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Federal Reserve ban k
of

Dallas

HELEN E. HOLCOMB
DALLAS, TEXAS

FIRS T VICE P R E S ID E N T AND

752 6 5 -5 9 0 6

C H IE F O PER ATIN G O FFICER

December 28, 1998

Notice 98-123

TO:

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

SUBJECT
Termination of
Proposed Rulemaking
DETAILS
In March 1998, the Board issued an advance notice of proposed rulemaking request­
ing comment on the benefits and drawbacks associated with its same-day settlement rule, which
became effective in January 1994. The same-day settlement rule, which is part of Regulation
CC, requires paying banks to settle in same-day funds for checks presented to them by privatesector banks by 8:00 a.m. local time at a location specified by the paying bank.
The Board also requested comment on the implications of potential rule changes to
reduce or eliminate the remaining legal disparities between Federal Reserve Banks and privatesector banks in the presentment and settlement of checks. The Board considered whether such
changes would enhance the efficiency of the interbank check collection market, the check collec­
tion process, and the payments system as a whole. Based on its analysis of the comments re­
ceived, the Board concluded that the costs associated with reducing the remaining disparities
would outweigh any gains in payments system efficiency. "Therefore, the Board has decided not
to propose any specific regulatory changes at this time.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 68701-05, Vol. 63, No. 239 of the
Federal Register dated December 14, 1998, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank o f 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)

MORE INFORMATION
For more information, please contact Don Jackson, (214) 922-5431, at the Dallas
Office; Eloise Guinn, (915) 521-8201, at the El Paso Branch; Rene Gonzales, (713) 652-1543,
at the Houston Branch; or Herb Barbee, (210) 978-1402, at the San Antonio Branch.
Sincerely,

Federal Register/Vol. 63, No. 239/Monday, December 14, 1998/Proposed Rules

68701

more broadly, on the payments system.
(63 FR 12700, March 16, 1998) The
notice also requested comment on the
benefits and drawbacks of reducing
SUPPLEMENTARY INFORMATION:
legal disparities between Federal
Reserve Banks and private-sector
I. Background
collecting banks. These legal disparities
In 1987 Congress passed the
include the rules governing presentment
Expedited Funds Availability Act
deadlines, presentment locations,
(EFAA). That act gave the Board the
reasonable delivery requirements, the
responsibility to regulate “any aspect of
control and timing of settlement, and
the payment system, including the
receipt, payment, collection, or clearing the obligation to settle on a non-banking
day.
of checks, and any related function of
The Board undertook this evaluation
the payment system with respect to
checks” to carry out provisions of the
to consider whether reducing these
act. (12 U.S.C. 4008(c)(1)) The Board
disparities would enhance the efficiency
issued Regulation CC, Availability of
of the interbank check collection
Funds and Collection of Checks, to carry market, the check collection process,
out its responsibilities under the EFAA. and the payments system as a whole
(12 CFR part 229) In October 1992, the
either directly, by expediting the
Board amended Regulation CC by
collection and return of checks, or
adopting the same-day settlement rule,
indirectly, by fostering competition.
effective January 1994. (57 FR 46956,
Improved competition among collecting
October 14, 1992) The same-day
banks that would likely result from a
settlement rule requires a paying bank
reduction in legal disparities and the
to settle on the day of presentment by
efficiency gains derived from this
Fedwire for checks presented by a
competition were weighed against any
private-sector collecting bank, without
increased costs to paying banks and
the imposition of presentment fees, if
their check-writing customers that could
the checks are presented at a location
result from the changes. Consistent with
designated by the paying bank by 8:00
its policy, the Board’s evaluation of
a.m. local time.1 (12 CFR 229.36(f))
potential regulatory changes included
The same-day settlement rule was
an analysis of the competitive impact
designed to improve payments system
efficiency by 1) enhancing competition
any changes might have on the ability
between private-sector banks and
of other service providers to compete
Reserve Banks in the provision of check with the Reserve Banks.2 The following
collection services, 2) encouraging
is a summary of the comments received
agreements between presenting banks
and the Board’s analysis of those
and paying banks that would reduce the comments.
cost of the check collection system, 3)
II. Summary of Comments
reducing inefficient intermediation in
the check collection process, and 4)
The Board received a total of eightyencouraging the migration from checks
one comment letters in response to the
to more efficient payment mechanisms.
At the same time, the rule was designed March 1998 advance notice of proposed
rulemaking. The following table shows
to address the concerns of large check
the number of comments received by
drawers and banks that their controlled
category of commenter:
disbursement arrangements and paying
bank operations would not be unduly
disrupted.
In March 1998, the Board issued an
2 The Board has established procedures for
advance notice of proposed rulemaking
assessing the com petitive im pact of rule changes
that may have a substantial im pact on paym ents
requesting comment on the effect that
the same-day settlement rule has had on system participants. U nder these procedures, the
Board w ill assess w hether a change w ould have a
the interbank check collection market,
direct and m aterial adverse effect on the ability of
on the check collection process, and,
other service providers to com pete effectively with
Legal Division. For the hearing impaired
only, contact Diane Jenkins,
Telecommunications Device for the Deaf
(TDD) (202/452-3544).

