[Federal Register Volume 62, Number 97 (Tuesday, May 20, 1997)]
[Proposed Rules]
[Pages 27547-27554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13028]


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FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-0972]


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: Effective January 1, 1998, the Reserve Banks will begin to 
implement a policy under which each depository institution may maintain 
only a single funds account with the Federal Reserve. A single account 
will establish a single debtor-creditor relationship between each 
institution and a Federal Reserve Bank and will make account management 
more efficient for banks with interstate branches. The Board is 
proposing amendments to subpart A of Regulation J to conform the 
Federal Reserve check collection rules to the single account structure.

DATES: Comments must be submitted on or before July 21, 1997.

ADDRESSES: Comments, which should refer to Docket No. R-0972, may be 
mailed to Mr. William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments addressed to Mr. Wiles also may be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and 
to the security control room outside of those hours. Both the mail room 
and the security control room are accessible from the courtyard 
entrance on 20th Street between Constitution Avenue and C Street, N.W. 
Comments may be inspected in Room MP-500 between 9:00 a.m. and 5:00 
p.m. weekdays, except as provided in Sec. 261.8 of the Board's Rules 
Regarding Availability of Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General 
Counsel, (202/452-3625), Stephanie Martin, Senior Attorney (202/452-
3198), or Heatherun Allison, Attorney (202/452-3565), Legal Division. 
For the hearing impaired only, contact Diane Jenkins, 
Telecommunications Device for the Deaf (TDD) (202/452-3544), Board of 
Governors of the Federal Reserve System, 20th and C Streets, N.W., 
Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION:

Overview

    The Riegle-Neal Interstate Banking and Branching Efficiency Act of 
1994 (Pub. L. 103-328) made significant changes to various banking laws 
to authorize and facilitate interstate banking. Consequently, the 
number of depository institutions that operate branches in more than 
one Federal Reserve District is expected to increase. On January 1, 
1998, the Federal Reserve Banks will begin to implement a new account 
structure that will provide a single Federal Reserve account for each

[[Page 27548]]

institution.1 A primary objective of the single account 
structure is to establish a single debtor-creditor relationship between 
each chartered entity and the Federal Reserve. A single debtor-creditor 
relationship is the most effective means for Reserve Banks to manage 
their affairs with a depository institution. A single account structure 
also may allow depository institutions to manage their overall position 
with the Reserve Banks more efficiently.
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    \1\ A foreign bank's U.S. branches and agencies and an Edge or 
agreement corporation's offices will not be required to adopt a 
single account structure.
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    The Board has already requested comment on amendments to 
Regulations D and I (Reserve Requirements of Depository Institutions 
and Issue and Cancellation of Capital Stock of Federal Reserve Banks, 
respectively) to define the location of a depository institution for 
purposes of reserve accounts and Federal Reserve membership (62 FR 
11117, March 11, 1997). The Board is now proposing amendments to 
subpart A of Regulation J, governing the collection of checks and other 
items by Federal Reserve Banks, to conform the Federal Reserve check 
collection rules to the single account structure. The Board does not 
believe it is necessary to amend subpart B of Regulation J, which 
governs funds transfers through Fedwire, to accommodate the single 
account structure. The Reserve Banks will, however, issue revised 
operating circulars governing collection of cash items, Fedwire funds 
transfers, and other Reserve Bank services to reflect the new account 
structure.
    Under the proposed Regulation J amendments, all of an institution's 
check collection transactions through the Federal Reserve Banks would 
be reflected in a single account held at that institution's 
``Administrative Reserve Bank'' (or in a correspondent's account at a 
Reserve Bank). The proposed amendments to Regulation D provide a means 
to determine the location of an institution's reserve 
account.2 Proposed Regulation J would provide that the 
account location of an institution that sends items to a Reserve Bank 
for collection (and the identity of its Administrative Reserve Bank) 
would be determined in accordance with the provisions of Regulation D, 
even if the institution is not otherwise subject to that regulation.
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    \2\ The proposed Regulation D provision would provide that a 
depository institution is considered to be located in the Federal 
Reserve District specified in the institution's charter or 
organizing certificate, or, if no such location is specified, the 
location of its head office. If that location, in the Board's 
judgment, is ambiguous or would impede the ability of the Board or 
the Federal Reserve Banks to perform their functions under the 
Federal Reserve Act, the Board could make exceptions to the general 
rule for a particular institution after considering certain 
criteria.
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    Under the proposed amendments, an institution generally would be 
permitted to send an item to any Reserve Bank for collection, but the 
item will be deemed to have been sent first to that institution's 
Administrative Reserve Bank. The proposed amendments would designate 
the parties that are deemed to handle the item and the order in which 
they are deemed to have handled it. (Although the Administrative 
Reserve Bank would be deemed to handle the check, it would not be 
considered to have ``received'' the check as that term is used in 
subpart A of Regulation J if the check is initially sent to another 
Reserve Bank.) The amendments would require a paying bank to settle for 
an item with its Administrative Reserve Bank (regardless of whether the 
institution received the item from its Administrative Reserve Bank) and 
would specify the time and manner in which the paying bank is to make 
settlement. The proposed amendments also would make changes in the 
rules governing the handling of and settlement for returned checks 
parallel to those proposed for cash items.

