[Federal Register Volume 63, Number 50 (Monday, March 16, 1998)]
[Proposed Rules]
[Pages 12700-12706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6614]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 210 and 229

[Regulations J and CC; Docket No. R-1009]


Collection of Checks and Other Items by Federal Reserve Banks and 
Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Board requests comment on the benefits and drawbacks 
associated with its same-day settlement rule, which became effective in 
January 1994, and the implications of potential modifications of that 
rule to reduce or eliminate legal disparities between the Federal 
Reserve Banks and private-sector banks in the presentment and 
settlement of checks. The same-day settlement rule requires paying 
banks to provide same-day settlement for checks presented by private-
sector banks by

[[Page 12701]]

8:00 a.m. local time at specified locations. The Board is evaluating 
the market experience under the same-day settlement rule and is 
considering further modifications to that rule pursuant to its 
responsibility under the Expedited Funds Availability Act to regulate 
the receipt, payment, collection, or clearing of checks in order to 
carry out the provisions of that Act and to improve the check 
collection system. The Board is also considering whether modifications 
to its Regulation J, subpart A, which governs check collection by the 
Federal Reserve Banks, to reduce or eliminate legal disparities would 
enhance the efficiency of the interbank check collection market, the 
check collection process, and the payments system more broadly.

DATES: Comments must be submitted on or before July 17, 1998.

ADDRESSES: Comments should refer to Docket R-1009 and 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 may also be delivered to the Board's mail room 
between 8:45 a.m. and 5:15 p.m. on weekdays, and to the security 
control room at all other times. The mail room and the security control 
rooms are accessible from the courtyard entrance on 20th Street between 
Constitution Avenue and C Street, N.W. Comments will be available for 
inspection and copying by members of the public in the Freedom of 
Information Office, Room MP-500, between 9:00 a.m. and 5:00 p.m. 
weekdays, except as provided in Section 261.12 of the Board's Rules 
Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Louise Roseman, Associate Director 
(202/452-2789) or Jack Walton, Manager, Check Section (202/452-2660), 
Division of Reserve Bank Operations and Payment Systems; Oliver 
Ireland, Associate General Counsel (202/452-3625) or Stephanie Martin, 
Senior Counsel (202/452-3198), Legal Division. For the hearing impaired 
only, contact Diane Jenkins, Telecommunications Device for the Deaf 
(TDD) (202/452-3544).

SUPPLEMENTARY INFORMATION:

I. Overview

    The Board is evaluating the extent to which its 1994 same-day 
settlement rule resulted in overall improvements to the check 
collection system and the payments system more broadly. The Board is 
undertaking this evaluation in the context of deciding whether other 
reductions in the legal disparities between Federal Reserve Banks and 
private-sector collecting banks in the check collection process might 
result in improvements to the check collection system or the payments 
system. These analyses are complex. As an initial matter, the Board 
expects that a reduction in the legal disparities between the Federal 
Reserve Banks and private-sector collecting banks generally should 
promote competition in the provision of check collection services. This 
competition should, in turn, promote efficiencies and spur innovation. 
Any such efficiencies, however, should be evaluated in the context of 
the potential effects that such changes may have on other participants 
in the check payment process. Thus, improved competition among 
collecting banks and the efficiency gains derived from this competition 
should be weighed against any increased costs to paying banks and their 
check-writing customers that could result from the changes. Further, 
the Board would evaluate whether increases in costs to paying banks and 
their check-writing customers represent unwarranted increases in the 
overall cost of the check payment system or a mere shift in costs from 
other check system participants to the drawer of the check, who 
generally is responsible for selecting the check as a medium of 
payment. Shifts in payment system costs in the direction of those 
responsible for selecting payment media generally may result in more 
efficient choices of payment media and therefore may be viewed as 
desirable in and of themselves.
    The Board notes that removing legal disparities between Federal 
Reserve Banks and private-sector collecting banks associated with the 
presentment and settlement of checks would not result in a completely 
level ``playing field'' in the interbank check collection market. For 
example, the Reserve Banks enjoy an unsurpassable credit rating that 
makes them an attractive service provider in times of financial stress. 
They also labor, however, under constraints not imposed on their 
private-sector competitors, such as central bank concerns regarding the 
adequacy of payment services in the markets and cost recovery by major 
service category, as well as a level of public scrutiny of price and 
service level determinations not shared by the private sector. The 
Board will assess the desirability of further reductions in the legal 
disparities in the presentment and settlement of checks in the context 
of their effect on the overall competitive environment between the 
Federal Reserve Banks and private-sector collecting banks.
    While the scope of this notice is limited to legal disparities 
between the Federal Reserve Banks and private-sector collecting banks 
in the presentment and settlement of checks, the Board expects to 
evaluate other possible regulatory changes that may have the potential 
to improve the efficiency and integrity of the nation's payments system 
and may request comment on them in the future. Further analysis is 
required before the Board may consider certain potential regulatory 
changes, however, such as changes to encourage electronic check 
presentment and truncation. As noted in the January 1998 report to the 
Board on The Federal Reserve in the Payments Mechanism (the Rivlin 
Committee Report), the Federal Reserve believes that, prior to 
considering regulatory changes that would foster the growth of 
electronic check presentment and truncation, it should first determine, 
together with other check collection system participants and users, 
their cost and feasibility. If this analysis concludes that electronic 
check presentment and truncation have substantial potential to increase 
the efficiency of the check system and that the requisite investment 
can be justified, the Board could work with other payments system 
participants to identify regulatory changes that would foster their 
growth.

