[Federal Register Volume 62, Number 178 (Monday, September 15, 1997)]
[Rules and Regulations]
[Pages 48166-48174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24405]
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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: Final rule.
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SUMMARY: Effective January 2, 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
adopting amendments to subpart A of Regulation J to conform the Federal
Reserve check collection rules to the single account structure.
EFFECTIVE DATE: January 2, 1998.
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 2,
1998, the Federal Reserve Banks will begin to implement a new account
structure that will provide a single Federal Reserve account for each
institution. 1 A primary objective of the single account
structure is to establish a single debtor-creditor relationship
[[Page 48167]]
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. The Board has proposed amendments to
Regulation D to allow such institutions with offices in multiple
Federal Reserve Districts to choose whether to adopt a single-
account structure or retain multiple accounts as they do currently
[62 FR 42708, August 8, 1997].
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The Board is adopting 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 Regulation J amendments, all of an institution's check
collection and return transactions through the Federal Reserve Banks
will be reflected in a single account held at that institution's
``Administrative Reserve Bank'' (or in a correspondent's account at a
Reserve Bank). Recent amendments to Regulation D provide a means to
determine the location of an institution's reserve account.2
The final amendments to Regulation J provide that the account location
for an institution that sends items to a Reserve Bank for collection
(and the identity of its Administrative Reserve Bank) will 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\ Regulation D provides 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, would impede the
ability of the Board or the Federal Reserve Banks to perform their
functions under the Federal Reserve Act, or would impede the ability
of the institution to operate efficiently, the Board could make
exceptions to the general rule for a particular institution after
considering certain criteria. [62 FR 34613, June 27, 1997].
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Under the amendments, an institution generally is permitted to send
an item to any Reserve Bank for collection, but the item is deemed to
have been sent first to that institution's Administrative Reserve Bank.
The amendments 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 is 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 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
specify the time and manner in which the paying bank is to make
settlement. The amendments also 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 and Summary of Public Comments
The Board received nine comments on the proposed amendments to
Regulation J from two bank holding companies, two trade associations,
two clearing houses, two Federal Reserve Banks, and a financial
services company. Overall, the commenters supported the changes and
agreed that the single-account structure as implemented by the
Regulation J proposal would promote operational efficiency, speed the
collection of checks, and facilitate account management.
Section 210.2 Definitions
The Board proposed 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 proposed to add a definition of
``account'' to mean an account with reserve or clearing balances held
on the books of a Federal Reserve Bank. The proposed definition stated
that a subaccount is an informational record of a subset of
transactions that affect an account and is not a separate account. (If
a depository institution desires, the Reserve Banks will keep records
of certain transactions in ``subaccounts,'' such as the transactions
performed by a branch of a bank that may be in another District from
the Administrative Reserve Bank.) The Board proposed to define
``Administrative Reserve Bank'' as the Reserve Bank in whose District
the entity in question is located, as determined in the same way as
location is determined for purposes of reserve accounts under the
Board's Regulation D. The Board also proposed to amend the definition
of ``bank'' to conform to the Uniform Commercial Code (U.C.C.) sections
4-105 and 4-107). Finally, the Board proposed 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.
The Board received one comment on the definition of ``account,''
specifically, on the discussion of a subaccount. The commenter noted
that, due to recent bank mergers and for other reasons, certain banks
may have several routing numbers within the same District for a period
of time. The commenter suggested that the Board clarify that
subaccounts could be established based on a bank's routing numbers
presently in use. The Board anticipates that banks will be able to
establish subaccounts based on routing numbers in use immediately prior
to a merger. The Board also believes that a broad definition of
subaccount is desirable to encompass transaction subsets based on
routing numbers or on other criteria and has adopted the definition as
proposed.