Section-by-Section Analysis

Section 210.2  Definitions

    The Board proposes to add two new definitions to Regulation J. 
Under the new account structure, all of an institution's transactions 
will be reflected in a single account held at the institution's 
Administrative Reserve Bank. The Board is proposing to add a definition 
of ``account'' to mean an account with reserve or clearing balances 
held on the books of a Federal Reserve Bank. If a depository 
institution desires, the Reserve Banks will also keep informational 
records, or subaccounts, of certain subsets of transactions that affect 
an account (such as the transactions performed by a branch of a bank 
that may be in another district from the Administrative Reserve Bank).
    The Board proposes to define ``Administrative Reserve Bank'' as the 
Reserve Bank in whose District the entity in question is located. An 
entity's location would be determined in the same way as location is 
determined for purposes of reserve accounts under the Board's 
Regulation D. (See footnote 2.)
    The Board also proposes to amend the definition of ``bank'' to 
conform to the Uniform Commercial Code (Secs. 4-105 and 4-107). 
Finally, the Board proposes to amend the definition of ``cash item'' to 
provide that, under the new single-account system, the Reserve Bank 
that initially receives an item for deposit, rather than the Reserve 
Bank in whose District the item is payable, is the Reserve Bank that 
decides whether to accept the item as a cash item.

Section 210.3(a)  General Provisions

    This paragraph provides that the Reserve Banks may issue operating 
circulars governing the details of their check collection services and 
related matters. The Board proposes to specify that the operating 
circulars may allow an Administrative Reserve Bank to give instructions 
to other Reserve Banks, such as instructions regarding the handling of 
items that would affect an account on its books.

Section 210.4  Sending Items to Reserve Banks

    The Board proposes to amend this section to provide that a sender 
(other than a Reserve Bank sender) may send an item to any Reserve Bank 
for collection, regardless of where the sender or the paying bank is 
located. This amendment would provide flexibility for depository 
institutions, foster competition among Reserve Banks, and promote 
faster collection of checks. For example, a bank with its head office 
in Richmond would likely have its account at the Federal Reserve Bank 
of Richmond. An Iowa branch of that bank may wish to send its checks to 
the Federal Reserve Bank of Chicago or the Federal Reserve Bank of 
Kansas City, or both, all of which would be permissible under the 
proposed rule. The sender's Administrative Reserve Bank (the Federal 
Reserve Bank of Richmond in this example), however, may override this 
rule and require the sender to send the item to a particular Reserve 
Bank. For example, if a bank is in financial difficulty, the 
Administrative Reserve Bank may want to require the bank to deposit all 
of its items directly with a particular Reserve Bank in order to retain 
closer control over the bank's account.
    Section 13(1) of the Federal Reserve Act (FRA) 3 
authorizes a Reserve Bank to accept deposits of checks and other items 
from its member banks or from other depository institutions and to 
accept from other Reserve Banks checks and other items payable within 
its District. Under the Board's proposal, if a sender sends a check to 
a Reserve Bank other than its Administrative Reserve Bank or the 
Reserve Bank in whose District the check is payable, the receiving 
Reserve Bank would be

[[Page 27549]]

deemed to be acting as agent of the Administrative Reserve Bank. 
Proposed Regulation J would require, however, that such a receiving 
Reserve Bank take on additional rights, duties, and liabilities in its 
own name that it would not necessarily have as a common law agent of 
the Administrative Reserve Bank. For example, the receiving Reserve 
Bank would be considered an indorser on the check and would make 
warranties on the check under Sec. 210.6, Regulation CC, and the 
Uniform Commercial Code in its own name. The Board believes that 
requiring such a receiving Reserve Bank to take on these rights, 
duties, and liabilities is necessary to preserve a clear chain of 
warranties and other claims in the check collection and return system. 
Currently, in those limited situations where a Reserve Bank accepts 
deposits from institutions other than those located in its District, it 
does so under a special agency agreement with the institution's home 
Reserve Bank. Rather than perpetuating these special agreements, the 
Board proposes to amend Regulation J to establish the terms under which 
the receiving Reserve Bank would handle items on behalf of an 
Administrative Reserve Bank.
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    \3\ 12 U.S.C. 360.
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    Specifically, the proposed amendments to Sec. 210.4 would designate 
the parties that are deemed to handle an item and the order in which 
they are deemed to have handled the item. These amendments would 
establish the chain of indorsements on an item under Regulation J, 
Regulation CC, and the Uniform Commercial Code, as well as the order in 
which the parties are agents or subagents of the owner of an item, as 
provided in Sec. 210.6(a). As noted above, the proposal provides that 
the sender is deemed to send the item to its Administrative Reserve 
Bank, regardless of whether that Reserve Bank actually receives the 
item first. The Administrative Reserve Bank is deemed to send the item 
to the Reserve Bank that actually receives the item from the sender (if 
different from the Administrative Reserve Bank). Any subsequent Reserve 
Bank that receives the item from another Reserve Bank is deemed to 
handle the item in turn.
    In the example from the previous paragraph, where an Iowa branch of 
a Richmond bank sends a check to the Chicago Reserve Bank for 
collection, the check would be deemed handled in the following order: 
the initial sender, the Richmond Reserve Bank (the Administrative 
Reserve Bank), and the Chicago Reserve Bank (the first Reserve Bank to 
receive the item). If the check in this example were drawn on a banking 
office in New York, the Chicago Reserve Bank would send the check to 
the Federal Reserve Bank of New York, in which case the New York 
Reserve Bank would be the last Reserve Bank to handle the check and 
would present the check to the paying bank. No other Reserve Bank would 
handle or would be deemed to handle the item. In the example, if the 
paying bank's Administrative Reserve Bank is the Federal Reserve Bank 
of Boston (which might be the case if the check is payable by a New 
York office of a bank headquartered in Boston), the Boston Reserve Bank 
is not a party to the check, even though settlement for the check will 
ultimately take place by a debit to an account on the Boston Reserve 
Bank's books. (See Table 1.)