II. Background

    The Federal Reserve Banks generally have the right to receive same-
day settlement in the form of a debit to a bank's account on the books 
of a Reserve Bank for checks they present to paying banks prior to 2:00 
p.m. local time.1 2 3 Effective January 1994, the

[[Page 12702]]

Board amended its Regulation CC to include the so-called ``same-day 
settlement rule.'' That rule requires paying banks to settle for checks 
presented by private-sector collecting banks on the day of presentment 
by credit to an account on a Reserve Bank's books (typically, Fedwire 
funds transfers) with no presentment fees if the checks are presented 
at the designated location of the paying bank by 8:00 a.m. local 
time.4 5 (12 CFR 229.36(f)) Previously, some paying banks 
refused presentments from banks other than the Federal Reserve Banks, 
and other paying banks imposed presentment fees on private-sector 
presenting banks for the right to obtain same-day settlement or imposed 
other restrictions to presentment.
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    \1\ The term ``bank'' as used in this notice and in Regulation 
CC (12 CFR 229.2(e)) includes a commercial bank, savings bank, 
savings and loan association, credit union, and a U.S. agency or 
branch of a foreign bank. A ``collecting bank'' is a bank handling a 
check for collection, except the paying bank. A ``correspondent 
bank'' is an intermediary collecting bank that provides check 
collection services to other banks. A ``presenting bank'' is the 
collecting bank that presents a check to the paying bank. A ``paying 
bank'' generally is the bank by, at, or through which a check is 
payable.
    2 The Board adopted a policy in 1982 under which the 
Reserve Banks generally must present checks to paying banks located 
in Federal Reserve city availability zones by noon local time. (48 
FR 79, January 3, 1983) This ``noon presentment'' policy, which 
provided for later presentment to city banks than was previously the 
case, was part of a broader program to expedite the collection of 
checks by establishing significantly later deposit deadlines and 
associated later presentment deadlines for checks drawn on city 
banks.
    3 The Federal Reserve Banks can obtain same-day 
settlement for checks presented to a paying bank before its cut-off 
hour of generally 2:00 p.m. or later. (12 CFR 210.9(b)(1); Uniform 
Commercial Code Article 4-108)
    \4\ The same-day settlement rule requires that settlement be 
made by the close of Fedwire on the business day the paying bank 
receives the check. (12 CFR 229.36(f)(2)) The scheduled closing time 
for Fedwire is 6:30 p.m. Eastern Time. Beginning on December 8, 
1997, the Fedwire funds transfer system has opened at 12:30 a.m. 
Eastern Time (9:30 p.m. local time for west coast banks). Even 
though Fedwire re-opens on the same calendar day on the west coast, 
the Fedwire closing time and the settlement deadline under the same-
day settlement rule will continue to be 6:30 p.m. Eastern Time (or 
3:30 p.m. Pacific Time) for west coast banks.
    5 Under the Uniform Commercial Code, a private-sector 
presenting bank has a right to obtain same-day settlement for checks 
it presents by the paying bank's cut-off hour of generally 2:00 p.m. 
or later. Unlike a Federal Reserve Bank, however, which obtains 
settlement by debit to a bank's account on its books, a paying bank 
may settle with a private-sector collecting bank by credit to a 
Federal Reserve account or by cash. (UCC Article 4-108; 4-213(a)(1))
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    The Board's regulatory authority to adopt the same-day settlement 
rule is derived from the Expedited Funds Availability Act (EFAA). That 
Act gives the Board the responsibility to regulate ``any aspect of the 
payment system, including the receipt, payment, collection, or clearing 
of checks, and any related function of the payment system with respect 
to checks'' in order to carry out the provisions of the Act. (12 U.S.C. 
4008(c)(1)) Prior to the enactment of the EFAA, the Board generally had 
authority only to regulate payments that were processed by Federal 
Reserve Banks.
    The same-day settlement rule adopted by the Board was the 
culmination of two requests for public comment. In April 1988, the 
Board first requested comment on the concept of providing private-
sector collecting banks presentment rights that were equivalent to 
those of the Reserve Banks, i.e., to obtain same-day settlement, 
without presentment fees, for all checks presented by 2:00 p.m. (53 FR 
11911, April 11, 1988) The Board received 1,148 comments, 95 percent of 
which were opposed to the concept as proposed. Approximately 70 percent 
of commenters were businesses that believed that the 2:00 p.m. 
presentment deadline would severely disrupt, if not put an end to, 
corporate cash management and controlled disbursement 
services.6 Generally, bank commenters echoed the concerns 
raised by businesses. In addition, banks expressed concern about the 
