[Federal Register Volume 65, Number 3 (Wednesday, January 5, 2000)]
[Notices]
[Pages 463-485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-42]


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FEDERAL RESERVE SYSTEM

[Docket No. 1054]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved the fee schedules for Federal Reserve 
priced services and electronic connections and a private sector 
adjustment factor (PSAF) for 2000 of $192.6 million. These actions were 
taken in accordance with 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 new fee schedules become effective April 3, 2000.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee 
schedules: Jeff Stehm, Assistant Director (202/452-2217); Erik Kiefel, 
Financial Services Analyst, Check Payments (202/721-4559); Riaz Ahmed, 
Assistant Financial Services Analyst, ACH Payments (202/452-3959); 
Joshua Weisbrod, Assistant Financial Services Analyst, Funds Transfer 
and Book-Entry Securities Services (202/530-6214); Michele Raville, 
Information Technology Analyst (electronic connections) (202/736-5601); 
Donna DeCorleto, Financial Services Analyst, Noncash Collection Service 
(202/452-3956); or Michael Lambert, Financial Services Analyst, Special 
Cash Services (202/452-3376), Division of Reserve Bank Operations and 
Payment Systems. For questions regarding the Private Sector Adjustment 
Factor: Paul Bettge, Assistant Director (202/452-3174); Bill Pullen, 
Accountant (202/736-1947), Division of Reserve Bank Operations and 
Payment Systems. For users of Telecommunications Device for the Deaf 
(TDD) only, please contact Diane Jenkins (202/452-3749).
    Copies of the 2000 fee schedules 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 they recover, over the long run, their direct 
and indirect costs, including imputed costs and profits, of providing 
priced services. Over the period 1989 through 1998, the Reserve Banks 
recovered 99.9 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).1
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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 PSAF. The PSAF is based on data developed in part from a 
model comprising the nation's fifty largest (by asset size) bank 
holding companies. 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. The 
ten-year recovery rate is based on the method used for the pro forma 
income statement for Federal Reserve priced services published in 
the Board's Annual Report. The pro forma income statement reflects 
certain costs and offsets to costs differently than do the pro forma 
cost and revenue performance tables used in this memorandum to set 
fees. For example, offsets to costs associated with the transition 
to and retroactive application of the Financial Accounting Standards 
Board's Statement of Financial Accounting Standards No. 87 (SFAS 
87), pension accounting, and SFAS 106, other employee retirement 
benefits accounting, have not been included in this memorandum. If 
the modification to the PSAF calculation described in section II on 
the 2000 PSAF were not applied to prior periods, the ten-year 
recovery rate would increase to 100.7 percent. The 1998 and 1999 
service line recovery data in this memorandum do not reflect the 
revisions to the PSAF method in order to provide a more accurate 
comparison against the targeted return on equity that was used for 
establishing prices within those services.
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    For 1999, the Reserve Banks estimate that they will recover 102.8 
percent of the costs of providing priced services. They project a 99.0 
percent recovery rate in 2000. The primary risk to the 2000 projection 
lies in the ability of the Reserve Banks to meet aggressive revenue and 
cost targets in the check service, particularly costs associated with 
its check automation standardization project.
    In their 2000 fee schedules, the Reserve Banks include changes that 
reduce fees to depository institution customers that 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 clearinghouse, funds transfer 
and net settlement, book-entry securities, and electronic check) and 
electronic connections is projected to decline approximately 4.9 
percent in 2000. The index for paper-based payment services (check, 
special cash, and noncash collection) is expected to increase 3.6 
percent. The overall 2000 price index for all Federal Reserve priced 
services is projected to increase 1.3 percent, compared with an overall 
decline of 1.9 percent in 1999.2
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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 changes in fee structures and levels for priced 
services in 2000:
     The Reserve Banks will reduce fees for Fedwire funds 
transfers for the fourth consecutive year. The weighted average price 
for a Fedwire funds transfer will decline 11.9 percent from the 1999 
level. The Reserve Banks, however, will increase the surcharge for off-
line Fedwire funds transfers to $15 to reflect better the product's 
costs. The 2000 fee changes are expected to save customers 
approximately $5.1 million next year. Including the fee changes for 
2000, the price index for Fedwire funds transfers has declined 
approximately 49 percent since 1996.
     The Reserve Banks will reduce the fee for an on-line 
Fedwire book-entry securities transfer almost 17.6 percent in 2000. The 
Reserve Banks, however, will increase the surcharge for off-line 
Fedwire securities transfers to $18 to reflect better the product's 
costs. The fee changes are expected to save customers approximately 
$1.1 million next year. Including the fee changes for 2000, the price 
index for the book-entry securities service has declined about 16 
percent since 1996.

[[Page 464]]

     The Reserve Banks will make reductions of 15.4 percent for 
an ACH small-file origination and 18.2 percent for a large-file 
origination in 2000. The price reductions are expected to save 
depository institution customers approximately $3.0 million next year. 
Including the reductions for 2000, the price index for the ACH service 
has decreased nearly 46 percent since 1996. In addition, funding for 
ACH promotion and education programs will increase to promote the use 
of direct deposit and payment.
     The Reserve Banks will increase fees for paper check 
products 3.3 percent on a volume-weighted basis over current prices (a 
7.1 percent increase from January 1999 fee levels). Paper check 
products include forward-processed, fine sort, and returned checks. The 
fees for forward-processed items will increase 3.5 percent over current 
prices (7.2 percent over January 1999 fee levels). Prices for fine sort 
and return items will increase 4.4 and 2.1 percent, respectively, over 
current prices (8.9 and 6.5 percent when compared with January 1999 fee 
levels). Fees for payor bank services, which include electronic check 
products, will increase about 11.0 percent (a 14.8 percent increase 
from January 1999 fee levels). Electronic check products include 
electronic check presentment, image services, and electronic 
information. Reserve Banks are standardizing these products and 
implementing a common pricing structure with fixed and per-item fees. 
Including the fee changes in 2000, the price index for the check 
service has increased approximately 14 percent since 1996. Aggregate 
check service fee increases in 2000 are expected to cost depository 
institution customers approximately $50 million.
     The Reserve Banks will delay the implementation of the 
coming year's price and price structure changes until April 3, 2000. 
The delay is intended to minimize changes during the period surrounding 
the century rollover. Current Reserve Bank prices and products will 
remain applicable through the first quarter of next year.

