[Federal Register Volume 63, Number 219 (Friday, November 13, 1998)]
[Notices]
[Pages 63552-63575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30338]



[[Page 63551]]

_______________________________________________________________________

Part V





Federal Reserve System





_______________________________________________________________________



Federal Reserve Bank Services; Notice



_______________________________________________________________________





Department of the Treasury





_______________________________________________________________________



Fiscal Service



_______________________________________________________________________



Fee Structure for the Transfer of U.S. Treasury Book-Entry Securities 
Held on the National Book-Entry System; Notice

  Federal Register / Vol. 63, No. 219 / Friday, November 13, 1998 / 
Notices  

[[Page 63552]]



FEDERAL RESERVE SYSTEM

[Docket No. R-1023]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved fee schedules for Federal Reserve 
priced services and electronic connections and a Private Sector 
Adjustment Factor (PSAF) for 1999 of $115.8 million. These actions were 
taken pursuant to the requirements of the Monetary Control Act of 1980, 
which requires that, over the long run, fees for Federal Reserve priced 
services be established on the basis of all direct and indirect costs, 
including the PSAF.

DATES: The fee schedules become effective on January 4, 1999, with the 
exceptions noted below. For the Fedwire funds transfer 
service, the volume-based transfer fees and off-line surcharges take 
effect on February 1, 1999. For the book-entry securities service, the 
new fee structure and levels become effective on February 1, 1999, and 
the change in the applicability of the account-maintenance fee takes 
effect on July 1, 1999. The PSAF becomes effective on January 4, 1999.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee 
schedules: Erik Kiefel, Financial Services Analyst, Check Payments, 
(202/721-4559); Wes Horn, Manager, ACH Payments, (202/452-2756); 
Stephen Cohen, Financial Services Analyst, Funds Transfer and Book-
Entry Securities Services, (202/452-3480); Myriam Payne, Senior 
Financial Services Analyst, Multilateral Settlement Services, (202/452-
3219); Michael Bermudez, Financial Services Analyst, Noncash Collection 
Service, (202/452-2216); Kate Connor, Senior Financial Services 
Analyst, Special Cash Services, (202/452-3917); or Anne Paulin, Senior 
Information Technology Analyst (electronic connections), (202/452-
2560), Division of Reserve Bank Operations and Payment Systems. For 
questions regarding the Private Sector Adjustment Factor: Martha 
Stallard, Senior Accountant, Division of Reserve Bank Operations and 
Payment Systems, (202/452-3758). For users of Telecommunications Device 
for the Deaf (TDD) only, please contact Diane Jenkins (202/452-3749).
    Copies of the 1999 fee schedule for the check service are available 
from the Board or the Reserve Banks.

SUPPLEMENTARY INFORMATION:

I. Priced Services

    A. Overview--The Federal Reserve Banks continue to meet the 
Monetary Control Act's requirement that the Federal Reserve recover, 
over the long run, its direct and indirect costs, including imputed 
costs and profits, of providing priced services.\1\ Over the period 
1988 through 1997, the Reserve Banks recovered 99.6 percent of their 
total costs for providing priced services, including imputed expenses, 
special project costs that were budgeted for recovery, and targeted 
after-tax profits, or return on equity (ROE).
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    \1\ These imputed costs, such as taxes that would have been 
paid, and the return on capital that would have been earned had the 
services been provided by a private business firm are referred to as 
the Private Sector Adjustment Factor (PSAF). The PSAF is based on 
data developed in part from a model comprised of the nation's fifty 
largest (by asset size) bank holding companies (BHCs). Based on 
consolidated financial data for the holding companies in the model 
for each of the last five years, the targeted ROE is the budgeted 
after-tax profit that the Federal Reserve would have earned had it 
been a private business firm. In setting fees, certain costs or 
adjustments to costs are treated differently in the pro forma income 
statement for priced services that is published in the Board's 
Annual Report and the Board's annual Federal Register notice on 
priced service fees. In order to compare total expenses in the pro 
forma income statement with total expenses in Table 3 in this 
notice, the amortization of the initial retirement plan over funding 
required by Statement of Financial Accounting Standards No. 87, and 
the deferred costs of automation consolidation must be deducted from 
the pro forma expenses. These adjustments are detailed in Note 10 to 
the pro forma income statement in the Annual Report. Under the 
procedures used to prepare the pro forma income statement, the 
Reserve Banks recovered 100.4 percent of priced services expenses, 
including targeted ROE, for the period 1988 to 1997.
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    For 1998, the Reserve Banks estimate that they will recover 102.2 
percent of the costs of providing priced services, including imputed 
expenses and targeted ROE. Reserve Banks project that they will recover 
101.0 percent of their costs of providing priced services in 1999. The 
primary risk to the 1999 projections lies in the uncertain cost to 
upgrade the security of electronic connections to the Federal Reserve.
    In their 1999 fee schedules, the Reserve Banks include several 
changes that reduce fees to depository institution customers and 
provide a continued economic incentive for those customers to make 
greater use of electronic payment services. In particular, the price 
index for electronic payment services (automated clearing house, funds 
transfer, book-entry securities, and electronic check) and electronic 
connections is projected to decline by approximately 17.5 percent in 
1999, and the index for paper-based payment services (check and noncash 
collection) is expected to increase 2.8 percent. The overall 1999 price 
index for Federal Reserve services is projected to decrease 3.5 
percent, compared with an overall decline of 4.0 percent in 1998.\2\
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    \2\ These estimates are based on a chained Fisher Ideal price 
index. This index was not adjusted for quality changes in Federal 
Reserve priced services.
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    The following are the key changes in fee structures and fee levels 
for priced services in 1999:
     The Reserve Banks will reduce the fee for a Fedwire funds 
transfer for the third consecutive year. The price index for a Fedwire 
funds transfer will decline by almost 30 percent from the 1998 level. 
(Including the reductions for 1999, the price index for Fedwire funds 
transfers has declined more than 40 percent since 1996. Including 1999, 
the average on-line transfer fee for a Fedwire funds transfer has 
declined 48 percent since 1996.) The 1999 fee reductions are expected 
to save depository institution customers approximately $27.8 million 
next year. Reserve Banks will implement a volume-based pricing 
structure for the funds transfer service that recognizes the scale 
economies and differences in demand for large-value transfers. The 
funds transfer service's volume-based pricing structure will be similar 
to that employed by other domestic and international large-value 
transfer systems.
     The Reserve Banks will reduce the fee for an on-line 
Fedwire book-entry securities transfer almost 25 percent in 1999. 
(Including changes in other fees, the price index for the book-entry 
securities service has declined more than 15 percent since 1996.) The 
fee reduction is expected to save depository institutions approximately 
$1.4 million in 1999. The Reserve Banks will implement a fee structure 
for the service that will split the transfer fee between the originator 
and receiver of a transfer (rather than charge the entire transfer fee 
to the originator), convert the off-line fee to a surcharge, and apply 
the existing account-maintenance fee more broadly.
     The Reserve Banks will implement an enhanced multilateral 
settlement service in 1999 that will offer finality characteristics 
similar to the Fedwire funds transfer service and provide settlement 
arrangements with an automated mechanism to submit settlement files to 
the Reserve Banks.\3\ The fees and fee structure for the new and 
existing multilateral settlement

