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F E D E R A L R E S E R V E BANK
O F NEW YO R K
[
Circular No. 9494 "1
May 12, 1983
J
Fim l Phase off Program To Reduce and Price Federal Reserve Float
To All Depository Institutions in the Second
Federal Reserve District, and Others Concerned:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has approved procedures to eliminate or price the remaining categories of Federal Reserve
check float. This type of float is the value of checks for which the Federal Reserve has given credit to the institution that
deposited the checks for collection, but for which the Federal Reserve has not yet received payment.
The Board acted under the Monetary Control Act of 1980, which requires the System to reduce and price remaining
Federal Reserve float. The Board’s approval of these procedures is the latest in a series of actions to fulfill these
requirements.
In November 1982, the Board requested public comment on a proposal to charge depository institutions for large
($50,000 or more) interterritory returned checks as a result of a wire notification from the returning Federal Reserve office.
Interterritory returned checks cause Federal Reserve float because Reserve Banks are unable to debit immediately the
original depositing institution’s account for the returned checks.
After reviewing comment received, the Board decided not to adopt the proposal. As suggested by commenters, the
Board voted to defer credit for interterritory returned items for one day. This one-day deferral of credit will eliminate $130
million of interterritory return-item float. This procedure will be implemented in August 1983 to provide Reserve Banks
and depository institutions sufficient time to make necessary operational changes.
In April 1982, the Board proposed an amendment to Regulation J to require paying banks to pay for checks delivered
or made available to them on days the paying banks are closed and on which the Reserve Bank is open. Such days consist of
‘‘midweek closing days ’’ — regular weekdays on which a depository institution is closed as permitted by state law — and
“ nonstandard holidays” — days on which the paying bank is closed because of a state or local holiday.
In response to comment received, the Board did not adopt the proposed amendment at this time. As an alternative, the
Board decided to eliminate or price float arising from midweek closings and nonstandard holidays, beginning in October
1983, by giving Reserve Banks three options to deal with such float. The three options are:
— a Reserve Bank could modify its availability schedule for local depositors so that credit for checks drawn on closed
institutions would be deferred an additional day.
— a Reserve Bank could modify its current practice of posting funds received for the account of the institution on the
day the institution is closed.
— Reserve Banks could price all or any remaining float arising from midweek closings or nonstandard holidays by
including the value of such float in the cost of the Federal Reserve’s check collection service.
(OVER)
The Board also had requested comment in November 1982 on proposals to price intraterritory transportation float and
the other remaining categories of check float. The Board has approved the proposals to price these categories of check float
by adding the cost of such float to the cost of the check collection service. The addition of these costs to the costs of the
check collection service will begin in October 1983.
With the implementation of these procedures, all Federal Reserve check float arising from the provision of check
collection services to depository institutions will be eliminated or priced.
Enclosed, for depository institutions in this District, is a copy of the Board’s official notice in this matter; it will
be published in the Federal Register, and additional copies may be obtained from our Circulars Division (Tel. No.
212-791-5216).
Questions on check float should be directed, if you are in this Bank’s Head Office territory, to James O. Aston,
Vice President (Tel. No. 212-791-6334) or John F. Sobala, Assistant Vice President (Tel. No. 212-791-5997). In the
Buffalo Branch territory, such questions should be directed to Peter D. Luce, Assistant Vice President (Tel. No.
716-849-5013) or Robert J. McDonnell, Operations Officer (Tel. No. 716-849-5022).
A nthony
M. S o l o m o n ,
President.
FEDERAL RESERVE SYSTEM
[Docket Nos o R -0392, 0433]
Reduction and Pricing of Federal Reserve Float
AGENCY:
Board of Governors of the Federal Reserve System*
ACTION:
float.
Approval of proposals to reduce and price Federal Reserve check
SUMMARY:
The Board of Governors has approved procedures to eliminate and
price Federal Reserve check float* A substantial portion of float arising
from interterritory returned checks will be eliminated by deferring credit
for these returned checks by one day* Other check float will be eliminated
or priced. With the implementation of these procedures, all Federal Reserve
float arising from the provision of check collection services to depository
institutions will be eliminated or priced*
EFFECTIVE DATE:
August 1, 1983*
On that date, Reserve Banks will change
availability schedules for interterritory returned checks*
The other
procedures will be implemented on October 1, 1983.