B. Discussion

    Table 1 presents an overview of the budgeted 1999, estimated 1999, 
and projected 2000 cost recovery performance for all priced services. 
Although the 2000 price changes would not go into effect until April 3, 
2000, the 2000 cost recovery rate is a projection for the full calendar 
year.

                                 Table 1
                              [In percent]
------------------------------------------------------------------------
                                       1999         1999         2000
          Priced service              budget      estimate      budget
------------------------------------------------------------------------
All Services.....................        101.0        102.8         99.0
    Check........................        100.5        101.5         98.7
    ACH..........................        104.5        112.6        100.0
    Funds transfer...............        102.0        105.5        100.5
    Book-entry...................        105.2        108.1        101.2
    Noncash collection...........        118.6        140.2        107.6
    Special cash.................        105.8        106.2        101.8
------------------------------------------------------------------------

    The aggregate cost-recovery rate is heavily influenced by the check 
service, which accounts for approximately 83 percent of the total cost 
of priced services. The electronic services (ACH, Fedwire funds 
transfer, and Fedwire book-entry securities transfer) account for about 
17 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 1999 estimated priced services costs 
attributable to each service. 

[[Page 465]]

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BILLING CODE 4410-10-M

[[Page 466]]

    Table 2 summarizes the cost and revenue performance for priced 
services since 1998. In 1999, the Reserve Banks completed their 
recovery of transition costs associated with the automation 
consolidation project (special project costs) and associated financing 
costs. In addition to facilitating 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.
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    \3\ Calculations on this table and subsequent pro forma cost and 
revenue tables may be affected by rounding. If the PSAF method used 
to calculate the 2000 aggregate priced service cost in this table is 
applied to the actual 1998 and estimated 1999 calculations, the 
recovery rate for 1998 would decline to 101.1 percent and that for 
1999 would decrease to 99.2 percent.

                                                   Table 2.--Pro Forma Cost and Revenue Performance 3
                                                                      [$ millions]
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                                                                                                                                               Special
                                                               Operating      Special                                             Recovery     project
                                                               costs and      project       Total      Net income   Target ROE   rate after     costs
                      Year                       Revenue (a)    imputed        costs       expense     (ROE)  [1-      (d)       target ROE    deferred
                                                                expenses     recovered      [2+3]          4]                    [1/(4+6)]       and
                                                                  (b)           (c)                                                            financed
                                                           1            2             3            4            5            6            7            8
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1998...........................................        839.7        753.2          15.7        768.9         70.8         52.3       102.3%          1.7
1999 (Est).....................................        871.4        789.7           1.7        791.4         80.0         56.0       102.8%          0.0
2000 (Bud).....................................        925.5        823.7          13.2        836.8         88.7         98.4        99.0%          0.0
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a Includes net income on clearing balances.
b 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 retirement benefits in accordance with SFAS 106 are included.
c Special project costs include the priced portion of automation consolidation costs through 1999 and check standardization costs in 2000.
d Targeted ROE is based on the ROE included in the 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 in 1998.
e Totals include financing costs.

1. 2000 Projected Performance
    The Reserve Banks project that they will recover 99.0 percent of 
total expenses related to priced services, including imputed expenses 
and targeted ROE, in 2000. The 2000 fees for priced services will 
result in a net income of $88.7 million, compared with a targeted ROE 
of $98.4 million. The check service will recover approximately $13.2 
million of priced services costs associated with the check automation 
standardization special project.4
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    \4\ Under an existing Board policy, the Reserve Banks may defer 
and finance special project costs if they 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 special project costs. The financing rates represent the 
weighted-average imputed costs of the Federal Reserve's long-term 
debt and equity. This method is similar to the approach a private 
firm would use in financing such costs. The check automation 
standardization special project did not meet the requirements for 
deferral and financing. Costs associated with this special project 
will be fully recovered in 2000.
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    The price index for electronic payment services and electronic 
connections is projected to decline approximately 4.9 percent in 2000, 
and the index for paper-based payment services is expected to increase 
3.6 percent. The overall 2000 price index for Federal Reserve services 
is projected to increase 1.3 percent, compared with an overall decline 
of 1.9 percent in 1999. Increases in prices for check products are the 
primary reasons for the higher overall price index in 2000. Figure 2 
compares the Federal Reserve's price index for priced services with the 
gross domestic product price deflator, illustrating that Federal 
Reserve priced services have historically increased more slowly than 
the deflator.
    The continued decline in the price index for electronic payment 
services reflects, in large part, the ability of the Reserve Banks to 
capitalize on the operational efficiencies and scale economies inherent 
in providing payment services through centralized electronic payment 
processing applications. Between 1992 and 1998, the Reserve Banks' 
automated data processing facilities were consolidated into three 
sites, significantly reducing the cost of providing electronic payment 
services.