increased cost, operational complexity, and disruption that would be 
caused by the receipt of checks later in the day. Reserve Banks were 
concerned primarily that the rule would significantly erode their check 
collection volume and therefore would lessen their ability to exert 
leadership in improving the efficiency of the check system.
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    \6\ Banks offering controlled disbursement services notify their 
corporate customers early in the day of the amount of the 
corporation's check payments that have been presented that day so 
that the corporation can invest surplus balances or borrow 
additional funds, as necessary, while money markets are still 
active. U.S. money markets become progressively less liquid after 
noon Eastern Time.
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    In light of the concerns raised by banks and their business 
customers in the response to its initial request for comment, the Board 
proposed in February 1991 a same-day settlement rule that reduced, but 
did not eliminate, the disparity in presentment rights between Reserve 
Banks and private-sector collecting banks. The revised proposal 
provided for an 8:00 a.m. local time presentment deadline for private-
sector collecting banks. (56 FR 4743, February 8, 1991) While this 
proposal was supported by many correspondent banks and some other 
commenters, controlled disbursement banks and their business customers 
voiced continuing concerns.7 In October 1992, the Board 
adopted this rule in slightly revised form, effective January 1994. (57 
FR 46956, October 14, 1992)
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    \7\ Of the 291 commenters on this proposed rule, 130 opposed the 
proposal because of concerns related to the costs and operational 
burdens it may place on paying banks. Of the remaining commenters, 
31 supported the proposal, 35 indicated support if suggested 
modifications were incorporated, 15 supported the Board's objectives 
to improve the check collection system but did not believe the 
proposal would achieve that objective, and 80 raised issues 
regarding the proposal but did not explicitly indicate whether they 
supported or opposed it.
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    The same-day settlement rule that was adopted by the Board was 
designed to provide for more balanced bargaining power between 
presenting banks and paying banks by reducing the barriers to 
presentment that some paying banks previously imposed. The Board 
believed that the more balanced bargaining positions would improve 
payments system efficiency by (1) enhancing competition between 
private-sector banks and Reserve Banks in the provision of check 
collection services; (2) encouraging agreements between presenting 
banks and paying banks that would reduce the cost of the check system; 
(3) reducing inefficient intermediation in the check collection 
process; and (4) encouraging the migration of checks to more efficient 
payment mechanisms. At the same time, the rule was designed to address 
the concerns raised by large check drawers (i.e., businesses) and their 
banks that controlled disbursement arrangements not be unduly 
disrupted.
    The Board requests comment on the effect the same-day settlement 
rule has had on the interbank check collection market, the check 
collection process, and the payments system more broadly. For example, 
this rule has resulted in a significant shift in check collection 
volume from the Federal Reserve Banks to private-sector correspondent 
banks or to direct presentments. Reserve Bank check volume has declined 
by 15 percent from 1993 to 1997, primarily due to changes in check 
collection patterns resulting from this rule. The Board assumes that 
collecting banks altered their check collection patterns in response to 
the same-day settlement rule in a manner that improved the efficiency 
of their collection process (by improving availability of funds and/or 
reducing the cost of collection). This improved efficiency in check 
collection must be weighed against additional costs the rule may have 
imposed on paying banks and their customers. The significant 
operational problems that large paying banks and their business 
customers believed would result from the adoption of the same-day 
settlement rule have not materialized to the Board's knowledge. The 
Board requests comment on the effect the rule has had on paying banks 
and their customers and on whether the rule has affected the choice of 
the payment mechanism used by payors.
    The Board also requests comment on the benefits and drawbacks to 
potential further reductions in legal disparities. These changes 
include changes not only to the presentment deadline but also changes 
to the rules governing presentment location, the ability of the paying 
bank to impose reasonable delivery requirements, the control and timing 
of settlement, the obligation to settle on a non-banking day, and 
potentially other matters.