[[Page 63553]]

services have been revised by lowering the per-entry fee, introducing a 
settlement file fee, increasing the off-line surcharge, and introducing 
a minimum monthly fee.
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    \3\ The Board recently approved enhancements to the Reserve 
Banks' net settlement services. To better reflect the ability of 
these services to accommodate net and gross transactions, the 
Federal Reserve now refers to this service as the multilateral 
settlement service.
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     After several years of significant price reductions, 
Reserve Banks plan further, more modest price reductions in 1999 for 
the automated clearing house (ACH) service. (Including the reductions 
for 1999, the price index for the ACH service has decreased more than 
40 percent since 1996.) The 1999 price reductions are expected to save 
depository institution customers approximately $6.2 million next year. 
Working with other industry participants, the Reserve Banks also plan 
to expand their efforts to educate depository institutions and end 
users about the benefits of the ACH. This campaign, coupled with the 
fee decreases for 1999, is expected to spur commercial ACH growth and 
help broaden the use of electronic payment systems.
     Fees for paper check products, which include forward 
processed, fine sort, and returned checks, will increase about 2.6 
percent on a volume-weighted basis (a 3.7 percent increase from January 
1998 fee levels). (Including the fee increases in 1999, the price index 
for the paper check service has increased about 2 percent since 1996.) 
This increase will be driven primarily by increases in fine sort and 
returned check fees. Fees for forward-processed items will remain 
stable. Fees for payor bank services, which include electronic check 
products, will increase about 0.6 percent (a 1.2 percent increase from 
January 1998 fee levels). The check service has experienced dramatic 
growth in the electronic products it offers, and the Reserve Banks 
project continued robust growth during 1999. Electronic check 
presentment, truncation, and imaging volumes are each estimated to grow 
more than 20 percent in 1998 and projected to sustain similar rates of 
growth in 1999. Reserve Banks now provide paying banks with electronic 
check data for approximately 25 percent of the checks they collect; of 
the checks collected through the Federal Reserve, 16.5 percent are 
presented electronically.
     Fee structures and schedules will take effect on January 
4, 1999, with the following exceptions: The fee and fee structure 
changes for the Fedwire funds transfer and book-entry securities 
transfer services will take effect on February 1, 1999. (During January 
1999, the basic transfer fee for the funds transfer service will be set 
at $0.34, a $0.06 reduction from the 1998 per-transfer fee.) The 
broader application of the existing book-entry account maintenance fee 
will become effective on July 1, 1999.
    Table 1 presents an overview of the budgeted 1998, estimated 1998, 
and projected 1999 cost recovery performance for individual priced 
services.

                                 Table 1
                              [In percent]
------------------------------------------------------------------------
                                                    1998
          Priced service           1998 budget    estimate   1999 budget
------------------------------------------------------------------------
All Services.....................        100.8        102.2        101.0
    Check........................        100.4        100.9        100.4
    ACH..........................        100.4        103.9        104.6
    Funds transfer...............        103.1        108.1        101.5
    Book-entry...................        100.0        108.5        104.5
    Noncash collection...........        126.8        130.0        117.3
    Special cash.................        102.4        104.0        104.3
------------------------------------------------------------------------

    The aggregate cost-recovery rate is heavily influenced by the check 
service, which accounts for almost 80 percent of total priced services 
costs. The electronic services (ACH, Fedwire funds transfer, and 
Fedwire book-entry securities transfer) account for 20 percent of 
costs. The noncash collection and special cash services represent a de 
minimis proportion of priced services expenses. Figure 1 shows the 
proportion of 1998 estimated priced services costs attributable to each 
service.

[[Page 63554]]

[GRAPHIC] [TIFF OMITTED] TN13NO98.000



[[Page 63555]]

    1. 1999 Projected Performance--In 1999, the Reserve Banks project 
that they will recover 101.0 percent of total expenses, including 
imputed expenses, targeted ROE, and full retirement of debt associated 
with the automation consolidation special project. The 1999 fees for 
priced services are projected to yield a net income of $64.2 million, 
compared with a targeted ROE of $56.0 million. The book-entry 
securities service will recover approximately $1.7 million of 
automation consolidation special project expenses and financing costs, 
completing the debt retirement for this project.\4\
    The price index for electronic payment services (automated clearing 
house, funds transfer, book-entry securities, and electronic check) and 
electronic connections is projected to decline by approximately 17.5 
percent in 1999, and the index for paper-based payment services (check 
and noncash collection) is expected to increase 2.8 percent. The 
overall 1999 price index for Federal Reserve services is projected to 
decrease 3.5 percent, compared with an overall decline of 4.0 percent 
in 1998. Figure 2 compares the Federal Reserve's price index for priced 
services with the gross domestic product price deflator.

BILLING CODE 6210-01-P
      
      
      
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    \4\ Under an existing Board policy, the Reserve Banks may defer 
and finance development costs if the development costs would have a 
material effect on unit costs, provided that a conservative period 
is set for full cost recovery and a financing factor is applied to 
the deferred portion of development costs. The financing rates 
represent the weighted-average imputed costs of the Federal 
Reserve's long-term debt and equity. This methodology is similar to 
the approach a private firm would use in financing such costs. 
Starting in 1992, the Reserve Banks deferred and financed the 
special project costs for automation consolidation that were 
associated with employee retention and severance benefits and excess 
mainframe computer capacity. By the end of 1999, priced services 
will have recovered fully their portion of these deferred expenses 
and accumulated finance charges. The deferred costs for the 
automation consolidation project have been financed at rates of 16.9 
percent and 17.2 percent, respectively, in 1998 and 1999.

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[[Page 63556]]

Figure 2--Federal Reserve Payment Services Price Index

Chained Fisher Ideal Index Compared With GDP Price Deflator
[GRAPHIC] [TIFF OMITTED] TN13NO98.001


BILLING CODE 6210-01-C

[[Page 63557]]

    The significant decline in the price index for electronic payment 
services reflects, in large part, the increased ability of the Reserve 
Banks to capitalize on the scale economies inherent in providing 
payment services through centralized electronic payment processing 
applications. Between 1992 and 1998, the Reserve Banks' automated 
processing functions were consolidated into three sites, significantly 
reducing the cost of providing electronic payment services.
    2. Allocation of Corporate Overhead Costs to Priced Services--In 
1997, the Reserve Banks changed the method used to allocate corporate 
overhead costs among the priced services.\5\ In 1997 and 1998, and to a 
much smaller extent in 1999, the Reserve Banks used their increased 
flexibility to allocate these costs among priced services to accelerate 
the retirement of debt associated with the automation consolidation 
special project. For 1999, the allocation of corporate overhead costs 
largely returns to the expense-ratio methodology used to allocate these 
costs to priced services in total and to other Reserve Bank 
activities.\6\ Table 2 shows the allocation of corporate overhead costs 
to each priced service for the years 1997 through 1999.
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    \5\ Certain corporate overhead costs are not closely related to 
any particular priced service; these costs include some or all of 
the following activities: Reserve Bank and System administrative 
functions, central mail operations, legal, budget preparation and 
control, expense accounting, records management and contingency 
planning, motor vehicles, and audit. Therefore, the Federal Reserve, 
consistent with industry practice, allocates these costs among 
priced services based on management decision rather than fixed 
allocation rules. The Federal Reserve continues to allocate 
corporate overhead costs to priced services in total and to other 
Reserve Bank activities based on their proportion of total Reserve 
Bank costs.
    \6\ The only exception to the expense-ratio methodology for 
allocating corporate overhead costs among priced services in 1999 is 
a shift of $1.1 million in costs from the book-entry securities 
service to the funds transfer service. The book-entry service is the 
only service that has not yet fully retired its automation 
consolidation special project costs.