[[Page 467]]

[GRAPHIC] [TIFF OMITTED] TN05JA00.003



BILLING CODE 4410-10-C

[[Page 468]]

2. Allocation of Corporate Overhead Costs to Priced Services
    Corporate overhead costs are allocated to priced services in total 
and to other Reserve Bank activities based on their proportion of total 
Reserve Bank costs (expense-ratio basis). Because corporate overhead 
costs are not closely related to any particular priced service, these 
costs are assigned among the individual services to facilitate the 
funding of significant multiyear strategic investments that would 
otherwise result in short-term price fluctuations, subject to 
established minimum and maximum amounts.5 In 1998, and to a 
much smaller extent in 1999, the Reserve Banks assigned these costs 
among priced services to accelerate the retirement of debt associated 
with the automation consolidation special project. For 2000, the 
assignment of corporate overhead costs to individual priced services 
will support the Reserve Banks' strategic check automation project. 
Table 3 shows the assignment of corporate overhead costs for the years 
1998-2000.
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    \5\ Corporate overhead costs include all or portions 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.

                                               Table 3.--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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1998 Actual..................................................         27.3          0.0         17.4          0.0          0.1          0.2         45.0
1999 (Est)...................................................         38.8          3.7          5.9          0.0          0.1          0.2         48.7
2000 (Bud)...................................................         36.1          8.2          4.6          1.2          0.1          0.1         50.4
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3. 1999 Estimated Performance
    The Reserve Banks estimate that priced services will yield a net 
income of $80.0 million in 1999, compared with a targeted ROE of $56.0 
million. In 1999, the Reserve Banks estimate that they will recover 
102.8 percent of the costs of providing priced services, including 
imputed expenses, all remaining automation consolidation special 
project costs, and targeted ROE, compared with a targeted recovery rate 
of 101.0 percent.6 The Reserve Banks recovered a larger-
than-expected percentage of costs primarily because of increased 
revenues associated with higher-than-expected volumes for most priced 
services, substantial midyear price increases within the check service, 
and reductions in operating costs in the funds transfer service.
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    \6\ Through October 1999, the Reserve Banks recovered 103.6 
percent of total priced services expenses, including imputed 
expenses, automation consolidation special project financing, and 
targeted ROE.
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4. 1998 Performance
    In 1998, the Reserve Banks'' priced services revenue yielded a net 
income of $70.8 million, compared with a targeted ROE of $52.3 million. 
The Reserve Banks recovered 102.3 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 100.8 percent. The Reserve Banks recovered a larger-
than-expected percentage of costs primarily because of higher revenues 
from larger-than-anticipated increases in volume across most services, 
midyear price increases in the check service, operational cost 
reductions in the funds transfer service, and lower-than-anticipated 
support costs in ACH.

C. Check

    Table 4 presents the actual 1998, estimated 1999, and projected 
2000 cost recovery performance for the check service.

                                                 Table 4.--Check Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
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                                                                                                                                               Special
                                                                Operating     Special                                             Recovery     project
                                                                costs and     project       Total      Net Income                rate after     costs
                      Year                          Revenue      imputed       costs       expense     (ROE)  [1-  Target  ROE   target ROE    deferred
                                                                 expenses    recovered      [2+3]          4]                    [1/(4+6)]       and
                                                                                                                                 (percent)     financed
                                                            1            2            3            4            5            6            7            8
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1998............................................        651.8        601.7          5.7        607.5         44.4         40.9        100.5          0.0
1999 (Est)......................................        708.9        653.5          0.0        653.5         55.4         45.1        101.5          0.0
2000 (Bud)......................................        768.0        684.4         13.2        697.6         70.4         80.8         98.7          0.0
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1. 1998 Performance
    The check service recovered 100.5 percent of total expenses in 
1998, including imputed expenses, the completion of debt retirement 
related to automation consolidation special project costs, and targeted 
ROE. Substantial volume growth at most Reserve Banks and midyear price 
increases helped actual cost recovery to exceed the targeted rate of 
100.4 percent. The volume of checks collected increased 5.3 percent 
from 1997 levels because of several factors, including (1) The exit of 
several correspondent banks from the interbank check market; (2) The 
introduction of new check products; (3) The acquisition of new 
customers beyond those gained from the exit of correspondent banks; and 
(4) The increased reliance on Reserve Bank check processing by some 
banks during merger-and-acquisition-related operational changes.
2. 1999 Performance
    Through October 1999, the check service has recovered 102.4 percent 
of

[[Page 469]]

total expenses, including imputed expenses, and targeted ROE. The 
Reserve Banks estimate that the check service will recover 101.5 
percent of its costs for the full year compared with the targeted 1999 
recovery rate of 100.5 percent. The higher recovery rate reflects 
improved income from higher than expected volumes, midyear 1999 price 
increases, and higher than expected pension credits.
    Volume growth within paper check products has been higher through 
October 1999 than originally budgeted at all Reserve Banks, largely 
because of increases in the number of forward-processed items at one 
Reserve Bank as a major regional bank exited the local correspondent 
banking business. Table 5 summarizes the year-to-date and currently 
estimated growth rates for all paper check products for the entire 
year.

               Table 5.--Paper Check Product Growth Rates
                              [In percent]
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                                                   Volume
                                     Budgeted      growth
     Check product or service          1999       through     Estimated
                                      growth      October    1999 growth
                                                    1999
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Total Forward Collected..........          1.4          3.0          3.9
    Forward-processed............          3.1          4.6          5.5
    Fine Sort....................         -9.5         -6.0         -9.0
Returns..........................          2.2         -1.9         -9.7
------------------------------------------------------------------------

    The Board considers the Reserve Banks' 1999 volume estimates for 
forward-processed items to be slightly optimistic given current trends. 
Because of the current volume growth rates and the apparent effects of 
midyear price increases on these product lines, the Board also expects 
a much less dramatic reduction in fine sort and return volumes for the 
full year than that in the Reserve Banks' estimate. The Board believes 
cost recovery for the full year will likely remain closer to its 
current level of 102.4 percent than to the 101.5 percent estimated by 
the Reserve Banks.
    The Reserve Banks also have seen steadily increasing demand for 
some electronic check products. Electronic check presentment (ECP) and 
check image products have seen approximately 15 percent and 36 percent 
growth rates, respectively, in 1999. Reserve Banks now provide paying 
banks with electronic check data or images for approximately 32 percent 
of Reserve Bank-collected checks, or about 4.5 billion items, up from 
about 27 percent of all Reserve Bank-collected checks in 1998. Growth 
and penetration rates for electronic check products are summarized in 
table 6.