FOR FURTHER INFORMATION CONTACT:
Elliott C. McEntee, Assistant Director
(202/452-2231) or Morgan J. Hallmon, Program Manager, Payments Mechanism
Planning (202/452-3878), Division of Federal Reserve Bank Operations;
Gilbert T. Schwartz,
Associate General
Counsel
(202/452-3625),
Daniel L. Rhoads, Attorney (202/452-3711), or Robert G. Ballen, Attorney,
(202/452-3265), Legal Division, Board of Governors of the Federal Reserve
System, Washington, D* C. 20551.
SUPPLEMENTARY INFORMATION:
The M o n e t a r y C o n t r o l A c t o f 1980 (P* L* 96-221)
('■'MCA") r e q u i r e s
t h a t f e e s be e s t a b l i s h e d
f o r F e d e r a l R e s e r v e Bank
services.
The MCA r e q u i r e s t h a t t h e F e d e r a l R e s e r v e p r i c e f o r F e d e r a l
R e s e r v e f l o a t t h a t r e m a i n s a f t e r o p e r a t i o n a l m e a ns t o r e d u c e f l o a t a r e
implemented ._L/
On December 31, 1980, the Board determined, in response to comments
received on the Board's proposals to reduce and price float (45 F.R* 58689)9
to proceed with internal operational improvements to reduce float.
i/l26 Cong * Rec. S3167
Senator Proxmire).
[Enc* Cir* No. 9494]
(daily
ed.
March 27,
1980)
(statement
of
-2 As a method of eliminating a portion of Federal Reserve check
float, the Board requested comment in April 1982 on a proposed amendment to
Regulation J to require a depository institution to pay for checks made
available to it by a Reserve Bank on a weekday that is a banking day for the
Reserve Bank even if the institution is closed on a regular basis during the
business week ("midweek closings"). Comment was also requested on whether
this procedure should apply to checks made available to institutions that
are closed on state or local holidays by Reserve Banks that are open on such
days ("non-standard holidays"). 47 F.R. 15349, (April 9, 1982).
The Board also requested comment in November 1982 on a proposal to
charge a depository institution that deposits an interterritory check of
$50,000 or more based on a wire notification by the Reserve Bank when that
check is returned.
Comment was also requested on proposals to price
holdover check float, intraterritory check transportation float, and other
categories of check float as well as interterritory check float. 47 F.R.
50342 (November 5, 1982).
On March 8, 1983, the Board announced a program to reduce and/or
price interterritory check float and check holdover float.
48 F.R. 10753
(March 14, 1983).
Under this program, depository institutions would be
offered two crediting options to reduce interterritory check float and three
methods for paying for remaining interterritory check float. Additionally,
the Board approved pricing of check holdover float over a six month period
by incorporating the value of this float in the cost of check services to be
recovered in 1983.
The Board has now adopted procedures to reduce and/or
price the remaining categories of Federal Reserve float arising from the
provision of check collection services to depository institutions.
Return Item Float
Float associated with interterritory returned items amounted to
$150 million on a daily average basis in 1982.
This float arises because
current System procedures specify that payor institutions receive immediate
credit for returned items. Reserve Banks, however, are operationally unable
to debit immediately the original depositing institution's account for
returned items drawn on an institution located in another Federal Reserve
territory.
In order to reduce the float associated with such interterritory
returned items, the Board requested public comment in November 1982 on a
proposal to charge the depositing institution's account for large
interterritory returned items ($50,000 or more) based on receipt of a wire
notification from the returning Federal Reserve office.
As an alternative
to having the institution's account debited immediately, the Board proposed
that a depository institution could compensate for such return item float
through an "as of" adjustment to its account.
-3The Board received 144 comments on the return item float proposal.
A substantial number of commenters (68) expressed support for the proposal,.
However, a number of commenters, including many who supported the proposal,
raised legal concerns regarding the proposal. These concerns included:
(1)
the
im pact
of
the
proposal
on
the m id n igh t
d eadline
for
returned
item s;
(2) whether a Reserve Bank has authority to charge an institution's account
based upon a wire notification; (3) the authority of a depository
institution to charge its customer's account prior to receipt of the
physical itfem; (4) the depository institution's liability for errors in
account entries, including the possibility of. charging an account twice for
the same return or charging an account improperly, which may result in
subsequent wrongful dishonors; and (5) the Federal Reserve's lack of
liability for transmission of erroneous payment data.
In addition, a large
number of commenters also cited considerable operational difficulties such
as reconciling the wire notification with the paper return.
