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FEDERAL RESERVE BANK OF N E W YORK r Circular No. 5 8 4 9 1 L August 5, 1966 J Collection of Items Requiring Special Handling as Noncash Items To All Banking Institutions, and Others Concerned, in the Second Federal Reserve District: Effective September 1, 1967, the Federal Reserve B a n k s will classify as items requiring special handling all checks, drafts, and similar items received by them on which the payor’s routing symboltransit number has not been preprinted, or post-encoded before their receipt by a Federal Reserve office, in E-13B magnetic ink characters in the manner prescribed and in the location assigned by The American Bankers Association. After that date all such items must be sent to the Federal Reserve offices as noncash items. On and after that date, all such items sent as cash items will be handled by the receiving Federal Reserve office as follows: (a ) Items o f $1,000 or more received from banks located outside the city o f the receiving Federal Reserve office w ill be charged back and entered fo r collection as noncash item s; and (b ) A ll other items will be charged back and returned. Since the introduction of the Magnetic Ink Character Recognition Program by The American Bankers Association, bankers have become increasingly aware of the operating problems caused by “ headache” items. The term “ headache items” is used to describe any of a number of types of non standard checks, drafts, or similar instruments which, because of their design or size, cause errors or require special handling in present check-handling operations. Efforts have been made and are continuing to be made by The American Bankers Association, individual commercial banks, and the Federal Reserve System to eliminate such items from the check collection system. Consistent with this program the Federal Reserve Banks previously announced that (1) after January 1, 1964, they would no longer accept as cash items any items that, because of their size, could not be processed in the customary manner through low-speed proof machine equipment, and (2) after January 1,1965, they would no longer accept as cash items any items containing more than a single thickness of card or paper. With the substantial progress being made by the banks of the country in redesigning their check forms to include the magnetic ink preprinting of their routing symbol-transit numbers, and with the expanded use by the commercial banks and the Federal Reserve Banks of high-speed processing equipment which relies on such preprinting, the Federal Reserve Banks have concluded that it is now appropriate to take this next step of classifying as n o n c a s h items all items which do not bear the payor’s routing symbol-transit number in magnetic ink characters. Prior to the effective date, depending upon progress shown in the meantime in the elimination of such items from the collection system, further consideration will be given to the matter with a view to determining whether it would be appropriate for the Federal Reserve Banks to take additional action, including possibly the imposition of a collection charge on such items. W e believe you will recognize this action as a constructive and mutually beneficial step toward improving the efficiency of the country’s check collection system and minimizing operating prob lems by eliminating from cash item channels an additional type of “ headache” item. W e urge you to support the action and solicit your cooperation in complying with it. W e appreciate your support of the action which has been taken to date, and we look forward to your continuing efforts to attain the ultimate goal of having all checks, drafts, and similar items which are to be handled as cash items, fully encoded in accordance with the Magnetic Ink Character Recognition Program of The American Bankers Association. The Board of Governors of the Federal Reserve System has issued a statement on the above change and on Federal Reserve System studies to improve procedures for handling financial transfers. A copy of the statement is printed below. Additional copies of this circular will be furnished upon request. A lfred H ayes, President. (P ress Release o f Board of Governors of the Federal R eserve System ) August 5, 1966. F or release in morning newspapers o f M onday, A u gu st 8. The Federal Reserve System is stepping up efforts to increase the use o f automation in order to expedite— and cut the cost of— the processes by which it clears millions o f checks each day, the System ’s Board of Governors announced today. To that end, the B oard said, the 12 Federal Reserve Banks have taken a further step— the third since the beginning o f 1964— aimed at discouraging the use o f checks that cannot be handled by high-speed electronic equipment. In addition, the B oard disclosed, System committees are going forw ard with studies aimed a t : 1. In the early future, replacing the System ’s present facilities fo r transferring funds by wire with new equipment that will not only handle the present volume more efficiently but also accommodate the movement of masses o f economic data and permit an expanded system of fun d transfers by wire fo r banks, businesses and the public. 2. In the farther future, devising means o f making payments more directly and expeditiously than by check— by taking advantage of technological progress in the development o f advanced automation and transmis sion equipment. 