                         Table 6.--Electronic Check Product Penetration and Growth Rates
                                    [Versus net checks collected, in percent]
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                                                                    Penetration   Year-over-year
                                                                   rate through   growth through  Estimated 1999
                                                                   October 1999    October 1999       growth
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Electronic Check Presentment....................................            18.7            15.3             5.2
    Truncation..................................................             4.9            22.3            25.4
    Non-truncation..............................................            13.8            13.0            -1.5
Electronic Check Information....................................             8.0            -3.4           -15.6
Images..........................................................             5.0            36.2            31.9
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    The Reserve Banks' growth estimates for 1999 appear to 
underestimate the growth rates for all electronic check products, 
except ECP with truncation, when compared with the year-to-date growth 
rates. The primary reason for this difference appears to be the Reserve 
Banks' expectation that the current freeze on adding new customers 
during the months surrounding the century rollover will have a 
significant effect on volume growth. The Board does not agree with this 
conclusion and believes that volume growth from current customers will 
enable the Reserve Banks to sustain growth rates for the full year 
similar to those seen through October.
3. 2000 Pricing
    For the coming year, the Reserve Banks have developed national 
product and pricing strategies and committed to major infrastructure 
investments to improve check services, reduce costs, and respond to 
structural changes, such as mergers and bank operations consolidation, 
that are occurring in the financial services industry. To serve a 
growing number of national and interregional customers while still 
providing flexible and quality service to meet the needs of local 
customers, the Reserve Banks are establishing a series of national 
product lines and prices. In 2000, standard national products and price 
ranges for payor bank services are being initiated.7 The 
Reserve Banks expect to establish similar standard products and price 
ranges for paper check products in the future.
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    \7\ These services include electronic information, electronic 
check presentment, truncation, image products, large dollar return 
notifications, and other services.
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    The Reserve Banks also have several major automation initiatives 
that will affect 2000 expenses, including a critical effort to 
standardize check processing platforms and software, a national effort 
to standardize check adjustments software, and several check imaging 
projects. These automation initiatives are expected to reduce costs and 
improve service over the long term. For example, the Reserve Banks 
expect pilot image projects in Montana and Utica, N.Y., to identify 
operational, legal, and customer service benefits and drawbacks 
associated with using images and electronic information instead of 
physical items for processing and collecting checks.

[[Page 470]]

    In 2000, the total forward check collection volume (processed and 
fine sort) is projected to increase 3.0 percent, reflecting a projected 
increase of 3.5 percent in processed volume and a decrease of 1.9 
percent in fine sort volume. Returned check volume is projected to 
decrease by half a percent. With respect to payor bank services, 
volumes for electronic check presentment with paper checks subsequently 
delivered, electronic presentment of truncated checks, and check 
imaging are expected to grow 17.2 percent, 12.0 percent, and 50.3 
percent, respectively. Electronic check information volume is expected 
to decline 4.2 percent as volume continues to shift to electronic check 
presentment products.
    In response to the rising costs associated with large 
infrastructure investments and short-term operational inefficiencies 
stemming from recent, unanticipated volume increases, the Reserve Banks 
have modified their pricing strategies to focus upon improving the 
check service's net revenue position. To that end, the Reserve Banks 
are establishing more substantial and widespread fee and pricing 
structure changes in 2000. Table 7 provides details on the 2000 price 
changes.8
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    \8\ Table 7 shows volume-weighted calculations for 2000 based on 
a comparison of January 1, 1999, or current transaction fees with 
the 2000 fees for check products weighted by the 2000 volumes for 
those services. These volume-weighted calculations summarize changes 
in specific check product transaction fees while an aggregate price 
index would include the all-in cost to a customer of purchasing a 
market basket of Federal Reserve check products. The market basket 
would include, for example, the effect of changing transaction fees, 
electronic connection fees, and imputed income.

                      Table 7.--2000 Price Changes
                            [Percent change]
------------------------------------------------------------------------
                                                  2000 vs.     2000 vs.
                   Products                      January 1,    current
                                                 1999 fees    1999 fees
------------------------------------------------------------------------
Total Paper Products..........................          7.1          3.3
    Forward-processed.........................          7.2          3.5
    Fine Sort.................................          8.9          4.4
    Returns...................................          6.5          2.1
Payor Bank Services...........................         14.8         11.0
Electronic Check Presentment..................          2.6         -1.4
------------------------------------------------------------------------

    The Reserve Banks will increase fees for paper-based check products 
on a volume-weighted basis 7.1 percent compared with fees at the 
beginning of 1999 (3.3 percent compared with current prices). The 
substantial increase in paper check prices in 2000 result from (a) The 
initiation of several major projects requiring significant 
infrastructure investments; (b) Short-term operational inefficiencies 
within the Reserve Banks' check processing operations as a result of 
significant volume increases, shifts in the quality and product mix of 
items being processed, and local market labor constraints; and (c) A 
revised private sector adjustment factor (PSAF) method. There are no 
planned changes to Check Relay's consolidated shipment surcharges in 
2000.
    Prices for payor bank services will increase 14.8 percent in 2000 
compared with fees at the beginning of 1999 (11.0 percent compared with 
current fees) as standard national pricing ranges and product 
structures and definitions are introduced. Instead of bundled services 
with a daily minimum fee plus a per-item fee, the new structure 
includes national, unbundled products with fixed and per-item fee 
components. For example, customers formerly purchasing a bundled check 
image product with a single daily minimum and per-item fee will be 
charged the sum of the individual fixed fees for each part of the 
unbundled service, such as image capture, retrieval, and archiving, and 
the individual per-item fees for those services. Under this new 
structure, fixed fees will generally tend to decrease in 2000 compared 
with 1999 price levels, while most per-item fees will increase. These 
changes are part of a longer-term strategy to enhance payor bank 
services' net revenue contribution to the check service.
    The Board supports the Reserve Banks' new focus on improving net 
revenue in the check service through price increases on highly demanded 
forward check products. The Board also supports the Reserve Banks' 
continuing efforts to standardize and unbundle payor bank services and 
to continue this effort with forward and return products in the future. 
Table 8 summarizes ranges of key check fees for 2000.

