[Federal Register Volume 63, Number 239 (Monday, December 14, 1998)]
[Proposed Rules]
[Pages 68701-68705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33049]


=======================================================================
-----------------------------------------------------------------------

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: Notice of proposed rulemaking; termination.

-----------------------------------------------------------------------

SUMMARY: In March 1998, the Board issued an advance notice of proposed 
rulemaking requesting comment on the benefits and drawbacks associated 
with its same-day settlement rule, which became effective in January 
1994. The same-day settlement rule, which is part of Regulation CC, 
requires paying banks to settle in same-day funds for checks presented 
to them by private-sector banks by 8:00 a.m. local time at a location 
specified by the paying bank. The Board also requested comment on the 
implications of potential rule changes to reduce or eliminate the 
remaining legal disparities between Federal Reserve Banks and private-
sector banks in the presentment and settlement of checks. The Board 
considered whether such changes would enhance the efficiency of the 
interbank check collection market, the check collection process, and 
the payments system as a whole. Based on its analysis of the comments 
received, the Board concluded that the costs associated with reducing 
the remaining legal disparities would outweigh any payments system 
efficiency gains. Therefore, the Board has decided not to propose any 
specific regulatory changes at this time to reduce these remaining 
legal disparities.

FOR FURTHER INFORMATION CONTACT: Louise L. Roseman, Associate Director 
(202/452-2789) or Jack K. Walton II, Manager, Check Payments 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. Background

    In 1987 Congress passed the Expedited Funds Availability Act 
(EFAA). That act gave 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'' to carry out provisions of the 
act. (12 U.S.C. 4008(c)(1)) The Board issued Regulation CC, 
Availability of Funds and Collection of Checks, to carry out its 
responsibilities under the EFAA. (12 CFR part 229) In October 1992, the 
Board amended Regulation CC by adopting the same-day settlement rule, 
effective January 1994. (57 FR 46956, October 14, 1992) The same-day 
settlement rule requires a paying bank to settle on the day of 
presentment by Fedwire for checks presented by a private-sector 
collecting bank, without the imposition of presentment fees, if the 
checks are presented at a location designated by the paying bank by 
8:00 a.m. local time.1 (12 CFR 229.36(f))
---------------------------------------------------------------------------

    \1\ The term ``bank'' as used in this notice and in Regulation 
CC includes a commercial bank, savings bank, savings and loan 
association, credit union, and U.S. agency or branch of a foreign 
bank. (12 CFR 229.2(e)) 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.
---------------------------------------------------------------------------

    The same-day settlement rule was designed to 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 collection system, 3) reducing 
inefficient intermediation in the check collection process, and 4) 
encouraging the migration from checks to more efficient payment 
mechanisms. At the same time, the rule was designed to address the 
concerns of large check drawers and banks that their controlled 
disbursement arrangements and paying bank operations would not be 
unduly disrupted.
    In March 1998, the Board issued an advance notice of proposed 
rulemaking requesting comment on the effect that the same-day 
settlement rule has had on the interbank check collection market, on 
the check collection process, and, more broadly, on the payments 
system. (63 FR 12700, March 16, 1998) The notice also requested comment 
on the benefits and drawbacks of reducing legal disparities between 
Federal Reserve Banks and private-sector collecting banks. These legal 
disparities include the rules governing presentment deadlines, 
presentment locations, reasonable delivery requirements, the control 
and timing of settlement, and the obligation to settle on a non-banking 
day.
    The Board undertook this evaluation to consider whether reducing 
these disparities would enhance the efficiency of the interbank check 
collection market, the check collection process, and the payments 
system as a whole either directly, by expediting the collection and 
return of checks, or indirectly, by fostering competition. Improved 
competition among collecting banks that would likely result from a 
reduction in legal disparities and the efficiency gains derived from 
this competition were weighed against any increased costs to paying 
banks and their check-writing customers that could result from the 
changes. Consistent with its policy, the Board's evaluation of 
potential regulatory changes included an analysis of the competitive 
impact any changes might have on the ability of other service providers 
to compete with the Reserve Banks.2 The following is a 
summary of the comments received and the Board's analysis of those 
comments.
---------------------------------------------------------------------------