                                 Table 1                                
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  This table illustrates the following example:                         
  A Richmond-based bank has its account at the Federal Reserve Bank of  
 Richmond (Richmond Fed), its Administrative Reserve Bank. An Iowa      
 branch of the bank sends a check to the Federal Reserve Bank of Chicago
 (Chicago Fed) for collection. The check is payable by a New York office
 of a Boston-based bank, which has an account at the Federal Reserve    
 Bank of Boston (Boston Fed). The Chicago Fed sends the check to the    
 Federal Reserve Bank of New York (NY Fed), which presents the check to 
 the New York office of the paying bank.                                
                                                                        
                         Path of physical check                         
                                                                        
 Initial sender  Chicago Fed  NY Fed  Paying 
                                  Bank                                  
                                                                        
    Parties deemed to have handled the check (Chain of indorsements)    
                                                                        
Initial sender  Richmond Fed  Chicago Fed  NY
                        Fed  Paying Bank                       
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Section 210.5  Sender's Agreement; Recovery by Reserve Bank

    Paragraph (a) of Sec. 210.5 sets forth the terms and warranties to 
which a sender agrees when it sends an item to a Reserve Bank. The 
Board is proposing to amend this paragraph to conform with the 
provisions of Sec. 210.4. Specifically, a sender would authorize its 
Administrative Reserve Bank, as well as any other Reserve Bank to which 
the item is sent, to handle an item and would authorize the Reserve 
Banks to make the appropriate accounting entries in settlement for the 
item. The Board proposes to make minor amendments to paragraph (c) (and 
parallel amendments to Sec. 210.12(f)), which would simplify the 
provisions describing how settlements occur between Reserve Banks. The 
Board also proposes to redesignate the paragraph numbers in paragraph 
(c).
    Paragraph (d) of Sec. 210.5 requires a sender to grant a security 
interest in all its assets held by a Reserve Bank to secure any of its 
obligations related to items collected through the Reserve Banks. The 
Board proposes to amend this section to provide that the security 
interest is granted to the sender's Administrative Reserve Bank.

Section 210.6  Status, Warranties, and Liability of Reserve Bank

    Paragraph (a) of this section provides that Reserve Banks act as 
agents or subagents of the owner of an item. The Board proposes to 
modify the reference to a Reserve Bank in the first sentence with the 
phrase ``that handles an item'' to clarify that this paragraph refers 
to the Reserve Banks that are identified in proposed Sec. 210.4. The 
current language provides that the agency terminates when a Reserve 
Bank receives final payment for the item and makes the proceeds 
available for use by the sender. The Board proposes to amend this 
provision by stating that the agency status will not end unless the 
time for commencing all actions against the Reserve Bank has expired. 
This amendment would ensure that the agency and subagency relationships 
between Reserve Banks regarding a particular item, as set forth in 
proposed Sec. 210.4, will continue until the statute of limitations has 
run on claims regarding any dispute concerning the item. The Board also 
proposes to reorganize the numbering in paragraphs (a) and (b) of this 
section.

Section 210.7  Presenting Items for Payment

    This section provides rules regarding the presentment of items for 
payment. The Board proposes to make minor changes to paragraphs (c) and 
(d). Rather than referring to an item that is

[[Page 27550]]

``payable'' in a certain Federal Reserve District, the Board proposes 
to refer to items that may be ``sent to the paying bank or nonbank 
payor'' in a certain Federal Reserve District. The Board believes the 
proposed language is more precise that the current provision.

Section 210.8  Presenting Noncash Items for Acceptance

    Similar to the proposed changes to Sec. 210.7, the Board is 
proposing to replace the term ``payable elsewhere'' with the term ``may 
be presented elsewhere.'' The Board also proposes to reorganize the 
paragraph numbering in this section.