FEDERAL RESERVE SYSTEM
12CFR Parts 210 and 229
[Regulations J and CC; Docket No. R -1 00 9 ]

Collection of Checks and Other Items
by Federal Reserve Banks and
Availability of Funds and Collection of
Checks
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Notice of proposed rulemaking;
termination.

In March 1998, the Board
issued an advance notice of proposed
rulemaking requesting comment on the
benefits and drawbacks associated with
its same-day settlement rule, which
became effective in January 1994. The
same-day settlement rule, which is part
of Regulation CC, requires paying banks
to settle in same-day funds for checks
presented to them by private-sector
banks by 8:00 a.m. local time at a
location specified by the paying bank.
The Board also requested comment on
the implications of potential rule
changes to reduce or eliminate the
remaining legal disparities between
Federal Reserve Banks and privatesector banks in the presentment and
settlement of checks. The Board
considered whether such changes
would enhance the efficiency of the
interbank check collection market, the
check collection process, and the
payments system as a whole. Based on
its analysis of the comments received,
the Board concluded that the costs
associated with reducing the remaining
legal disparities would outweigh any
payments system efficiency gains.
Therefore, the Board has decided not to
propose any specific regulatory changes
at this time to reduce these remaining
legal disparities.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Louise L. Roseman, Associate Director
(202/452-2789) or Jack K. Walton II,
Manager, Check Payments Section (202/
452-2660), Division of Reserve Bank
Operations and Payment Systems;
Oliver Ireland, Associate General
Counsel (202/452—
3625), or Stephanie
Martin, Senior Counsel (202/452-3198),

1 The term “bank” as used in this notice and in
Regulation CC includes a commercial bank, savings
bank, savings and loan association, credit union,
and U.S. agency or branch of a foreign bank. (12
CFR 229.2(e)) A “collecting bank” is a bank
handling a check for collection, except th e paying
bank. A “ correspondent bank” is an interm ediary
collecting bank th at provides check collection
services to other banks. A “ presenting bank” is the
collecting bank that presents a check to the paying
bank. A “ paying bank” generally is the bank by, at,
or through w hich a check is payable.

the Federal Reserve in providing sim ilar services
due to differing legal pow ers or constraints, or due
to a dom inant m arket position of the Federal
Reserve deriving from such differences. If no
reasonable m odifications w o u ld m itigate the
adverse com petitive effects, the Board w ill
determ ine w hether the anticipated benefits are
significant enough to proceed w ith the change
despite the adverse effects. These procedures are
described in the Board’s policy statem ent “The
Federal Reserve in the Paym ents System ,” as
revised in M arch 1990. (55 FR 11648, March 29,
1990; FRRS 7-145.2)

68702

Federal Register/Vol. 63, No. 239/M onday, December 14, 1998/Proposed Rules

Category of commenter
Depository institutions, bank
holding companies, and as­
sociations representing de­
pository institutions................
Corporations and associations
representing corporations ....
Clearinghouses ..........................
Check processors ......................
Federal Reserve Banks ............
Money order companies ...........
Other organizations ..................
Total .....................................