    \2\ The Board has established procedures for assessing the 
competitive impact of rule changes that may have a substantial 
impact on payments system participants. Under these procedures, the 
Board will assess whether a 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 
due to differing legal powers or constraints, or due to a dominant 
market position of the Federal Reserve deriving from such 
differences. If no reasonable modifications would mitigate the 
adverse competitive effects, the Board will determine whether the 
anticipated benefits are significant enough to proceed with the 
change despite the adverse effects. These procedures are described 
in the Board's policy statement ``The Federal Reserve in the 
Payments System,'' as revised in March 1990. (55 FR 11648, March 29, 
1990; FRRS 7-145.2)
---------------------------------------------------------------------------

II. Summary of Comments

    The Board received a total of eighty-one comment letters in 
response to the March 1998 advance notice of proposed rulemaking. The 
following table shows the number of comments received by category of 
commenter:

[[Page 68702]]



------------------------------------------------------------------------
                                                              Number of
                   Category of commenter                      responses
------------------------------------------------------------------------
Depository institutions, bank holding companies, and
 associations representing depository institutions.........           45
Corporations and associations representing corporations....           15
Clearinghouses.............................................            7
Check processors...........................................            6
Federal Reserve Banks......................................            4
Money order companies......................................            2
Other organizations........................................            2
                                                            ------------
    Total..................................................           81
------------------------------------------------------------------------

    Sixty-one commenters recommended not changing the rule governing 
the same-day settlement presentment deadline or reducing other legal 
disparities. Eight commenters recommended limited expansion of the 
same-day settlement rule. Six commenters suggested rescinding the 
existing rule, and six did not offer a specific opinion. Thirteen 
commenters stated that if the Board were to make any regulatory 
changes, particularly those that would require operational or 
programming changes, the changes should not take effect prior to mid-
2000. Several commenters raised other regulatory issues as well as 
issues related to specific Reserve Bank services or policies that were 
not germane to the Board's March 1998 advance notice of proposed 
rulemaking.
    Based on its analysis of the comments received, the Board has 
decided not to propose specific amendments to the same-day settlement 
rule or Regulation J at this time. The following sections summarize the 
comments received regarding current market practices, the presentment 
deadline, the timing and control of settlement, and other legal 
disparities and review the Board's conclusions based on its analysis of 
the comments.

