
business day. Nevertheless, the Board
determined that, to provide somewhat
earlier intraday credit and to
standardize the time at which credit is
granted across Reserve offices, new
deposit deadlines for separately sorted
items will be established at 12:01 a.m. or
later (local time) and at 4 p.m. ET,
effective July 1,1993. When the new
measurement procedures are
implemented on October 14,1993, credit
for items deposited by the new “12:01
a.m.” deadline will be posted at the
opening of Fedwire and credit for items
deposited by 4 p.m. ET will be posted at
5 p.m. ET. In addition, the Board
determined that Reserve Bank offices
may continue their current late
afternoon deadlines for separately
sorted deposits—with credit posted
after the close of Fedwire. If the Reserve
Banks begin to receive large-dollar
volumes of these items at other times
during the day, consideration will be
given to adding deposit deadlines.
Depository institutions may also
deposit these items in mixed and city
Federal Register / Vol. 57, No. 199 / W ednesday. October 14, 1992 / Notices
accounts of receivers of ACH credit
transactions should be posted at the
opening of Fedwire as proposed in 1991
In the case of ACH debit transactions.
nearly 80 percent of the commenters
opposed the proposal to post credits to
the accounts of institutions originating
ACH debit transactions and debits to
the accounts of institutions receiving
such transactions at 11 a.m. ET. Because
of the desire to receive credit early in
the day, the majority of these
respondents requested the Federal
Reserve to post ACH debit transactions
at the opening of business. Commenters
noted that ACH debit transactions were
used for a variety of purposes in
addition to cash concentration
transactions and that the transactions
were funded not only by checksbecoming available on the settlement
date, but also in a variety of other ways.
As a result, these commenters indicated
that associating the posting time for
ACH debit transactions with the first
posting time for commercial check
transactions did not reflect depository
institutions’ funding practices.
B. ACH Transactions
Several respondents acknowledged
The Board's proposals concerning
that posting ACH debit transactions at
ACH transactions were discussed by
the opening of Fedwire causes daylight
131 commenters. Nearly 90 percent of
overdrafts in many receiving
these commenters supported the
institutions' Federal Reserve accounts.
proposal to post debits to the accounts
The majority of these commenters
of institutions originating ACH credit
suggested that overdrafts caused by
transactions and credits to the accounts ACH debit transactions be exempt from
of institutions receiving such
overdraft charges. A number of
transactions at the opening of Fedwire
commenters located on the west coast
on the settlement day. These
indicated that the posting time for ACH
commenters indicated that the proposal debit transactions should be based on
was consistent with current industry
local time to permit west coast
practices, which allow customers to use institutions to obtain funding before the
the proceeds of ACH credit transactions debit is posted.
early in the morning on the settlement
Posting ACH debit transactions at 11
day. Only two respondents opposed the a.m. ET would delay funds availability
proposal. These commenters were
to originators of these transactions
concerned that posting debits to
compared with the current measurement
originating institutions’ accounts at the
procedures. At the same time, posting
opening of Fedwire would have a
ACH debit transactions at the opening
detrimental effect on the ACH
of business would cause about 200 to
mechanism because institutions would
300 institutions to start the day in an
be required to fund their accounts the
overdrawn position. As commenters
day before the settlement day.
indicated, the Reserve Banks do not
Numerous discussions with users of
presently counsel institutions that incur
the ACH mechanism have indicated that daylight overdrafts due solely to ACH
the benefits of eariy-in-the-day funds
transactions, largely because these
availability for receivers of ACH credit
institutions do no currently have the
transactions are important to the future
opportunity to obtain funding for ACH
viability of the mechanism. Further,
debit transactions before their accounts
originating institutions are aware of the
are charged. The Board believes,
value of payments settling each day and however, that when fees are assessed
can plan to cover those payments.
for daylight overdrafts, no overdrafts
Survey data for the four-week period
should be exempt from charges beyond
ending August 23,1989, also indicated
the deductible determined by the Board.
that the proposal would not
Finally, if the accounts of receivers of
disadvantage the majority of originating ACH debit transactions were debited
institutions. The Board, therefore, has
based on local time, as suggested by
determined that debits to the accounts
some commenters, it would be
of originators and credits to the
necessary to grant credit to the accounts
cash letters. When they are contained in
such deposits, they will be posted at the
float-weighted posting time or included
in the 11 a.m. ET fraction, for the time
zone of the Federal Reserve office at
which they are deposited.
b. Foreign check deposits.—Credit for
deposits of foreign checks will be posted
after the close of Fedwire. Debits to the
accounts of collecting institutions
through which the Federal Reserve
collects foreign checks will also be
posted after the close of Fedwire.
c. Nonmachinable check deposits—
Credit for deposits of nonmachinable
checks will be posted after the close of
Fedwire.
d. Corrections—Data entry errors
discovered by the Federal Reserve or by
depository institutions amounting to $1
million or more affecting the amount of
credit or debit for cash letters will be
corrected as soon as discovered and
posted beginning at 11 a.m. ET and
hourly thereafter. Smaller errors will be
posted to Federal Reserve accounts after
the close of Fedwire.
47099
of originators based on the location of
trie receiving institution to avoid
creating intraday float. Such a step
would significantly complicate operating
procedures and would certainly reduce
the attractiveness of this electronic
mechanism
Receivers of ACH debit transactions
cannot predict with certainly the value
of transactions that they will receive on
a certain day. In order to avoid incurring
overdrafts, receiving institutions need
some time after the opening of Fedwire
to obtain funding for payments before
their accounts are debited. The Board,
therefore, has adopted the 1991 proposal
to credit the accounts of originators and
debit the accounts of receivers of ACH
debit transactions at 11 a.m. ET.
The Board has also determined that
ACH return items and check truncation
items, which are processed during the
day for same-day availability and are
normally delivered to receiving
institutions around 4 p.m. ET, should be
posted at 5 p.m. ET, as proposed in 1991.
C. Net Settlement Transactions
Under the 1991 proposal, members of
private-sector clearing arrangements
would be permitted to determine the
time at which the net settlement entries
for their clearing arrangements would be
posted.12 The Reserve Banks would
accept multiple settlement statements
and would post settlement entries one
hour after the data were received from
the agent for the clearing arrangement.
Thirteen of the 20 commenters that
discussed this proposal supported it.
Four of these respondents suggested that
entries be posted 30 minutes after
receipt by the Federal Reserve.
Respondents opposing the proposal
were concerned that members of
clearing arrangements would select late
posting times, thus delaying availability.
Other commenters indicated that
Reserve Bank participation in clearing
arrangements that selected late posting
times would create competitive
inequities by creating incentives for
corporate customers to maintain
accounts with institutions receiving late
afternoon charges. Several commenters
suggested that posting times for net
settlement entries should be no later
than 12 noon or 1 p.m. ET. One
commenter suggested that the current
procedures should be retained; that is,
post net credits as though they occurred
at the opening of Fedwire and net debits
12 The Reserve Banks provide net settlement
services to about 250 private clearing arrangements,
including local check clearing arrangements,
privately operated ACH networks, autom ated teller
machine (ATM) networks, point-of-sale (POS)
networks, and credit card processing arrangements.
47100
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Notices
as though they occurred after the close
of Fedwire. Five commenters indicated
that the current procedures should be
retained for exchanges of short-term
instruments, such as commercial paper.
The Board believes that permitting
members of clearing arrangements to
agree on the time at which settlement
entries would be posted provides
clearing arrangements the means to
provide effective and competitive
services. To the extent that the posting
times selected by clearing groups are
late in the day, the Reserve Banks would
exercise their option of not participating
in such arrangements. The Board also
recognizes that the value of short-term
instruments exchanged among members
of the New York Clearing House is large.
It would be inconsistent with the
Board’s objective of eliminating intraday
float, however, to retain the current
procedures for posting these entries.
Further, the Depository Trust Company's
book-entry commercial paper clearing
and settlement system continues to
expand and should contribute to a
reduction in daylight overdrafts caused
by commercial paper activity. Finally,
the Board believes that providing the
Reserve Banks an hour to post net
settlement entries is not unreasonable
because processing is often performed
manually. In addition, the Reserve
Banks’ staffs must ensure the accuracy
of the data submitted and determine
that the entries are in balance before
they are posted.