The Board received one comment on the proposed definition of
``Administrative Reserve Bank.'' The commenter stated that a depository
institution should have more flexibility in choosing where its account
will be located, that is, the depository institution should be allowed
to hold its account at any Reserve Bank in whose District it operates,
which may not be the Reserve Bank where the institution is located
under Regulation D. The commenter argued that the proposed definition
unnecessarily tied priced service offerings and account relationship
issues to regulatory oversight issues. The theory behind the single-
account structure, however, is that each depository institution will
have a debtor-creditor relationship with a single Reserve Bank.
Allowing an institution to choose to hold a clearing account for
payment-related purposes at a Reserve Bank other than the Reserve Bank
where its reserve account is located would result in debtor-creditor
relationships with at least two Reserve Banks. If a depository
institution wishes to have an account relationship with a Reserve Bank
other than the Reserve Bank whose District encompasses its charter
location, it may request a location determination under the procedure
described in Regulation D. Moreover, the location of a depository
institution's account for check collection and return purposes should
not matter to the institution under the Regulation J amendments; the
institution will be able to send checks to any Reserve Bank for
collection with settlement through its Federal Reserve account
regardless of the account's
[[Page 48168]]
location. The Board, therefore, has adopted the proposed definition of
``Administrative Reserve Bank,'' as well as the other proposed changes
to Sec. 210.2.
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 proposed 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. The Board received no
comments on this amendment and has adopted it as proposed.
Section 210.4 Sending Items to Reserve Banks
The Board proposed 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, but that the sender's Administrative Reserve Bank may override
this rule and require the sender to send the item to a particular
Reserve Bank. The Board provided an example of a bank in financial
difficulty, in which case 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.
Three commenters objected to the broad powers that this section
gives to the Administrative Reserve Bank to require that checks be sent
to a specific Reserve Bank. One commenter expressed concern that such
an action could introduce inefficiencies into the payments system,
increase return item risk, and provide the Administrative Reserve Bank
with open-ended power over its private-sector competitors and
customers. This commenter suggested that the Board remove the
Administrative Reserve Bank's override power or, alternatively, clearly
define the circumstances under which the Administrative Reserve Bank
has this authority. The other commenters suggested that the Board limit
the Administrative Reserve Bank's override authority to cases where the
depositing institution is in financial difficulty or where the override
is necessary to protect the safety and soundness of the payments
system.
The Board believes this provision is necessary to address isolated
emergency situations that may arise. The Board expects that an
Administrative Reserve Bank would direct a bank to send checks to a
specific Reserve Bank only under extreme and unusual circumstances.
These circumstances might be caused by different situations, including
a severe operational problem at a Reserve Bank. Consequently, the Board
does not believe that it is feasible or appropriate to attempt to
specify all such circumstances in advance. The Board, therefore, has
adopted the provision as proposed.
The Board received no other specific comments on Sec. 210.4. Three
commenters generally supported giving depository institutions the
flexibility to deposit checks with any Reserve Bank. The Board,
therefore, has adopted the Sec. 210.4 as proposed. The following
discussion describes the amendments to this section in more detail:
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 Regulation J amendment, 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 is deemed to be acting as agent of the Administrative
Reserve Bank. Regulation J requires, 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 is considered an indorser on the check and makes warranties on the
check under Sec. 210.6, Regulation CC, and the U.C.C. 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 new Regulation J amendments establish the terms under
which the receiving Reserve Bank will 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 amendments to Sec. 210.4 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 establish the chain
of indorsements on an item under Regulation J, Regulation CC, and the
U.C.C., 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 rule 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.
If, for example, an Iowa branch of a Richmond bank, with an account
at the Richmond Reserve Bank, sends a check to the Chicago Reserve Bank
for collection, the check is 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.
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.
[[Page 48169]]
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
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 proposed 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 proposed to make minor amendments to paragraph (c) (and
parallel amendments to Sec. 210.12(f)) to simplify the provisions
describing how settlements occur between Reserve Banks. The Board also
proposed 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 proposed to amend this section to provide that the security
interest is granted to the sender's Administrative Reserve Bank. The
Board received no comments on the amendments to this section and has
adopted them as proposed.