Section 210.9  Settlement and Payment

    This section sets forth the time and manner by which a paying bank 
must settle for items it receives from a Reserve Bank. The Board 
proposes to add a new paragraph (a) (and to redesignate the following 
paragraphs accordingly) to provide that a paying bank must settle for 
an item with its Administrative Reserve Bank, whether or not the paying 
bank actually receives the item from that Reserve Bank. By settling 
with its Administrative Reserve Bank, the paying bank would meet any 
settlement obligation it may have under Regulation CC and the Uniform 
Commercial Code. For example, the Uniform Commercial Code (Secs. 4-301 
and 4-302) requires a paying bank to settle with the presenting bank by 
midnight on the day of presentment if it wants to preserve its right to 
return the check by its midnight deadline on its next banking day. By 
settling with its Administrative Reserve Bank, a paying bank would 
satisfy this obligation to a presenting Reserve Bank.
    The new paragraph (a) would also provide that a paying bank may 
settle through a correspondent account, with the agreement of its 
Administrative Reserve Bank, the Reserve Bank (if different) that holds 
the correspondent's account, and the correspondent. The paying bank 
would remain responsible for settlement if for some reason settlement 
does not occur through the correspondent account. The Board proposes to 
make a conforming change to paragraph (c) (as redesignated) related to 
payment for noncash items.
    Currently, Regulation J requires the paying bank to settle so that 
funds are available to the presenting Reserve Bank by the close of 
Fedwire on the day of presentment. The Board proposes: (1) amendments 
to paragraph (b) (as redesignated) of Sec. 210.9 to clarify that 
settlement funds must be made available to the paying bank's 
Administrative Reserve Bank, rather than the presenting Reserve Bank; 
(2) to change the references to a Reserve Bank's operating circular to 
include all of the Reserve Banks' operating circulars, as those 
circulars will be uniform as of January 1, 1998; (3) to clarify 
paragraph (b)(3) to refer to days the paying bank is closed voluntarily 
``so that it does not receive a cash item'' (the provisions of this 
paragraph would not apply if the paying bank's head office were closed 
for business but a branch still received presentment of cash items from 
the Reserve Banks); (4) to replace references to ``one hour after the 
scheduled opening of Fedwire'' with ``9:30 a.m. Eastern Time'' so that 
this time will remain unchanged when the Fedwire opening hour is moved 
to 12:30 a.m. in December 1997; (5) to add paragraph headings 
throughout paragraph (b); and (6) to make conforming changes to cross-
references throughout Sec. 210.9 in light of the paragraph 
redesignations.

Section 210.10  Time Schedule and Availability of Credits for Cash 
Items and Returned Checks

    This paragraph provides that a Reserve Bank shall make proceeds 
available for cash items and returned checks according to its published 
time schedules. The proposed amendments to this section would clarify 
that the Reserve Bank that holds the settlement account will make 
credit available according to the time schedule of the Reserve Bank 
that first receives the cash item (or returned check) from the sender 
(or the paying or returning bank). The Board also proposes a conforming 
amendment to Sec. 210.11(b) regarding credit for noncash items.

Section 210.12  Return of Cash Items and Handling of Returned Checks

    This section sets forth the rules governing handling of and 
settlement for returned checks. The rules for returned checks are 
generally parallel to the rules for cash items, and the Board is 
proposing amendments that are parallel to the amendments for cash items 
discussed above. Under the proposal, a paying bank or returning bank 
may send a returned check to any Reserve Bank, unless its 
Administrative Reserve Bank directs it to send the returned check to a 
specific Reserve Bank. As with cash items, the paying or returning 
bank's Administrative Reserve Bank would be deemed to have handled the 
item first, prior to the Reserve Bank that actually received the item, 
for purposes of determining the relationships, rights, and liabilities 
of the parties (see discussion of Sec. 210.4). Also similar to cash 
items, a paying or returning bank would authorize the handling of a 
returned check by its Administrative Reserve Bank, as well as by any 
other Reserve Bank to which a returned check is sent, and would 
authorize the Reserve Banks to make the appropriate accounting entries 
in settlement for the returned check (see discussion of Sec. 210.5). A 
subsequent returning bank or depositary bank would be required to 
settle for a returned check with its Administrative Reserve Bank, 
whether or not the bank actually receives the returned check from that 
Reserve Bank. By settling with its Administrative Reserve Bank, the 
subsequent returning bank or depositary bank would meet its settlement 
obligations under Regulation CC and the Uniform Commercial Code (see 
discussion of Sec. 210.9(a)). Finally, a paying or returning bank would 
grant a security interest in all its assets held by its Administrative 
Reserve Bank to secure any of its obligations related to returned 
checks it sends to a Reserve Bank (see discussion of Sec. 210.5(d)).

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601-612) requires an 
agency to publish an initial regulatory flexibility analysis with any 
notice of proposed rulemaking. Two of the requirements of an initial 
regulatory flexibility analysis (5 U.S.C. 603(b)), a description of the 
reasons why action by the agency is being considered and a statement of 
the objectives of, and legal basis for, the proposed rule, are 
contained in the supplementary material above. The proposed rule 
requires no additional reporting or recordkeeping requirements and does 
not overlap with other federal rules. Regulation J bears a close 
relationship with the Board's Regulation CC (12 CFR part 229), and that 
relationship is explained in the supplementary information above as 
well as in the provisions of the two regulations.
    Another requirement for the initial regulatory flexibility analysis 
is a description of and, where feasible, an estimate of the number of 
small entities to which the proposed rule will apply. The proposal will 
apply to all institutions, regardless of size, that send checks, 
returned checks, or other items to a Reserve Bank or receive items from 
a Reserve Bank. In 1996, subsidiaries of the 100 largest bank holding 
companies deposited approximately 46 percent of the Federal Reserve 
Banks' check volume, and all other banks deposited 54 percent. The 
Reserve Banks presented approximately 31 percent of their check volume 
to subsidiaries of the 100 largest bank holding companies,

[[Page 27551]]

and 69 percent to all other banks. The proposed rule sets out the terms 
under which the Reserve Banks handle items and do not impose 
significant burdens on small institutions.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed rule 
under the authority delegated to the Board by the Office of Management 
and Budget. No collections of information pursuant to the Paperwork 
Reduction Act are contained in the proposed rule.