[[Page 12703]]

    Commenters' overall perspectives on the issues raised in this 
notice, as well as their responses to the specific questions posed 
below, will be useful in the Board's analysis of the desirability of 
further regulatory changes. These questions are designed to stimulate 
comment on various aspects of the issues raised and should not be 
interpreted as the Board's views on these issues. Comments that provide 
quantitative data related to the costs and benefits of the current 
same-day settlement rule and of potential reductions in the remaining 
legal disparities would further assist the Board in its analysis of 
these issues. The Board recognizes that commenters may not be able to 
address each question that is posed; for example, banks may be in a 
better position to address certain issues while businesses may have 
more information regarding certain aspects of their payment practices.

III. Presentment Deadline

    Today, assuming the same level of efficiency of check collection 
operations, the Reserve Banks are able to provide prompter availability 
than that provided by correspondent banks, in part because the Reserve 
Banks have the right to present checks with same-day settlement as long 
as six hours later than their correspondent bank 
competitors.8 9 Extending the current 8:00 a.m. presentment 
deadline for private-sector collecting banks in the same-day settlement 
rule to a later time should enable correspondent banks (1) to obtain 
settlement on some checks that they collect one day earlier than they 
do today (i.e., on those checks that can be presented by the later 
deadline but that could not be presented as early as 8:00 a.m.); (2) to 
better match the availability provided by the Reserve Banks on checks 
they do not now collect; or (3) to avoid presentment fees on some 
checks now presented after 8:00 a.m. Such an expansion, however, may 
increase costs incurred by paying banks and may make current controlled 
disbursement arrangements less attractive to business customers.
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    \8\ In practice, Reserve Banks present most checks substantially 
earlier than 2:00 p.m. For example, in November 1997, more than 45 
percent of the value of all checks were presented by the Reserve 
Banks by 10:00 a.m. Eastern Time (ET), nearly 60 percent were 
presented by 11:00 a.m. ET, and almost 75 percent were presented by 
noon ET.
    9 Although the Federal Reserve Banks have a later-in-
the-day presentment deadline for forward collection checks than do 
private-sector banks, the Reserve Banks and private-sector banks are 
subject to the same deadline for the delivery of returned checks for 
same-day settlement. (12 CFR 229.32(b); 12 CFR 210.9(b)(1) and 
210.12(h))
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    The Board requests comment on the benefits and costs of its 1994 
same-day settlement rule and the likely effect of further reducing the 
disparity in presentment deadlines between the Reserve Banks and 
private-sector collecting banks. Questions regarding current market 
practices can be answered from an overall industry perspective or from 
the perspective of the organization providing comments.

A. Current Bank Market Practices

    1. What proportion of checks drawn on U.S. banks (in terms of 
volume and value) are (a) presented for same-day settlement by private-
sector banks? (b) presented through clearinghouses? (c) presented by 
Federal Reserve Banks? (d) other? To what extent do these proportions 
vary from the proportions that were prevailing prior to the 
implementation of the same-day settlement rule? How many banks 
typically make and receive same-day settlement presentments?
    2. Has the 1994 same-day settlement rule improved the speed and/or 
reduced the cost of collecting checks? Please explain.
    3. Has the same-day settlement rule affected the number of banks 
that participate in check clearinghouses? Has it affected the volume of 
checks that are presented at clearinghouse exchanges?
    4. To what extent has the same-day settlement rule affected the 
volume of checks that are collected by correspondent banks?
    5. Do banks have agreements (other than clearinghouse agreements) 
that allow them to present checks after 8:00 a.m. and obtain settlement 
in same-day funds without presentment fees? If yes, how prevalent are 
these agreements? What offsetting benefits or considerations are 
provided to paying banks in the agreements? Are reciprocal late 
presentment privileges granted? Do the agreements impose any 
requirements for later presentments, such as requiring transmission of 
MICR data? 10 How late can banks present checks for same-day 
settlement? What percentage of overall same-day settlement presentments 
do these later-in-the-day presentments represent?
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    \10\ Magnetic Ink Character Recognition (MICR) data refer to the 
machine-readable information printed along the bottom of the check, 
and include the amount of the check, the routing number of the 
paying bank, and the account number of the drawer.
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    6. Has the same-day settlement rule adversely affected paying 
banks' operations or risks? If yes, how? Has the rule affected the 
manner in which banks provide controlled disbursement and other 
corporate cash management services to their business customers? If yes, 
how? Are these effects significant?
    B. Current Business Disbursement Market ractices
    1. For what types of check payments (e.g., payroll, expense 
reimbursement, dividend, vendor, other) do businesses generally use 
controlled disbursement accounts?
    2. To what extent do businesses make payments electronically, 
rather than by check? Do practices differ for specific types of 
payments (e.g., payroll, expense reimbursement, dividend, vendor, 
other)?
    3. Has the same-day settlement rule adversely affected the ability 
of businesses to manage their disbursements effectively? If so, how?
    4. Has the same-day settlement rule caused businesses to rely to a 
greater extent on internal forecasts of daily presentments to 
controlled disbursement accounts rather than on presentment totals 
provided by the paying bank?
    5. Has the same-day settlement rule influenced businesses' 
decisions on whether to make payments by check or by other means? If 
so, how and why?