A. Current Practices

    The March 1998 notice asked commenters to provide information on 
what effect, if any, the same-day settlement rule has had on their 
operations since it was implemented in January 1994. In addition, the 
Board requested information on current practices that it could use to 
assess the need to modify the same-day settlement rule further. In 
total, sixty-eight commenters provided information on the current 
practices of businesses and banks, including changes made since the 
implementation of the same-day settlement rule.
Banks
    Twenty-three out of twenty-five comments on the effect of the same-
day settlement rule on check collection costs and availability stated 
that the rule had resulted in lower costs for collecting banks. Ten of 
those commenters also stated that they had experienced an improvement 
in funds availability due to the implementation of the same-day 
settlement rule. Several large collecting banks reported that their 
check collection costs were reduced not only by the elimination of 
presentment fees, but by using lower-priced check clearing services 
offered by correspondent banks.
    Smaller banks commented that the same-day settlement rule benefited 
only large collecting banks by shifting funds transfer, staff, and 
adjustment costs for same-day settlement presentments to small paying 
banks. Community banks stated that they have benefited, in some cases, 
from receiving same-day settlement presentments earlier in the day than 
they receive Reserve Bank presentments. Receiving presentments earlier 
in the day provides the paying bank with more time to process the 
presentments, which lowers their processing costs. Most of these banks, 
however, also cited the cost of funds transfers for settlement as 
particularly burdensome.
    Old Kent Financial Corporation noted that the Grand Rapids, 
Michigan, Clearing House disbanded as a result of the same-day 
settlement rule because members were able to present items directly 
without incurring the administrative and organizational expenses of 
maintaining a clearinghouse organization. Conversely, the five 
clearinghouses that provided information on their membership and 
clearing volume since 1993 stated that they had expanded their 
membership and clearing networks in response to the same-day settlement 
rule by providing transportation or settlement services.
Businesses
    Of the thirty-eight commenters that commented on current business 
practices, none stated that the same-day settlement rule had influenced 
businesses' decisions to use controlled disbursement services. The 
Treasury Management Association (TMA) noted that 80 percent of 
businesses with annual sales over $100 million use controlled 
disbursement services. TMA as well as several businesses and banks 
noted that the primary benefit of controlled disbursement services was 
not the ability to generate float, but the ability to make investment 
and borrowing decisions early in the day based on knowledge of the 
value of that day's check presentments. Several large banks that 
provide cash management services as well as most businesses stated that 
they rely primarily or solely on the disbursement totals provided by 
their banks to determine their daily account balances because 
businesses tend to view internal forecasting as not sufficiently 
reliable. Three large cash management service providers and TMA 
reported that since the implementation of the same-day settlement rule, 
up to 55 percent of the value of their first presentment notification 
had shifted to their second presentment notification.3 As a 
result, businesses that previously forecasted total daily presentments 
based on first presentment notifications have become more dependent on 
second presentment notifications to more accurately project daily 
presentments. Several banks and businesses indicated that maintaining 
an early morning presentment deadline also allows banks enough time to 
provide positive pay services, which help reduce losses from fraudulent 
check activity.4
---------------------------------------------------------------------------

    \3\ Cash management banks typically provide corporations with a 
preliminary initial notification of the day's clearing totals by 
around 8:00 a.m. local time, which includes early direct 
presentments, on-us items, and the first Reserve Bank presentments. 
The second notification is typically made between 9:30 and 11:00 
a.m. eastern time and includes the second Reserve Bank presentment 
from the high dollar group sort program and most same-day settlement 
presentments.
    \4\ Companies using positive pay services generally provide the 
paying bank with an electronic file containing information on all 
checks disbursed. The paying bank compares data on the file with 
data captured from the presented checks to identify exceptions that 
are examined for potential fraudulent check activity.
---------------------------------------------------------------------------

    None of the cash management service providers or businesses 
reported any plans to shift from checks to electronic payments as their 
primary method for disbursements, but a few noted that some businesses 
would consider expanding their use of electronic payments as services 
become more widely accepted and affordable. Technological investment 
and other startup costs were mentioned most often as the primary 
barriers to expanded use of electronic forms of payment.

B. Presentment Deadline Disparity

    Under Regulation J, Reserve Banks can obtain same-day settlement 
for checks presented to a paying bank before its cut-off hour, 
generally 2:00 p.m. or later. (12 CFR 210.9(b)(1)) The same-day 
settlement rule for private-sector banks, however, requires that they 
make their presentments by 8:00 a.m. to ensure that they receive same-
day settlement by Fedwire without

[[Page 68703]]