                                               Table 2--Corporate Overhead Allocations to Priced Services
                                                                      [$ millions]
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                                                                                            Funds                    Noncash      Special
                             Year                                 Check         ACH        transfer    Book-entry   collection      cash        Total
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1997 Actual..................................................         30.7          0.0         12.3          0.0          0.0          0.3         43.3
1998 (Est)...................................................         27.2          0.0         17.7          0.0          0.1          0.2         45.1
1999 (Bud)...................................................         37.2          3.9          6.0          0.0          0.1          0.2         47.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

    3. 1998 Estimated Performance--The Reserve Banks estimate that 
priced services revenue will yield a net income of $70.3 million in 
1998, compared with a targeted ROE of $52.3 million. Revenue in 1998 is 
estimated to recover 102.2 percent of the costs of providing priced 
services, including imputed expenses, costs related to the automation 
consolidation special project, and targeted ROE, compared with a 
targeted recovery rate of 100.8 percent.\7\ The Reserve Banks recovered 
a larger percentage of costs than targeted primarily because of a 
larger-than-expected reduction in expenses related to the System's 
prepaid pension costs and higher-than-anticipated volume in the funds 
transfer and book-entry securities services. Approximately $23.1 
million in automation consolidation special project costs will be 
recovered in 1998, leaving $1.6 million in accumulated costs to be 
financed and recovered.
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    \7\ Through August 1998, the Reserve Banks recovered 101.1 
percent of total priced services expenses, including imputed 
expenses, automation consolidation special project costs, and 
targeted ROE.
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    4. 1997 Performance--In 1997, the Reserve Banks' priced services 
revenue yielded a net income of $47.3 million, compared with a targeted 
ROE of $45.8 million. The Reserve Banks recovered 100.2 percent of 
total expenses, including imputed expenses, automation consolidation 
special project costs budgeted for recovery, and targeted ROE, compared 
with a targeted recovery rate of 100.5 percent.
    5. Long-Term Aggregate Cost Recovery--Table 3 summarizes the cost 
and revenue performance for priced services since 1988. The costs 
recovered through 1999 include Reserve Banks' recovery of $130.0 
million in transition costs associated with the automation 
consolidation project (special project costs) and $11.8 million in 
deferred financing costs. In addition to fee reductions in electronic 
payment services, the consolidation initiative has dramatically 
improved the Reserve Banks' disaster recovery and information security 
capabilities, increased the System's responsiveness to change, and 
enhanced the central bank's management of payment system risk.
    Because the revenue from the Reserve Banks' priced services 
recovers imputed profits and imputed costs that are not actually 
incurred, the Federal Reserve's provision of priced services has 
consistently had a positive effect on the level of earnings transferred 
by the Federal Reserve to the Treasury. Over the past ten years, priced 
services revenue has exceeded operating costs by more than $900 
million.

[[Page 63558]]



                                                Table 3.--Pro Forma Cost and Revenue Performance (a) \8\
                                                                      [$ millions]
                                                           1            2            3            4            5            6             7            8
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1988...........................................        667.7        641.1          3.2        644.3         23.4         32.7          98.6          0.0
1989...........................................        718.6        692.1          4.6        696.7         21.9         32.9          98.5          0.0
1990...........................................        746.5        698.1          2.8        700.9         45.6         33.6         101.6          0.0
1991...........................................        750.2        710.0          1.6        711.6         38.6         32.5         100.8          0.0
1992...........................................        760.8        731.0         11.2        742.2         18.6         26.0          99.0          1.6
1993...........................................        774.5        722.4         27.1        749.5         25.0         24.9         100.0         12.5
1994...........................................        767.2        748.3          8.8        757.1         10.1         34.6          96.9         33.9
1995...........................................        765.2        724.0         19.8        743.8         21.4         31.5          98.7         36.3
1996...........................................        815.9        736.4         26.8        763.2         52.7         36.7         102.0         30.1
1997...........................................        818.8        743.7         27.7        771.4         47.3         45.8         100.2         20.3
1998 (Est).....................................        838.6        745.3         23.1        768.3         70.3         52.3         102.2          1.6
1999 (Bud).....................................        843.5        777.6          1.7        779.4         64.2         56.0         101.0         0.0
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a. The revenues and expenses for 1988 through 1993 include the definitive securities safekeeping service, which was discontinued in 1993.
b. Includes net income on clearing balances.
c. Imputed expenses include interest on debt, taxes, FDIC insurance, and the cost of float. Credits for prepaid pension costs under SFAS 87 and the
  charges for post-retirement benefits in accordance with SFAS 106 are included beginning in 1993.
d. Special project costs include research and development expenses for evaluating a different computer processing platform for electronic payments from
  1988 through 1990, check image project costs from 1988 through 1993, and automation consolidation costs from 1992 through 1998.
e. Targeted ROE is based on the ROE included in the private sector adjustment factor (PSAF) and has been adjusted for taxes, which are included in
  column 2. Targeted ROE has not been adjusted to reflect automation consolidation special project costs deferred and financed.
f. Totals include financing costs.

B. Service-Specific Discussions

    1. Check--Table 4 presents the actual 1997, estimated 1998, and 
projected 1999 cost recovery performance for the check service.

                                                 Table 4.--Check Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
                                                            1            2            3            4            5            6            7            8
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1997............................................        621.6        589.4          7.5        596.9         24.7         35.3         98.3          7.5
1998 (Est)......................................        651.5        596.3          8.4        604.7         46.8         40.9        100.9          0.0
1999 (Bud)......................................        685.3        637.1          0.0        637.1         48.2         45.1        100.4          0.0
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    a. 1997 Performance--The check service recovered 98.3 percent of 
total expenses in 1997, including imputed expenses, automation 
consolidation special project costs budgeted for recovery, and targeted 
ROE. Higher-than-expected costs because of write-offs for adjustment 
problems associated with infrastructure changes at one Reserve Bank 
were largely responsible for this lower-than-expected recovery rate. 
The volume of checks collected increased 3.0 percent from 1996 levels 
because of several factors: (1) The exit of several correspondent banks 
from the interbank check market, (2) the introduction of new check 
products, and (3) increased reliance on Reserve Bank check processing 
by banks undergoing operational changes resulting from merger and 
acquisition activity.
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    \8\ Calculations on this table and subsequent pro forma cost and 
revenue tables may be affected by rounding.
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    b. 1998 Performance--Through August 1998, the check service has 
recovered 101.3 percent of total expenses, including imputed expenses, 
targeted ROE, and the completion of debt retirement related to 
automation consolidation special project costs. The Reserve Banks 
estimate that the check service will recover 100.9 percent of its costs 
for the full year compared with the targeted 1998 recovery rate of 
100.4 percent. This estimated cost recovery rate, however, may be 
adversely affected by potential write-offs associated with adjustment 
and reconcilement problems at one Reserve Bank. Even if the ultimate 
write-off is higher than currently estimated, the Reserve Banks expect 
that they would still be able to achieve full cost recovery in 1998.
    For the first eight months of 1998, total forward-processed check 
volume has increased 5.2 percent over the year-earlier time period. The 
Reserve Banks estimate that the total volume of forward-processed 
checks collected during full-year 1998 will increase 5.1 percent over 
1997 levels. Fine sort volume fell 0.5 percent through August 1998 
compared with the same period in 1997 and is expected to decline 
further by the end of 1998. Total forward check collection volume 
(processed and fine sort) has increased 4.3 percent through August 
1998, and is estimated to grow 2.5 percent for the full year.