C. Effect of Presentment Deadline Disparity on the Ability of Private 
Collecting Banks to Compete with the Federal Reserve

    1. To what extent does the disparity in the presentment deadlines 
of the Reserve Banks and private-sector collecting banks affect the 
ability of the correspondent banks to compete with the Reserve Banks in 
the interbank check collection market?

D. Effect of Reducing or Eliminating the Presentment Deadline Disparity

    1. Should the Board extend the presentment deadline for private-
sector collecting banks? If so, to what time? What would be the latest 
presentment deadline that could be implemented for private-sector 
collecting banks without significantly disrupting cash management 
operations? without significantly disrupting paying bank operations? 
Please explain. What would be the implications to check depositors, 
collecting banks, check clearing houses, paying banks, and check 
drawers if the presentment deadline for private-sector banks were moved 
to 10:00 a.m.? noon? 2:00 p.m.? (See also question III.F.1.) Should 
this deadline apply to presentments by Federal Reserve Banks as well as 
to presentments by private-sector collecting banks? Why or why not?
    2. Alternatively, should the Board impose an earlier presentment 
deadline on Federal Reserve Banks? If so, at what

[[Page 12704]]

time? Should this deadline apply to presentments by private-sector 
collecting banks as well as to presentments by Federal Reserve Banks? 
Why or why not?
    3. To what extent would an extension of the presentment deadline 
for private-sector collecting banks expedite the collection of checks? 
What categories of checks, if any (e.g., local checks, nonlocal checks 
drawn on RCPC endpoints, checks drawn on east coast banks that are 
collected by west coast banks), would get collected faster if a later 
presentment deadline were established? To the extent that checks would 
be collected faster, would the cost of collection increase materially?
    4. To what extent would a further reduction or elimination of 
differences in the presentment deadlines of Reserve Banks and private-
sector collecting banks further improve decisions regarding the 
collection of checks by encouraging the use of the most efficient 
collection path?
    5. What steps would businesses take to manage their payment 
disbursements if early-in-the-day presentment totals were not available 
from their banks? Would they rely on internal forecasting of the daily 
value of check presentments for some or all categories of payments? 
rely on electronic payments to a greater degree? shift their capital 
market activity to later in the day? Please explain. To what extent 
would these steps enable businesses to continue to manage their 
disbursements effectively?

E. Later-in-the-day presentment deadline conditioned on electronic 
transmission of check information

    Some private-sector representatives and Reserve Banks have 
suggested that if the Board were to extend the presentment deadline for 
private collecting banks, it should condition the later deadline on the 
transmission of check MICR data by some earlier deadline.11 
Proponents of this approach believe that it would minimize any 
potential disruptions of a later presentment deadline on business cash 
management operations and may foster the ultimate acceptance of 
electronic check presentment. Others have expressed concerns that such 
an approach may be very cumbersome to impose by regulation and that 
paying banks that desire information regarding their check presentments 
earlier in the day can generally obtain this information by agreement 
with the presenting banks.
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    \11\ Under this scenario, the delivery of the physical checks 
would continue to constitute presentment, absent an agreement 
between the presenting bank and paying bank.
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    At the time the Board adopted the same-day settlement rule, it 
stated that ``because the same-day settlement rule may induce 
agreements between paying banks and presenting banks that would allow 
for later presentment under certain conditions, the Board believes that 
it is preferable that market forces determine the development of 
private-sector response with respect to early electronic delivery. The 
Board will review the developments in the marketplace after this rule 
takes effect to determine whether further action may be necessary to 
encourage greater utilization of same-day settlement.'' (57 FR 46959, 
October 14, 1992)
    1. If the Board were to condition a later-in-the-day presentment 
deadline for private-sector collecting banks on an earlier transmission 
of the MICR data on the checks to be presented, what would be the 
latest time the electronic transmission could be received by the paying 
bank without substantially disrupting cash management operations? What 
would be the latest presentment deadline for the physical checks that 
would not substantially disrupt paying bank operations? Explain.
    2. If this approach were adopted, should the Board specify 
standards for the format and communication protocols for electronic 
transmission of the check information in Regulation CC? Would the 
benefits of simplicity and uniformity associated with mandated 
standards outweigh the negative effects on innovation that may result? 
If the Board were to specify these standards in regulation, what 
standards should be adopted? If the regulation does not incorporate 
these standards, should the authority to dictate the technical 
specifications be vested with the presenting bank or the paying bank?
    3. What responsibility should be placed on the paying bank to 
ensure sufficient communications capacity to accept transmissions of 
check information, including receipt of multiple transmissions sent 
shortly before the electronic transmission deadline? If the presenting 
bank is unable to transmit the information because it cannot establish 
a connection with the paying bank (due to contention for communications 
lines or an operating outage at the paying bank), should it still have 
the right to present the checks at the later-in-the-day deadline? What 
warranties, if any, should the presenting bank provide regarding the 
accuracy of the information that is transmitted?
    4. If the Board were to adopt a later presentment deadline for 
private-sector collecting banks that was not conditioned on the 
transmission of the MICR-line information earlier in the day, to what 
extent would presenting banks be willing to provide this information by 
agreement to paying banks that desired it? Do commenters believe that 
such agreements could be obtained at a reasonable price?