being assessed presentment fees. The Board requested comment on the 
effect of the difference in presentment deadlines for Reserve Banks and 
private-sector collecting banks. The Board also requested comment on an 
extension of the presentment deadline if the presenting bank transmits 
the information contained in the magnetic ink character recognition 
(MICR) line of each check by some earlier time. Further, the Board 
requested comment on the Reserve Banks' noon presentment policy and the 
effect of allowing interest payments on demand deposit accounts.
Presentment Deadline
    Most commenters did not believe that the six-hour difference in 
presentment deadlines was a significant impediment to the ability of 
private-sector collecting banks to compete with the Reserve Banks. 
Several banks and processors noted that Reserve Banks typically make 
their check presentments to paying banks much earlier than the 2:00 
p.m. cut-off hour. In addition, most large correspondent banks 
indicated that they are able to compete effectively with Reserve Banks 
by offering lower prices and, in some cases, better availability of 
funds.
    Ten banks, two check processors, and one Federal Reserve Bank noted 
that a later same-day settlement presentment deadline would require 
paying banks to process incoming presentments during the time they 
currently use to process internal documents and outgoing checks. For 
example, commenters noted that shifting same-day settlement check 
volumes into a shorter processing window would cause paying banks to 
incur significant additional costs, including the cost of acquiring 
additional sorter capacity and increased staffing expense. Commenters 
also indicated that the shorter processing windows would likely result 
in higher check-fraud losses because paying banks would have less time 
to inspect presented checks properly and make return decisions 
regarding those checks. In addition, banks and processors that provide 
cash management services stated that later presentments would reduce 
their revenue from cash management services because daily clearing 
totals would be reported later in the day to businesses and, therefore, 
businesses would be less willing to pay for those services. All of the 
comments received from businesses stated that a later presentment 
deadline would severely diminish their ability to manage account 
balances efficiently because presentment totals would be reported to 
them later in the day.
    Seventy-five percent of all commenters favored not changing the 
8:00 a.m. same-day settlement presentment deadline primarily because 
the additional costs incurred by paying banks and businesses would 
outweigh benefits gained by collecting banks. Six commenters 
recommended that the same-day settlement rule be rescinded to allow 
paying banks to discourage private-sector presentments, regardless of 
the presentment deadline. Seven commenters favored expanding the same-
day settlement rules by moving the deadline for private-sector 
presentments later in the day, with the recommended new deadline 
ranging from 9:00 a.m. to 2:00 p.m. First Union Bank and Firstar Bank 
conditioned their recommendation on preserving an 8:00 deadline for 
controlled disbursement checks, while First Tennessee Bank recommended 
the deadline only be extended if the presenting bank provided a MICR 
information transmission by 8:00 a.m. Several banks both for and 
against extending the same-day settlement presentment deadline 
suggested that a later deadline would improve funds availability by 
increasing the amount of processing time available to private-sector 
collecting banks, particularly for West Coast banks collecting checks 
drawn on East Coast banks. Those opposed to extending the deadline, 
however, believed that the availability improvements would not likely 
be of sufficient magnitude to justify additional transportation 
expenses for collecting banks or the increased operational costs to 
paying banks.
    Six banks and one check processor with operations in the Midwest or 
West noted that moving the presentment deadline as little as thirty 
minutes later would result in a further shift of controlled 
disbursement accounts to banks in the eastern time zone. Being located 
in the eastern time zone gives controlled disbursement service 
providers an advantage in reporting disbursement totals to customers 
earlier in the day because it offers them time to make investment and 
funding decisions prior to the close of the European and U.S. financial 
markets. First Interstate Bank (Montana) and Bank of America proposed 
establishing a presentment deadline based on eastern time, rather than 
local time, to allow banks in the western part of the country to 
compete more effectively with banks in the eastern time zone in 
providing cash management services. In addition, four commenters 
recommended creating a special class of controlled disbursement routing 
numbers with an 8:00 a.m. presentment deadline and extending the 
presentment deadline for all other types of checks.
    Because some collecting banks have been slow to take advantage of 
the same-day settlement rule, several commenters noted that they would 
prefer to leave the current same-day settlement rule unchanged. 
Maintaining the rule would allow the private sector to continue 
promoting other initiatives, such as the expansion of direct 
presentments through existing clearinghouses. A few commenters 
recommended moving the Reserve Banks' presentment deadline earlier, to 
match the private-sector same-day settlement presentment deadline, but 
several others noted that this would most likely force Reserve Banks to 
move deposit deadlines earlier, slowing the check collection process.
Later Presentment Deadline Conditioned on Earlier Transmission of MICR 
Information
    Forty-seven commenters commented on conditioning the extension of 
the same-day settlement presentment deadline for paper checks on the 
transmission of check MICR information earlier in the day. Twenty-nine 
of those commenters opposed conditioning the extension of the 
presentment deadline on an earlier MICR transmission. Twelve commenters 
stated that the presentment deadline under the same-day settlement rule 
could be extended by the earlier provision of MICR information only if 
the rule contained detailed standards regarding the MICR transmission. 
Six commenters favored using MICR files to extend the presentment 
deadline as long as the private sector is allowed to set MICR 
transmission standards. The primary concern of those opposed to 
conditioning the extension of the presentment deadline on the earlier 
transmission of MICR information was the accuracy of the data contained 
in the MICR files. Three banks stated that they currently receive MICR 
files from presenting banks and noted that they occasionally find 
discrepancies between data contained in the electronic files and the 
associated checks. Other concerns included the investment required to 
send, receive, and process MICR files; potential communication network 
capacity issues at peak transmission times; and the need for additional 
warranties.
    The commenters that currently receive MICR file transmissions under 
bilateral agreements stated that their existing agreements adequately 
cover relevant MICR file transmission issues and that regulation of 
these issues would likely be too general to address