[[Page 471]]



                                          Table 8.--Selected Check Fees
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               Products                          1999 price ranges                    2000 price ranges
----------------------------------------------------------------------------------------------------------------
Items:                                                          (per item)                           (per item)
Forward-processed
    City..............................                     $0.004 to 0.081                      $0.004 to 0.079
    RCPC..............................                     $0.004 to 0.180                      $0.003 to 0.200
Fine Sort
    City..............................                     $0.004 to 0.015                      $0.004 to 0.017
    RCPC..............................                    $0.0025 to 0.018                      $0.003 to 0.018
Qualified returned checks
    City..............................                       $0.17 to 1.11                        $0.17 to 1.15
    RCPC..............................                       $0.21 to 1.75                        $0.21 to 1.50
Raw returned checks
    City..............................                       $1.00 to 5.50                        $1.00 to 5.50
    RCPC..............................                       $1.00 to 5.50                        $1.00 to 5.50
Cash letters:                                            (per cash letter)                    (per cash letter)
    Forward-processed.................                       $1.75 to 9.25                       $1.75 to 10.25
    Forward fine sort.................                      $3.00 to 14.00                       $3.00 to 14.00
Returned checks: raw/qualified........                      $1.75 to 14.00                       $1.75 to 14.00
Payor bank services:                                (min.)      (per item)              (Fixed)      (per item)
    MICR information..................             $5-$30    $0.001-0.0060             $2-$15    $0.0013-0.0060
    Electronic presentment............             $3-$14    $0.001-0.0045             $2-$11    $0.0010-0.0120
    Truncation........................             $3-$25    $0.004-0.0170             $2-$10    $0.0060-0.0200
    Image.............................  ...................................            $2-$15    $0.0010-0.0200
----------------------------------------------------------------------------------------------------------------

    For 2000, the Reserve Banks project that the check service will 
recover 98.7 percent of total costs, including imputed expenses, costs 
associated with the check automation standardization special project, 
and targeted ROE. The check service is projected to have expenses 
totaling $697.6 million and a targeted ROE of $80.8 million. Total 
expenses, including targeted ROE, are projected to increase 
approximately $79.3 million, or 11.4 percent, from estimated 1999 
expenses. These incremental expenses for 2000 include $35.2 million 
additional ROE, $29.6 million for automation initiatives, and $14.5 
million for other expenses, such as recruitment and retention of staff 
and new equipment purchases to process increasing check volumes.
    Total expenses for 2000 include approximately $81.5 million for 
check automation initiatives (check standardization, check image 
projects, and check adjustments standardization), an increase of $29.6 
million or 56.9 percent over 1999 estimated expenses for those same 
projects. Of that total in 2000, approximately $34 million is budgeted 
for standardizing check processing platforms and software, of which 
$13.2 million in priced services costs has been budgeted as a special 
project. Excluding these automation initiatives and the imputed tax 
effect, total expenses in 2000 would increase $14.5 million or 2.4 
percent ($23.6 million or 3.8 percent when the resulting tax effect is 
imputed) versus $44.1 million or 6.8 percent with the automation 
initiatives.
    The check service is projected to have revenue in 2000 totaling 
$768.0 million from forward collection and return item processing (75.6 
percent), payor bank services (12.2 percent), and other operating and 
imputed revenues (12.2 percent). Total revenue is expected to increase 
approximately $59.1 million, or 8.3 percent, in 2000, as a result of 
increased forward check-collection revenue ($30.2 million), returned 
check revenue ($6.6 million), payor bank services revenue ($17.6 
million), and other operating and imputed revenues ($4.7 million).
    Two important risks to the Reserve Banks' ability to realize their 
cost recovery projections lies in meeting float, volume, and national 
cost targets and in retaining customers and revenue during a period of 
substantial price increases. Risks regarding the costs of check 
automation initiatives and operational risks may also materially affect 
the check service's cost recovery in 2000.
    External challenges that may affect the Reserve Banks' volumes and 
cost recovery include interstate branch banking and the level of 
continued competition in the interbank check collection market. 
Although interstate branch banking may eventually reduce the size of 
the interbank check collection market, Reserve Bank check collection 
volumes may increase in 2000 as banks face merger-related operational 
challenges, exit the correspondent check-clearing business, or 
outsource their check-processing operations. In addition to increased 
volumes, some Reserve Banks face a changing mix and quality of 
processed items that are more costly to process and more complex to 
price. Many Reserve Banks also face tight local labor markets that have 
made it increasingly difficult to recruit and retain employees, 
creating pressures on operational costs, productivity, and quality. To 
help address these labor-related concerns, the Reserve Banks are 
identifying and implementing appropriate human resources strategies and 
programs.
    The Board believes that projected 2000 volume increases for paper-
based products are reasonable compared with current volume growth rates 
and the potential negative effect of next year's planned price 
increases. The Board views the Reserve Banks' projection of 
substantially increased volumes and revenue for payor bank services to 
be optimistic given the implementation of a new standardized product 
structure and its accompanying pricing structure. It also is not clear 
whether, as the Reserve Banks believe, customers will begin to move 
aggressively to electronics following the century rollover.
    Should the Reserve Banks gain higher-than-projected processing 
volumes, short-term operational costs associated with adjusting to 
those new levels may rise faster than their associated revenues. In 
that case or if the Reserve Banks are unable to manage their internal 
costs or achieve expected revenue levels, they may have to consider 
further price increases during the year. The Reserve Banks, however, 
may have limited opportunities for further price increases during 2000,

[[Page 472]]

given the delayed effective date of April 3 for implementing the 2000 
price and price structure changes.
    To address this concern, the Reserve Banks are working to improve 
their market intelligence capabilities and operational efficiency to 
minimize any adverse effects of unexpected volume increases. The 
Reserve Banks are also examining other areas for improving net revenue 
to address any unanticipated volumes or other exigencies during the 
coming year. The Board supports the Reserve Banks' 2000 pricing while 
underlining the need for continual vigilance to effectively manage the 
check service and to address quickly any unanticipated complications 
that may arise during the year.