The Board, therefore, has determined
that members of private-sector clearing
arrangements should be permitted to
determine, the time at which the net
settlement entries for their clearing
arrangement will be posted, as proposed
in 1991. The Reserve Banks will accept
multiple settlement statements and will
post net settlement entries on the next
clock hour approximately one hour after
the data are received from the agent for
the clearing arrangement.13
entry transfer system be opened later
than the funds transfer system to
provide receiving institutions time to
obtain funding before securities
transfers are delivered. Suggested
opening times ranged from 9:15 a.m. to
11:30 a.m. ET. Commenters also
suggested that the system be modified to
provide receivers time to obtain funding
during the day before the securities are
delivered and debits are posted to their
accounts. Finally, two commenters
expressed concern about overdrafts
caus.ed by deliveries of original issues of
U.S. Treasury securities. One
commenter proposed that new issues be
deposited in a separate account, which
would not be subject to daylight
overdraft charges. The other commenter
suggested that deliveries be delayed
until 11 a.m.
In April 1990, the Board adopted
uniform opening hours for the Fedwire
funds and securities transfer systems.
Concerns raised by some commenters
on the uniform opening time proposal
regarding funding incoming securities
transfers were addressed at that time,
although it is not clear that commenters
had considered the full implications of
the Board’s 1989 proposal to charge for
daylight overdrafts. Consideration is
now being given to expanding Fedwire
operating hours, and a request for
comment on this issue appears
elsewhere in today’s Federal Register.
(See Docket No. R-0778.) In the context
of that proposal, the public will have an
opportunity to discuss the benefits and
costs of opening the book-entry
securities system at the same time as the
funds transfer system.
The Board understands the concerns
of commenters about their inability to
control daylight overdrafts caused by
incoming book-entry securities transfers.
The commenters’ suggestion that
receivers be provided time to obtain
funding before securities are delivered
would require a fundamental change in
D. Book-Entry Securities Activity
the design of the current book-entry
Thirty-eight commenters discussed the securities system. The Federal Reserve
posting of book-entry securities activity. is designing a new book-entry securities
transfer system, however, and that
These respondents indicated that,
design could include features that would
because the book-entry transfer system
provide receivers of incoming securities
is sender-driven, it is difficult for
greater control over the receipt of such
receivers of incoming transfers to
transfers.
control overdrafts caused by such
With respect to overdrafts caused by
transfers. The majority of these
the delivery of original issues of bookcommenters requested that the bookentry securities, the Board believes that
these overdrafts, like overdrafts caused
11 The Board'* determination does not affect
by other securities transfers, should be
clearing arrangements that use Fedwires to
complete settlement, such as the Clearing House
included in the calculation of a
Interbank Payment System, the Depository Trust
depository institution’s daily average
Company, the P articipants Trust Company, and
daylight overdraft. Currently, original
participants using,VISA'S national ACH services.
issues of Treasury securities are
The FedwireB sent and received to complete
settlem ent would be posted as they are processed.
delivered to purchasing institutions
beginning at 9:15 a.m. ET. Thus,
depository institutions are given some
time to obtain funding before they are
charged for the securities. Moreover,
institutions purchasing new issues of
Treasury securities are aware of the
payments associated with their
purchases in advance of the settlement
date and should be able to arrange
funding.
E. Other Transactions
Commenters on the 1991 proposal
discussed a number of other
transactions processed by the Reserve
Banks, such as adjustments, currency
and coin transactions, discount window
loans, and Treasury investments.
1. Adjustments—Several commenters
requested that adjustments for check
transactions be posted before the close
of Fedwire, rather than after the close of
Fedwire as proposed by the Board.
Other commented indicated that
adjustments should include
compensation for the cost of funds as
well as adjustments to daylight
overdraft charges.
Although respondents to the Board's
proposal focused on the treatment of
adjustments for check transactions, the
Board believes that similar concerns
about the treatment of adjustments
apply to all types of transactions
processed by the Reserve Banks. Largedollar adjustments may have a
significant effect on depository
institutions’ intraday Federal Reserve
account positions and, as pointed out by
commenters, could affect daylight
overdraft charges.
To address the concerns raised by
commenters, the Board believes that
large-dollar credit adjustments, that is,
those amounting to $1 million or more,
should be posted during the business
day. On the other hand, depository
institutions should have an opportunity
to arrange funding for debit adjustments.
The Board, therefore, believes that
debit adjustments should be posted after
the close of Fedwire.
Because adjustments are typically
processed as of the date of the original
transactions, the interday value of funds
is currently taken into consideration.
With respect to the intraday value of
funds, depository institutions are
expected to manage their Federal
Reserve accounts each day in a way to
ensure that their use of Federal Reserve
credit does not exceed their net debit
caps and that their closing balance is
positive. Thus, the Board believes that
adjustments should only be considered
in the calculation of daily average
overdrafts on the day that the
adjustment is found and posted to an
Federal Register / Vol. 57, No. 199 / Wednesday. October 14, 1992 / Notices
Institution's account. At the same time,
posting large-dollar credit adjustments
during the business day as they are
discovered and posting debit
adjustments after the close of business
on the day they ere discovered gives
depository institutions the benefit of the
doubt with respect to the intraday effect
of adjustments.
The Board, therefore, has determined
that (1) credit adjustments amounting to
$1 million or more should be posted
hourly beginning at 11 ajn. ET as they
are discovered during the business day
and (2) small-dollar credit and all debit
adjustments should be posted after the
close of Fedwire.
2. Currency and Coin Transactions—
Thirteen commenters discussed the
Board’s proposal to post (1) credits for
currency and coin deposits on a flow
basis, beginning at 11 ajn. ET and
hourly thereafter until ail credits have
been posted on the day of deposit, and
(2) debits for shipments of currency and
coin after the close of Fedwire on the
day the shipment is dispatched. Two
commenters opposed the proposal.
Some commenters indicated that there
should be fewer posting times during the
day. One commenter suggested that the
value of currency and coin deposits did
not warrant intraday posting. On the
other hand, one commenter stated that
credits for currency and coin deposits
should be posted at time of shipment to
the Federal Reserve, and another
commenter requested that charges for
currency shipments be delayed until the
date of actual delivery.
While the value of currency and coin
transactions is not significant in
absolute terms for many depository
institutions, survey data gathered during
the four-week period ending August 23,
1989, indicated that several hundred
depository institutions’ overdrafts could
be measurably reduced if currency and
coin deposits were posted during the
business day. Further, granting credit for
currency and coin deposits during the
business day should address some
concerns raised by smaller depository
institutions about the equity of Federal
Reserve policies.
With respect to the manner in which
credits would be posted during the
business day, the Reserve Banks plan to
verify currency and coin deposits as
they are received. Following
verification, accounting entries would be
generated and sent to the Reserve
Banks’ Integrated Accounting System
(IAS). These accounting entries would
be accumulated and posted on each
clock hour, beginning at 11 a.m. ET until
all entries had been posted. Although
posting would continue throughout the
business day, many depository
institutions make only one currency or
coin deposit a day. As a result, they
would normally receive only one credit
each business day and would not be
exposed to multiple posting times. For
those institutions that make more than
one deposit a day, the only way to
reduce the number of posting times
would be to delay crediting for all
deposits until the last deposit was
verified. The Board believes that
providing credit for deposits as they are
verified would benefit more institutions
than it would disadvantage.
The times at which credits and debits
would be posted to the accounts of
depository institutions participating in
the Reserve Banks' early credit/delayed
debit program was not addressed in the
Board’s January 1991 proposal. The
Board agrees with commenters that
credits should be posted to the accounts
of depository institutions participating
in the early credit program on the day
that the institution ships currency or
coin to the Federal Reserve. Similarly,
debits for shipments of currency and
coin to the accounts of institutions
participating in the delayed debit
program should be posted after the close
of Fedwire on the day that the
institution is scheduled to receive the
shipment
The Board, thereiore, has determined
that credits for currency and coin
deposits should be posted on the clock
hour, beginning at 11 a.m. ET until all
credit have been posted. Accounting
entries will be posted hourly as the
Reserve Banks receive and verify
currency and coin deposits or receive
notifications of shipments from
institutions participating in the early
credit program. The Board has also
determined that debits for shipments of
currency and coin should be posted
after the close of Fedwire on the day the
shipment is dispatched or, for
institutions participating in the delayed
debit program, on the day the shipment
is scheduled to be received.
3. Discount W indow Loans—In 1991,
the Board proposed to post both credits
for extensions of discount window loans
and debits for their repayment after the
close of Fedwire. On an exception basis,
the Reserve Banks’ staff would have had
the option to post the credit for a loan
before the close of business and to post
the repayment 24 hours later.
Twelve commenters discussed the
treatment of discount window loans and
seven commenters supported the
Board's proposal. Commenters opposing
the proposal indicated that discount
window loans represent large credits for
small institutions and that posting such
transactions after the close of Fedwtre
would disadvantage them. These
47101
commenters requested that posting of
discount window loans be permitted at
any time during the business day.