[[Page 63559]]

    Returned check volume has decreased by 3.6 percent through August 
1998 compared with the first eight months of 1997 and is expected to 
decrease 4.1 percent for full-year 1998 as customers' merger-related 
quality problems are resolved and greater competition erodes volume in 
several Districts.
    The check service has experienced substantial growth in electronic 
check products. Reserve Banks now provide paying banks with electronic 
check data for approximately 25 percent of the checks they collect. 
Growth and penetration rates for electronic check products are 
summarized in table 5.

     Table 5.--Electronic Check Product Growth and Penetration Rates
                              [In percent]
------------------------------------------------------------------------
                                   Penetration    Year-to-
                                       rate     date growth   Estimated
                                     through      through    1998 growth
                                   August 1998  August 1998
------------------------------------------------------------------------
Electronic Check Presentment.....         16.4         29.7         25.9
    Truncation...................          4.1         28.4         33.0
    Non-Truncation...............         12.3         30.1         23.5
Electronic Check Information.....          8.6         -4.7        -11.3
------------------------------------------------------------------------

    Beginning this year, all Reserve Banks provide check image 
services, and check image volumes are growing rapidly. Through August 
1998, check image volume has grown 139.8 percent. For the remainder of 
the year, the growth in check image volume is expected to slow 
somewhat, with the year-over-year growth rate declining to 
approximately 105.6 percent. The Reserve Banks provide check image 
services for approximately 3.6 percent of all checks they collect; 
these services are generally provided as an adjunct to electronic check 
presentment.
    c. 1999 Pricing--The Reserve Banks continue to improve operational 
efficiency in check processing through changes to their operating 
environment and new product offerings. For example, over the next 
several years, the Reserve Banks plan to implement an enterprise-wide 
adjustment system that will enable them to process adjustment cases 
more efficiently. In addition, the Reserve Banks have adopted a new 
check automation strategy. Under this strategy, the Reserve Banks will 
consolidate check data processing at several sites, allowing them to 
improve efficiency and reduce costs over the long term. Also, by mid-
year 1999, Reserve Banks expect to offer electronic deposit options for 
all major check products to improve internal processing efficiency.
    In 1999, fees for paper-based check products, which include 
forward-processed, fine sort, and returned checks, are expected to 
increase on a volume-weighted basis about 2.6 percent over current 
prices and 3.7 percent over January 1998 prices, mainly because of a 25 
percent increase in fine sort fees. (Including the fee increases in 
1999, the price index for the paper check service has increased about 2 
percent since 1996.) Prices for forward-processed checks will decrease 
0.3 percent from current fee levels, or 0.2 percent from January 1998 
prices. Prices for return items will increase 2.8 percent from current 
fee levels, or 6.2 percent from January 1998 prices.
    Prices for payor bank services would increase 0.6 percent over 
current prices and 1.2 percent over January 1998 levels. Payor bank 
services include electronic information, electronic check presentment, 
truncation, image products, and large dollar return notifications. 
Higher magnetic ink character recognition (MICR) information fees 
account for most of this fee increase. Prices for electronic check 
presentment products, which include both truncation and non-truncation 
products, would decrease 0.2 percent on a volume-weighted basis in 
1999.
    Table 6 summarizes key check fees.

                                          Table 6.--Selected Check Fees
----------------------------------------------------------------------------------------------------------------
                Products                           1998 price ranges                   1999 price ranges
----------------------------------------------------------------------------------------------------------------
Items:                                                (per item)                          (per item)
Forward-processed
    City................................  $0.002 to 0.080...................  $0.002 to 0.080
    RCPC................................  $0.003 to 0.180...................  $0.003 to 0.180
Fine Sort
    City................................  $0.002 to 0.013...................  $0.002 to 0.015
    RCPC................................  $0.003 to 0.018...................  $0.003 to 0.018
Qualified returned checks
    City................................  $0.065 to 1.110...................  $0.065 to 1.110
    RCPC................................  $0.068 to 1.560...................  $0.065 to 1.750
Raw returned checks
    City................................  $0.90 to 5.00.....................  $0.90 to 5.75
    RCPC................................  $0.90 to 5.00.....................  $0.90 to 5.75
Cash letters:                                      (per cash letter)                   (per cash letter)
    Forward processed...................  $1.50 to 9.00.....................  $2.50 to 9.00
    Forward fine-sort...................  $3.00 to 14.00....................  $3.00 to 14.00
    Returned checks: raw & qualified....  $1.75 to 12.00....................  $1.75 to 12.00
Payor bank services:                      (min.)      (per item)............  (min.)      (per item)
    MICR information....................  $5-$30  $0.001-0.0060.............  $5-$30  $0.001-0.0060

[[Page 63560]]

    Electronic presentment..............  $2-$14  $0.001-0.0045.............  $3-$14  $0.001-0.0045
    Truncation..........................  $2-$25  $0.004-0.0170.............  $3-$25  $0.004-0.0170
----------------------------------------------------------------------------------------------------------------

    For 1999, the Reserve Banks project that the check service will 
recover 100.4 percent of total costs, including imputed expenses and 
targeted ROE. Total expenses, excluding special project costs, are 
projected to increase approximately $40.8 million, or 6.8 percent, from 
estimated 1998 expenses. The increased costs reflect the anticipated 
addition of staff and equipment to process increased check volume, the 
development and implementation of the enterprise-wide adjustment 
system, the implementation of the future check automation strategy, and 
a higher allocation of corporate overhead costs.
    Total revenue is expected to increase approximately $33.8 million, 
or 5.2 percent, in 1999. Forward check-collection revenue is projected 
to increase $15.4 million, or 3.9 percent. Returned check revenue is 
expected to grow $4.1 million, or 3.2 percent. Revenue from payor bank 
services is projected to increase $9.2 million, or 15.0 percent. Other 
operating and imputed revenues account for the remaining increase in 
revenue. Paper-based check products--forward collection and returns--
will account for about 80 percent of total check revenues in 1999. The 
Reserve Banks expect payor bank services to account for about 10 
percent of the check service's total revenues in 1999. Other operating 
and imputed revenues account for the remaining 10 percent.
    The Reserve Banks expect a modest volume increase for paper-based 
check products in 1999. Total forward check collection volume 
(processed and fine sort) is projected to increase 1.4 percent in 1999, 
reflecting a projected increase of 3.1 percent in processed volume and 
a decrease of 9.5 percent in fine sort volume. Returned check volume is 
projected to increase 2.2 percent. Volumes for electronic check 
presentment with paper checks subsequently delivered, electronic 
presentment of truncated checks, and check imaging are expected to grow 
28.7 percent, 19.2 percent, and 66.4 percent, respectively. Electronic 
check information volume is expected to decline 15.1 percent as volume 
continues to shift to electronic check presentment products.
    The Reserve Banks view interstate branch banking and competition in 
the interbank check collection market as important external factors 
affecting their volume projections for paper-based products. Although 
interstate branch banking may eventually reduce the size of the 
interbank check collection market, Reserve Bank check collection 
volumes may increase in 1999 as banks focus on resolving merger-related 
operational concerns. In addition, some Reserve Banks have seen 
increased check collection and returned check volumes as smaller third-
party processors and correspondent banks have exited the interbank 
check collection market. Thus, the projected volume increase for paper-
based products appears reasonable. The projection of substantially 
increased volumes and penetration rates for electronic and image 
services, however, may be optimistic given the level of resources that 
most banks are committing to year 2000 preparations.
    2. Automated Clearing House (ACH)--Table 7 presents the actual 
1997, estimated 1998, and projected 1999 cost recovery performance for 
the commercial ACH service.

