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FEDERAL RESERVE BAWK OF MEW YORK [ Circular N o. 9 9 6 2 "1 D ecem ber 4 , 1985 NONSTANDARD HOLIDAYS Proposals to Reduce Check and ACH Float To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: * The Federal Reserve Board has issued for comment proposals, including an amendment to Regula tion J (Collection of Checks and Other Items and Wire Transfer of Funds), to reduce float generated because of local holiday schedules. Comment is requested by December 30, 1985. The proposals would modify check and automated clearing house (ACH) procedures used by Re serve Banks to recover the value of float generated by the closing of depository institutions on local holidays, reduce the financial risk associated with current procedures for handling certain types of ACH float, and establish a uniform holiday schedule to be followed by the Reserve Banks. Printed on the following pages is the text of the Board’s proposals, as published in the Federal Register of November 20,1985. Comments thereon should be submitted by December 30,1985 and may be sent to Cathy E. Minehan, Vice President. E. G er ald C o r r ig a n , President. FEDERAL RESERVE SYSTEM [Dock©4 No. R-0558] 12 CFR Part 210 Regulation J; Proposals T© R@duc© Federal R g<® Float @ rv© aoemcv: Federal Reserve System. ACTION: Proposed rule; request for comment. SUMMARY: The Board is requesting comments on proposals that would: (1) Amend Subpart A of the Board’s Regulation J, 12 CFR Part 210, which governs the collection of checks and other items, to require paying banks that close voluntarily on days that are banking days for their Reserve Banks to pay on such days for cash items that Reserve Banks make available to them on such days; (2) modify the procedures used by Reserve Banks to recover the value of float generated in automated clearing house (“ACH”) operations due to nonstandard holiday closings; (3] reduce financial risks to the Federal Reserve by changing procedures in handling ACH credit transactions on days that the originator is closed; and (4) establish a uniform holiday schedule to be followed by the Reserve Banks. ©AYE: Comments must be submitted by December 30,1985. ADDRESSES: Comments, which should refer to Docket No. R-0558, may be mailed to the Board of Governors of the Federal Reserve System, 20th & C Sts., NW., Washington, DC 20551, attention: Mr. William W. Wiles, Secretary. Comments may also be delivered to Room B-2223 between 8:45 a.m. and 5:15 p.m. Comments may be inspected at Room B-1122 between 8:45 a.m, and 5:15 p.m. except as provided in § 261.6(e) of the Board’s Rules Regarding Availability of Information, 12 CFR 261.6(a). FOR FURTHER INFORM ATION CONTACT; Florence M. Young, Adviser (202-4523955) or William S. Brown, Manager (202^152-3760) Division of Federal Reserve Bank Operations; Joseph R. Alexander, Attorney, Legal Division (202^152-2489); or Joy W. O’Connell, Telecommunications Device for the Deaf (202-452-3244). SUPPLEMENTARY INFORM ATION; Background The Federal Reserve has made continuing efforts to reduce float in the payments system. Such float arises in the check collection process when a sender receives credit for a deposited check before the Federal Reserve is able This situation creates the potential for to obtain payment from the paying bank, substantial increases in nonstandard for example, if the paying bank is closed holiday float. Cases like this are likely on a day presentment would normally to increase as interstate banking be made. Similarly, in ACH becomes more prevalent. Current procedures for deferring transactions, float may be created if a credit to senders for cash items drawn party to a transaction is closed on the on banks observing nonstandard date a transaction is to be settled. In such cases, the Federal Reserve may not holidays are generally limited to those instances where all banks in a state are be able to debit the appropriate account closed.3 Where only one or a few at the same time credit is passed.1 institutions are closed, Reserve Banks In both check and ACH transactions, cannot defer credit to the senders, and some float is generated as a result of in such instances a substantial amount nonstandard holidays (state or local of float could be generated that would holidays not observed on a regional or have to be added to the cost base for national basis). On two previous check collection services. The Board occasions, the Board has considered the believes that it is not equitable to issue of nonstandard holiday float in require all users of Federal Reserve check services. See 48 FR 20802 (1983); check collection services to bear the 49 FR 4196 (1984). Most recently, the costs of float generated by institutions Board decided to permit Reserve Banks that voluntarily choose to close on days to defer credit to senders for cash items when most other banks are open for drawn on institutions that are closed on business. nonstandard holidays where When the Board last considered a operationally feasible. The value of any Regulation J amendment to charge nonstandard holiday float remaining is banks for checks made available to added to the cost base for the check them on nonstandard holidays on which collection service. Similar procedures they are closed, the Board decided not have been adopted for ACH services. to go forward with the proposal in part These procedures have enabled the because it agreed with commenters that Federal Reserve to keep nonstandard it would be