D. Automated Clearinghouse (ACH)

    Table 9 presents the actual 1998, estimated 1999, and projected 
2000 cost recovery performance for the commercial ACH service.

                                                  Table 9.--ACH Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Special
                                                                Operating     Special                                             Recovery     project
                                                                costs and     project       Total      Net income                rate after     costs
                      Year                          Revenue      imputed       costs       expense     (ROE)  [1-   Target ROE   target ROE    deferred
                                                                 expenses    recovered      [2+3]          4]                    [1/(4+6)]       and
                                                                                                                                               financed
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998............................................         68.4         52.2          8.2         60.4          8.0          4.0       106.3%          0.0
1999 (Est)......................................         68.6         56.4          0.0         56.4         12.2          4.5       112.6%          0.0
2000 (Bud)......................................         70.4         62.5          0.0         62.5          8.0          8.0       100.0%          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance
    The ACH service recovered 106.3 percent of total expenses, 
including imputed expenses, automation consolidation special project 
costs, and targeted ROE, in 1998. Commercial ACH volume in 1998 was 
13.9 percent higher than 1997 volume, less than the 15.4 percent 
increase originally projected. The lower-than-expected volume level 
resulted from consolidation within the industry.
2. 1999 Performance
    Through October 1999, the ACH service recovered 112.1 percent of 
total expenses, including imputed expenses and targeted ROE. For the 
full year, Reserve Banks estimate that the service will recover 112.6 
percent of total expenses compared with the targeted 1999 recovery rate 
of 104.5 percent. The estimated overrecovery is due to higher revenues 
($3.2 million), primarily because possible changes in the pricing 
structure for products offered to private sector operators were not 
implemented this year, and due to a reduction in support costs of $2.9 
million. During the year, ACH lowered all origination fees an 
additional $0.0005.
    Through October 1999, commercial ACH volume has increased 12.7 
percent over the same period in 1998. For the full year, Reserve Banks 
expect commercial volume to increase 12.7 percent, compared with the 
12.0 percent increase originally projected for 1999.
3. 2000 Pricing
    After several years of significant price reductions, Reserve Banks 
will make further price reductions effective April 3, 2000, in the fees 
for originated ACH items (see table 10). The Reserve Banks will reduce 
the fee for items originated in small and large files by one mill, 
generating $3.0 million in aggregate savings to depository institutions 
next year at projected 2000 volumes. (Including the reductions for 
2000, the price index for ACH items has decreased 46 percent since 
1996.) These price decreases support the System's strategic direction 
to encourage the migration from a paper-based to a more electronic 
payments system and are possible because of ongoing scale efficiencies 
of centralized ACH processing.

                      Table 10.--2000 Price Changes
------------------------------------------------------------------------
            Fee category \9\                Current fee      2000 fee
------------------------------------------------------------------------
Item originated in small file...........         $0.0065         $0.0055
Item originated in large file...........          0.0055          0.0045
------------------------------------------------------------------------
\9\ Small files contain fewer than 2,500 items; large files contain
  2,500 items or more.

    The Reserve Banks project that the ACH service will recover 100.0 
percent of its costs in 2000, including imputed expenses and targeted 
ROE. Total expenses are projected to increase $6.1 million, or 10.8 
percent, from the 1999 estimate due to increased joint priced corporate 
overhead and higher funding for ACH promotion and education programs. 
Total revenue in 2000 is projected to be $70.4 million, or 2.7 percent 
higher than the 1999 estimate. The higher revenue is attributable to 
projected commercial volume growth but also includes a placeholder 
revenue reduction for possible price and price structure changes 
associated with resolution of the outstanding issues related to 
transactions involving private-sector operators.
    A risk to the 2000 revenue and cost projections lies in the 
uncertain effect of potential changes in price and service levels for 
ACH volume received from or sent to private sector ACH operators. The 
Board requested comment on potential changes to the Reserve Banks' ACH 
prices and service level practices with regard to private sector ACH 
operators (64 FR 27793, May 21, 1999). The Board is evaluating comments 
on the benefits and drawbacks of modifying the Reserve Banks' pricing 
practices and deposit deadlines for ACH transactions that they exchange 
with private sector ACH providers.

[[Page 473]]

    ACH volume in 2000 is projected to increase 13.9 percent over 1999 
estimates. The 2000 volume estimate assumes the same rate of growth as 
in 1998 and is higher than the 1999 estimate of 12.7 percent. The Board 
believes that given the overall anticipated growth rate in the ACH 
industry and the uncertain effects of potential changes in price and 
service levels that may affect ACH operators and their customers, the 
projected 2000 volumes are reasonable.

E. Funds Transfer and Net Settlement

    Table 11 presents the actual 1998, estimated 1999, and projected 
2000 cost recovery performance for the funds transfer and net 
settlement services.