                                                  Table 7.--ACH Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997............................................         72.7         53.1         11.1         64.2          8.5          4.0        106.6         10.8
1998 (Est)......................................         68.2         49.6         12.0         61.6          6.6          4.0        103.9          0.0
1999 (Bud)......................................         65.1         57.8          0.0         57.8          7.4          4.5        104.6          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    a. 1997 Performance--The ACH service recovered 106.6 percent of 
total expenses, including imputed expenses, automation consolidation 
special project costs budgeted for recovery, and targeted ROE, in 1997. 
ACH volume in 1997 was 9.7 percent higher than 1996 volume.
    b. 1998 Performance--Through August 1998, the ACH service recovered 
105.3 percent of total expenses, including imputed expenses, targeted 
ROE, and the completion of debt retirement related to automation 
consolidation special project costs. For the full year, Reserve Banks 
estimate that the service will recover 103.9 percent of total expenses, 
compared with the targeted 1998 recovery rate of 100.4 percent. The 
estimated overrecovery is due to lower-than-budgeted overhead and 
support costs. Through August 1998, commercial ACH volume has increased 
13.2 percent over the same period in 1997. For the full year, Reserve 
Banks expect commercial volume to increase 11.5 percent, compared with 
the 15.4 percent increase originally projected. Volume growth is 
projected to be lower than planned due to the aggressive 1998 volume 
target and consolidation in the banking industry.
    c. 1999 Pricing--After several years of significant price 
reductions, Reserve Banks plan further, more modest price reductions in 
1999 for the automated

[[Page 63561]]

clearing house (ACH) service (see table 8). (Including the reductions 
for 1999, fees for ACH items have decreased more than 40 percent since 
1996.) These changes support the System's strategic direction to 
encourage the migration from a paper-based to a more electronic 
payments system.

                                 Table 8
                              [In dollars]
------------------------------------------------------------------------
                                                          1998     1999
                     Fee category                         fee      fee
------------------------------------------------------------------------
Item originated in small file \9\.....................    0.008    0.007
Item received.........................................    0.008    0.007
Premium cycle surcharge...............................    0.005    0.000
Return item surcharge.................................    0.040    0.000
------------------------------------------------------------------------

    The Reserve Banks will reduce the fee for items originated in small 
files by one mill, generating $0.2 million in aggregate savings to 
depository institutions in 1999. In addition, the Reserve Banks will 
reduce the fee for forward items received by one mill, saving customers 
$3.4 million in 1999. Finally, the Reserve Banks will eliminate both 
the premium and return-item surcharges, generating an additional $2.5 
million in fee reductions. Based on 1998 volume estimates, changes to 
the ACH fee schedule will reduce fees to depository institutions by a 
total of approximately $6.2 million in 1999.
    In addition to the fee changes, the Reserve Banks have received 
approval to no longer accept paper or telephone return items and paper 
notifications of change, beginning in January 1999. Instead, depository 
institutions will be expected to submit those items electronically 
(either through a computer connection or a voice response system). A 
facsimile service will be available in limited circumstances in which 
an item cannot be submitted electronically. This change is intended to 
expedite the return of items and help move the ACH service to a more 
electronic environment. In addition, the Reserve Banks now offer a new 
product to enable receiving depository financial institutions (RDFIs) 
that use a third-party processor for their ACH processing to receive a 
copy of their ACH items so that they can provide remittance information 
to their customers.
    The Reserve Banks project that the ACH service will recover 104.6 
percent of its costs in 1999, including imputed expenses and targeted 
ROE. Expenses in 1999 are projected to be $8.2 million, or 16.5 
percent, higher than 1998 estimated costs, excluding 1998 special 
project costs. Total expenses for 1999 are projected to decline $3.9 
million, or 6.3 percent, from their 1998 level when special project 
costs are included in the 1998 estimate. Total revenue in 1999 is 
projected to be $65.1 million, or 4.4 percent less than the 1998 
estimate. The lower revenue is attributable to 1999 price reductions 
and potential changes in the way the Reserve Banks provide services to 
private-sector ACH operators. The Reserve Banks are evaluating the way 
they treat private-sector ACH operators and their customers with 
respect to fees and deadlines to determine if an alternative approach 
would better promote competition in the market for ACH services.
    ACH volume in 1999 is projected to increase 14.5 percent over 1998 
estimates. This volume projection includes the expected effects of 
marketing and education initiatives that are planned for next year.
    3. Funds Transfer and Multilateral Settlement--Table 9 presents the 
actual 1997, estimated 1998, and projected 1999 cost recovery 
performance for the funds transfer and multilateral settlement 
services.

                                             Table 9.--Funds Transfer Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997............................................         97.8         78.6          7.4         85.9         11.9          5.1        107.4          0.0
1998 (Est)......................................         94.2         80.7          0.2         80.9         13.3          6.2        108.1          0.0
1999 (Bud)......................................         71.2         65.0          0.0         65.0          6.2          5.2        101.5          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    a. 1997 Performance--For 1997, the funds transfer and multilateral 
settlement services recovered 107.4 percent of total expenses, 
including imputed expenses, automation consolidation special project 
costs budgeted for recovery, and targeted ROE, compared with a targeted 
recovery rate of 104.3 percent. Operating costs were 2.1 percent lower 
than original budget estimates because of greater-than-expected 
efficiencies realized from processing funds transfers in a centralized 
processing environment and a decrease in overhead costs. 
---------------------------------------------------------------------------

    \9\ Small files contain fewer than 2,500 items; large files 
contain 2,500 items or more.
---------------------------------------------------------------------------

    Funds transfer on-line volume increased 8.2 percent over the 1996 
level, compared with a budgeted increase of 4.2 percent. This volume 
increase was due to strong economic activity.
    b. 1998 Performance--Through August 1998, the funds transfer and 
multilateral settlement services recovered 110.9 percent of total 
expenses, including imputed expenses, targeted ROE, and the completion 
of debt retirement related to automation consolidation special project 
costs. For full-year 1998, the Reserve Banks estimate that the funds 
transfer and multilateral settlement services will recover 108.1 
percent of total expenses, compared with a targeted recovery rate of 
102.8 percent. The higher recovery rate is primarily attributable to a 
large increase in on-line transaction revenue and small increases in 
electronic connection and off-line transaction revenues.
    On-line funds transfer volume through August 1998 has increased 
10.1 percent relative to the same period in 1997. This robust volume 
growth is above historical trend and is attributable mainly to 
sustained strong economic growth. For the full year, the Reserve Banks 
expect volume to increase 7.3 percent, compared with the more 
conservative original target of 3.8 percent.
    c. 1999 Funds Transfer Pricing--Starting in 1998 and continuing 
through first quarter 1999, the Reserve Banks are consolidating their 
off-line transfer processing functions at the Federal Reserve Banks of 
Boston and Kansas

[[Page 63562]]