Staff also has been advised that there
may be some circumstances in which
depository institutions would prefer to
repay discount window loans before the
time at which the loan is due. In most,
cases, the desire to repay early is
related to a borrower’s need to obtain
the release of securities pledged as
collateral to secure its discount window
loan in time to permit transfer of the
■securities over the book-entry system
the same day. To accommodate this
need, it was suggested that, on an
exception basis and where valid reasons
are given, depository institutions be
permitted to repay discount window
loans before the time of day that the
loan becomes due.
The Board continues to believe that,
in an active intraday pricing
environment, discount rates should
represent the cost of 24-hour extensions
of Federal Reserve credit which would
be comparable in term to 24-hour
extensions of credit in the federal funds
market. In response to the introduction
of charges for intraday credit by the
Federal Reserve, participants in the
federal funds market presumably will
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 rates 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 window at the prevailing
discount rate. Hence, it would seem
most appropriate to link the level of
borrowing to a 24-hour federal funds
rate by having the maturities of discount
window loans be 24 hours or multiples
thereof.
At the same time, the Board agrees
with commenters that there may be
occasions, consistent with the basic
policies governing all use of Federal
Reserve credit, when a depository
institution should be permitted to use
funds advanced through the discount
window during a portion of the day on
which the loan is granted. The Board
also agrees that there may be some
circumstances that would justify
allowing repayment of a discount
window loan before its scheduled
maturity of 24 hours cr a multipis
thereof.
47102
Federal Register / Vol. 57, No. 199 f Wednesday, October 14, 1992 / Notices
The Board, therefore, has determined
that credits for discount window loans
and debits for repayments normally
should be posted after the close of
Fedwire. In the occasional
circumstances where a depository
institution does not have ready access
to fhofiey markets and must make
unanticipated payments during the
business day, however, the Reserve
Bank may post the loan during the
business day and post the repayment 24
hours later. Further, on an exception
basis and where a valid reason is given,
an institution may be permitted to repay
a loan before it otherwise would be due.
The associated debit would be posted at
the same time.
4. Treasury Investm ents-^All eight
commenters tb»t discussed the proposal
to post advance notice Treasury'
investments (that is. Treasury direct and
special direct investments) at the
opening of Fedwire and to post sameday investments at 2. p.m. local time
supported the Board's proposal. The
Treasury Department, however,
expressed concern that postingsameday investments at 2 p.m. local time
might dlscmtrage participation in the
program.
The Board-acknowledges that some
Treasury Tax and Loan (TT&L)depositaries may wish to invest funds in
Treasury securities. Because the
Fedwire securities transfer system
officially closes at 2.-30 p.m. ET, the
Board agrees that some depositaries
might be unable to invest fuads<based
on their preferences if the Board’s
proposal for same-day investments were
adopted. The Reserve Banks typically
receive information from the Treasury
Department about same-day
investments between 11:30 a.m. and
12:30 p.Ttn. ET. Because a small number
of institutions participate in the
program, the Reserve Banks have
indicated that they would be able to
post same-day Treasury investments by
1 p.m. ET. The Board, therefore, haB
determined that advance notice
Treasury investments should be posted
at the opening of Fedwire and that
same-day investments should be posted
by 1 p.m. ET. For practical purposes, this
determination would mean that sameday investments will be posted, on a
flow basis, from 12 noon through 1 pjn.
ET, as Reserve Banks receive and
process information from the Treasury
Department
5. Letters o f Credit—The Board
proposed to post all manual letters of
credit that had been processed by 2 p.m.
ET at that time and to post all remaining
transactions at 5 p.m. ET. (The majority
df letter-of-credit activity is processed'
would increase by about 50 percent and
more than 400 institutions would exceed
their net debit caps. Approximately 240
of the institutions With excess
overdrafts, however, would be eligible
for either higher caps or the exemptfrom-filing status, which was
implemented in January 1991. In
addition, the majority of excess
overdrafts are due to book-entry
securities activity and are concentrated
at the three New York clearing banks.
Depository institutions are permitted to
exceed their caps due solely to bookentry activity, provided they fully
collateralize those overdrafts. As a
result, these excess overdrafts would
not need to be reduced due to the
implementation of the modified
measurement scheme.
While the number of institutions
affected in a material way would not be
extremely large, the majority of
institutions would need to make some
adjustment to the procedures they use to
manage their intraday Federal Reserve
account positions. In this regard, several
commenters expressed ^Oncem nbout
the Reserve Bank’s ability to provide the
information needed by depository
institutions to make cash management
decisions, monitor their intraday
positions, and reconcile daylight
overdraft charges.
Because a large number of institutions
rely upon the Reserve Banks’ ABMS to
manage their intraday use of Federal
Reserve credit die ABMS is being
modified to provide depository
institutions account balance information
reflecting (1) all transactions that have
been posted to the Reserve Banks*
Integrated Accounting System
throughout the day and (2) balances
F. Effect of Modifications on Depository available for transfer under the
measurement scheme adopted by the
Institutions
Board. The first balance can be used for
Because the changes to the Board’s
cash management purposes and the
1991 proposal for measuring daylight
second balance can be used to manage
overdrafts do not result in significant
the amount of intraday credit an
changes in the times that paymen*
institution uses. In addition, the Reserve
transactions would be posted, the effect Banks will provide information
of this set of modifications would
concerning the value of specific types of
similar to the effect of the 1991
transactions processed and the time
proposal.
during the day that funds will be debited
It is clear that implementation of the
or credited to an institution's account.
modifications to the measurement
To ensure that the information services
proposal would require some adjustment provided by the Reserve Banks satisfy
by all institutions using Federal Reserve the needs of the majority of depository
payment services. Survey data for the
institutions. Federal Reserve staff will
four-week period ending August 23,
survey representatives of depository
1989, indicate that the elimination of
institutions to determine their specific
intraday float would increase the level
requirements and will consider thcnb
of daylight overdrafts by about $30
requirements in the final design of
billion per day. The number of
Reserve Bank information services.
institutions incurring daylight overdrafts
Although a fairly large number of
depository institutions would need to
See 56 FK 3107. January 28.1991.
make some, adjustments to manage their
over Fedwire and> as a result credits are
posted to recipients’ accounts when the
funds transfers are processed.
All eight commenters that discussed
this proposal supported i t Because the
payments associated with these
transactions involve very large amounts
and would typically be invested on the
day of receipt, the Board has determined
that all manual letters of credit should
be posted as proposed in January 1991
6. State and Local Government
Series— Treasury Securities (SLGs}—
SLGs are nonmarketable 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.
The Board proposed to post (1) debits
to the accounts of depository institutions
for new issues of SLGs after the close of
Fedwire on the issue date and (2) credits
to the accounts of depository institutions
for interest and principal payments for
SLGs made via reserve account entries
at the opening of business on the
interest payment and redemption dates.
Interest and principal payments that are
made via the ACH or by means of
Treasury checks would be treated like
other ACH credit and Treasure check
transactions.
All eight commenters that discussed
the treatment of SLGs supported the
Board’sproposal. Because the risk faced
by the Reserve Banks in handling these
transactions is limited, the Board has
determined to adopt its 1991 proposal
for posting debits for original issues and
credits for interest and redemption
payments for SLGs.
Federal Register / Vol. 87, No. 199 / Wednesday, October 14, 1992 / Notices
use of Federal Reserve intraday credit
under the proposal, the Board believes
that the costs of these changes should
be relatively low. In order to manage
their intraday Federal Reserve account
positions, some depository institutions
may need to modify the procedures that
they use to monitor their customers’
intraday account balances. In particular,
the determination that debits for check
presentments be posted during the
business day is likely to necessitate
depository institutions’ requiring some
customers to fund check presentments
earlier in the day than they do now.
Further, a relatively small number of
institutions may choose to modify their
customer monitoring systems and
develop systems to charge customers for
daylight overdrafts. These institutions
could incur material costs. Although
implementing the modified measurement
scheme would contribute to some cost
increases for depository institutions, it
would also place the burden associated
with intraday float reduction on the
parties responsible for making
payments—both senders of electronic
payments and issuers of checks.
without incurring daylight overdrafts,
provided that the timing of the payments
to respondents followed the receipt of
credit from the Federal Reserve. Private
collecting institutions that enter into
bilateral agreements with payor
institutions currently are able to obtain
payment for check presentments on the
day of presentment and, in some cases,
do not pay presentment fees to the
payor institutions. At the same time, the
modification to subpart A of Regulation
J and the measurement procedures
improve further the Reserve Bank’s
ability to obtain settlement for check
presentments vis-a-vis some privatesector collecting institutions.