List of Subjects in 12 CFR Part 210

    Banks, banking, Federal Reserve System.

    For the reasons set out in the preamble, the Board proposes to 
amend part 210 of chapter II of title 12 of the Code of Federal 
Regulations as set forth below:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

    1. The authority citation for part 210 continues to read as 
follows:

    Authority: 12 U.S.C. 248(i), (j), and (o), 342, 360, 464, and 
4001-4010.

    2. Section 210.2 is amended by redesignating paragraph (a) and 
paragraphs (b) through (p) as paragraph (b) and paragraphs (d) through 
(r), respectively; adding new paragraphs (a) and (c); and revising 
newly redesignated paragraphs (d), (g) introductory text, and (g)(2) to 
read as follows:


Sec. 210.2  Definitions.

* * * * *
    (a) Account means an account with reserve or clearing balances on 
the books of a Federal Reserve Bank. A subaccount is an informational 
record of a subset of transactions that affect an account and is not a 
separate account.
* * * * *
    (c) Administrative Reserve Bank with respect to an entity means the 
Reserve Bank in whose District the entity is located, as determined 
under the procedure described in Sec. 204.3(b)(2) of this chapter 
(Regulation D), even if the entity is not otherwise subject to that 
section.
* * * * *
    (d) Bank means any person engaged in the business of banking. A 
branch or separate office of a bank is a separate bank to the extent 
provided in the Uniform Commercial Code.
* * * * *
    (g) Cash item means--
* * * * *
    (2) Any other item payable on demand and collectible at par that 
the Reserve Bank that receives the item is willing to accept as a cash 
item. Cash item does not include a returned check.
* * * * *
    3. In Sec. 210.3, the last sentence of paragraph (a) is revised to 
read as follows:


Sec. 210.3  General provisions.

    (a) General. * * * The circulars may, among other things, classify 
cash items and noncash items, require separate sorts and letters, 
provide different closing times for the receipt of different classes or 
types of items, provide for instructions by an Administrative Reserve 
Bank to other Reserve Banks, set forth terms of services, and establish 
procedures for adjustments on a Reserve Bank's books, including 
amounts, waiver of expenses, and payment of interest by as-of 
adjustment.
* * * * *
    4. Section 210.4 is revised to read as follows:


Sec. 210.4  Sending items to Reserve Banks.

    (a) Sending of items. A sender, other than a Reserve Bank, may send 
any item to any Reserve Bank, whether or not the item is payable within 
the Reserve Bank's District, unless the sender's Administrative Reserve 
Bank directs the sender to send the item to a specific Reserve Bank.
    (b) Handling of items. (1) The following parties, in the following 
order, are deemed to have handled an item that is sent to a Reserve 
Bank for collection--
    (i) The initial sender;
    (ii) The initial sender's Administrative Reserve Bank;
    (iii) The Reserve Bank that receives the item from the initial 
sender (if different from the initial sender's Administrative Reserve 
Bank); and
    (iv) Another Reserve Bank, if any, that receives the item from a 
Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of 
this section is not a party that handles an item and is not a 
collecting bank with respect to an item.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code. An initial sender's 
Administrative Reserve Bank that is deemed to handle an item is also 
deemed to be a sender with respect to that item. The Reserve Banks that 
are deemed to handle an item are deemed to be agents or subagents of 
the owner of the item, as provided in Sec. 210.6(a) of this subpart.
    (c) Checks received at par. The Reserve Banks shall receive cash 
items and other checks at par.
    5. In Sec. 210.5, paragraphs (a)(1) and (c) and the first sentence 
of paragraph (d) are revised to read as follows:


Sec. 210.5  Sender's agreement; recovery by Reserve Bank.

    (a) * * *
    (1) Authorizes the sender's Administrative Reserve Bank and any 
other Reserve Bank or collecting bank to which the item is sent to 
handle the item (and authorizes any Reserve Bank that handles 
settlement for the item to make accounting entries), subject to this 
subpart and to the Reserve Banks' operating circulars, and warrants its 
authority to give this authorization;
* * * * *
    (c) Methods of recovery. (1) The Reserve Bank may recover the 
amount stated in paragraph (b) of this section by charging any account 
on its books that is maintained or used by the sender (or by charging a 
Reserve Bank sender), if--
    (i) The Reserve Bank made seasonable written demand on the sender 
to assume defense of the action or proceeding; and
    (ii) The sender has not made any other arrangement for payment that 
is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that 
has been charged under this paragraph (c) may recover from its sender 
in the manner and under the circumstances set forth in this paragraph 
(c). A Reserve Bank's failure to avail itself of the remedy provided in 
this paragraph (c) does not prejudice its enforcement in any other 
manner of the indemnity agreement referred to in paragraph (a)(3) of 
this section.
    (d) Security interest. When a sender sends an item to a Reserve 
Bank, the sender and any prior collecting bank grant to the sender's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
of part 229 of this chapter (Regulation CC). * * *
    6. In Sec. 210.6, paragraphs (a)(1) and (b) are revised to read as 
follows:

[[Page 27552]]

Sec. 210.6  Status, warranties, and liability of Reserve Bank.