City. By consolidating the off-line portion of the funds transfer 
business, the Reserve Banks expect to reduce total off-line processing 
costs, streamline off-line activity, and ensure uniform customer 
service levels nationwide.
    The Reserve Banks will implement a block-declining price structure 
for the basic funds transfer fee on February 1, 1999. Under the new 
price structure, a per transfer fee of $0.34 will be charged for the 
first 2,500 funds transfers originated and received by a depository 
institution each month; a per transfer fee of $0.27 will be charged for 
additional transactions up to 80,000 transfers each month; and, for 
every transaction above 80,000 transfers each month, a per transfer fee 
of $0.21 will be assessed. Prior to implementing the block-declining 
price schedule, the Reserve Banks will lower the basic funds transfer 
fee from $0.40 to $0.34 for January 1999.
    On average, basic funds transfer fees will decline by 35.0 percent 
under the new structure compared with the current fee level. (Including 
the reductions for 1999, fees for Fedwire funds transfers have declined 
nearly 50 percent since 1996. Including 1999, the average on-line 
transfer fee for a Fedwire funds transfer has declined 48 percent since 
1996.) This third consecutive reduction in the funds transfer fee will 
save depository institutions approximately $27.8 million in 1999, 
reflecting both the continued benefit of scale economies from 
centralized processing and the reduction of corporate overhead 
allocations in 1999. The implementation of a volume-based pricing 
structure will bring Fedwire pricing in line with other funds transfer 
and payment messaging systems and is expected to increase the 
efficiency of the service.
    The Reserve Banks will increase the off-line transaction surcharge 
from $12.00 to $13.00 to reflect more fully the costs of processing 
off-line transfers and to encourage off-line customers with higher 
transfer volume to install electronic connections. This increase will 
become effective on February 1, 1999.
    Reserve Banks project that the Fedwire funds transfer service will 
recover 101.5 percent of total expenses, including imputed expenses and 
targeted ROE, in 1999. Total costs are expected to decline $15.6 
million, or 19.4 percent, from the 1998 estimate primarily because of a 
significant reduction in the allocation of corporate overhead to the 
service. Lower data processing costs associated with automation 
consolidation also contribute to the lower costs. Excluding corporate 
overhead expenses, total costs for the funds transfer service are 
projected to decline $3.9 million, or 6.2 percent, from 1998 to 1999. 
Service revenue is projected to decline $23.0 million, or 24.4 percent, 
in 1999 compared with the 1998 estimate as a result of the lower fees 
contained in the volume-based pricing structure.
    On-line funds transfer volume is expected to increase 5.8 percent 
over 1998 estimated levels. This volume projection is consistent with 
long-term historical trends for the service and reflects an anticipated 
slowdown in growth relative to the high volume growth over the last 
three years.
    d. 1999 Multilateral Settlement Pricing--During the first quarter 
of 1999, the Reserve Banks will implement an enhanced multilateral 
settlement service that will allow participants in settlement 
arrangements to submit settlement files to them via a computer 
interface connection or a Fedline terminal. The enhanced 
service will improve operational efficiency over current methods and 
reduce settlement risk to participants by granting settlement finality 
on the settlement day. It also enables Reserve Banks to manage and 
limit risk by incorporating risk controls that are as robust as those 
used currently in the Fedwire funds transfer service. The Reserve Banks 
will continue to offer the current ``settlement sheet'' and Fedwire-
based multilateral settlement services.\10\ The settlement sheet 
service, however, will be phased out gradually and all participating 
arrangements will need to make plans to migrate to the enhanced service 
by year-end 2001.
---------------------------------------------------------------------------

    \10\ The settlement sheet service refers to the transmission to 
a Reserve Bank of settlement information that is then posted to 
participants' accounts via the Reserve Banks' accounting system.
---------------------------------------------------------------------------

    The Reserve Banks will adopt a price structure for the enhanced 
service that is similar to the price structure for the current 
settlement sheet service. The new price structure will consist of a 
fixed charge for each settlement file and a fixed price for each 
settlement entry on the file. The Reserve Banks also will assess the 
same prices for the enhanced service and the current settlement sheet 
service. This approach will eliminate an economic incentive for 
clearing arrangements to postpone migrating to the enhanced service.
    The Reserve Banks will imp lement a fee of $0.95 for each 
settlement entry on a settlement file or settlement sheet submitted to 
the Reserve Banks. This is a reduction of $0.05 from the current $1.00 
per entry fee. A $12.00 fee will be charged for each settlement file or 
settlement sheet submitted to the Reserve Banks. This is a new fee 
designed to recover the fixed costs associated with maintaining static 
settlement information for each arrangement and processing daily 
settlements. Each settlement arrangement that incurs total settlement 
charges of less than $60 during a calendar month will pay a minimum fee 
that raises total charges for the month to $60. This minimum fee is 
designed to recover the fixed costs of supporting arrangements that are 
not active users of the Reserve Banks' multilateral settlement 
services, including those arrangements that use Reserve Bank 
multilateral settlement services as contingency back-up to another 
settlement method.
    The current off-line surcharge for arrangements that submit 
settlement information via non-electronic means (fax, phone, or paper) 
will increase from $10.00 to $13.00. The revised surcharge will be 
consistent with the Fedwire funds transfer and book-entry securities 
transfer off-line surcharges, and, similarly, it will reflect more 
fully the costs of processing off-line settlements. The higher fee will 
provide an additional economic incentive for settlement participants to 
migrate to the more efficient enhanced service. The off-line 
origination surcharge will be waived by Reserve Banks that do not 
provide an electronic submission capability for the settlement sheet 
service. The current $10.00 surcharge for telephone notification will 
increase to $13.00 in 1999.
    Fees for the Fedwire-based multilateral settlement service used by 
national, small-dollar and large-dollar settlement arrangements will 
remain unchanged for 1999. A per transfer fee is also charged for each 
Fedwire funds transfer sent and received into or out of the settlement 
account for Fedwire-based arrangements.
    4. Book-Entry Securities--Table 10 presents the actual 1997, 
estimated 1998, and projected 1999 cost recovery performance for the 
book-entry securities service.11 12 
---------------------------------------------------------------------------

    \11\ Includes purchase and sale activity.
    \12\ The Reserve Banks provide securities transfer services for 
securities issued by the U.S. Treasury, federal government agencies, 
government sponsored enterprises, and certain international 
institutions. The priced component of this service, reflected in 
this notice, consists of the revenues, expenses, and volumes 
associated with the transfer of all non-Treasury securities. For 
Treasury securities, the Reserve Banks act as fiscal agents for the 
Treasury Department, which assesses fees for the securities transfer 
component of the service. The Reserve Banks assess a fee for the 
money settlement component of a Treasury securities transfer; this 
component is not treated as a priced service.