Many c o m m e n t e r s s u g g e s t e d t h a t t h e F e d e r a l
Reserve co n sid er
a l t e r n a t i v e methods o f r e c o v e r i n g r e t u r n item f l o a t .
Twenty com m enters
s u g g e s t e d t h a t r e t u r n i t e m f l o a t be h a n d l e d th r o u g h a m o d i f i c a t i o n t o t h e
Federal R eserve's a v a ila b ilit y
schedules.
C o m m en t e rs s u g g e s t i n g
th is
d e f e r r e d a v a i l a b i l i t y a p p r o a c h g e n e r a l l y s t a t e d t h e i r b e l i e f t h a t su c h an
a p p r o a c h w ould more e q u i t a b l y a s s i g n f l o a t c o s t s a s s o c i a t e d w i t h r e t u r n e d
i t e m s by p l a c i n g t h e b u r d e n o f t h i s c o s t o n t h e i n s t i t u t i o n s t h a t a r e
r e t u r n i n g t h e i t e m s a nd t h e i r c u s t o m e r s .
Some c o m m e n t e r s s u g g e s t e d t h a t t h e
F e d e r a l R e s e r v e i m p o s e an e x p l i c i t f e e f o r r e t u r n e d i t e m s , w h i c h w o u l d a l s o
cover the f l o a t c o s t s .
The B o a r d b e l i e v e s t h a t t h e c o m m e n t e r s r a i s e d l e g a l a nd o p e r a t i o n a l
i s s u e s w i t h r e s p e c t t o t h e p r o p o s a l t h a t c a n n o t be r e s o l v e d i n a c o s t
e f f e c t i v e manner.
F u r th e r , s i n c e the p r o p o s a l would have a p p l i e d o n ly to
la rg e d o lla r retu rn ed item s, procedures for p r ic in g rem aining retu rn item
f l o a t w ould s t i l l h a v e to be d e v e l o p e d .
The B o a r d h a s t h e r e f o r e d e c i d e d n o t
to adopt the p rop osal reg a rd in g i n t e r t e r r i t o r y retu rn item f l o a t .
Further,
t h e B o a r d d o e s n o t b e l i e v e t h a t a d o p t i o n o f an e x p l i c i t f e e f o r r e t u r n e d
i t e m s a s s u g g e s t e d i n s ome o f t h e c o m me n t s i s a p p r o p r i a t e a t t h i s t i m e s i n c e
t h e S y s t e m i s c o n d u c t i n g p i l o t programs i n t h e D a l l a s a n d K a n s a s C i t y
D i s t r i c t s to d eterm in e the e f f e c t i v e n e s s o f r e tu r n item p r i c i n g .
A f t e r c o n s i d e r a t i o n o f t h e c o m me n t s r e c e i v e d a nd f u r t h e r a n a l y s i s ,
t h e Board h a s d e c i d e d t o a d o p t an a l t e r n a t i v e s u g g e s t e d by t h e c o m m e n t e r s .
Under t h i s a p p r o a c h , c r e d i t f o r i n t e r t e r r i t o r y r e t u r n e d i t e m s w ould be
d e f e r r e d one d a y .
T h is d e f e r r a l o f c r e d i t on i n t e r t e r r i t o r y r e t u r n e d i t e m s
-4 -
.2/ 2/
would eliminate $130 million of return item float
Deferring credit
by one day for interterritory returned items will be implemented in August
1983 in order to provide Reserve Banks and depository institutions
sufficient time to make operational changes.2/ Since this procedure may
affect local clearinghouses that require immediate credit for returned
itemss Reserve Banks will consult with local clearinghouses to assure
orderly implementation of the procedures.
Midweek C l o s i n g s
and N o n s t a n d a r d H o l i d a y s
In April 1982, the Board requested public comment on a proposal to
amend Regulation J to require a depository institution to pay for checks
delivered or made available to it on days the institution is closed and on
which the Reserve Bank is open.