    (a)(1) Status and Liability. A Reserve Bank that handles an item 
shall act as agent or subagent of the owner with respect to the item. 
This agency terminates when a Reserve Bank receives final payment for 
the item in actually and finally collected funds, a Reserve Bank makes 
the proceeds available for use by the sender, and the time for 
commencing all actions against the Reserve Bank has expired. A Reserve 
Bank shall not have or assume any liability with respect to an item or 
its proceeds except--
    (i) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care;
    (ii) As provided in paragraph (b) of this section; and
    (iii) As provided in subpart C of part 229 (Regulation CC) of this 
chapter.
* * * * *
    (b) Warranties and liability. (1) By presenting or sending an item, 
a Reserve Bank warrants to a subsequent collecting bank and to the 
paying bank and any other payor--
    (i) That the Reserve Bank is a person entitled to enforce the item 
(or is authorized to obtain payment of the item on behalf of a person 
who is either entitled to enforce the item or authorized to obtain 
payment on behalf of a person entitled to enforce the item); and
    (ii) That the item has not been altered.
    (2) The Reserve Bank also makes the warranties set forth in 
Sec. 229.34(c) of this chapter, subject to the terms of part 229 of 
this chapter (Regulation CC). The Reserve Bank shall not have or assume 
any other liability to the paying bank or other payor, except for the 
Reserve Bank's own lack of good faith or failure to exercise ordinary 
care.
* * * * *
    7. In Sec. 210.7, paragraph (c) introductory text and paragraph (d) 
are revised to read as follows:


Sec. 210.7  Presenting items for payment.

* * * * *
    (c) Presenting or sending direct. A Reserve Bank or subsequent 
collecting bank may, with respect to an item that may be sent to the 
paying bank or nonbank payor in the Reserve Bank's District--
* * * * *
    (d) Item sent to another district. A Reserve Bank receiving an item 
that may be sent to a paying bank or nonbank payor in another District 
ordinarily sends the item to the Reserve Bank of the other District, 
but with the agreement of the other Reserve Bank, may present or send 
the item as if it were sent to a paying bank or nonbank payor in its 
own District.
    8. Section 210.8 is revised to read as follows:


Sec. 210.8  Presenting noncash items for acceptance.

    (a) A Reserve Bank or a subsequent collecting bank may, if 
instructed by the sender, present a noncash item for acceptance in any 
manner authorized by law if--
    (1) The item provides that it must be presented for acceptance;
    (2) The item may be presented elsewhere than at the residence or 
place of business of the payor; or
    (3) The date of payment of the item depends on presentment for 
acceptance.
    (b) Documents accompanying a noncash item shall not be delivered to 
the payor upon acceptance of the item unless the sender specifically 
authorizes delivery. A Reserve Bank shall not have or assume any other 
obligation to present or to send for presentment for acceptance any 
noncash item.
    9. Section 210.9 is amended by redesignating paragraphs (a) through 
(e) as paragraphs (b) through (f); adding a new paragraph (a); revising 
newly redesignated paragraphs (b) and (c); and in newly redesignated 
paragraph (f) removing the references ``paragraphs (a), (b), and (c)'' 
and adding in their place ``paragraphs (b), (c), and (d)''.


Sec. 210.9  Settlement and payment.

    (a) Settlement through Administrative Reserve Bank. A paying bank 
shall settle for an item under this subpart with its Administrative 
Reserve Bank, whether or not the paying bank received the item from 
that Reserve Bank. A paying bank's settlement with its Administrative 
Reserve Bank is deemed to be settlement with the Reserve Bank from 
which the paying bank received the item. A paying bank may settle for 
an item using any account on a Reserve Bank's books by agreement with 
its Administrative Reserve Bank, any other Reserve Bank holding the 
settlement account, and the account-holder. The paying bank remains 
responsible for settlement if the Reserve Bank holding the settlement 
account does not, for any reason, obtain settlement in that account.
    (b) Cash items--(1) Settlement obligation. On the day a paying bank 
receives 2 a cash item from a Reserve Bank, it shall settle 
for the item such that the proceeds of the settlement are available to 
its Administrative Reserve Bank by the close of Fedwire on that day, or 
it shall return the item by the later of the close of its banking day 
or the close of Fedwire. If the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(1), it is 
accountable for the amount of the item as of the close of its banking 
day or the close of Fedwire on the day it receives the item, whichever 
is earlier.
---------------------------------------------------------------------------

    \2\ A paying bank is deemed to receive a cash item on its next 
banking day if it receives the item--
    (1) On a day other than a banking day for it; or
    (2) On a banking day for it, but after a ``cut-off hour'' 
established by it in accordance with state law.
---------------------------------------------------------------------------