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 proposed 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 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 proposed 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
Sec. 210.4, will continue until the statute of limitations has run on
claims regarding any dispute concerning the item. The Board also
proposed to reorganize the numbering in paragraphs (a) and (b) of this
section.
The Board received one comment that specifically supported the
amendments to this section. Another commenter asked why the agency
status of a Reserve Bank should continue for an open-ended period of
time. The commenter believed that the Reserve Bank's agency status
should continue for the same period of time as the agency status of a
private-sector collecting bank (until the settlement received for the
item becomes final, as provided in U.C.C. section 4-201(a)), absent a
compelling reason. The Board intended this provision to provide a
theoretical basis for an Administrative Reserve Bank's right to
instruct another Reserve Bank relating to risk, even after settlement
is final. (Under Regulation CC, 12 CFR 229.36(d), settlements between
banks are final when made.) For example, the Administrative Reserve
Bank may wish to instruct another Reserve Bank about possible warranty
claims and returns. The agency status is necessary for the Reserve
Banks because they are separate corporations. Private-sector collecting
banks can also extend the agency period by agreement. The Board has
adopted Sec. 210.6 as proposed.
Section 210.7 Presenting Items for Payment
This section provides rules regarding the presentment of items for
payment. The Board proposed to make minor changes to paragraphs (c) and
(d). Rather than referring to an item that is ``payable'' in a certain
Federal Reserve District, the Board proposed to improve the precision
of these provisions by referring to items that may be ``sent to the
paying bank or nonbank payor'' in a certain Federal Reserve District.
The Board received no comments on these amendments and has adopted them
as proposed.
Section 210.8 Presenting Noncash Items for Acceptance
Similar to the changes to Sec. 210.7, the Board proposed to replace
the term ``payable elsewhere'' with the term ``may be presented
elsewhere.'' The Board also proposed to reorganize the paragraph
numbering in this section. The Board received no comments on these
amendments and has adopted them as proposed.
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
proposed 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 U.C.C.
For example, the U.C.C. (sections 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 proposed 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 proposed: (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
[[Page 48170]]
throughout Sec. 210.9 in light of the paragraph redesignations. The
Board received one comment that specifically supported the amendments
to this section and has adopted the amendments as proposed.
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 Board proposed to 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 proposed a conforming amendment to Sec. 210.11(b)
regarding credit for noncash items. The Board received no comments on
these amendments and has adopted them as proposed.
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 proposed
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 U.C.C. (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)). The Board received no comments on
these amendments and has adopted them as proposed.
Transition Issues
One commenter expressed concern that the proposal may not make
adequate provision for post-merger situations, when a depository
institution may have a temporary transition account at a Reserve Bank
other than its Administrative Reserve Bank. The commenter stated that,
when some of an institution's checks will settle in a transition
account, the Reserve Bank holding the transition account should have
rights, privileges, and duties comparable to those of the
Administrative Reserve Bank with respect to settlement, check
warranties, control over direct-sends, instructions to other Reserve
Banks with respect to items that affect the account on its books, and
security interests in assets held at other Reserve Banks.
The Board believes that Regulation J as proposed adequately covers
transition situations. For example, in the case of a bank merger, the
surviving bank will have an account at its Administrative Reserve Bank
while other offices may still have transition accounts at other Reserve
Banks. Those transition accounts would operate similarly to
correspondent settlement accounts. Checks that are deposited by the
bank will be deemed to be handled first by the Administrative Reserve
Bank and then by other Reserve Banks in the order set forth in
Sec. 210.4. The Reserve Bank that holds the transition account will not
be considered a party to a check unless it actually handles the check
and therefore should be considered more like a correspondent bank than
an Administrative Reserve Bank. If the bank settles for checks
presented by a Reserve Bank through a transition account, it will be
deemed to have settled with its Administrative Reserve Bank for those
checks under Sec. 210.9(a).