[[Page 63563]]



                                    Table 10.--Book-Entry Securities Transfer Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
                                                           1            2            3            4            5            6             7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997...........................................         17.1         14.4          1.5         15.9          1.3          0.9         101.9          3.6
1998 (Est).....................................         18.5         13.7          2.4         16.1          2.5          1.0         108.5          1.6
1999 (Bud).....................................         16.7         13.2          1.7         15.0          1.8          1.0         104.5          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    a. 1997 Performance--The book-entry securities service recovered 
101.9 percent of total expenses in 1997, including imputed expenses, 
automation consolidation special project costs budgeted for recovery, 
and targeted ROE. On-line volume increased 0.3 percent from the 1996 
level, compared with a budgeted decrease of 3.4 percent. This higher-
than-budgeted volume may partially have been the result of increased 
securities movements associated with mergers and higher-than-expected 
mortgage refinancing activity, which affects activity in the mortgage-
backed securities market.
    b. 1998 Performance--Through August 1998, the book-entry securities 
service recovered 104.3 percent of total expenses, including imputed 
expenses, automation consolidation special project costs budgeted for 
recovery, and targeted ROE. For full-year 1998, the Reserve Banks 
estimate that the book-entry securities service will recover 108.5 
percent of total costs compared with a targeted recovery rate of 100.0 
percent. This overrecovery is attributable to higher-than-expected 
transaction volume.
    On-line volume has increased 17.5 percent through August 1998 
compared with the same period in 1997. This large increase in volume is 
due to a significantly higher level of repackaging and new issuance of 
mortgage-backed securities. For the full year, the Reserve Banks 
estimate that on-line volume will increase 14.5 percent, which is 
significantly higher than the original budgeted 0.8 percent volume 
decline.
    c. 1999 Pricing--Starting in 1998 and continuing through first 
quarter 1999, the Reserve Banks are consolidating their off-line 
processing functions at the Federal Reserve Banks of Boston and Kansas 
City. By consolidating the off-line portion of the book-entry 
securities transfer service, the Reserve Banks expect to reduce total 
off-line activity costs, streamline off-line activity, and ensure 
uniform customer service levels nationwide.
    Starting February 1, 1999, the Reserve Banks will split the current 
$2.25 on-line origination fee into a basic transfer fee charged to the 
sending bank and receiving bank of both on-line and off-line transfers. 
The Reserve Banks will implement a $0.85 fee for each securities 
transfer and reversal sent and received, a 24.4 percent fee decrease in 
the total fee per transfer. (Including changes in other fees, the price 
index for the book-entry securities service has declined more than 15 
percent since 1996.) The Reserve Banks also will convert the current 
$10 off-line fee into an off-line surcharge and raise this surcharge to 
$13 to be consistent with the off-line surcharge in the Fedwire funds 
transfer and multilateral settlement services. An additional pricing 
change, applying the existing account-maintenance fee to all joint-
custody collateral accounts, will be implemented on July 1, 1999. 
Delaying implementation of this change until mid-year 1999 will allow 
affected customers time to consolidate accounts, make any necessary 
system changes, and notify pledgees.
    Changing the on-line transfer fee to a fee assessed to both senders 
and receivers more accurately aligns the costs and benefits to 
participants in a transfer. The new price structure promotes pricing 
consistency with other Federal Reserve electronic payment services and 
is consistent with practices in the securities industry. The decision 
to charge for all joint-custody accounts held by a customer, rather 
than just the first account, is intended to implement a consistent, 
cost-based, Systemwide pricing practice following the completion of the 
Reserve Banks' conversion to the centralized National Book-Entry System 
(NBES). Prior to the conversion of all Reserve Banks to NBES, account 
maintenance pricing for joint custody securities accounts was different 
across the Reserve Banks. During the transition to NBES, the interim 
pricing practice for these accounts was standardized to charge one 
account-maintenance fee per customer regardless of the number of 
pledgees. This interim practice achieved consistency and minimized the 
effect on customers converting to the new system but resulted in 
reduced revenue and incomplete recovery of processing costs.
    The Purchase and Sale service represents less than 3.0 percent of 
the costs and revenues of the book-entry securities service. Provision 
of the service is consolidated at the Federal Reserve Bank of Chicago. 
The Reserve Banks will increase the transaction fee for securities 
purchases and sales from $34 to $40 to recover the costs of providing 
the service.
    The Reserve Banks project that the book-entry securities service 
will recover 104.5 percent of costs in 1999, including imputed 
expenses, targeted ROE, and the complete retirement of debt relating to 
automation consolidation special project costs. Total expenses, 
excluding special project costs, are projected to decrease $0.5 
million, or 3.6 percent, in 1999 versus the 1998 estimate because full 
implementation of NBES (the New York District was the last to convert 
in February 1998) and full consolidation at Federal Reserve Automation 
Services (FRAS) have created scale economies that lower per-item data 
processing costs.
    Book-entry securities transfer service revenue is expected to 
decline $1.8 million, or 9.9 percent, in 1999 compared with the 1998 
estimate as a result of the fee levels contained in the new pricing 
structure and price levels. The reduced fees are expected to save 
depository institutions approximately $1.4 million in 1999.
    The Reserve Banks expect on-line book-entry securities transfer 
volume to decline 4.0 percent in 1999 from the 1998 estimated level. 
According to Reserve Bank projections, the unusually high volume growth 
rate in 1998 is an aberration and 1999 volume will likely decline from 
its 1998 level. In addition, some volume losses are expected as

[[Page 63564]]

large customers consolidate their operations.
    5. Noncash Collection--Table 11 lists the actual 1997, estimated 
1998, and projected 1999 cost recovery performance for the noncash 
collection service.

                                          Table 11.--Noncash Collection Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997............................................          4.4          3.5          0.3          3.8          0.7          0.2        110.9          0.0
1998 (Est)......................................          3.7          2.7          0.0          2.7          1.0          0.2        130.0          0.0
1999 (Bud)......................................          2.6          2.0          0.0          2.0          0.5          0.1        117.3          0.0

    a. 1997 Performance--The noncash collection service recovered 110.9 
percent of total expenses in 1997, including imputed expenses, 
automation consolidation special project costs budgeted for recovery, 
and targeted ROE, compared with a target recovery rate of 103.8 
percent. Volume for 1997 decreased 17.1 percent from 1996 volumes 
compared with a 19.6 percent budgeted volume decline.
    b. 1998 Performance--Through August 1998, the noncash collection 
service recovered 135.0 percent of its costs. For full-year 1998, the 
Reserve Banks estimate that the noncash service will recover 130.0 
percent of costs, including imputed expenses and targeted ROE, compared 
with the projected recovery rate of 126.8 percent. The higher recovery 
rate is attributable to higher-than-expected revenue from additional 
called bond activity generated by lower interest rates and slightly 
higher-than-budgeted coupon volume. The higher recovery rate also 
reflects lower costs resulting from efficiencies gained from full-year 
centralized operations at the Jacksonville Branch.
    Through August, volume has decreased 13.8 percent compared with the 
same period in 1997. The Reserve Banks estimate that full-year 1998 
volume will decline 14.1 percent from 1997 levels compared with a 19.7 
percent budgeted volume decline.
    c. 1999 Pricing--The Reserve Banks will retain 1999 fees at their 
1998 levels. The Reserve Banks project that the noncash collection 
service will recover 117.3 percent of total costs, including imputed 
expenses and targeted ROE, in 1999. These fees will yield a ten-year 
recovery rate for the noncash collection service of approximately 96 
percent. Total expenses are projected to decline $0.6 million, or 23.0 
percent, in 1999, and total revenues are projected to decline $1.1 
million, or 30.3 percent, because of a projected volume decline of 26.0 
percent. Volume declines will continue as the number of unmatured 
bearer municipal securities declines. New issues of bearer municipal 
securities effectively ceased in mid-1983 when the Tax Equity and 
Fiscal Responsibility Act of 1982 (TEFRA) removed the tax advantage for 
investors.
    6. Special Cash--Priced special cash services represent a very 
small portion (approximately 0.05 percent) of overall cash services 
provided by the Reserve Banks to depository institutions. Special cash 
services include wrapped coin, nonstandard packaging of currency orders 
and deposits, and registered mail shipments of currency and coin.
    Table 12 presents the actual 1997, estimated 1998, and projected 
1999 cost recovery performance for the special cash service.