    (2) Time of settlement. (i) On the day a paying bank receives a 
cash item from a Reserve Bank, it shall settle for the item so that the 
proceeds of the settlement are available to its Administrative Reserve 
Bank, or return the item, by the latest of--
    (A) The next clock hour that is at least one hour after the paying 
bank receives the item;
    (B) 9:30 a.m. Eastern Time; or
    (C) Such later time as provided in the Reserve Banks' operating 
circulars.
    (ii) If the paying bank fails to settle for or return a cash item 
in accordance with paragraph (b)(2)(i) of this section, it shall be 
subject to any applicable overdraft charges. Settlement under paragraph 
(b)(2)(i) of this section satisfies the settlement requirements of 
paragraph (b)(1) of this section.
    (3) Paying bank closes voluntarily. (i) If a paying bank closes 
voluntarily so that it does not receive a cash item on a day that is a 
banking day for a Reserve Bank, and the Reserve Bank makes the cash 
item available to the paying bank on that day, the paying bank shall 
either--
    (A) On that day, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank, or return 
the item, by the latest of the next clock hour that is at least one 
hour after it ordinarily would have received the item, 9:30 a.m. 
Eastern Time, or such later time as provided in the Reserve Banks' 
operating circulars; or
    (B) On the next day that is a banking day for both the paying bank 
and the Reserve Bank, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank by 9:30 
a.m. Eastern Time on that day or such later time as provided in the 
Reserve Banks' operating circulars and compensate the Reserve Bank for 
the value of the float associated with the item in accordance with 
procedures provided in the Reserve Bank's operating circular.
    (ii) If a paying bank closes voluntarily so that it does not 
receive a cash item on a day that is a banking day for a Reserve Bank, 
and the Reserve Bank makes the cash item available to the

[[Page 27553]]

paying bank on that day, the paying bank is not considered to have 
received the item until its next banking day, but it shall be subject 
to any applicable overdraft charges if it fails to settle for or return 
the item in accordance with paragraph (b)(3)(i) of this section. The 
settlement requirements of paragraphs (b)(1) and (b)(2) of this section 
do not apply to a paying bank that settles in accordance with paragraph 
(b)(3)(i) of this section.
    (4) Reserve Bank closed. (i) If a paying bank receives a cash item 
from a Reserve Bank on a banking day that is not a banking day for the 
Reserve Bank, the paying bank shall--
    (A) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by the close of Fedwire on 
the Reserve Bank's next banking day, or return the item by midnight of 
the day it receives the item (if the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(4)(i)(A), it 
shall become accountable for the amount of the item as of the close of 
the its banking day on the day it receives the item); and
    (B) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by 9:30 a.m. Eastern Time 
on the Reserve Bank's next banking day or such later time as provided 
in the Reserve Bank's operating circular, or return the item by 
midnight of the day it receives the item. If the paying bank fails to 
settle for or return a cash item in accordance with this paragraph 
(b)(4)(i)(B), it shall be subject to any applicable overdraft charges. 
Settlement under this paragraph (b)(4)(i)(B) satisfies the settlement 
requirements of paragraph (b)(4)(i)(A) of this section.
    (ii) The settlement requirements of paragraphs (b)(1) and (b)(2) of 
this section do not apply to a paying bank that settles in accordance 
with paragraph (b)(4)(i) of this section.
    (5) Manner of settlement. Settlement with a Reserve Bank under 
paragraphs (b) (1) through (4) of this section shall be made by debit 
to an account on the Reserve Bank's books, cash, or other form of 
settlement to which the Reserve Bank agrees, except that the Reserve 
Bank may, in its discretion, obtain settlement by charging the paying 
bank's account. A paying bank may not set off against the amount of a 
settlement under this section the amount of a claim with respect to 
another cash item, cash letter, or other claim under Sec. 229.34(c) of 
this chapter (Regulation CC) or other law.
    (6) Notice in lieu of return. If a cash item is unavailable for 
return, the paying bank may send a notice in lieu of return as provided 
in Sec. 229.30(f) of this chapter (Regulation CC).
    (c) Noncash items. A Reserve Bank may require the paying or 
collecting bank to which it has presented or sent a noncash item to pay 
for the item in cash, but the Reserve Bank may permit payment by a 
debit to an account maintained or used by the paying or collecting bank 
on a Reserve Bank's books or by any of the following that is in a form 
acceptable to the collecting Reserve Bank: bank draft, transfer of 
funds or bank credit, or any other form of payment authorized by State 
law.
* * * * *
    10. Section 210.10 is revised to read as follows:


Sec. 210.10  Time schedule and availability of credits for cash items 
and returned checks.

    (a) Each Reserve Bank shall include in its operating circulars a 
time schedule for each of its offices indicating when the amount of any 
cash item or returned check received by it is counted as reserves for 
purposes of part 204 of this chapter (Regulation D) and becomes 
available for use by the sender or paying or returning bank. The 
Reserve Bank that holds the settlement account shall give either 
immediate or deferred credit to a sender, a paying bank, or a returning 
bank (other than a foreign correspondent) in accordance with the time 
schedule of the receiving Reserve Bank. A Reserve Bank ordinarily gives 
credit to a foreign correspondent only when the Reserve Bank receives 
payment of the item in actually and finally collected funds, but, in 
its discretion, a Reserve Bank may give immediate or deferred credit in 
accordance with its time schedule.
    (b) Notwithstanding its time schedule, a Reserve Bank may refuse at 
any time to permit the use of credit given by it for any cash item or 
returned check, and may defer availability after credit is received by 
the Reserve Bank for a period of time that is reasonable under the 
circumstances.
    11. In Sec. 210.11, the last sentence of paragraph (b) is revised 
to read as follows:


Sec. 210.11  Availability of proceeds of noncash items; time schedule.