Competitive Impact
One commenter stated that the Board should review the competitive
equity issues that arise from the combination of the proposed
Regulation J amendments and the Board's proposed enhanced net
settlement service for depository institutions [62 FR 32118, June 12,
1997]. The commenter believed that private-sector clearing houses would
be at a disadvantage vis-a-vis the Reserve Banks if the Reserve Banks
are able to accommodate interstate banking starting on January 2, 1998,
and the private-sector clearing houses are unable to avail themselves
of the proposed net settlement services until late 1998. The commenter
suggested that the Board analyze issues such as the risks that the
Regulation J proposal is designed to address, the benefits that the
proposal will provide to depository institutions, any cost savings that
will accrue to Reserve Banks under the proposal, as well as other
issues related to account monitoring and troubled banks. The commenter
also asked that the Board consider allowing check clearing houses to
have interim access to interdistrict net settlement services while the
Board develops service enhancements.
The Regulation J proposal is driven by both operational and risk
concerns. The structural changes in the banking business brought about
by the increase in the number of banks with interstate branches have
necessitated a new account structure in the Federal Reserve Banks to
handle interstate banking. The Regulation J changes are necessary to
set forth the rules that will govern Federal Reserve check collection
under the new account structure. Depository institutions will benefit
from the efficiencies of having to manage only a single Federal Reserve
account and the ability to deposit checks for collection at any Reserve
Bank.
In practical terms, the Regulation J proposal would likely have
little immediate effect on current check collection patterns through
the Reserve Banks. The proposal would allow branches of interstate
banks to continue to deposits checks at the same Reserve Banks that
they use today, irrespective of where their accounts are located.
Eventually, these banks could benefit from price competition between
Reserve Banks, which could result in volume shifts. Private-sector
collecting banks could establish nationwide check collection or
exchange systems as well. The Board does not believe that the
Regulation J proposal, on its own, provides the Reserve Banks with any
greater advantages in the check collection business than they already
have today due to their nationwide presence and their ability to settle
directly through Federal Reserve accounts.
For private-sector check clearing arrangements that wish to settle
on a net basis on the books of a Reserve Bank, there are currently two
net settlement services available, as set forth in the
[[Page 48171]]
notice for the proposed service enhancement. The traditional
settlement-sheet-based service provides next-day finality, and the
Fedwire-based service provides same-day finality. The Board proposed an
enhanced settlement-sheet-based service that would provide same-day
finality and establish more effective risk controls than exist under
the current traditional service, which was designed to handle
intradistrict clearing. In the interim, the Board recognizes that some
clearing arrangements that receive traditional net settlement services
from the Reserve Banks may have participants with an interstate
presence. The Board will not require that such participants be excluded
from such arrangements while the Board is developing the enhanced
service.
Final Regulatory Flexibility Analysis
Two of the three requirements of a final regulatory flexibility
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and
the objectives of the rule and (2) a summary of the issues raised by
the public comments, the agency's assessment of the issues, and a
statement of the changes made in the final rule in response to the
comments, are discussed above. The third requirement of a final
regulatory flexibility analysis is a description of significant
alternatives to the rule that would minimize the rule's economic impact
on small entities and reasons why the alternatives were rejected.
The rule 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. The rule sets out the terms under
which the Reserve Banks handle items and does not impose significant
burdens on small institutions, therefore no alternatives were
considered for 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 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 rule.
List of Subjects in 12 CFR Part 210
Banks, banking, Federal Reserve System.
For the reasons set out in the preamble, the Board is amending 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'
[[Page 48172]]
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:
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 of this chapter
(Regulation CC).
* * * * *
(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)'' to read as
follows:
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
[[Page 48173]]
(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 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
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
[[Page 48174]]
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 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 (f) may recover from the paying
or returning bank in the manner and under the circumstances set forth
in this paragraph (f). A Reserve Bank's failure to avail itself of the
remedy provided in this paragraph (f) 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, September 10, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-24405 Filed 9-12-97; 8:45 am]
BILLING CODE 6210-01-P