                                             Table 12.--Special Cash Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
                                                           1            2            3            4            5            6             7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1997...........................................          5.1          4.7          0.0          4.7          0.4          0.3         102.5          0.0
1998 (Est).....................................          2.6          2.4          0.0          2.4          0.2          0.1         104.0          0.0
1999 (Bud).....................................          2.6          2.5          0.0          2.5          0.2          0.0         104.3          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    a. 1997 Performance--In 1997, the special cash service recovered 
102.5 percent of total expenses, including imputed expenses and 
targeted ROE, compared with a targeted recovery rate of 102.3 percent.
    b. 1998 Performance--Through August 1998, the special cash service 
recovered 101.8 percent of total expenses, including imputed expenses 
and targeted ROE. For full-year 1998, the Reserve Banks estimate that 
the special cash service will recover 104.0 percent of total expenses, 
compared with a targeted recovery rate of 103.5 percent. Costs are 
lower than budgeted in most offices.
    Revenue is estimated to decline approximately $2.5 million, or 49.4 
percent, in 1998 compared with 1997, due mainly to the reclassification 
of cash access as a nonpriced service. Before 1998, nonstandard access 
to cash services was treated as a priced service. In anticipation of 
implementing the uniform cash access policy in May 1998,

[[Page 63565]]

the Federal Reserve concluded that, due to the governmental nature of 
this function, the costs and revenue associated with nonstandard access 
should be treated as a nonpriced service.\13\
---------------------------------------------------------------------------

    \13\ The uniform cash access policy provides for a base level of 
free currency access to all depository institutions but restricts 
the number of offices served and the frequency of access. Depository 
institutions that meet minimum volume thresholds can obtain more 
frequent free access. Fees are charged for additional access beyond 
the free level.
---------------------------------------------------------------------------

    In June 1998, the Chicago office began offering a nonstandard 
packaging service for a fee of $12.00 per order or deposit. The Detroit 
Branch offers this service for the same fee.
    c. 1999 Pricing--For 1999, the Reserve Banks project that the 
special cash service will recover 104.3 percent of costs, including 
imputed expenses and targeted ROE. Total costs in 1999 are projected to 
rise $0.1 million, or 2.7 percent, from the 1998 level. Revenue in 1999 
is expected to increase $0.1 million, or 2.6 percent, from the 1998 
level.
    The Cleveland, Cincinnati, and Pittsburgh offices will implement a 
uniform District fee of $1.80 per box for wrapped coin to replace the 
previous range of $1.95 to $2.25 per box. The Helena office will reduce 
its wrapped coin fee from $2.90 to $2.50 per box to reflect more 
accurately the cost of providing this service.
    The El Paso and San Antonio offices will reduce the registered mail 
surcharge from $100 to $80 to reflect more accurately the costs of 
providing this service. The San Antonio office plans to discontinue 
this service in April 1999.

II. Private Sector Adjustment Factor

    A. Overview--The Board has approved a 1999 PSAF for Federal Reserve 
priced services of $115.8 million. This amount represents an increase 
of $7.3 million, or 6.7 percent, from the 1998 PSAF of $108.5 million.
    As required by the Monetary Control Act, the Federal Reserve's fee 
schedule for priced services includes ``taxes that would have been paid 
and the return on capital that would have been provided had the 
services been furnished by a private business firm.'' These imputed 
costs are based on data developed in part from a model comprising 
consolidated financial data for the nation's fifty largest (in asset 
size) bank holding companies (BHCs).
    The methodology for calculating the PSAF involves determining the 
value of Federal Reserve assets that will be used in providing priced 
services during the coming year. Short-term assets are assumed to be 
financed with short-term liabilities; long-term assets are assumed to 
be financed with a combination of long-term debt and equity derived 
from the BHC model.
    Imputed capital costs are determined by applying related interest 
rates and rates of return on equity from the BHC model. The long-term 
debt and equity rates are based on BHCs in the model for each of the 
last five years. Because short-term debt, by definition, matures within 
one year, only data for the most recent year are used for computing the 
short-term debt rate.
    The PSAF comprises these capital costs as well as imputed sales 
taxes, expenses of the Board of Governors related to priced services, 
and an imputed FDIC insurance assessment on clearing balances held with 
the Federal Reserve Banks to settle transactions.
    B. Asset Base--The total estimated value of Federal Reserve assets 
to be used in providing priced services in 1999 is reflected in table 
13. Table 14 shows that the assets assumed to be financed through debt 
and equity are projected to total $651.4 million. This represents a net 
increase of $35.1 million, or 5.7%, from 1998 assets of $616.3 million, 
as shown in table 15. This increase results from a building project in 
one District, offset somewhat by a lower asset base associated with 
Federal Reserve Automation Services (FRAS).
    C. Cost of Capital, Taxes, and Other Imputed Costs--Table 15 also 
shows the financing and tax rates and the other required PSAF 
recoveries approved for 1999 and compares the 1999 rates with the rates 
used for developing the PSAF for 1998. The pre-tax return on equity 
rate increased from 22.4% for 1998 to 23.5% for 1999. The increase is a 
result of stronger 1997 BHC financial performance included in the 1999 
BHC model relative to the 1992 BHC financial performance used in the 
1998 BHC model.
    D. Capital Adequacy--As shown in table 16, the amount of capital 
imputed for the 1999 PSAF totals 27.2% of risk-weighted assets and 3.0% 
of total assets. The capital to risk-weighted asset ratio well exceeds 
the 8% guideline for adequately capitalized state member banks and 
BHCs. The capital to total asset ratio meets the 3% guideline for 
adequately capitalized institutions that are rated composite 1 under 
the CAMELS rating system.

III. Analysis of Competitive Effect

    All operational and legal changes considered by the Board that have 
a substantial effect on payment system participants are subject to the 
competitive impact analysis described in the March 1990 policy 
statement ``The Federal Reserve in the Payments System.'' In this 
analysis, Board staff assesses whether the proposed change would have a 
direct and material adverse effect on the ability of other service 
providers to compete effectively with the Federal Reserve in providing 
similar services because of differing legal powers or constraints or 
because of a dominant market position of the Federal Reserve deriving 
from such legal differences. If the fees or fee structures create such 
an effect, the Federal Reserve must further evaluate the changes to 
assess whether their benefits--such as contributions to payment system 
efficiency, payment system integrity, or other Board objectives--can be 
retained while reducing the hindrances to competition.
    The Board does not believe that the fees and fee structures will 
have a direct and material adverse effect on the ability of other 
service providers to compete effectively with the Federal Reserve in 
providing similar services. Assuming the Reserve Banks' volume and cost 
projections are accurate, the fees are set to provide the Federal 
Reserve a return on equity at least equal to that earned on average by 
large bank holding companies during the past five years. Moreover, the 
1999 fee schedules enable the Reserve Banks to continue to recover all 
actual and imputed costs of providing priced services over the long 
run; these fees also provide for projected full cost recovery in 1999. 
Therefore, the Board believes the 1999 Reserve Bank price and service 
levels will not adversely affect the ability of other service providers 
to compete effectively with the Reserve Banks in providing similar 
services.

BILLING CODE 6210-01-P

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    By order of the Board of Governors of the Federal Reserve 
System, November 4, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-30338 Filed 11-12-98; 8:45 am]
BILLING CODE 6210-01-C