* * * * *
    (b) * * * A Reserve Bank may, however, refuse at any time to permit 
the use of credit given by it for a noncash item for which the Reserve 
Bank has not yet received payment in actually and finally collected 
funds.
* * * * *
    12. Section 210.12 is amended by revising paragraphs (a), (b), and 
(c)(1), the first sentence of paragraph (d), paragraphs (f) and (h), 
and the first sentence of paragraph (i); and by removing the last 
sentence of paragraph (g), to read as follows:


Sec. 210.12  Return of cash items and handling of returned checks.

    (a) Return of items--(1) Return of cash items handled by Reserve 
Banks. A paying bank that receives a cash item from a Reserve Bank, 
other than for immediate payment over the counter, and that settles for 
the item as provided in Sec. 210.9(b) of this subpart, may, before it 
has finally paid the item, return the item to any Reserve Bank (unless 
its Administrative Reserve Bank directs it to return the item to a 
specific Reserve Bank) in accordance with subpart C of part 229 of this 
chapter (Regulation CC), the Uniform Commercial Code, and the Reserve 
Banks' operating circulars. A paying bank that receives a cash item 
from a Reserve Bank also may return the item prior to settlement, in 
accordance with Sec. 210.9(b) of this subpart and the Reserve Banks' 
operating circulars. The rules or practices of a clearinghouse through 
which the item was presented, or a special collection agreement under 
which the item was presented, may not extend these return times, but 
may provide for a shorter return time.
    (2) Return of checks not handled by Reserve Banks. A paying bank 
that receives a check as defined in Sec. 229.2(k) of this chapter 
(Regulation CC), other than from a Reserve Bank, and that determines 
not to pay the check, may send the returned check to any Reserve Bank 
(unless its Administrative Reserve Bank directs it to send the returned 
check to a specific Reserve Bank) in accordance with subpart C of part 
229 of this chapter (Regulation CC), the Uniform Commercial Code, and 
the Reserve Banks' operating circulars. A returning bank may send a 
returned check to any Reserve Bank (unless its Administrative Reserve 
Bank directs it to send the returned check to a specific Reserve Bank) 
in accordance with subpart C of part 229 of this chapter (Regulation 
CC), the Uniform Commercial Code, and the Reserve Banks' operating 
circulars.
    (b) Handling of returned checks. (1) The following parties, in the 
following order, are deemed to have handled a returned check sent to a 
Reserve Bank under paragraph (a) of this section--
    (i) The paying or returning bank;
    (ii) The paying bank's or returning bank's Administrative Reserve 
Bank;
    (iii) The Reserve Bank that receives the returned check from the 
paying or returning bank (if different from the

[[Page 27554]]

paying bank's or returning bank's Administrative Reserve Bank); and
    (iv) Another Reserve Bank, if any, that receives the returned check 
from a Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of 
this section is not a party that handles a returned check and is not a 
returning bank with respect to a returned check.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code.
    (c) Paying bank's and returning bank's agreement. * * *
    (1) Authorizes the paying or returning bank's Administrative 
Reserve Bank, and any other Reserve Bank or returning bank to which the 
returned check is sent, to handle the returned check (and authorizes 
any Reserve Bank that handles settlement for the returned check to make 
accounting entries) subject to this subpart and to the Reserve Banks' 
operating circulars;
* * * * *
    (d) Warranties by Reserve Bank. By handling a returned check under 
this subpart, a Reserve Bank makes the returning bank warranties as set 
forth in Sec. 229.34 of this chapter, subject to the terms of part 229 
of this chapter (Regulation CC). * * *
* * * * *
    (f) Methods of recovery. (1) The Reserve Bank may recover the 
amount stated in paragraph (d) of this section by charging any account 
on its books that is maintained or used by the paying or returning bank 
(or by charging another returning Reserve Bank), if--
    (i) The Reserve Bank made seasonable written demand on the paying 
or returning bank to assume defense of the action or proceeding; and
    (ii) The paying or returning bank has not made any other 
arrangement for payment that is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that 
has been charged under this paragraph may recover from the paying or 
returning bank in the manner and under the circumstances set forth in 
this paragraph. A Reserve Bank's failure to avail itself of the remedy 
provided in this paragraph does not prejudice its enforcement in any 
other manner of the indemnity agreement referred to in paragraph (c)(3) 
of this section.
* * * * *
    (h) Settlement. A subsequent returning bank or depositary bank 
shall settle with its Administrative Reserve Bank for returned checks 
in the same manner and by the same time as for cash items presented for 
payment under this subpart. Settlement with its Administrative Reserve 
Bank is deemed to be settlement with the Reserve Bank from which the 
returning bank or depositary bank received the item.
    (i) Security interest. When a paying or returning bank sends a 
returned check to a Reserve Bank, the paying bank, returning bank, and 
any prior returning bank grant to the paying bank's or returning bank's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank, to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
of part 229 of this chapter (Regulation CC). * * *

    By order of the Board of Governors of the Federal Reserve 
System, May 14, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-13028 Filed 5-19-97; 8:45 am]
BILLING CODE 6210-01-P