Number of
responses

45
15
7
6
4
2
2
81

Sixty-one commenters recommended
not changing the rule governing the
same-day settlement presentment
deadline or reducing other legal
disparities. Eight commenters
recommended limited expansion of the
same-day settlement rule. Six
commenters suggested rescinding the
existing rule, and six did not offer a
specific opinion. Thirteen commenters
stated that if the Board were to make
any regulatory changes, particularly
those that would require operational or
programming changes, the changes
should not take effect prior to mid-2000.
Several commenters raised other
regulatory issues as well as issues
related to specific Reserve Bank services
or policies that were not germane to the
Board’s March 1998 advance notice of
proposed rulemaking.
Based on its analysis of the comments
received, the Board has decided not to
propose specific amendments to the
same-day settlement rule or Regulation
J at this time. The following sections
summarize the comments received
regarding current market practices, the
presentment deadline, the timing and
control of settlement, and other legal
disparities and review the Board’s
conclusions based on its analysis of the
comments.
A. Current Practices
The March 1998 notice asked
commenters to provide information on
what effect, if any, the same-day
settlement rule has had on their
operations since it was implemented in
January 1994. In addition, the Board
requested information on current
practices that it could use to assess the
need to modify the same-day settlement
rule further. In total, sixty-eight
commenters provided information on
the current practices of businesses and
banks, including changes made since
the implementation of the same-day
settlement rule.

Banks
Twenty-three out of twenty-five
comments on the effect of the same-day
settlement rule on check collection costs
and availability stated that the rule had
resulted in lower costs for collecting
banks. Ten of those commenters also
stated that they had experienced an
improvement in funds availability due
to the implementation of the same-day
settlement rule. Several large collecting
banks reported that their check
collection costs were reduced not only
by the elimination of presentment fees,
but by using lower-priced check
clearing services offered by
correspondent banks.
Smaller banks commented that the
same-day settlement rule benefited only
large collecting banks by shifting funds
transfer, staff, and adjustment costs for
same-day settlement presentments to
small paying banks. Community banks
stated that they have benefited, in some
cases, from receiving same-day
settlement presentments earlier in the
day than they receive Reserve Bank
presentments. Receiving presentments
earlier in the day provides the paying
bank with more time to process the
presentments, which lowers their
processing costs. Most of these banks,
however, also cited the cost of funds
transfers for settlement as particularly
burdensome.
Old Kent Financial Corporation noted
that the Grand Rapids, Michigan,
Clearing House disbanded as a result of
the same-day settlement rule because
members were able to present items
directly without incurring the
administrative and organizational
expenses of maintaining a clearinghouse
organization. Conversely, the five
clearinghouses that provided
information on their membership and
clearing volume since 1993 stated that
they had expanded their membership
and clearing networks in response to the
same-day settlement rule by providing
transportation or settlement services.
Businesses
Of the thirty-eight commenters that
commented on current business
practices, none stated that the same-day
settlement rule had influenced
businesses’ decisions to use controlled
disbursement services. The Treasury
Management Association (TMA) noted
that 80 percent of businesses with
annual sales over $100 million use
controlled disbursement services. TMA
as well as several businesses and banks
noted that the primary benefit of
controlled disbursement services was
not the ability to generate float, but the
ability to make investment and