The Board's proposal to amend
Regulation CC to provide same-day
settlement for private-sector
presentments requested comment on
whether payor institutions should be
obligated to settle for private-sector
presentments on as timely a basis as
required in the 1991 proposed
modification to subpart A of Regulation
J (56 FR 4743, February 8,1991). The
Board recently adopted a same-day
settlement rule, and a discussion of the
timing of private-sector presentments is
Competitive Impact Analysis
included in Docket R-0723, elsewhere in
Under its competitive equity policy,
today's Federal Register.
the Board assesses the competitive
In the case of the ACH service, the
impact of changes that have a
availability of funds to receivers of ACH
substantial effect on payments system
credit transactions would be slightly
participants.16 Under this analysis, the
more favorable than the terms of the
Board determines whether the change
national ACH net settlement service. On
would have a direct and material
the other hand, institutions originating
adverse effect on the ability of other
service providers to compete effectively ACH credit transactions would be
charged earlier than they would be
with the Federal Reserve in providing
under the terms of the national ACH net
similar services.
settlement service. In the case of ACH
The Board believes that the modified
debit transactions, funds availability
measurement scheme would permit
under the proposal would be
depository institutions and private
comparable to the terms of the national
clearing groups to offer safe and
ACH net settlement service. Because
effective payment services that would
compare favorably with those offered by there are a variety of reasons that
depository institutions choose to use
the Reserve Banks. In the case of the
private-sector processors, including
check collection service, depository
pricing and deposit deadlines, slight
institutions participating in private
differences in the timing of credits and
clearing houses would be able to
debits for transactions are unlikely to
establish the time at which net
settlement entries for checks exchanged cause institutions to shift their
transactions to the Federal Reserve’s
among participants would be posted to
ACH.
Federal Reserve accounts. Thus, the
participants would be able to control the Summary
time at which credits and debits would
The Board believes that the method
be posted to their accounts.
adopted for posting check transactions
Correspondent banks that clear checks
during the business day addresses many
on behalf of respondents would be able
of the concerns that were raised by
to make payments to iheir respondents
commenters on the 1989 and 1991
for any checks collected through the
Federal Reserve on the availability date proposals. At the same time, the Board
acknowledges that the banking industry
will incur some incremental costs in
•'* These assessment procedure* a re described in
implementing the measurement scheme.
the Board's policy statement entitled “The Federal
The Board does not believe that the
Reserve in the Payments System" (65 FR 1164a
March 29.1990).
implementation and ongoing costs that
47103
will be borne by the industry will be
substantial, unless a large number of
institutions choose to emulate the
Federal Reserve’s procedures for
monitoring their customers’ intraday
account positions. Because it is likely
that depository institutions will make
rational business decisions, the Board
expects depository institutions to
implement any changes that will be
required in the most cost effective way
possible and, thus, keep to a minimum
potential expenditures.
The Board has determined to adopt
modifications to the procedures used to
measure daylight overdrafts that result
in intraday accounting for non-wire
transactions based on a quasi-real-time
approach. In particular, depository
institutions collecting checks through
the Federal Reserve would have the
option to receive check credits (1) at one
float-weighted posting time for each of
the four U.S. Time zones; or (2) based on
a unique set of fractions for each time
zone. The Board has also determined
that debits for check presentments
should be posted on the next clock hour
that is at least one hour after
presentment takes place, beginning at 11
a.m. ET.
Fedwire funds and book-entry
securities transfers would continue to be
posted as they are processed. The
details of the Board’s determination are
outlined in Appendix 2.
Policy Statement
The Board has adopted the following
to replace part (I) (A) in its “Federal
Reserve System Policy Statement on
Payments System Risk” under the
headings “I. Federal Reserve Policy”
and “A. Daylight Overdraft Definition,”
effective October 14,1993:
A daylight overdraft occurs when a
depository institution’s Federal Reserve
account is in a negative position during
the business day. The Reserve Banks
use an ex post system to measure
daylight overdrafts in depository
institution’s Federal Reserve accounts.
The procedures used result in Fedwire
funds and book-entry securities
transfers being posted as they are
processed during the business day.
Intraday accounting for automated
clearing house (ACH) and non-wire
transactions is based on a quasi-realtime accounting approach. The following
table (the table presented in appendix 2
will be included in the policy statement)
presents the detail of the procedures
used by the Federal Reserve for
measuring daylight overdrafts.
47104
Federal Register / Vol. .57,-No. 199 / W ednesday, October 14, 1992 / Notices
By order to the Board of Governors of the
Federal Reserve .System, O ctober 6,1992.
William W. Wiles,
Secretary of the Board.
Appendix 1—1991 Proposal for
Measuring Daylight Overdrafts
Opening Balance (Previous Day's Closing
Balance)
Post at the Opening of Fedwire Funds
Transfer System
+ / - Government and Commercial ACH
Credit Transactions
+ Advance Notice Treasury Investm ents
4-Treasury State and Local Government
Series {SLGs) Interest and RedemptionPayments
-(-Treasury Checks. Postal Money Orders.
Federal Reserve Bank Checks, and EZClear Savings Bond Redemptions
Deposited the Previous Night
Post Throughout Business Day
+ / —Fedwire Funds Transfers
+ / —Fedw ire Book-Entry Securities
Transfers
+ / —Net Settlem ent Entries 1
Post at 9:15 a.m. Eastern Time
—Original Issues of Treasury Securities *
+U.S. Treasury and Government Agency
Interest a n d Redemption Payments
Post at 11 a.m. Eastern Time
+ / —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 M anual Letters of Credit *
Post at 2 p.m. Local Time
-t-Same-Day Treasury Investments
Post One Hour After Deposits Deadline (4-5
p.m. Local Timej
+ 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
+ / —Same-Day ACH Transactions 4
1 Net settlement entries would be posted one hour
after settlement data are received by the Reserve
Banks.
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.
s Letters jof credit transactions are draw dow ns of
government grants.
Same-day ACH transactions include ACH
return items and check truncation items.
6 In unusual circum stances it. a depositary
institution dbes not have r^ady access to money
markets and has dem onstrated a need to make
Post After the Close of Fedwire Funds
Transfer System
+ / —All Other Non-Wire Transactions (such
as, Noncash, Government Coupons.
TT&L Calls. Subscription for SLGs.
Discount Window Loans and
Repayments.5 and Currency and Coin
Shipments.)
EQUALS
Closing Balance
Appendix 2—Modified Procedures for
Measuring Daylight Overdrafts6
Opening Balance (Previous Day’s Closing
Balance)
Post at the Opening of Fedwire Funds
Transfer System
+ / —Government and Commercial ACH
Credit Transactions
+ Advance Notice Treasury Investments
4- Treasury State and Local Government
Series (SLGs) Interest and Redemption
Payments
.c
+ Treasury Checks, Postal Money Orders,
local Federal Reserve Bank Checks, and
EZ-Cierk Savings Bond Redemptions in
Separately Sorted Deposits
Post Throughout Business Day
+1 — Fedwire Funds Transfers
+ / —Fedwire Book-Entry Securities
Transfers
+■-/ —Net Settlement Entries'7
Post by 9:15 a,m. Eastern Time
+ U.S. Treasury and Government Agency
Book-Entry Interest and Redemption
Payments
+ U.S. Treasury and Government Agency
Matured Coupon and Definitive
Securities Received before the Maturity
Date
Post Beginning at 9:15 a.m. Eastern Time
—Original Issues of Treasury Securities 8
Post at 11 a.m. Eastern Time
+ / —ACH Debit Transactions
Post at 11 a.m. Eastern Time and Hourly
Thereafter
+ / — Commercial Check Transactions,
Including Return Items
+ / —Check Correction Amounting to $1
million or more
■+ Currency and Coin Deposits
-t- Credit Adjustments Amounting to $1
million or more
Post by 1 p.m. Eastern Time
+ Same-Day Treasury Investments
unanticipated payments. Reserve Banks may post
the credit for a discount window loan when it is
granted, provided It is repaid 24 hours later.
6 The posting changes do not affect the overdraft
restrictions and overdraft m easurem ent provisions
for nonbank banks established by the Competitive
Equality Banking Act of 1987 and the Board's
Regulation Y (12 CFR 225.52).
7 N et settlem ent entries will be posted on the next
clock hour approximately one hour after settlement
d a ta are received by the Reserve Banks.
®Original issues of Government agency securities
are delivered as book-entry securities transfers and
Post at 2 p.m. Eastern Time
+ Processed Manual Letters of Credit'9
Post at 5p.m. Eastern Time
+ Treasury Checks, Postal Money Orders,
local Federal Reserve Bank Checks, and
EZ-Clear Savings Bond Redemptions in
Separately Sorted Deposits
+ Processed Manual Letters of Credit
+ / — Same-Day ACH Transactions 10
Post After the Close of Fedwire Funds
Transfer System
+ / — All O ther Non-Wire Transactions such
as. Noncash, Government Coupons 11
TT&L Calls. Subscription for SLGs.