F. Federal Reserve noon presentment policy

    In conjunction with its review of potential modifications to its 
same-day settlement rule, the Board will also consider whether it 
should modify or rescind its 1983 policy that established a noon local 
time presentment deadline for checks presented by the Reserve Banks to 
paying banks located in Federal Reserve city availability zones. 
Historically, the Reserve Banks presented checks to members of city 
clearinghouse associations at the clearinghouse exchange, enabling the 
Reserve Banks to avoid transportation expenses that would be incurred 
by presenting checks to each clearinghouse member at its own facility. 
Following implementation of the noon presentment policy, some check 
clearinghouses moved their exchange to later in the morning, but 
generally not as late as noon. In most cases, the Reserve Banks have 
continued to present checks to city banks at the clearinghouse 
exchanges. Thus, although as a matter of policy banks located in 
Federal Reserve city zones are treated differently than banks located 
in other availability zones, in practice, the difference in treatment 
may be less significant than it appears, because the Reserve Banks 
currently present checks to most paying banks in RCPC and country zones 
by noon. Establishing a 2:00 p.m. presentment deadline for city paying 
banks would allow Reserve Banks to establish significantly later 
deposit deadlines for city checks, which would accelerate the 
collection of some checks drawn on these banks.
    1. Should the Board modify or rescind its noon presentment policy 
for checks presented to banks in city availability zones? Why or why 
not?

G. Effect of elimination of prohibition to pay interest on demand 
deposits

    Congress is considering legislative proposals that would remove the 
current restriction on the ability of banks to pay interest on demand 
deposits, most of which are held by businesses. The Board has supported 
the repeal of the prohibition on the

[[Page 12705]]

payment of interest on demand deposits.
    1. To what extent would the answers to the above questions be 
affected by a change in the law to permit banks to pay interest on 
demand deposits?
    2. To what extent are controlled disbursement arrangements designed 
to minimize the interest earnings lost by holding funds in demand 
deposits? If banks paid an explicit market rate of return on business 
demand deposits, would controlled disbursement arrangements be 
necessary?

IV. Other Legal Differences between the Federal Reserve Banks and 
Private Collecting Banks

    In addition to the disparity in presentment deadlines, there are 
other legal differences in the abilities of the Federal Reserve Banks 
and private-sector banks to collect checks. The Board requests comment 
on the continued justification of these legal differences, the effect 
of reducing or eliminating these legal differences on the efficiency 
and integrity of the interbank check collection market, the check 
collection process, and the payments system more broadly, and, if the 
Board were to modify these regulatory provisions, how it should do so.

A. Presentment location for same-day settlement

    The Reserve Banks have greater flexibility than private-sector 
collecting banks have under the same-day settlement with respect to the 
locations to which they may present checks to a paying bank. Under the 
same-day settlement rule, a presenting bank must present a check to the 
paying bank ``at a location designated by the paying bank. . . in the 
check-processing region consistent with the routing number encoded in 
magnetic ink on the check.'' (12 CFR 229.36(f)(1)(i)) If the paying 
bank does not designate a presentment location, then the presenting 
bank may present the check to any location described in Sec. 229.36(b). 
In contrast, the paying bank does not have the legal right to designate 
a single location to which checks must be presented by a Federal 
Reserve Bank. The Board's Regulation J, which governs check collection 
by the Federal Reserve Banks, does not limit the permissible 
presentment location to that designated by the paying bank. Instead, it 
provides the Federal Reserve Banks flexibility, including the right to 
present checks to any location specified in Sec. 229.36(b) of 
Regulation CC or to present checks through a clearinghouse, subject to 
its rules and practices. (12 CFR 210.7(b)) In practice, however, the 
Reserve Banks generally present checks to the location designated by 
the paying bank consistent with the routing number on the check.
    1. To what extent does this disparity in permissible presentment 
locations affect the ability of private-sector banks to compete 
effectively with the Reserve Banks in the interbank check collection 
market? In practice, to what extent and why do paying banks designate a 
presentment location for presentments made under the same-day 
settlement rule that differs from the presentment location used by the 
Federal Reserve Bank?
    2. Should the Reserve Banks and private-sector collecting banks be 
subject to the same rules regarding presentment locations for check 
presented for same-day settlement? Why or why not?
    3. If the Board were to eliminate the disparity regarding 
permissible presentment locations, should it make the flexibility 
currently provided to the Reserve Banks in Regulation J available to 
private-sector collecting banks or impose on the Reserve Banks the 
standard currently applicable to private-sector collecting banks?