borrowing decisions early in the day
based on knowledge of the value of that
day’s check presentments. Several large
banks that provide cash management
services as well as most businesses
stated that they rely primarily or solely
on the disbursement totals provided by
their banks to determine their daily
account balances because businesses
tend to view internal forecasting as not
sufficiently reliable. Three large cash
management service providers and TMA
reported that since the implementation
of the same-day settlement rule, up to
55 percent of the value of their first
presentment notification had shifted to
their second presentment notification.3
As a result, businesses that previously
forecasted total daily presentments
based on first presentment notifications
have become more dependent on second
presentment notifications to more
accurately project daily presentments.
Several banks and businesses indicated
that maintaining an early morning
presentment deadline also allows banks
enough time to provide positive pay
services, which help reduce losses from
fraudulent check activity.4
None of the cash management service
providers or businesses reported any
plans to shift from checks to electronic
payments as their primary method for
disbursements, but a few noted that
some businesses would consider
expanding their use of electronic
payments as services become more
widely accepted and affordable.
Technological investment and other
startup costs were mentioned most often
as the primary barriers to expanded use
of electronic forms of payment.
B. Presentment Deadline Disparity
Under Regulation J, Reserve Banks
can obtain same-day settlement for
checks presented to a paying bank
before its cut-off hour, generally 2:00
p.m. or later. (12 CFR 210.9(b)(1)) The
same-day settlement rule for privatesector banks, however, requires that
they make their presentments by 8:00
a.m. to ensure that they receive sameday settlement by Fedwire without
3Cash m anagem ent banks typically provide
corporations w ith a prelim inary initial notification
of the day’s clearing totals by around 8:00 a.m. local
time, w hich includes early direct presentm ents, on­
us items, and the first Reserve Bank presentm ents.
The second notification is typically m ade between
9:30 and 11:00 a.m. eastern tim e and includes the
second Reserve Bank presentm ent from the high
dollar group sort program and m ost same-day
settlem ent presentm ents.
4 Companies using positive pay services generally
provide the paying bank w ith an electronic file
containing inform ation on all checks disbursed. The
paying bank compares data on the file w ith data
captured from the presented checks to identify
exceptions that are exam ined for potential
fraudulent check activity.

Federal Register/Vol. 63, No. 239/Monday, December 14, 1998/Proposed Rules
being assessed presentment fees. The
Board requested comment on the effect
of the difference in presentment
deadlines for Reserve Banks and
private-sector collecting banks. The
Board also requested comment on an
extension of the presentment deadline if
the presenting bank transmits the
information contained in the magnetic
ink character recognition (MICR) line of
each check by some earlier time.
Further, the Board requested comment
on the Reserve Banks’ noon presentment
policy and the effect of allowing interest
payments on demand deposit accounts.
Presentment Deadline
Most commenters did not believe that
the six-hour difference in presentment
deadlines was a significant impediment
to the ability of private-sector collecting
banks to compete with the Reserve
Banks. Several banks and processors
noted that Reserve Banks typically make
their check presentments to paying
banks much earlier than the 2:00 p.m.
cut-off hour. In addition, most large
correspondent banks indicated that they
are able to compete effectively with
Reserve Banks by offering lower prices
and, in some cases, better availability of
funds.
Ten banks, two check processors, and
one Federal Reserve Bank noted that a
later same-day settlement presentment
deadline would require paying banks to
process incoming presentments during
the time they currently use to process
internal documents and outgoing
checks. For example, commenters noted
that shifting same-day settlement check
volumes into a shorter processing
window would cause paying banks to
incur significant additional costs,
including the cost of acquiring
additional sorter capacity and increased
staffing expense. Commenters also
indicated that the shorter processing
windows would likely result in higher
check-fraud losses because paying banks
would have less time to inspect
presented checks properly and make
return decisions regarding those checks.
In addition, banks and processors that
provide cash management services
stated that later presentments would
reduce their revenue from cash
management services because daily
clearing totals would be reported later
in the day to businesses and, therefore,
businesses would be less willing to pay
for those services. All of the comments
received from businesses stated that a
later presentment deadline would
severely diminish their ability to
manage account balances efficiently
because presentment totals would be
reported to them later in the day.