                                   Table 11.--Funds Transfer and Net Settlement Pro Forma Cost and Revenue Performance
                                                                       [$millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Special
                                                                Operating     Special                                             Recovery     project
                                                                costs and     project       Total      Net income                rate after     costs
                      Year                          Revenue      imputed       costs       expense    (ROE) [1-4]   Target ROE   target ROE    deferred
                                                                 expenses    recovered      [2+3]                                [1/(4+6)]       and
                                                                                                                                 (percent)     financed
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998............................................         94.5         79.4          0.2         79.6         14.9          6.2        110.2          0.0
1999 (Est)......................................         70.7         61.9          0.0         61.9          8.9          5.2        105.5          0.0
2000 (Bud)......................................         66.0         58.2          0.0         58.2          7.8          7.5        100.5          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance
    For 1998, the funds transfer and net settlement services recovered 
110.2 percent of total expenses, including imputed expenses, automation 
consolidation special project costs, and targeted ROE, compared with a 
targeted recovery rate of 102.8 percent. Service revenue for 1998 was 
approximately $5.9 million, or 6.7 percent, greater than original 
budget projections due to higher-than-expected transaction volume. 
Funds transfer on-line origination volume increased 9.6 percent over 
the 1997 level, compared with expected near-zero growth.
2. 1999 Performance
    Through October 1999, the funds transfer and net settlement 
services recovered 103.8 percent of total expenses, including imputed 
expenses and targeted ROE. For full-year 1999, the Reserve Banks 
estimate that the funds transfer and net settlement services will 
recover 105.5 percent of total expenses, compared with a targeted 
recovery rate of 102.0 percent. The higher-than-budgeted recovery rate 
is attributable to cost reductions of $2.6 million, or 3.7 percent, 
primarily in the areas of support, overhead, and personnel. In 
particular, the Reserve Banks achieved cost reductions of $1.1 million 
in 1999 from the consolidation of their off-line processing functions 
to the Federal Reserve Banks of Boston and Kansas City.
    On-line funds transfer volume through October 1999 has increased 
4.4 percent relative to the same period in 1998. For the full year, the 
Reserve Banks expect on-line volume to increase 5.4 percent from the 
1998 level, more than the originally budgeted 3.5 percent growth rate. 
In the first year of the tiered price structure for the Fedwire funds 
transfer service, there was a greater percentage of total volume in the 
high-volume, low-price tier than the Reserve Banks had anticipated. The 
Reserve Banks project that the movement of volume to the low-price tier 
may be even more pronounced in 2000.
3. 2000 Funds Transfer Pricing
    The Reserve Banks will reduce the per-transfer fees charged within 
all three volume categories and maintaining the current thresholds for 
volume-based discounts. The Reserve Banks will offer the following per-
transfer prices for 2000:

[[Page 474]]



                                Table 12
------------------------------------------------------------------------
             Volume category                Current fee       2000 fee
------------------------------------------------------------------------
First 2,500 transfers per month.........           $0.34           $0.33
Additional transactions up to 80,000 per            0.27            0.24
 month..................................
Additional transactions over 80,000 per             0.21            0.17
 month..................................
Average (volume-weighted) price paid               0.262          0.231
 \10\...................................
------------------------------------------------------------------------
\10\ Based on 1999 estimated and 2000 projected volume distributions
  across depository institution customers.

    In addition, the Reserve Banks will increase the off-line surcharge 
from $13 to $15 to reflect more accurately the cost of processing an 
off-line funds transfer.
    Reserve Banks project that the Fedwire funds transfer service will 
recover 100.5 percent of total expenses, including imputed expenses and 
targeted ROE, in 2000. Total costs are expected to decline $3.7 
million, or 6.0 percent, from the 1999 estimate, due in part to a 
decrease in total operating costs and a reduction in corporate overhead 
costs.
    On-line funds transfer volume is expected to increase 6.0 percent 
over 1999 estimated levels. Despite this anticipated volume growth, 
service revenue is projected to decline $4.7 million, or 6.6 percent, 
in 2000 compared with the 1999 estimate because of the lower transfer 
fees.
4. 2000 Net Settlement Pricing
    The Reserve Banks will retain the net settlement per-entry and file 
fees at their current levels and increase the off-line settlement 
surcharge from $13 to $15 per transaction to reflect more accurately 
the costs of off-line processing. Fees for the Fedwire-based settlement 
service will remain unchanged for 2000.11
---------------------------------------------------------------------------

    \11\ Participants in arrangements and settlement agents are also 
charged the applicable Fedwire funds transaction fee for each 
transfer into and out of the settlement account.
---------------------------------------------------------------------------

    In March 1999, the Reserve Banks implemented an enhanced net 
settlement service that allows participants in settlement arrangements 
to submit settlement files to them via a computer interface connection 
or a Fedline terminal. The Reserve Banks continue to offer the current 
``settlement sheet'' and Fedwire-based settlement 
services.12 The settlement sheet service, however, will be 
phased out, and all participating arrangements will need to migrate to 
the enhanced service by year-end 2001. Overall use of the net 
settlement services is not projected to change significantly in 2000.
---------------------------------------------------------------------------

    \12\ 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.
---------------------------------------------------------------------------

F. Book-Entry Securities 13

    Table 13 presents the actual 1998, estimated 1999, and projected 
2000 cost recovery performance for the book-entry securities 
service.14

