[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