Seventy-five percent of all
commenters favored not changing the
8:00 a.m. same-day settlement
presentment deadline primarily because
the additional costs incurred by paying
banks and businesses would outweigh
benefits gained by collecting banks. Six
commenters recommended that the
same-day settlement rule be rescinded
to allow paying banks to discourage
private-sector presentments, regardless
of the presentment deadline. Seven
commenters favored expanding the
same-day settlement rules by moving
the deadline for private-sector
presentments later in the day, with the
recommended new deadline ranging
from 9:00 a.m. to 2:00 p.m. First Union
Bank and Firstar Bank conditioned their
recommendation on preserving an 8:00
deadline for controlled disbursement
checks, while First Tennessee Bank
recommended the deadline only be
extended if the presenting bank
provided a MICR information
transmission by 8:00 a.m. Several banks
both for and against extending the sameday settlement presentment deadline
suggested that a later deadline would
improve funds availability by increasing
the amount of processing time available
to private-sector collecting banks,
particularly for West Coast banks
collecting checks drawn on East Coast
banks. Those opposed to extending the
deadline, however, believed that the
availability improvements would not
likely be of sufficient magnitude to
justify additional transportation
expenses for collecting banks or the
increased operational costs to paying
banks.
Six banks and one check processor
with operations in the Midwest or West
noted that moving the presentment
deadline as little as thirty minutes later
would result in a further shift of
controlled disbursement accounts to
banks in the eastern time zone. Being
located in the eastern time zone gives
controlled disbursement service
providers an advantage in reporting
disbursement totals to customers earlier
in the day because it offers them time
to make investment and funding
decisions prior to the close of the
European and U.S. financial markets.
First Interstate Bank (Montana) and
Bank of America proposed establishing
a presentment deadline based on eastern
time, rather than local time, to allow
banks in the western part of the country
to compete more effectively with banks
in the eastern time zone in providing
cash management services. In addition,
four commenters recommended creating
a special class of controlled
disbursement routing numbers with an

68703

8:00 a.m. presentment deadline and
extending the presentment deadline for
all other types of checks.
Because some collecting banks have
been slow to take advantage of the sameday settlement rule, several commenters
noted that they would prefer to leave
the current same-day settlement rule
unchanged. Maintaining the rule would
allow the private sector to continue
promoting other initiatives, such as the
expansion of direct presentments
through existing clearinghouses. A few
commenters recommended moving the
Reserve Banks’ presentment deadline
earlier, to match the private-sector
same-day settlement presentment
deadline, but several others noted that
this would most likely force Reserve
Banks to move deposit deadlines earlier,
slowing the check collection process.
Later Presentment Deadline
Conditioned on Earlier Transmission of
MICR Information
Forty-seven commenters commented
on conditioning the extension of the
same-day settlement presentment
deadline for paper checks on the
transmission of check MICR information
earlier in the day. Twenty-nine of those
commenters opposed conditioning the
extension of the presentment deadline
on an earlier MICR transmission.
Twelve commenters stated that the
presentment deadline under the sameday settlement rule could be extended
by the earlier provision of MICR
information only if the rule contained
detailed standards regarding the MICR
transmission. Six commenters favored
using MICR files to extend the
presentment deadline as long as the
private sector is allowed to set MICR
transmission standards. The primary
concern of those opposed to
conditioning the extension of the
presentment deadline on the earlier
transmission of MICR information was
the accuracy of the data contained in the
MICR files. Three banks stated that they
currently receive MICR files from
presenting banks and noted that they
occasionally find discrepancies between
data contained in the electronic files
and the associated checks. Other
concerns included the investment
required to send, receive, and process
MICR files; potential communication
network capacity issues at peak
transmission times; and the need for
additional warranties.
The commenters that currently
receive MICR file transmissions under
bilateral agreements stated that their
existing agreements adequately cover
relevant MICR file transmission issues
and that regulation of these issues
would likely be too general to address