Such days consist of "midweek closing
days"— regular weekdays on which a depository institution closes as
permitted by state law and "nonstandard holidays"— days on which the paying
institution is closed because of a state or local holiday., The proposal was
intended to eliminate the float that results from granting credit to the
depositor for checks that could not be charged to the closed paying
institution.,
Float resulting from midweek closings was approximately
$160 million, and float resulting from nonstandard holidays was
approximately $100 million on a daily average basis in 1982o
A total of 150 comments were received on the issue of midweek
closings; 59 commenters favored the proposal, and 91 were opposed,, Most of
those opposed were small institutions and their trade associations. These
commenters opposed the proposal because they believed that it was unfair to
. 2 / Some c o m m e n t e r s s u g g e s t e d t h a t c r e d i t f o r i n t e r t e r r i t o r y r e t u r n e d i t e m s
be p r o v i d e d b a s e d upon a f i x e d a v a i l a b i l i t y s c h e d u l e d e p e n d i n g upon t h e
l o c a t i o n o f the d e p o s it in g bank.
The B o a r d d o e s n o t b e l i e v e t h a t s u c h a
s c h e d u le i s n e c e s s a r y or a p p r o p r ia te s i n c e most r e tu r n e d item s are d e l i v e r e d
to the d e p o s i t i n g bank's F ed era l R eserve o f f i c e w i t h i n one day.
2 / The r e m a i n i n g $ 2 0 m i l l i o n o f r e t u r n i t e m f l o a t a r i s e s f r o m a v a r i e t y o f
o t h e r r e a s o n s , i n c l u d i n g w he n a R e s e r v e Bank i s u n a b l e t o r e t u r n t h e i t e m t o
t h e d e p o s i t i n g i n s t i t u t i o n on a t i m e l y b a s i s o r w h e n i t h a s s e n t t h e i t e m t o
t h e wrong p a y o r .
T h i s " h o l d o v e r " f l o a t w i l l b e p r i c e d i n t h e s ame m a n n e r a s
o t h e r h o l d o v e r f l o a t 9 t h a t i s 9 t h e v a l u e i s t o b e added t o t h e c o s t o f t h e
check c o l l e c t i o n s e r v i c e .
2 / T his o n e -d a y d e f e r r a l g e n e r a l l y would a p p ly t o
i n t e r t e r r i t o r y a nd
in traterritory
returned
item s
that
are
commingled.
However,
if.
i n t r a t e r r i t o r y r e t u r n e d i t e m s a r e s e p a r a t e d by t h e p a y i n g b a n k , c r e d i t f o r
su c h i t e m s w ould n o t be d e f e r r e d s i n c e th e i t e m s can be r e t u r n e d t o t h e
d e p o s i t i n g b a n k t h e same d a y and no F e d e r a l R e s e r v e f l o a t w o u l d b e c r e a t e d .
R e s e r v e B anks t h a t a r e a b l e t o p r o c e s s c o m m i n g l e d r e t u r n s i n a t i m e l y
f a s h i o n c o u ld g i v e im m ediate c r e d i t f o r such i n t r a t e r r i t o r y r e t u r n e d ite m s
w h e n no F e d e r a l R e s e r v e f l o a t w o u l d a r i s e f r o m s u c h a p r a c t i c e .
-5require depository institutions to pay for checks when they are closed as
permitted by state law. The commenters also stated that the proposal would
make it difficult and more expensive for them to manage their cash positions <>
Those in favor of the proposal generally indicated that it is an
equitable way of eliminating float . Institutions that are the source of the
float would be most immediately affected by the proposal. These commenters
also indicated that the proposal would eliminate the advantages these closed
institutions may have in not having to bear the cost of such float directly.,
A total of 82 comments were received on the issue of nonstandard
holidays. Of these, 19 were in favor of the proposal, and 63 were opposed,,
Those opposed indicated that bank holidays are mandated by state law and it
would be unfair to penalize banks for acting in accordance with state law;
it is inequitable to charge banks that are closed on nonstandard holidays
when Reserve Banks themselves do not follow a uniform holiday schedule; and
the proposal would make it more difficult and expensive for depository
institutions to manage their cash positions.
The Board believes the comments on both midweek closings and
nonstandard holidays raise significant issues. The major impact of the
midweek closing proposal would be on small institutions in small communities
that are closed during the week.
In some areas the practice has been
widespread for many years. For example, it is reported that over 70 percent
of the banks in western Tennessee close during the week.
Such institutions
typically prefer to open on Saturdays as a convenience to customers that are
unable to do their banking business during the week.
Adoption of the
proposal could also have a significant effect upon the operations of some
small institutions, particularly since they would be unable to debit their
customers accounts until the following day.
In addition, there is little
evidence to suggest that the bulk of these institutions are closed in order
to avoid paying for checks or to create Federal Reserve float.