B. Ability of paying bank to impose reasonable delivery requirements

    Under the same-day settlement rule, a paying bank must settle for a 
check on the day of presentment ``if the presenting bank delivers the 
check in accordance with reasonable delivery requirements established 
by the paying bank.'' (12 CFR 229.36(f)(1)) The Commentary to this 
section notes that because presentment may not take place during the 
paying bank's banking day, a paying bank may establish reasonable 
delivery requirements to safeguard the checks presented. Regulation J 
provides no similar right to paying banks to establish reasonable 
delivery requirements for Federal Reserve Bank presentments.
    1. What types of delivery requirements are imposed by paying banks 
for presentments by private-sector collecting banks for same-day 
settlement?
    2. To what extent does the disparity in the right to impose 
reasonable delivery requirements affect the ability of private-sector 
banks to compete effectively with the Reserve Banks in the interbank 
check collection market?
    3. Should paying banks have the same right to impose reasonable 
delivery requirements on the Federal Reserve Banks as they have on 
private-sector presenting banks? Alternatively, should the paying 
banks' right to impose reasonable delivery standards on private-sector 
banks be eliminated? Why or why not?
    4. If paying banks had the right to impose reasonable delivery 
requirements on Federal Reserve Bank presentments, would banks require 
the Reserve Banks to modify their current presentment practices? If so, 
how?

C. Control of settlement

    The manner in which settlement of Federal Reserve-presented checks 
is made differs significantly from the manner in which settlement for 
checks presented by private-sector collecting banks is made. While the 
Federal Reserve controls the settlement of checks it presents, the 
paying bank controls the settlement of checks presented by private-
sector banks. In the case of checks presented by the Federal Reserve 
Banks, the Reserve Bank debits the account of the paying bank or its 
designated correspondent on its books. (12 CFR 210.9(b)(5)) In 
contrast, the paying bank settles for checks presented by a private-
sector bank for same-day settlement by sending a Fedwire funds transfer 
to the presenting bank or by another agreed-upon method. (12 CFR 
229.36(f)(2))
    1. To what extent does this disparity in the control of the 
settlement affect the ability of private-sector banks to compete 
effectively with the Reserve Banks in the interbank check collection 
market?
    2. Should the Board take steps to reduce or eliminate this 
disparity? If so, why and how? For example, should the Board eliminate 
the Reserve Banks' ability to autocharge (i.e., automatically debit the 
account of the paying bank)? Alternatively, should presenting banks 
have more control over the settlement of checks presented for same-day 
settlement? If yes, how could this best be accomplished?

D. Time of settlement

    In the case of presentments for same-day settlement by both Federal 
Reserve Banks and private-sector collecting banks, the paying bank 
becomes accountable for a check if it does not settle for the check by 
the close of Fedwire on the day of presentment. (12 CFR 210.9(b)(1) and 
12 CFR 229.36(f)(2)) The Reserve Banks, however, have the right to 
debit the account of the paying bank for settlement of checks by the 
latest of (a) the next clock hour that is at least one hour after the 
paying bank receives the check, (b) 9:30 a.m. Eastern Time, or (c) such 
later time provided in the Reserve Bank's operating circular. (12 CFR 
210.9(b)(2))

[[Page 12706]]