68704

Federal Register/Vol. 63, No. 239/Monday, December 14, 1998/Proposed Rules

C. Timing and Control o f Settlement
Under Regulation J, Reserve Banks
have the right to settle for check
presentments by debiting the Federal
Reserve account of the paying bank or
its correspondent settlement agent, a
process often referred to as autocharge.
(12 CFR 210.9(b)) The debit is posted
during the day based on the time of
presentment, as provided in the Reserve
Banks’ operating circulars. Under the
same-day settlement rule in Regulation
CC, however, the paying bank maintains
control of the settlement through the
initiation of a Fedwire funds transfer
that does not have to be made until the
close of Fedwire (6:30 p.m. eastern
time). (12 CFR 229.36(f)(2)) Most
Noon Presentm ent Policy
commenters acknowledge that the
Of the tw enty-three comments
regulations governing the timing and
received on the Reserve Banks’ current
control of settlement favor Reserve
noon presentm ent policy for city-zone
Banks over private-sector collecting
endpoints, seventeen commenters stated banks. None of the commenters,
that the policy does not need to be
however, suggested an alternative that
changed.5 They said that the current
eliminated the disparity while
policy adequately balances the Reserve
maintaining a balance between the
Banks’ ability to expedite the collection
needs of both the paying and collecting
of city-zone checks w ith the desire of
banks to control some portion of the
paying banks to receive their
settlement process.
presentm ents earlier in the day. Four
None of the commenters
com menters suggested that the Reserve
recommended changing the control of
Banks make presentm ents earlier in the
settlement. The primary concern with
day and two suggested that the Reserve
eliminating the Reserve Banks’ ability to
Banks could make their presentm ents
autocharge accounts was that paying
later in the day.
banks would incur additional costs to
transfer funds daily to the Reserve
Interest on Demand Deposits
Banks. In addition, none of the paying
Most banks th at provide cash
banks indicated problems with the
m anagem ent services stated that
Reserve Banks’ autocharge process.
controlled disbursem ent accounts
Moreover, most banks opposed giving
w ould still be needed even if banks
private-sector presenting banks the
were perm itted to pay interest on
ability to debit their Federal Reserve
corporate dem and deposits. Several
accounts directly. Smaller paying banks,
banks indicated that they already
in particular, stated that their ability to
compensate businesses through earnings adjust the amount of their funds
credits and that they w ould not be able
transfers for settlement was often their
to pay rates high enough to keep larger
most effective method of resolving
businesses from seeking higher returns
discrepancies in the presentment totals,
through alternative investm ents,
even though funds transfers were also
although paying interest might help
cited as a significant cost to paying
sm aller businesses. TMA and Bank of
banks under the same-day settlement
America stated, however, that if banks
rule.

operational issues effectively. Several
paying banks noted that if they w anted
to m aintain their current cash
m anagem ent reporting deadlines, they
w ould be required to process MICR files
from presenting banks that take
advantage of the later deadline, even if
paying banks determ ined that the
investm ent required to process MICR
inform ation could not be recouped by
efficiency gains. Several commenters
suggested that it w ould be better to let
m arket forces determ ine the acceptance
of MICR files than to incorporate the use
of MICR files in the same-day settlem ent
rule as a condition for a later
presentm ent deadline.

paid market rates of interest on
corporate dem and deposits, the dem and
for controlled disbursem ent services
w ould be significantly reduced, thus
m itigating concerns about a later sameday settlem ent presentm ent deadline.
5 The Board adopted a policy in 1982 under
w hich the Reserve Banks generally m ust p resent
checks to paying banks located in Federal Reserve
city availability zones by noon local tim e. (48 FR
79, January 3 1983) This noon presentm ent policy,
w hich provided for later p resentm ents to city banks
than was previously the case, was part of a broader
program to expedite the collection of checks by
establishing significantly later deposit deadlines
and associated later presentm ent tim es for checks
draw n on city banks.