[[Page 68704]]

operational issues effectively. Several paying banks noted that if they 
wanted to maintain their current cash management reporting deadlines, 
they would be required to process MICR files from presenting banks that 
take advantage of the later deadline, even if paying banks determined 
that the investment required to process MICR information could not be 
recouped by efficiency gains. Several commenters suggested that it 
would be better to let market forces determine the acceptance of MICR 
files than to incorporate the use of MICR files in the same-day 
settlement rule as a condition for a later presentment deadline.
Noon Presentment Policy
    Of the twenty-three comments received on the Reserve Banks' current 
noon presentment policy for city-zone endpoints, seventeen commenters 
stated that the policy does not need to be changed.5 They 
said that the current policy adequately balances the Reserve Banks' 
ability to expedite the collection of city-zone checks with the desire 
of paying banks to receive their presentments earlier in the day. Four 
commenters suggested that the Reserve Banks make presentments earlier 
in the day and two suggested that the Reserve Banks could make their 
presentments later in the day.
---------------------------------------------------------------------------

    \5\ 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 presentments 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 times for checks drawn on city banks.
---------------------------------------------------------------------------

Interest on Demand Deposits
    Most banks that provide cash management services stated that 
controlled disbursement accounts would still be needed even if banks 
were permitted to pay interest on corporate demand deposits. Several 
banks indicated that they already compensate businesses through 
earnings credits and that they would not be able to pay rates high 
enough to keep larger businesses from seeking higher returns through 
alternative investments, although paying interest might help smaller 
businesses. TMA and Bank of America stated, however, that if banks paid 
market rates of interest on corporate demand deposits, the demand for 
controlled disbursement services would be significantly reduced, thus 
mitigating concerns about a later same-day settlement presentment 
deadline.

C. Timing and Control of Settlement

    Under Regulation J, Reserve Banks have the right to settle for 
check presentments by debiting the Federal Reserve account of the 
paying bank or its correspondent settlement agent, a process often 
referred to as autocharge. (12 CFR 210.9(b)) The debit is posted during 
the day based on the time of presentment, as provided in the Reserve 
Banks' operating circulars. Under the same-day settlement rule in 
Regulation CC, however, the paying bank maintains control of the 
settlement through the initiation of a Fedwire funds transfer that does 
not have to be made until the close of Fedwire (6:30 p.m. eastern 
time). (12 CFR 229.36(f)(2)) Most commenters acknowledge that the 
regulations governing the timing and control of settlement favor 
Reserve Banks over private-sector collecting banks. None of the 
commenters, however, suggested an alternative that eliminated the 
disparity while maintaining a balance between the needs of both the 
paying and collecting banks to control some portion of the settlement 
process.
    None of the commenters recommended changing the control of 
settlement. The primary concern with eliminating the Reserve Banks' 
ability to autocharge accounts was that paying banks would incur 
additional costs to transfer funds daily to the Reserve Banks. In 
addition, none of the paying banks indicated problems with the Reserve 
Banks' autocharge process. Moreover, most banks opposed giving private-
sector presenting banks the ability to debit their Federal Reserve 
accounts directly. Smaller paying banks, in particular, stated that 
their ability to adjust the amount of their funds transfers for 
settlement was often their most effective method of resolving 
discrepancies in the presentment totals, even though funds transfers 
were also cited as a significant cost to paying banks under the same-
day settlement rule.
    While seven commenters suggested moving the settlement deadline 
under the same-day settlement rule for private-sector banks to earlier 
in the day, most commenters stated that the current timing of Reserve 
Bank settlements was appropriate. Several banks expressed concern that 
if Reserve Banks obtained settlement for their presentments later in 
the day, Reserve Banks would post credits to depositors' accounts 
later, thus increasing the likelihood of daylight overdrafts. Another 
concern cited by several collecting banks was that under the current 
same-day settlement rule, most funds transfers settling for same-day 
settlement presentments are received late in the day, making it 
difficult for collecting banks to manage account balances and reserve 
requirements. A few paying banks, however, noted that the later 
settlement deadline for private-sector banks provided paying banks time 
to process and reconcile presentments before settling. To help resolve 
issues regarding the timing and control of settlement, the regional 
check clearinghouses noted that they have incorporated same-day 
settlement presentments into their clearinghouse settlements.