unfair to charge for those holiday float to relatively low levels.2 nonstandard holidays that state or local Recent events, however, indicate that law require institutions to close. these procedures may not be fully Because it was unclear which effective in the future, and, in the case of nonstandard holidays were mandatory ACH services, may expose the Federal and which were permissive, the Board Reserve to financial risk. elected to treat all nonstandard holidays as mandatory and not charge paying Check Collection banks for cash items made available to Changes in banking structure have them on such days. created the potential for an increase in Although the Board still believes that nonstandard holiday float. For example, it is not appropriate to charge paying the Delaware State Bank Commissioner banks for checks made available to permits banks located in that state to them on days that the law requires them close on any day they choose provided to be closed, changing conditions have that they provide the public with led the Board to reconsider its 1984 advance notice. Banks with affiliates decision to' treat all nonstandard located in other states may take holidays as mandatory. Accordingly, the advantage of this fact to close on days Board proposes that Regulation J be their out-of-state affiliates are closed amended to allow Reserve Banks to regardless of whether other banks in charge paying banks for checks and Delaware are closed on that day and other cash items made available to them regardless of whether the Philadelphia on any day that is a banking day for the Reserve Bank is observing the holiday. Reserve Bank 4 and that the law of the * In ACH transactions, credits and debits resulting from the same transaction would normally be posted on the same day. In credit transactions, the originator’s account is debited and the receiver’s account is credited; these entries are generally treated as final. In a debit transaction, the originator’s account is credited and the receiver’s account is debited; these entries are generally treated as provisional. 2 In check services, a daily average float of approximately $15 million results from nonstandard holidays. In ACH services, nonstandard holidays cause a daily average float of approximately $2.0 million 2 3 A nine digit number Inscribed on checks is used to sort checks to paying banks. Collecting institutions often use only the first four digits of this number for sorting checks that are sent to the Federal Reserve. In many cases, these four digits will identify institutions in a particular state. Therefore, institutions uniformly observing nonstandard holidays in a particular state can be readily identified and credit for checks drawn on such institutions can be deferred. 4 The Board is also proposing for comment that Reserve Banks follow a uniform holiday schedule. See infra. place where the paying bank is located allows the bank to remain open. If local law requires a paying bank to close on a day that its Reserve Bank is open, the Board proposes that the holiday be treated as mandatory and the paying bank not be charged for items made available on such days. In such cases, Reserve Banks will defer credit to senders where possible; otherwise the value of the float will he added to the cost base for the check collection service. This provision is not intended to require paying banks to pay for items on days that they are closed because of weather or other emergencies. Section 210.14 provides relief under such conditions provided the bank exercises such diligence as the circumstances require. The Board has compiled a preliminary list of state holidays that it believes are mandatory, and specifically seeks comment on whether these holidays should be considered mandatory holidays and whether additional holidays should also be considered mandatory. Mandatory Nonstandard Holidays LPreiiminatj' ListJ State in which mandatediy observed Holiday Lincoln's Birthday (February 12). February 3rd (Presidents' Day). March 26 (Kuhio Day)............. June 11 (Kamehameha Day)... July 24 (Pioneer Day)............ , August 16 (Admission Day)..... October 31 (Nevada Day)....... Hawaii. Kansas, Connecticut. Wisconsin. Hawaii. Hawaii. Utah. ‘Hawaii. Nevada. In addition to the above, Mardi Gras may also be manda'toiyin many southern Louisiana parishes and municipalities. A ce Nonstandard Holidays: The current procedures for recovering nonstandard holiday float place the entire burden of the recovery on originators ©f ACH transactions. The National Automated Clearing House Association fl'MAGHA’’) has indicated to the Board that it is often difficult for originators to pass float costs back to their customers, and that the current procedures could therefore discourage small and medium size institutions from beginning to originate ACH transactions. Accordingly, NACHA requested a change to the procedures for recovering ACH float arising because one of the parties to the transaction (originator, receiver, or Reserve Bank) is closed. Under this proposal such float would be treated as follows: P R O C E D U R E S FOR E LIM IN A T IN G OR PR IC IN G AC H F LO A T A R IS IN G FR O M D E P O S ITO R Y IN S T ITU T IO N C L O S IN G S A N D R ES E R V E B A N K H O LID A Y S Type of transaction .Midweek closing ■Depository institution nonstandard holiday Reserve bank holiday Debit originator’s account on preceding business ■Debit originator's account on preceding business iday. Compensate for early debit with