W hile seven commenters suggested
moving the settlem ent deadline under
the same-day settlem ent rule for privatesector banks to earlier in the day, most
com m enters stated that the current
timing of Reserve Bank settlem ents was
appropriate. Several banks expressed
concern that if Reserve Banks obtained
settlem ent for their presentm ents later
in the day, Reserve Banks w ould post
credits to depositors’ accounts later,
thus increasing the likelihood of
daylight overdrafts. A nother concern
cited by several collecting banks was
that u nder the current same-day
settlem ent rule, most funds transfers

settling for same-day settlement
presentments are received late in the
day, making it difficult for collecting
banks to manage account balances and
reserve requirements. A few paying
banks, however, noted that the later
settlement deadline for private-sector
banks provided paying banks time to
process and reconcile presentments
before settling. To help resolve issues
regarding the timing and control of
settlement, the regional check
clearinghouses noted that they have
incorporated same-day settlement
presentments into their clearinghouse
settlements.
D. Other Legal Disparities
In its March 1998 notice, the Board
also requested comment on other legal
disparities that exist between Reserve
Banks and private-sector collecting
banks. Specifically, the Board wanted to
know if the difference in presentment
location, reasonable delivery
requirements, and the obligation to
settle on a non-banking day hindered
competition and innovation in the
payments system. The Board also asked
for comment on any other legal
differences between Reserve Banks and
private-sector collecting banks that limit
the ability of private-sector banks and
Reserve Banks to compete in the
interbank check collection market.
Under the same-day settlement rule,
paying banks have the right to designate
the presentment location, with certain
restrictions, and to impose reasonable
delivery requirements for presentments
received from private-sector presenting
banks. (12 CFR 229.36(f)(1)) Regulation
J, however, allows Reserve Banks to
present checks at certain locations that
may not be the same as the location
designated by the paying bank under the
same-day settlement rule. (12 CFR
210.7(b)) In addition, Regulation J does
not give paying banks the right to
impose delivery requirements on
Reserve Banks. In practice, however, the
Reserve Banks generally present checks
at a location designated by the paying
bank and generally comply with the
paying bank’s delivery requirements.
Most of the thirty-one commenters on
the issues of presentment location and
reasonable delivery requirements noted
that Reserve Banks already generally
comply with private-sector practices.
Fourteen commenters noted that the
current disparity in presentment
location and delivery requirements does
not result in any material competitive
advantage. Further, they noted that if
the Board were to make changes in this
area, the Board should modify
Regulation J to allow paying banks to
designate the presentment location and

Federal Register/Vol. 63, No. 239/M onday, December 14, 1998/Proposed Rules
reasonable delivery requirem ents for
presentm ents by Reserve Banks. None of
the comm enters suggested elim inating
the reasonable delivery requirem ents for
private-sector presentm ents. Only four
com m enters noted that the current rules
provide a m aterial competitive
advantage for the Reserve Banks and
suggested that collecting banks be given
the same legal rights for presentm ent
location as Reserve Banks.

The settlement obligation of a paying
bank that closes voluntarily on a
business day differs based on whether
the presenting bank is a Reserve Bank or
a private-sector bank. Under Regulation
J, the paying bank’s obligation to settle
with a Reserve Bank is triggered if the
Reserve Bank “makes a cash item
available to the paying bank on that
day.” (12 CFR 210.9(b)(3)) Under the
same-day settlement rule, the paying
bank’s obligation to settle with a
private-sector collecting bank is
triggered only if the paying bank
“receives presentment of a check” on a
business day on which it is open. (12
CFR 229.36(f)(3)). Of the seventeen
commenters that commented on this
issue, none of the commenters believed
that the difference between the rules for
private-sector banks and Federal
Reserve Banks had a material
competitive effect.
Nine commenters raised as another
legal disparity the way paying banks
and private-sector presenting banks
resolve discrepancies in the settlement
amount for presentments. The Reserve
Banks’ Operating Circular 3, Collection
of Cash Items and Returned Checks
(paragraphs 12,18, and 19), sets forth
the terms under which Reserve Banks
handle corrections, adjustments, and
warranty claims. Although paying banks
and private-sector presenting banks can
establish bilateral or multilateral
agreements addressing adjustment
standards, the same-day settlement rule
does not provide standards for privatesector banks lacking such agreements.
Several commenters noted that the lack
of detailed adjustment standards had
occasionally made it difficult to resolve
differences between collecting and
paying banks in a timely manner. While
a few commenters asked the Board to
incorporate detailed standards in
Regulation CC, several others
recommended that industry groups
continue to set these standards.