Discount W indow Loans and
Repaym ents,1’ and Currency and Coin
Shipments.)
EQUALS
Closing Balance
[FR Doc. 92-24690 Filed 10-13-92; 8:45 am)
8JUJNG CODE 62 tO-1(Ml
REVISIONS TO THE PAYMENTS
SYSTEM RISK REDUCTION
PROGRAM
(DOCKET R-0722)
46950
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Rules and Regulations
FEDERAL RESERVE SYSTEM
12 CFR Part 210
[Regulation J; Docket No. R-0722]
Collection of Checks and Other Items
by Federal Reserve Banks and Funds
Transfers Through Fedwire
Board of Governors of the
Federal Reserve System.
a c t io n : Final rule.
agency:
The Board is adopting an
amendment to its Regulation J to require
paying banks that receive presentment
of checks from a Federal Reserve Bank
to settle for those checks as soon as one
hour after receipt of the checks. This
amendment is necessary to implement
the procedures for posting debits and
credits to depository institutions’
reserve and clearing accounts in order
to measure daylight overdrafts
accurately under the Board's payments
system risk reduction program. The
intent of the program is to reduce both
Federal Reserve and overall payments
system risk. The Board is also making
other technical and clarifying
amendments to Regulation J.
EFFECTIVE DATE: October 14,1993.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Oliver I. Ireland, Associate General
Counsel (202/452-3625), Stephanie
Martin, Senior Attorney (202/452-3198),
Legal Division; or Florence M. Young,
Assistant Director, Division of Reserve
Bank Operations and Payment Systems
(202/452-3955); for the hearing impaired
only: Telecommunications Device for
the Deaf, Dorothea Thompson (202/4523544).
SUPPLEMENTARY INFORMATION: As part
of its payments system risk reduction
program, the Board has determined to
charge a fee for daylight overdrafts in
reserve and clearing accounts at Federal
Reserve Banks. To measure daylight
overdrafts accurately, the Board has
adopted procedures under which debits
and credits will be posted to reserve and
clearing accounts for various
transactions. (See Docket Nos. R-0668
and R-0721, elsewhere in today's
Federal Register.) Under the
measurement procedures adopted by the
Board, debits and credits for check
transactions will be posted throughout
the business day, based on when checks
are presented by Reserve Banks. When
the intraday check posting procedure
was published for comment in January
1991, the Board also requested comment
on an amendment to Regulation J (12
CFR part 210) to allow Reserve Banks to
debit the reserve and clearing accounts
of banks 1 as early as one hour after
presentment of checks (56 FR 3047,
January 28,1991). The Board has
adopted the proposed amendments to
Regulation J, modified as explained
below.
Regulation J Before Amendment
Subpart A of Regulation J governs the
collection of checks by Reserve Banks
and applies to “all parties interested in
an item handled by any Reserve
bank.” 2 Regulation J provides for
deferred posting of checks, i.e., a paying
bank can wait until the day after
presentment to decide whether to pay or
return a check if it settles for the check
on the day of presentment. Deferred
posting 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.
Before adoption of the amendments
published today (which are effective
October 14,1993), § 210.9(a)(1) of
Regulation J had provided that a paying
bank would become accountable for a
check presented by a Reserve Bank
unless it settled for or returned the
1 Under Regulation J, bank includes all depository
institutions, such as commercial banks, savings and
loan associations, and credit unions Regulation J
defines paying bank as the bank by. at. or through
which an item is payable or collectible and to which
it is sent for payment or collection, or the bank
whose routing num ber appears on the item and to
which it is sent for payment or collection. (12 CFR
210.2(b) and (j)).
* 12 CFR 210.3(b).
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Rules and Regulations
check by the close of its banking day on
which it received the check.3 Section
210.9(a)(2) of Regulation J specified that
settlement proceeds must be available
to the Reserve Bank by the close of the
Reserve Bank's banking day on the day
the paying bank received the checks.
Under these two provisions, it appeared
that a paying bank had to settle for a
check presented to it by a Reserve Bank
by the close of its banking day or the
close of the Reserve Bank’s banking day.
whichever was earlier. As a practical
matter, in many cases this time was
likely to be mid-afternoon, when the
paying bank closed its lobby. Generally,
if settlement was made under
Regulation J, the paying bank could
exercise deferred posting and return the
check before midnight of its next
banking day in accordance with § 4-301
of the Uniform Commercial Code
(UCC).«
Although the UCC allows deferred
posting of checks, the time for
settlement by paying banks under the
UCC differs from the time for settlement
by paying banks for checks presented
under 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. If the UCC settlement
obligation is met the paying bank may
exercise deferred posting under UCC
§ 4-301. Thus, Regulation J requires the
paying bank to settle for a check
presented by a Reserve Bank at an
earlier time than does the UCC if it
wishes to retain the right to return the
check on the next banking day.®
Reserve Banks may enter into
agreements with paying banks to alter
the settlement time for checks presented
by Reserve Banks, and the Board has
the ability to make further changes
regarding the collection of checks under
the authority of the Federal Reserve A ct
Section 16(14) of the Act authorizes the
Board to make 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 Act authorizes Reserve
Banks to engage in check collection on
* Settlement under regulation J (both before and
after amendment) must be by a debit to an account
on the books of the Reserve Bank, cash, or other
form of payment agreed to by the Reserve Bank.
4 UCC J 4-301 provides that if a paying bank
settles for a check by midnight on the banking day
of receipt, it may return the check or send notice of
nonpayment by midnight of the banking day
following the banking day of receipt.
‘ in addition, the means of settlement that a
paying bank may use to meet this obligation are
more limited under Regulation J than under the
UCC.
46951
would be subject to any applicable
overdraft charges. The Board has
adopted the proposed amendments with
minor revisions and clarifying changes
in the regulatory format
Amended Regulation ]
The Board received 34 comments on
The primary purpose of the Board's
the proposed amendments to
1991 Regulation J proposal was to allow § 210.9(a)(2) regarding the timing of
Reserve Banks to debit paying banks’
settlement to avoid overdraft charges.
accounts for presented checks during
Twenty-four commenters stated that a
the day for purposes of measuring
time frame of one or two hours between
daylight overdrafts under the risk
presentment and settlement is too short
reduction program. The proposal also
nine commenters supported the
included amendments intended to
proposed time frame, and one
clarify the accountability provisions of
commenter suggested that check
the regulation and to explain the rules
transactions be posted on the hour after
that would apply on days when either
presentment regardless of how much
the Reserve Bank or the paying bank
time has passed.
was closed. The Board received 65
Generally, the commenters who
comments that specifically addressed
opposed the settlement timing proposal
the proposed amendments to Regulation stated that one hour does not allow
J. Many other commenters suggested
sufficient time for a paying bank to
that the proposed check posting
verify receipt, examine cash letters, and
procedures in Docket R-0721 be
settle for or return checks. Five
modified and also suggested that
commenters suggested lengthening the
Regulation J be amended to reflect those time between presentment and
revisions or delayed until new posting
settlement to two or three hours, and
procedures were developed. Three
one commenter suggested settlement be
commenters supported the Regulation J
delayed until just before the close of
changes overall. One commenter
Fedwire.
conditioned support on the adoption of
The Board believes that the cash letter
pricing and another on the ability of
verification
practices of most paying
depository institutions to monitor their
banks would be unaffected by a
accounts on a real-time basis.
settlement deadline of at least one hour
Timing o f Settlem ent to A void Overdraft after presentment. Generally, all checks
Charges
now presented by the Federal Reserve
for
same-day settlement are received by
The proposed amendments to
the paying bank by 2 p.m., local time.
§ 210.9(a)(2) of Regulation J required a
Although Regulation J generally has
paying bank to settle with a Reserve
Bank for checks, or return the checks, by provided an opportunity for the paying
bank to examine the checks to decide
the end of the clock hour after the hour
whether to settle for or return them by
during which presentment had taken
the close of business, this time period
place,7 or by one hour after the
permitted only limited verification of
scheduled opening of Fedwire,
cash letters. For example, a paying bank
whichever was later (or by such later
could verify that a cash letter had been
time as provided in the Reserve Bank’s
received, but usually could not examine
operating circular).
individual checks prior to settling for the
The proposed amendments provided
cash letter at the close of business. This
that if the proceeds of the settlement
limited verification, however, is
were not available within the
consistent with the theory and practice
designated time frame and the check
of deferred posting of checks under the
was not returned, the paying bank
UCC. Paying banks generally do not
examine checks individually until after
* The Board’s authority to set the time and form
the close of business on the day of
of settlement for checks presented by Reserve
presentment or during the following day.