D. Other Legal Disparities

    In its March 1998 notice, the Board also requested comment on other 
legal disparities that exist between Reserve Banks and private-sector 
collecting banks. Specifically, the Board wanted to know if the 
difference in presentment location, reasonable delivery requirements, 
and the obligation to settle on a non-banking day hindered competition 
and innovation in the payments system. The Board also asked for comment 
on any other legal differences between Reserve Banks and private-sector 
collecting banks that limit the ability of private-sector banks and 
Reserve Banks to compete in the interbank check collection market.
    Under the same-day settlement rule, paying banks have the right to 
designate the presentment location, with certain restrictions, and to 
impose reasonable delivery requirements for presentments received from 
private-sector presenting banks. (12 CFR 229.36(f)(1)) Regulation J, 
however, allows Reserve Banks to present checks at certain locations 
that may not be the same as the location designated by the paying bank 
under the same-day settlement rule. (12 CFR 210.7(b)) In addition, 
Regulation J does not give paying banks the right to impose delivery 
requirements on Reserve Banks. In practice, however, the Reserve Banks 
generally present checks at a location designated by the paying bank 
and generally comply with the paying bank's delivery requirements.
    Most of the thirty-one commenters on the issues of presentment 
location and reasonable delivery requirements noted that Reserve Banks 
already generally comply with private-sector practices. Fourteen 
commenters noted that the current disparity in presentment location and 
delivery requirements does not result in any material competitive 
advantage. Further, they noted that if the Board were to make changes 
in this area, the Board should modify Regulation J to allow paying 
banks to designate the presentment location and

[[Page 68705]]

reasonable delivery requirements for presentments by Reserve Banks. 
None of the commenters suggested eliminating the reasonable delivery 
requirements for private-sector presentments. Only four commenters 
noted that the current rules provide a material competitive advantage 
for the Reserve Banks and suggested that collecting banks be given the 
same legal rights for presentment location as Reserve Banks.
    The settlement obligation of a paying bank that closes voluntarily 
on a business day differs based on whether the presenting bank is a 
Reserve Bank or a private-sector bank. Under Regulation J, the paying 
bank's obligation to settle with a Reserve Bank is triggered if the 
Reserve Bank ``makes a cash item available to the paying bank on that 
day.'' (12 CFR 210.9(b)(3)) Under the same-day settlement rule, the 
paying bank's obligation to settle with a private-sector collecting 
bank 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)). 
Of the seventeen commenters that commented on this issue, none of the 
commenters believed that the difference between the rules for private-
sector banks and Federal Reserve Banks had a material competitive 
effect.
    Nine commenters raised as another legal disparity the way paying 
banks and private-sector presenting banks resolve discrepancies in the 
settlement amount for presentments. The Reserve Banks' Operating 
Circular 3, Collection of Cash Items and Returned Checks (paragraphs 
12, 18, and 19), sets forth the terms under which Reserve Banks handle 
corrections, adjustments, and warranty claims. Although paying banks 
and private-sector presenting banks can establish bilateral or 
multilateral agreements addressing adjustment standards, the same-day 
settlement rule does not provide standards for private-sector banks 
lacking such agreements. Several commenters noted that the lack of 
detailed adjustment standards had occasionally made it difficult to 
resolve differences between collecting and paying banks in a timely 
manner. While a few commenters asked the Board to incorporate detailed 
standards in Regulation CC, several others recommended that industry 
groups continue to set these standards.