reductions in the legal disparities
between Reserve Banks and privatesector collecting banks, the Board
recognizes that even removing the
disparities discussed in its advance
notice of proposed rulemaking would
not result in a completely level playing
field in the interbank check collection
market. For example, the Reserve Banks
enjoy an unsurpassable credit rating that
makes them an attractive service
provider in times of financial stress.6
Based on the comments received, the
Board believes that regulatory changes
to reduce legal disparities between
Reserve Banks and private-sector
collecting banks would yield only
marginal benefits in terms of directly
expediting the collection and return of
checks. While the removal of these
disparities may foster competition
between Reserve Banks and privatesector collecting banks in the check
collection market, neither the direct nor
indirect benefits appear to be sufficient
to offset the significant additional costs
that such regulatory changes would
impose on paying banks and their
customers. Specifically, the Board has
concluded that moving the presentment
deadline later in the day for privatesector banks would impose significant
costs on paying bank operations and
those businesses that use controlled
disbursement services. In addition,
moving the Reserve Banks’ presentment
deadline earlier in the day would delay
the collection of some checks, which
would be inconsistent with one purpose
of EFAA: to expedite the check
collection and return system.
Further, the Board believes that
eliminating the disparities between the
Reserve Banks and private-sector banks
as to the control and timing of
settlement would also likely increase
costs and reduce the efficiency in the
check system. The Board notes that
private-sector initiatives, such as the
expansion of clearinghouse settlement
services, have been able to mitigate the
settlement disparities to some extent.
With respect to the control of
settlement, the Board believes that the
autocharge system used by the Reserve
Banks provides an efficient settlement
mechanism that has not created
problems for paying banks and therefore
should be retained. The Board
recognizes that while banks generally
are not concerned with the ability of

E. Analysis and Conclusions
The Board recognizes that certain
legal disparities between Reserve Banks
and private-sector collecting banks may
affect the competitive position of
participants in the check collection
system. In evaluating potential

6 Reserve Banks also labor, however, under
constraints not im posed on their private-sector
com petitors, such as central bank concerns
regarding the adequacy of paym ent services in the
markets and cost recovery by m ajor service
category, as w ell as a level of public scrutiny of
price and service level determ inations not shared
by the private sector.

68705

Reserve Banks to charge paying banks’
Federal Reserve accounts, banks are
very concerned about the risks
associated with extending this
capability to private-sector banks.
With respect to the timing of
settlement, providing for a later
settlement of Reserve Bank
presentments would similarly delay the
ability of Reserve Banks to post credits
for check deposits, thereby making
intraday account management more
difficult for many banks and potentially
increasing their daylight overdraft
charges. In addition, providing for an
earlier settlement deadline for
presentments by private-sector banks
could materially increase the costs and
risks to paying banks by reducing the
time that they have to process and
reconcile presentments before settling.
The Board has also concluded that the
legal disparities in control of
presentment location, delivery
requirements, and settlement on a non­
banking day do not materially affect the
efficiency of or competition in the check
collection system.
The implementation of the same-day
settlement rule in 1994 has significantly
reduced the legal disparities between
private-sector collecting banks and
Reserve Banks, thereby improving the
competitive position of private-sector
collecting banks. While some legal
disparities related to the presentment
and settlement of checks still exist, they
are not as significant as those that
existed prior to 1994. The Board
believes that the costs associated with
reducing the remaining legal disparities
would outweigh any payments system
efficiency gains. Therefore, based on its
analysis of the comments received, the
Board believes that changes to further
reduce the legal disparities should not
be made at this time.
By order of the Board of Governors of the
Federal Reserve System, December 8, 1998.
Jennifer J. Johnson,

Secretary o f the Board.
[FR Doc. 98-33049 Filed 12-11-98; 8:45 am]
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