as-of-adjustday. Compensate for early debit with as-of-adjustment. Reject nighttime nextday credit transac ment. Reject nighttime nextday credit transac tions. tions Credit receiver’s account as though institution were Compensate originator for .credit float caused by open. the receiving Reserve office's holiday with as-of adjustments. Credit originator's account as though institution Credit originator's account as though institution Compensate originate for credit float with an as-of were open. were open. adjustment. Debit receiver’s account as though institution were Debit receiver's account as though institution were Deter transaction to the originator until the next open or assess cost of float through explicit open or assess cost of float through explicit open business day for the receiving Reserve charge or as-of adjustment. charge or as-of adjustment. office. Debit originator's account on preceding business day Compensate tor early debit with as-of-adjustment. Reject nighttime next day credit transac tions. Credit receiver's account as though institution were open. The Board believes that the proposal may be a more equitable means of addressing ACH float, and is requesting comment on whether it should be adopted. Financial Risk: When ACH credit transactions are processed, funds flow from the originator of the transaction to the receiver. As a result, when an originator of a credit transaction is closed on the settlement date, float is created because funds are credited to the account of the receiving institution and the originator’s account is not charged. Under current procedures, the originator is charged on the next banking day and the value of float is recovered through an as-of adjustment or an explict fee. Because ACH credit transactions are generally treated by the Reserve Banks as final payments on the settlement date, the current procedures for recovering this float could expose the Federal Reserve to a possible loss should there be insufficient funds in the originating institution's reserve or clearing account on the banking day following the settlement date. To address this problem, the Board is proposing that institutions originating credit transactions for settlement on a day that they or their local Federal Reserve office will be closed be debited on the preceding banking day and be compensated for the early debit by means of an as-of adjustment. Reserve Bank Holiday Schedule Several commenters to previous proposals on midweek closing and nonstandard holiday float have recommended that the Federal Reserve should observe a standard holiday schedule. These commenters indicated that a standard holiday schedule would reduce the number of occasions when one Federal Reserve office was open and another closed, and, therefore, would reduce the uncertainty as to whether they would or would not be credited for their deposits. The Federal Reserve agrees with these sentiments 3 and is planning to adopt a uniform holiday schedule for all Reserve Banks beginning in 1987. That schedule is as follows: All Saturdays, All Sundays, New Year’s Day (January 1), Martin Luther King’s Birthday (third Monday in January), Washington’s Birthday (third Monday in February), Memorial Day (last Monday in May), Independence Day (July 4], Labor Day (first Monday in September], Columbus Day (second Monday in October), Veterans’ Day (November 11), Thanksgiving Day (fourth Thursday in November), and Christmas Day (December 25). If a fixed holiday (such as Christmas) falls on a Saturday, the holiday will be observed on the previous Friday; if it falls on a Sunday, it will be observed on the following Monday. Because this is a change in service arrangements that could have significant longer-run effects on the nation’s payments system, the Board is requesting public comment on the proposed standard holiday schedule. The Board does not anticipate that any of these proposals will result in any significant economic impact on a substantial number of small entities. section 16 of the Federal Reserve Act, 12 U.S.C 248(o) and 360, section 11 (i) of the Federal Reserve Act, 12 U.S.C. 248(i), and other provisions of law, the Board hereby proposes to amend 12 CFR Part 210 as follows: 1. The authority citation for Part 210 continues to read as follows: List of Subjects in 12 CFR Part 210 Authority: F ederal R eserve A ct, sec. 1 3 ,1 2 U.S.C. 342; sec. l l ( i ) , 12 U.S.C. 248(i), sec. 16, 12 U.S.C. 248(o) and 360, and sec. 19(f), 12 U.S.C. 464. Banks, Banking, Federal Reserve System. 2. The last sentence of § 210.9(a)(2) is revised to read as follows: Pmi 210— [AMENDED] Pursuant to its authority under § 13 of the Federal Reserve Act, 12 U.S.C. 342, § 210.9 f t * * * A ★ * By O rder o f the Board o f G overnors o f the F ederal R eserve S ystem , N ovem b er 15,1985. P aym ent * voluntarily on a day that is a banking day for the Reserve Bank shall either pay on that day by the close of the Reserve Bank’s banking day for cash items that the Reserve Bank makes available to the paying bank on that day, or compensate the Reserve Bank for the value of the float associated with the items in accordance with procedures provided in its Reserve Bank’s operating circular; in such circumstances, the paying bank is not considered to receive the item until its next banking day. * * W illiam W . W iles, (a ) * * * Secreta ry o f the Board. (2) * * * A paying bank that closes [FR D oc. 85-27710 Filed 11-19-85: 8:45 am] 4
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