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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. March 1998 advance notice of proposed At the same time, the rule was designed 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] BILLING CODE 6 210 -01 -P