Further,
depository institutions closed on nonstandard holidays generally do not have
the opportunity to remain open.
Therefore, the Board has determined not to
adopt the proposed amendment to Regulation J at this time.
The Board believes, however, that it is necessary to adopt
procedures to eliminate or price this float as reauired bv t-h^ m p a .
Therefore, Reserve Banks will have three options to deal with float arising
from midweek closings and nonstandard holidays. First, a Reserve Bank could
modify its availability schedule for local depositors so that credit for
checks drawn on closed institutions would be deferred one additional
day.5/
Second, a Reserve Bank could modify its current practice of
posting funds received for the account of the institution on the day the
U It
would be operationally infeasible for Reserve Banks to delay credit
on interterritory checks drawn on closed banks because each Reserve Bank
would be required to keep track of every bank in the country that is closed.
-6institution is closed. A one day deferral of credits received on the day
the institution is closed would offset some of the float arising from
midweek closings and nonstandard holidayso
Finallys Reserve Banks could
price all or any remaining float arising from midweek closings or
nonstandard holidays in the same manner as holdover float.
The value of
this float would be added to the cost of the check collection service.
The Board intends to monitor float associated with midweek closings
to determine whether it is increasing to any significant extent.,
If a
pattern develops, the Board may reconsider the proposed amendment to
Regulation J.
Intraterritory Transportation Float
In November 1982, it was proposed that intraterritory
transportation float be priced in the same manner as holdover float.
Intraterritory transportation float results primarily from the inability of
a Federal Reserve office to make presentment of checks to payor institutions
as a result of transportation delays.
The few commenters expressing views
specifically on this proposal generally were opposed to charging at all for
float that arises from conditions beyond the control of depository
institutions.
Other commenters argued that pricing of intraterritorv
transportation float in this manner would not provide Reserve Banks with an
incentive to operate efficiently.
The MCA requires that all Federal Reserve float arising from the
provision of priced services to depository institutions be priced.
Because
of the operational difficulty of allocating intraterritory transportation
float back to specific depository institutions and in view of the small
amount of float involved ($110 million), it would also be inefficient to
attempt to trace the float to individual depositors.
Accordingly, the Board
believes that the value of such float should be added to the cost of the
check collection service.
Reserve Bank performance will continue to be
monitored to ensure that intraterritory transportation float is kept to a
minimum and that Reserve Banks continue to operate efficiently.
All Other Check Float
Onl> a suiaj.1 amount ($40 million) of chectc rioac will remain after
implementation of the above procedures.
This remaining check float arises
primarily from adjustments to the accounts of depository institutions
because of Federal Reserve accounting errors and from the handling of
government agency deposits at Reserve Banks.
The amount of float arising
from adjustments is relatively small ($30 million) and it would not be cost
effective to charge the float to particular depository institutions.
The
Board therefore believes it appropriate to add the value of this float to
the cost of the check collection service.
-7The Board also believes that it is inappropriate to charge
depository institutions for float arising from deposits by government
agencies ($10 million) since such float does not arise from the provision of
priced services to depository institutions. Indeed, since such float arises
from the provision of services to government agencies, it is not necessary
to price such float under the Monetary Control Act. Accordingly, the value
of this float will be attributed to such government agencies.
Implementation Schedule
The one day deferral of credit for interterritory returned items
will be implemented on August 1, 1983, in order to provide Reserve Banks and
depository institutions sufficient time to make the appropriate operational
adjustments .
Virtually all other categories of check float will be priced by
adding the value of the float to the cost of the check collection service.
Any necessary adjustments to fee schedules will be implemented beginning in
October, 1983, thus providing Reserve Banks with an opportunity to implement
operational adjustments designed to reduce float further and to put into
place and test the systems necessary to implement the adopted procedures.
An October 1983 implementation date also will enable Reserve Banks fn
coordinate tnese change with modifications to fees that may result from the
comprehensive review of their fee schedules planned for this summer.
The
Board believes that piecemeal adjustments to fee schedules at an earlier
time could be disruptive to depository institutions that take Federal
Reserve fee schedules into account in their planning and operations. After
implementation of these procedures, all Federal Reserve float arising from
the provision of check collection services to depository institutions will
have been eliminated or priced in accordance with the Monetary Control Act
of 1980.
By order of the Board of Governors of the Federal Reserve System,
May 3, 1983.
(signed) James McAfee
James McAfee
Associate Secretary of the Board
@FedFRASER