    The Board noted, when it adopted the same-day settlement rule, that 
it believed that, at the present time, the settlement time for checks 
presented by private banks should not conform to the settlement time 
for checks presented by Reserve Banks under Regulation J. The Board 
reached that conclusion after considering the reasoning put forth by 
the commenters to the proposed rule as well as the fact that conforming 
the two times would (a) create the additional burden for the paying 
bank of initiating early-in-the-day Fedwire transfers for private-
sector presentments (as opposed to settlement payments to Reserve 
Banks, which are made by debits to accounts held by the Federal Reserve 
and require no affirmative action by the paying bank); (b) result in an 
increased potential for mistakes, even if the deadline were met; and 
(c) increase the risk faced by paying banks that may want to examine 
selected cash letters presented by certain banks. The Board noted, 
however, that it would revisit the issue of settlement deadlines for 
checks presented by private-sector collecting banks under the same-day 
settlement rule if intraday funds start to have significant value as a 
result of Federal Reserve pricing of daylight overdrafts. (57 FR 46964, 
October 14, 1992) To date, this has not occurred.
    1. To what extent does this disparity in the timing of the 
settlement affect the ability of private-sector banks to compete 
effectively with the Reserve Banks in the interbank check collection 
market?
    2. Have there been any changes in the marketplace or other 
considerations that should change the Board's earlier conclusion 
regarding this issue? If yes, please explain.
    3. Instead of requiring earlier-in-the-day settlement for same-day 
settlement presentments by private-sector collecting banks, the Board 
could also reduce the legal disparity in the timing of settlement by 
moving the paying banks' settlement to Federal Reserve Banks to the 
close of Fedwire. If such a change were made, the Reserve Banks would 
also provide credit for check deposits at the same time. Would this 
approach be desirable? Why or why not?

E. Obligation to settle on a non-banking day

    The settlement obligation of a paying bank that closes voluntarily 
on a business day (i.e., a day that the Federal Reserve Banks are open) 
differs depending on whether the Federal Reserve Bank or a private-
sector collecting bank is the presenting bank. In the case of the 
Federal Reserve Bank, the paying bank's settlement obligation is 
triggered if the Reserve Bank ``makes a cash item available to the 
paying bank on that day.'' (12 CFR 210.9(b)(3)) In the case of a 
presentment made by a private-sector collecting bank, the paying bank's 
settlement obligation is triggered only if the paying bank ``receives 
presentment of a check'' on a business day on which it is open. (12 CFR 
229.36(f)(3)) A paying bank that is obligated to settle for checks 
presented on a day that it is closed is not considered to have received 
the checks until its next banking day for purposes of the deadline for 
return.12
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    \12\ If a Federal Reserve Bank makes a cash item available to a 
paying bank on a day that it closes voluntarily, the paying bank 
must either settle for the item on that day or on the next banking 
day with an as-of adjustment or other interest compensation. If a 
private-sector bank presents a check to a paying bank for same-day 
settlement on a day that it closes voluntarily, the paying bank must 
settle by its next banking day and pay interest compensation.
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    1. To what extent does this disparity in the settlement obligation 
of a closed paying bank affect the ability of private-sector banks to 
compete effectively with the Reserve Banks in the interbank check 
collection market?
    2. Should the paying bank's obligation to settle on days on which 
it closes voluntarily be the same for presentments by the Federal 
Reserve Banks and private-sector collecting banks? If so, what standard 
should be used and why?

F. Other legal differences

    1. Are there additional legal differences between the rights and 
obligations associated with checks presented by the Federal Reserve 
Banks and private-sector collecting banks? If so, please describe. To 
what extent do these other differences affect the ability of private-
sector banks to compete effectively with the Reserve Banks, or the 
ability of Reserve Banks to compete effectively with other presenting 
banks, in the interbank check collection market? What changes, if any, 
should the Board consider to minimize or eliminate these differences?

V. Consistency of Reduction in Legal Disparities with Purposes of 
the Expedited Funds Availability Act

    The Board's authority to govern the collection of checks through 
private-sector banks is derived from the Expedited Funds Availability 
Act. Therefore, amendments to Regulation CC, subpart C should be 
consistent with the Act's purpose to provide timely availability of 
funds deposited into transaction accounts; this is generally 
accomplished by accelerating the collection and/or return of checks. To 
the extent that unpaid checks are returned to the depositary bank more 
expeditiously, the depositary bank can make the funds available to its 
customer for withdrawal on a more timely basis without assuming greater 
risk.
    In contrast, the Board's authority to govern checks collected 
through the Federal Reserve Banks is derived from the Federal Reserve 
Act and not the Expedited Funds Availability Act. Consequently, the 
Board's authority to amend Regulation J, subpart A, is not limited to 
changes that accelerate the collection and/or return of checks. 
Nonetheless, the Board has generally regulated the collection of checks 
through the Federal Reserve Banks in a manner that provides for their 
timely collection and return.
    1. Should the Board consider changes to Regulation J that would 
reduce the legal disparities between the Federal Reserve Banks and 
private-sector collecting banks, if those changes slow the collection 
and return of checks through the Reserve Banks and therefore are not 
consistent with the purpose of the Expedited Funds Availability Act?

    By order of the Board of Governors of the Federal Reserve 
System, March 10, 1998.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 98-6614 Filed 3-13-98; 8:45 am]
BILLING CODE 6210-01-P