3. Also, exploring ways fo r consummating more money settlements without directly involving Federal Reserve facilities. This might be accomplished b y the direct exchange o f checks among com puter centers or through the wider use o f local clearing centers that could more expeditiously handle many of the more than 4^2 billion checks now processed annually by the Federal Reserve. The new step aimed at minimizing the use o f checks that cannot be handled by high-speed electronic equip ment was made known in letters from the 12 Federal Reserve Banks to all banking institutions in their respective districts, advising that: “ Effective September 1, 1967, the Federal Reserve Banks will classify as items requiring special handling all checks, drafts, and similar items received by them on which the p a y o r’s routing symbol-transit number has not been preprinted, or post-encoded before their receipt by a Federal Reserve office, in E-13B magnetic ink charac ters in the manner prescribed and in the location assigned by The American Bankers Association. A fter that date all such items must be sent to the Federal Reserve offices as noncash items. “ On and after that date, all such items sent as cash items will be handled by the receiving Federal Reserve office as fo llo w s : “ (a) Items of $1,000 or more received from banks located outside the city o f the receiving Federal Reserve office will be charged back and entered for collection as noncash item s; and “ (b ) A ll other items will be charged back and returned.” Thus, while a bank will continue to receive credit in its account at the Federal Reserve Bank within two days for checks bearing the paying bank’s identifying routing symbol-transit number in magnetic ink characters that can be “ read ” by electronic devices, fo r other checks the presenting bank will receive credit only after col lection is actually accomplished— a process that often requires well over two days. The Reserve Bank letters also noted that, depending upon progress shown over com ing months in the elimina tion from the collection system o f checks that cannot be machine-processed, further consideration will be given— before September 1, 1967— “ to determining whether it would be appropriate fo r the Federal Reserve Banks to take additional action, including possibly the imposition o f a collection charge on such item s.” “ W e believe you will recognize this action as a constructive and mutually beneficial step toward im proving the efficiency of the cou n try’s check collection system and minimizing operating problems by eliminating from cash item channels an additional type o f ‘ headache’ item ,” the Reserve Banks added. “ W e urge you to support the action and solicit your cooperation in com plying with it. “ W e appreciate your support o f the action which has been taken to date, and we look forw ard to your continuing efforts to attain the ultimate goal of having all checks, drafts, and similar items which are to be handled as cash items, fu lly encoded in accordance with the Magnetic Ink Character Recognition Program o f The American Bankers A ssociation.” The letters also recalled earlier steps taken by the Federal Reserve toward eliminating “ headache item s” from the check clearing process. “ Headache item s” is the description given to various types o f nonstandard checks, drafts or similar instruments that, because o f their design or size, cause errors or require special handling in check clearing operations. In the earlier steps, the Federal Reserve Banks had announced that (1) after January 1, 1964, they would no longer accept as cash items any items that, because o f their size, could not be processed in the customary man ner through low-speed p roof machine equipment, and (2 ) after January 1, 1965, they would no longer accept as cash items any items containing more than a single thickness of card or paper. Commenting on the new steps and studies designed to advance the automation o f check clearings— already 88 per cent accomplished in Federal Reserve clearing operations— and to develop an im proved money transfer and management inform ation system, the Board o f Governors said: ‘ ‘ Automation in business and banking record keeping, economic or accounting analysis, and communication is spreading at an accelerating rate. Currently larger and more pow erful computers are being used with increas ing efficiency and broader application because technology of data transmission has provided fo r the linkage, on a practical basis, o f widely separated sources of data. ‘ ‘ These developments have great significance fo r the Federal Reserve System, which serves the money settle ment needs of the nation through its 36 offices and the offices of its member banks. The technological advances that have been made and are in the process o f being applied to data handling and transmission require that the System adapt its facilities as soon as practicable to accommodate financial transfers based on electronic data processing and transmission. “ The System ’s progress up to this time in coping with automation is indicated by its cooperation in the M IC R (M agnetic Ink Character Recognition) program and the substantial conversion of its check processing operation to electronic equipment. “ In moving ahead on this program, the System encourages cooperative efforts by banking groups and other interested parties in the development o f an improved country-wide payments system. Its expectation is that as automation makes possible more efficient and expeditious operations in money settlement, the Federal Reserve will be prepared and ready to serve the most advanced technology.”
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