Banks has been upheld by the courts on two
occasions. See C om m unity Bank v. Federal Reserve
Under the Regulation J amendment,
Bank o f San Francisco, 500 F.2d 292 (9th Cir. 1974),
paying banks would continue to have at
and Independent B ankers A ssociation o f A m erica v.
least one hour to verify the receipt of a
B oard o f Governors o f the Federal Reserve System,
cash letter before settling for it or to
500 F.2d 812 (DC. Cir. 1974).
7 For example, a paying bank would have to settle return the cash letter and avoid having
for checks presented at 12:30 pjn. ET by 2:00 p.m.
to settle for it.
ET. Generally, paying banks authorize Reserve
Four commenters noted that the
Banks, through an autocharge agreement, to debit
earlier settlement time would have a
their reserve or clearing accounts for the amount of
checks presented. This authorization would
negative impact on controlled
constitute settlement for the checks even if the
disbursement and cash management
Reserve Bank did not post the charge to the paying
practices because customer accounts
bank's account until after the time at which the
would have to be funded earlier in the
settlement obligation arose.
behalf of members and non-members,
and section 11 grants the Board general
supervisory and rulemaking authority
over Reserve Bank activities.8
46952
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Rules and Regulations
day. Seven commenters expressed
concern that banks would be unable to
allocate check debits to their customers
or respondents within one hour to
determine overdraft positions and thus
would be unable to motivate behavioral
changes through direct pricing.
Although it is true that paying banks
wishing to prevent daylight overdrafts
caused by check debits might have to
require earlier funding of their
customers’ accounts, collecting banks
and their customers will benefit from
earlier crediting of checks to reserve and
clearing accounts. The Board believes
that most paying banks could require
controlled disbursement customers to
fund their accounts based on estimated
presentments rather than expending
resources to determine the exact amount
of checks to be presented by the Federal
Reserve each day. Further, the Board
believes that only a relatively small
number of banks will change their
internal tracking and posting systems in
order to charge customers for their use
of daylight credit. Over 90 percent of the
institutions covered by the risk
reduction policy will not exceed their
net debit caps or incur daylight
overdraft charges, and thus would not
be likely to undertake costly system
changes. A few banks may incur
overdraft charges in amounts high
enough to justify system changes. These
banks would likely make such system
changes even if settlement for checks
presented by Reserve Banks were not
required until the close of business, due
to their need to track other types of
payment transactions.
Three of the commenters in support of
the proposal conditioned their support
on the establishment of an adjustment
process as part of the posting
procedures to correct for early or
erroneous debits that may have caused
daylight overdrafts. Another commenter
suggested that explicit adjustment
procedures be included in Regulation J,
Five commenters objected to basing the
timing of check debits on expected
presentment times, stating that Reserve
Bank courier schedules are often
unpredictable and can vary by as much
as an hour.
When the Reserve Bank presents
checks via courier, the checks will
generally arrive at the paying bank at
the same time each day, but could arrive
any time before 2 p.m. The Reserve
Banks will make adjustments in
overdraft charges if a presentment is
reported to have been made late (and a
reserve or clearing account is debited
too early) or if the amount of a debit is
incorrect.
Four commenters stated that the
proposal did not allow enough time for
the paying banks to transport checks
from their presentment point to their
correspondent or processing center, and
thus they would be unable to verify
receipt or cash letter totals. The Board
recognizes that there may be a limited
number of cases when paying banks
that have established presentment
points at locations distant from their
processing centers will be unable to
transport and verify cash letters within
an hour after presentment. These paying
banks may wish to select new
presentment locations. The Board
believes that, in most cases, one hour is
sufficient time for paying banks to verify
that presentment was made and
transport cash letters to their processing
center. Reserve Banks often deliver
directly to paying banks’ processing
centers.
One commenter suggested that the
settlement time should be triggered by
the receipt of the final check bundle for
those institutions that receive multiple
presentments from the Reserve Bank.
Another commenter suggested that the
Board clarify that presentment occurs
when the paying bank has picked up the
checks at the Reserve Bank or when the
Reserve Bank courier has delivered the
checks to the paying bank. Generally,
presentment by a Reserve Bank occurs
when a check is delivered to the paying
bank or made available for pick-up at a
presentment point designated by the
paying bank. The Reserve Bank may
present more than one cash letter each
day, and the time for settlement for each
cash letter is triggered by the
presentment of that cash letter.
One commenter suggested that the
Board clarify whether a paying bank
may return an entire cash letter before
the end of its banking day and how
much a return would affect settlement
Under amended Regulation J, a paying
bank can avoid incurring any overdraft
charges that would have resulted from
settlement by sending a cash letter for
return by the next clock hour that is at
least one hour after presentment or by
one hour after the scheduled opening of
Fedwire, whichever is later (or by a later
time as provided in the Reserve Bank’s
operating circular). As discussed below,
the paying bank may avoid
accountability for that cash letter by
sending it for return before the close of
Fedwire or the close of its banking day,
whichever is later. Both of these return
deadlines (the deadline for avoiding
overdraft charges and the deadline for
avoiding accountability) may be
extended under certain conditions, in
accordance with § 229.30(c) of
Regulation CC (12 CFR 229.30(c)).
Six commenters addressed the
question whether the Reserve Bank
should debit a paying bank's account
before physical presentment of the
checks. Three commenters from the
west coast were opposed to such a
practice because the paying bank would
not be able to verify receipt or examine
the cash letter totals before settlement.
One California bank noted that setting a
uniform settlement time without regard
to the time of presentment would likely
put east coast banks at a comparative
advantage because they normally
receive presentment earlier than west
coast banks and would likely have more
time to inspect the cash letter before
settling. Three commenters suggested
that the Board consider requiring
settlement before physical presentment,
perhaps based on electronic notification
of cash letter information.
Section 609(b)(1) of the Expedited
Fund Availability Act (12 U.S.C.
4008(b)(1)) provides that the Board shall
consider requiring regulation that banks
be charged based upon notification that
a check or similar instrument will be
presented for payment. The Federal
Reserve studied the feasibility of
mandatory and voluntary electronic
presentment in the Electronic
Clearinghouse Study, submitted to
Congress in August 1988. Although
electronic presentment is feasible given
current technology, the study concluded
that the benefits of mandatory electronic
presentment would be outweighed by
the potential risks borne by the paying
banks. Paying banks may wish to
participate in voluntary electronic
presentment arrangements with Reserve
banks or other presenting banks. Absent
such an arrangement, the Board believes
it is appropriate to require settlement
only after physical presentment so that
the paying bank will have the
opportunity to verify receipt of the cash
letter.
Accountability and Banking Day
Definition.
The amendments to § 210.9(a)(1), as
proposed, provided that as long as either
the proceeds of a settlement for
presented checks are available to the
Reserve Bank by close of Fedwire on the
day the paying bank receives the check
or the paying bank returns the check
before the close of its banking day,8 the
paying bank would not be accountable
for the check and would be able to
exercise deferred posting. The Board
also proposed a technical revision to the
definition of “banking day” to
• The deadline for returning a check without
settling for it maybe extended in certain cases in
accordance with j 229.30(c) of Regulation CC (12
CFR 229.30(c)).
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Rules and Regulations
correspond to the definition in UCC § 4104(a)(3) (1990 version). The Board has
adopted the proposed amendments with
two substantive changes: (1) the paying
bank may avoid accountability by
returning a check by the later of the
close of its banking day or the close of
Fedwire, and (2) the paying bank will be
accountable as of the close of its
banking day or the close of Fedwire,
whichever is earlier, if it fails to settle or
return by the deadline established in
§ 210.9(a)(1). The former change was
made in response to a commenter’s
suggestion, as explained below. The
latter change was made to ensure that, if
a paying bank fails to settle for a check
presented by a Reserve Bank and
becomes insolvent after the close of
business but before the close of
Fedwire, the failed paying bank’s
accountability for the check would be
fixed at its close of business and prior to
its insolvency. The Board has also
reformatted § 210.9(a)(1) for clarity,
adopted the proposed definition of
“Fedwire,” added a definition of "clock
hour,” and revised the definition of
"item” to correct an erroneous crossreference.
Three commenters suggested that a
paying bank should be free from
accountability if it returns a check
without settling for it by the close of
Fedwire, rather than by the close of its
banking day as proposed. The
commenters argued that, under the
previous version of Regulation J, a
paying bank’s banking day could be
interpreted to close at the close of
Fedwire, but the proposed incorporation
of the UCC definition of "banking day”
would negate such an interpretation,
requiring a paying bank to take action
before the time it closes its lobby, often
2 p.m. or 3 p.m,. if it wanted to return a
check without settling for it. As noted
above, the Board amended the proposed
regulation to allow a paying bank to
avoid accountability by returning a
check by the close of Fedwire or the
close of its banking day, whichever is
later.