E. Analysis and Conclusions

    The Board recognizes that certain legal disparities between Reserve 
Banks and private-sector collecting banks may affect the competitive 
position of participants in the check collection system. In evaluating 
potential reductions in the legal disparities between Reserve Banks and 
private-sector collecting banks, the Board recognizes that even 
removing the disparities discussed in its advance notice of proposed 
rulemaking 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.6
---------------------------------------------------------------------------

    \6\ Reserve Banks 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.
---------------------------------------------------------------------------

    Based on the comments received, the Board believes that regulatory 
changes to reduce legal disparities between Reserve Banks and private-
sector collecting banks would yield only marginal benefits in terms of 
directly expediting the collection and return of checks. While the 
removal of these disparities may foster competition between Reserve 
Banks and private-sector collecting banks in the check collection 
market, neither the direct nor indirect benefits appear to be 
sufficient to offset the significant additional costs that such 
regulatory changes would impose on paying banks and their customers. 
Specifically, the Board has concluded that moving the presentment 
deadline later in the day for private-sector banks would impose 
significant costs on paying bank operations and those businesses that 
use controlled disbursement services. In addition, moving the Reserve 
Banks' presentment deadline earlier in the day would delay the 
collection of some checks, which would be inconsistent with one purpose 
of EFAA: to expedite the check collection and return system.
    Further, the Board believes that eliminating the disparities 
between the Reserve Banks and private-sector banks as to the control 
and timing of settlement would also likely increase costs and reduce 
the efficiency in the check system. The Board notes that private-sector 
initiatives, such as the expansion of clearinghouse settlement 
services, have been able to mitigate the settlement disparities to some 
extent.
    With respect to the control of settlement, the Board believes that 
the autocharge system used by the Reserve Banks provides an efficient 
settlement mechanism that has not created problems for paying banks and 
therefore should be retained. The Board recognizes that while banks 
generally are not concerned with the ability of Reserve Banks to charge 
paying banks' Federal Reserve accounts, banks are very concerned about 
the risks associated with extending this capability to private-sector 
banks.
    With respect to the timing of settlement, providing for a later 
settlement of Reserve Bank presentments would similarly delay the 
ability of Reserve Banks to post credits for check deposits, thereby 
making intraday account management more difficult for many banks and 
potentially increasing their daylight overdraft charges. In addition, 
providing for an earlier settlement deadline for presentments by 
private-sector banks could materially increase the costs and risks to 
paying banks by reducing the time that they have to process and 
reconcile presentments before settling.
    The Board has also concluded that the legal disparities in control 
of presentment location, delivery requirements, and settlement on a 
non-banking day do not materially affect the efficiency of or 
competition in the check collection system.
    The implementation of the same-day settlement rule in 1994 has 
significantly reduced the legal disparities between private-sector 
collecting banks and Reserve Banks, thereby improving the competitive 
position of private-sector collecting banks. While some legal 
disparities related to the presentment and settlement of checks still 
exist, they are not as significant as those that existed prior to 1994. 
The Board believes that the costs associated with reducing the 
remaining legal disparities would outweigh any payments system 
efficiency gains. Therefore, based on its analysis of the comments 
received, the Board believes that changes to further reduce the legal 
disparities should not be made at this time.

    By order of the Board of Governors of the Federal Reserve 
System, December 8, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-33049 Filed 12-11-98; 8:45 am]
BILLING CODE 6210-01-P