Three commenters suggested that
Regulation J incorporate the Regulation
CC, rather than the UCC, definition of
banking day. The Regulation CC
definition mirrors and UCC banking day
definition except that Regulation CC
requires a banking day to be a part of a
business day, which is generally defined
to be all weekdays except federal
holidays (see 12 CFR 229.2(f) and (g)).
Three commenters requested
clarification that the Reserve Banks
would not present checks on banking
days that are not business days under
the Regulation CC definition.
46953
would not be liable for interest
compensation or overdraft charges
under Regulation J. However, most state
holidays are not mandatory bank
holidays, and if a bank chooses to close
on such a holiday, its closing would be
considered voluntary under Regulation J.
Under § 210.9(a)(4) (proposed
§ 210.9(a)(3)(i)), if the Reserve Bank is
closed on the day the paying bank
receives presentment of a check, the
paying bank will be accountable for the
check unless it returns the check by
midnight or settles for the check by the
close of Fedwire on the Reserve Bank’s
next banking day. In addition, if the
Reserve Bank or Paying Bank Closed
Reserve Bank is closed on the day the
Proposed § 210.9(a)(3) addressed the
paying bank receives presentment of a
situation in which either the Reserve
check, the paying bank will be subject to
Bank or the paying bank is closed on the any applicable daylight overdraft
day of presentment. One commenter
charges on the day the Reserve Bank
supported these provisions without
charges the paying bank’s account
discussion. One commenter suggested
unless the paying bank either returns the
that these provisions would be more
check by midnight on the day of
appropriate in the Reserve Bank's
presentment or settles for the check by
operating circulars than in Regulation J.
one hour after the scheduled opening of
Although these occasions may be rare,
Fedwire on the Reserve Bank’s next
the Board believes that they should be
banking day or by such later time as
addressed in Regulation J. The Board
provided in the Reserve Bank’s
has adopted the substance of the
operating circular.
amendments as proposed, but has
One commenter stated that the
reformatted the regulatory language for
Reserve
Banks should not present
purposes of clarification.
checks on days that are not Federal
Under § 210.9(a)(3) (proposed
Reserve banking days because the
§ 210.9(a)(3)(ii)), if the paying bank
possibility of a daylight overdraft
voluntarily closes on a day the Reserve
Bank is open, either for the entire day or caused by the early morning settlement
before it receives its check presentment time for such checks (one hour after the
from the Reserve Bank, it must either (-1) opening of Fedwire on the next Reserve
Bank banking day or such later time as
return or settle for checks by the next
clock hour that is at least one hour after provided in the Reserve Bank’s
operating circular) would discourage
it would ordinarily receive the checks,
banks from offering services on
or by one hour after the scheduled
weekends and holidays. As discussed
opening of Fedwire, whichever is later,
above, paying banks will ordinarily not
or by such later time as is provided in
the Reserve Bank’s operating circular; or receive presentment of checks on days
the Reserve Bank is closed, except in
(2) settle by one hour after the
rare circumstances where a cash letter
scheduled opening of Fedwire on the
next day on which both the paying bank that is mailed to a paying bank arrives
on a Saturday or when a Reserve Bank
and the Reserve Bank are open, or by
closes due to an emergency. The Board
such later time as is provided in the
does not believe that requiring the
Reserve Bank's operating circular, and
paying bank to settle for such checks on
compensate the Reserve Bank for the
the next day the Reserve Bank is open
interday float. Failure to settle by these
will discourage weekend or holiday
times could result in the imposition of
service in most cases.
daylight overdraft charges, but for
accountability purposes, the checks will Amendment to Subpart B
not be considered received until the
To implement pricing of overdrafts,
paying bank’s next banking day.
the Board proposed an amendment to
One commenter requested
Subpart B of Regulation J, Wire
clarification as to what constitutes a
Transfers of Funds. Under the
"voluntary” closing. The commenter
amendment, an account at a Reserve
stated that if closing is mandated by
state law, the paying bank should not be Bank would be subject explicitly to any
applicable overdraft charges resulting
assessed overdraft fees if the Reserve
from funds transfers.
Bank debits its account for check
The Board received seven comments
presentments on that day. Closings
on the proposed Subpart B amendment.
mandated by state law are not
Three commenters voiced reservation
voluntary, and thus the paying bank
The Reserve Banks are not open on
days, such as weekends and federal
holidays, that are not business days
under Regulation CC. Paying banks will
not receive presentment of checks on
such days, except in rare circumstances
when a cash letter that is mailed to a
paying bank arrives on a Saturday or
when a Reserve Bank closes early due
to an emergency but Federal Reserve
couriers continue to deliver checks.
Thus, in the vast majority of cases, a
Reserve Bank banking day under
Regulation J will always be a Regulation
CC banking day.
46954
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Rules and Regulations
about the amendment based on their
concerns regarding the proposed posting
procedures and their doubts about their
ability to reconcile their internal
accounting systems with those of the
Federal Reserve. Two commenters
supported the amendment if pricing is
eventually adopted. One commenter
suggested that the Board seek public
comment on pricing again before
adopting the amendment One
commenter suggested that the
amendment would be more appropriate
in the Reserve Bank's operating
circulars than in Regulation J. The Board
believes that it is appropriate to amend
Subpart B to implement overdraft
pricing and thus has adopted the
amendment
Final Regulatory Flexibility Analysis
Two of the three requirements of a
final regulatoiy flexibility analysis {5
U.S.C. 604j, (1) a succinct statement of
the need for and the objectives of the
rule and (2) a summary of the issues
raised by the public comments, the
agency’s assessment of the issues, and a
statement of the changes made in the
final rule in response to the comments,
are discussed above. The third
requirement of a final regulatory
flexibility analysis is a description of
significant alternatives to the rule that
would minimize the rule’s economic
impact on small entities and reasons
why the alternatives were rejected.
The amendments will apply to all
banks that receive presentment of
checks from Federal Reserve Banks,
regardless of size. The economic impact
of the Regulation J amendments on
small banks should be minimal. There
are no significant alternatives to the
amendments that will minimize the
effect on small banks, given the Board’s
adoption of a daylight overdraft pricing
program that applies to all banks. The
Board’s pricing program includes a
percent-of-capital deductible and the
waiver of fees that do not exceed $25
over a two-week reserve maintenance
period. The Board expects that small
overdrafts incurred by many small
banks (relative to their capital) will be
covered by the deductible or the waiver
and, therefore, exempt from pricing. In
addition, the amendments should not
require operational changes by small
banks that incur small or no overdrafts.
Competitive Impact Analysis
The Board has established procedures
for assessing the competitive impact of
rule or policy changes that have a
substantial effect on payments system
between the Reserve Banks and privatesector presenting banks. Five
participants.9 Under these procedures,
commenters opposed applying the
the Board will assess whether a change
proposed Regulation settlement time to
would have a direct and material
the same-day settlement rules. They
adverse effect on the ability of other
service providers to compete effectively believed that doing so would
significantly increase their risk exposure
with the Federal Reserve in providing
under same-day settlement because they
similar services due to differing legal
powers or constraints, or due to a
would be forced to accept presentment
dominant market position of the Federal from and settle within a short time
Reserve deriving from such legal
frame with banks with which they have
differences. If no reasonable
no established relationship.
modifications would mitigate the
One commercial bank stated that the
adverse competitive effects, the Board
advantage the Regulation J amendment
will determine whether the anticipated
would provide to the Reserve Banks in
benefits are significant enough to
the check collection business far
proceed with the change despite the
outweighs other mitigating factors, such
adverse effects.
as the ability for clearing houses to set
The Board believes that, when
their own settlement time and the sameconsidered alone, the amendment to
day settlement proposal. The commenter
Regulation J might have a direct and
argued that the total effect of all of the
material adverse effect on the ability of
proposals
will hurt private sector
other service providers to compete
collecting banks to a greater extent than
effectively with the Reserve Banks’
payments services. The amendment will the Reserve Banks, giving the Reserve
Banks a significant competitive
enable Reserve Banks to obtain
advantage.
settlement in immediately available
A check transportation corporation
funds for checks presented to paying
argued that the Regulation J
banks as early as one hour after
presentment. In turn, Reserve Banks will amendments would give a competitive
advantage to the Reserve Banks because
be able to give credit for checks they
it is difficult for banks and clearing
collect earlier in the day without
houses to establish settlement
incurring intraday float Private-sector
mechanisms that are independent of
collecting banks ordinarily can not
Fedwire. The commenters stated that
obtain settlement within a comparable
competing with Fedwire is difficult
time or in a comparable form without
because Fedwire pricing doesn't include
entering into an agreement with the
paying bank or paying presentment fees, a cost component for the intraday value
of money or credit risk, and the Reserve
or both. The Board requested comment,
Banks do not pay interest on reserve or
in light of the other modifications to the
payments system risk reduction program clearing account balances.
and its proposal on same-day settlement
The Board believes the Regulation}
for private-sector presentment (56 FR
amendment should be considered within
4743, February 6,1991), on whether the
the context of the modifications to the
ability to use check credits during the
risk reduction program regarding pricing
day outweighs the negative effects of
and overdraft measurement and the
being charged for checks intraday under Board's recent amendment to Regulation
the proposed Regulation J amendment
CC regarding same-day settlement for
(The Board has recently adopted a
private-sector collecting banks. In this
same-day settlement rule—see docket
context, the Board believes that the
R-0723, elsewhere in today’s Federal
benefits of the Regulation J amendment
Register.)
in facilitating the risk reduction program
Fourteen commenters addressed the
and enabling Reserve Banks to
competitive impact of the proposed
accelerate availability of check deposits
amendment to Regulation J. Nine
are significant enough to outweigh the
commenters urged the Board to adopt
adverse effects.
similar settlement times in both
The Board's goal of achieving
Regulation J and the proposed
amendments to Regulation CC regarding accurate measurement of daylight
same-day settlement These commenters overdrafts without incurring intraday
float could be met by posting credits and
stated that consistent settlement times
debits for checks presented by Reserve
in Regulations J and CC would aid in
Banks after the d ose of business, as
providing for more competitive equality
originally proposed in June 1989 (54 FR
26094,
June 21^ 1989). The Board’s June
* These procedures are described in the Board's
1989 proposal for overdraft
policy statem ent "The Federal Reserve in the
measurement would not have required
Payments System.” as revised in March 1990 (S5 FR
11648. March 29.1990).
an amendment to Regulation J and
Federal Register / Vol. 57, No. 199 / W ednesday, October 14, 1992 / Rules and Regulations
therefore would not have caused
adverse competitive effects. A majority
of the commenters to the June 1989
proposal, however, requested that check
credits and debits be posted earlier in
the day to allow intraday use of funds
by collecting banks. These commenters
stated that earlier credits for checks
were necessary to avoid disruption of
cash management practices and to allow
investment of excess reserve balances.
These comments indicated that the
benefits of early check credits would
outweigh the adverse competitive
effects of earlier check debits.
Many of the adverse effects on the
Federal Reserve’s competitors in the
check collection system will be
mitigated by the benefits of the
overdraft measurement procedures. The
primary benefit will be the intraday
posting of check credits, so that banks
may use those funds during the day.
Correspondent banks that clear checks
on behalf of respondents will 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. In
addition, banks participating in private
clearing houses will be able to establish
the time at which net settlement entries
for the checks exchanged among
participants will be posted to reserve
and clearing accounts. Thus, the
participants will be able to control the
time at which credits and debits will be
posted to their accounts.
The Board's same-day settlement rule
gives private collecting banks rights to
receive settlement from paying banks
that are closer to the rights the Reserve
Banks have under Regulation J. The
same-day settlement rule mitigates some
of the adverse competitive effects
caused by the Regulation J amendment.
The issues relating to the conformity of
settlement times for checks presented by
Reserve Banks under Regulation J and
by private-sector banks under
Regulation CC were raised in the
context of the same-day settlement
proposal and are addressed in Docket
R-0723, elsewhere in today’s Federal
Register.
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 amended
as follows:
PART 210—COLLECTION OF CHECKS
AND OTHER ITEMS BY FEDERAL
RESERVE BANKS AND FUNDS
TRANSFERS THROUGH FEDWIRE
(REGULATION J)
1. The authority citation for part 210
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.J
2. Section 210.2 is amended by
revising paragraph (d) and the last
sentence of the undesignated paragraph
following paragraph (g)(3) and adding
new paragraphs (n) and (o) to read as
follows:
§ 210.2
*
*
D efinition 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.
*
*
*
*
*
(g) * * * Item does not include a
check that cannot be collected at par, or
a paym ent order as defined in § 210.26(i)
and handled under subpart B of this
part.
* * * * *
(n) Clock hour means a time that is on
the hour, such as 1:00, 2:00, etc.
(o) Fedwire has the same meaning as
that set forth in § 210.26(e).
* * * * *
3. Section 210.9 is amended by
revising the heading and paragraph (a)
to read as follows:
§ 210.9
S e ttle m e n t a n d p a y m e n t
(a) Cash items. (1) On the day a
paying bank receives 2 a cash item
directly or indirectly from a Reserve
Bank, it shall settle for the item such
that the proceeds of the settlement are
available to the Reserve Bank by the
close of Fedwire on that day, or it shall
return the item by the later of the close
of the paying bank's banking day or the
close of Fedwire. If the paying bank fails
to settle for or return a cash item in
accordance with this paragraph (a)(1), it
is accountable for the amount of the
item as of the close of its banking day or
the close of Fedwire on the day it
receives the item, whichever is earlier.
(2)(i) On the day a paying bank
receives a cash item directly or
indirectly from a Reserve Bank, it shall
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.
46955
settle for the item so that the proceeds
of the settlement are available to the
Reserve Bank, or return the item, by the
latest of:
(A) The next clock hour that is at least
one hour after the paying bank receives
the item:
(B) One hour after the scheduled
opening of Fedwire; or
(C) Such later time as provided in the
Reserve Bank’s operating circular.
(ii) If the paying bank fails to settle for
or return a cash item in accordance with
paragraph (a)(2)(i) of this section, it shall
be subject to any applicable overdraft
charges. Settlement under paragraph
(a)(2)(i) of this section satisfies the
settlement requirements of paragraph
(a)(1) of this section.
(3)(i) 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 shall either:
(A) On that day, settle for the item so
that the proceeds of the settlement are
available to the Reserve Bank, or return
the item, by the latest of:
(7) The next clock hour that is at least
one hour after the paying bank
ordinarily would have received the item;
(2) One hour after the scheduled
opening of Fedwire; or
(3) Such later time as provided in the
Reserve Bank's operating circular; or
(B) On the next day that is a banking
day for both the paying bank and the
Reserve Bank, settle for the item so that
the proceeds of the settlement are
available to the Reserve Bank by the
later of:
(i) One hour after the scheduled
opening of Fedwire on that day; or
{2) Such later time as provided in the
Reserve Bank’s operating circular;
and compensate the Reserve Bank for
the value of the float associated with the
item in accordance with procedures
provided in the Reserve Bank’s
operating circular.
(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
paying bank on that day, the paying
bank is not considered to have received
the item until its next banking day, but it
shall be subject to any applicable
overdraft charges if it fails to settle for
or return the item in accordance with
paragraph (a)(3)(i) of this section. The
settlement requirements of paragraphs
(a)(1) and (a)(2) of this section do not
apply to a paying bank that settles in
accordance with paragraph (a)(3)(i) of
this section.
46956
Federal Register / Vol. 57, No. 199 / Wednesday, October 14. 1992 / Rules and Regulations
(4)(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 shall:
(1) Settle for the 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: or
(2) Return the item by midnight of the
day it receives the item.
If the paying bank fails to settle for or
return a cash item in accordance with
this paragraph (a)(4)(i)(A), it shall
become accountable for the amount of
the item as of the close of its banking
day on the day it receives the item.
(B) The paying bank shall:
(.7) Settle for the 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
such later time as provided in the
Reserve Bank's operating circular, or
(2) Return the item by midnight of the
day it receives the item.
If the paying bank fails to settle for or
return a cash item in accordance with
this paragraph (a)(4) (i)(B), it shall be
subject to any applicable overdraft
charges. Settlement under this
paragraph (a)(4)(i)(B) satisfies the
settlement requirements of paragraph
(a)(4)(i)(A) of this section.
(ii) "lie settlement requirements of
paragraphs (a)(1) and (a)(2) of this
section do not apply to a paying bank
that settles in accordance with
paragraph (a)(4)(i) of this section.
(5) Settlement with a Reserve Bank
under paragraphs (a)(1) through (4) of
this section shall be made by debit to an
account on the Reserve Bank’s books,
cash, or other form of settlement to
which the Reserve Bank agrees.
(6) If a cash item is unavailable for
return, the paying bank may send a
notice in lieu of return as provided in
§ 229.30(f) of this title.
*
*
*
*
4
„
4.
Section 210.28 is amended by
adding a new paragraph (b)(5) to read as
follows:
§ 210.28 Agreement of sender.
*
*
*
*
*
( b )‘ * *
(5) If a sender, other than a
government sender described in
5 210.25(d), 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 Governors of the
Federal Reserve System, October 6,1992.
W illiam W. Wiles,
Secretary of the Board.
(FR Doc. 92-24688 Filed 10-13-92: 8:45 am]
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