                                    Table 13.--Book Entry Securities Transfer Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Special
                                                                Operating     Special                                             Recovery     project
                                                                costs and     project       Total      Net income                rate after     costs
                      Year                          Revenue      imputed       costs       expense    (ROE) [1-4]   Target ROE   target ROE    deferred
                                                                 expenses    recovered      [2+3]                                [1/(4+6)]       and
                                                                                                                                               financed
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998............................................         18.8         14.8          1.6         16.4          2.4          1.0       107.8%          1.6
1999 (Est)......................................         17.4         13.3          1.7         15.0          2.3          1.0       108.1%          0.0
2000 (Bud)......................................         17.0         14.9          0.0         14.9          2.1          1.9       101.2%          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance
    The book-entry securities service recovered 107.8 percent of total 
expenses in 1998, including imputed expenses, automation consolidation 
special project costs budgeted for recovery, and targeted ROE. On-line 
origination volume increased 24.6 percent from the 1997 level, compared 
with an expected decrease of 4.5 percent, due mainly to an 
exceptionally high level of repackaging and new issuance of mortgage-
backed securities.
2. 1999 Performance
    Through October 1999, the book-entry securities service recovered 
107.0 percent of total expenses, including imputed expenses, automation 
consolidation special project costs, and targeted ROE. For full-year 
1999, the Reserve Banks estimate that the book-entry securities service 
will recover 108.1 percent of total costs compared with a targeted 
recovery rate of 105.2 percent. This higher-than-budget recovery rate 
comprises revenue that is 4.3 percent above budget and expense growth 
that is 1.5 percent above budget. The Reserve Banks expect revenue to 
be higher than projected due to higher-than-anticipated on-line 
transaction and monthly maintenance revenue. Costs are expected to be 
higher than budgeted because the level of government agency securities 
transfers as a percentage of total book-entry securities transfers 
processed by the Reserve Banks was higher than anticipated. This 
resulted in a higher-than-expected allocation of costs to the priced 
portion of the book-entry securities service.
    Book-entry securities transfer on-line origination volume has 
increased 5.5 percent through October 1999 compared with the same 
period in 1998 because of continued growth in the level of repackaging 
and new issuance of mortgage-backed securities. The Reserve Banks 
expect this growth rate to level off substantially, however, reducing 
the full-year growth rate to 2.8 percent, compared with the projected 
6.1 percent volume decline originally forecast at the beginning of the 
year.
    In March 1999, the Reserve Banks completed the consolidation of 
their off-

[[Page 475]]

line processing functions to the Federal Reserve Banks of Boston and 
Kansas City. Thus far, the consolidation of these functions has reduced 
costs approximately $1.6 million.
3. 2000 Pricing
    The Reserve Banks will reduce the on-line transfer fee to $0.70 on 
each side of the transaction from the current $0.85 per side to better 
reflect the costs of processing on-line transfers of securities. This 
17.6 percent decrease in the fee builds upon last year's 24.4 percent 
fee decrease; combined, these price decreases will make the 2000 fee 
for a book-entry securities transfer 37.8 percent lower than the 1998 
fee.
    The Reserve Banks also will increase the off-line surcharge to $18 
from $13 to better reflect the costs of providing the off-line service 
for book-entry securities. Other fees related to book-entry securities 
will remain the same.
    The purchase and sale service represents less than 2 percent of the 
costs and revenues of the book-entry securities service line. Provision 
of the service, which facilitates the purchase and sale of Treasury and 
government agency securities by depository institutions on the 
secondary market, is consolidated at the Federal Reserve Bank of 
Chicago. The Reserve Banks will maintain the $40 transaction fee for 
securities purchases and sales.
    The Reserve Banks project that the book-entry securities service 
will recover 101.2 percent of costs in 2000, including imputed expenses 
and targeted ROE. Total expenses are projected to decrease $0.1 
million, or 0.7 percent, from the 1999 estimate.

G. Noncash Collection

    Table 14 lists the actual 1998, estimated 1999, and projected 2000 
cost recovery performance for the noncash collection service.
---------------------------------------------------------------------------

    \13\ Includes purchase and sale activity. All volume comparisons 
prior to 1999 consist of on-line origination volume only, as the 
Reserve Banks did not charge a fee for the on-line receipt of a 
transfer until then.
    \14\ The Reserve Banks provide securities transfer services for 
securities issued by the U.S. Treasury Department, federal 
government agencies, government-sponsored enterprises, and certain 
international institutions. The priced component of this service, 
reflected in this memorandum, consists of 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 United States on behalf of 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.

                                          Table 14.--Noncash Collection Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Special
                                                                Operating     Special                                             Recovery     project
                                                                costs and     project       Total      Net income                rate after     costs
                      Year                          Revenue      imputed       costs       expense     (ROE)  [1-   Target ROE   target ROE    deferred
                                                                 expenses    recovered      [2+3]          4]                    [1/(4+6)]       and
                                                                                                                                 (percent)     financed
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998............................................          3.6          2.6          0.0          2.6          1.0          0.2        130.9          0.0
1999 (Est)......................................          3.0          2.0          0.0          2.0          1.0          0.1        140.2          0.0
2000 (Bud)......................................          2.0          1.7          0.0          1.7          0.3          0.2        107.6          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance
    The noncash collection service recovered 130.9 percent of total 
expenses in 1998 (including imputed expenses and targeted ROE) compared 
with a target recovery rate of 126.8 percent. Volume for 1998 decreased 
14.8 percent from 1997 volumes. This is smaller than the budgeted 19.7 
percent reduction.
2. 1999 Performance
    Through October 1999, the noncash collection service recovered 
141.2 percent of its costs. For full-year 1999, the Reserve Banks 
estimate that the noncash collection service will recover 140.2 percent 
of costs, including imputed expenses and targeted ROE, compared with 
the projected recovery rate of 118.6 percent. The higher recovery rate 
is attributable to higher-than-expected revenue from additional called-
bond activity and higher-than-budgeted coupon volume. Through October, 
volume had decreased 21.7 percent compared with the same period in 
1998. The Reserve Banks estimate that full-year 1999 volume will 
decline 21.4 percent from 1998 levels compared with a 26.0 percent 
budgeted decline.
3. 2000 Pricing
    The Reserve Banks will reduce two fees relative to 1999 fee levels. 
Specifically, the Reserve Banks will decrease the fee for bond 
collections from $50.00 per bond to $40.00 per bond and the per-
envelope fee for deposits containing six to fifty coupon envelopes from 
$3.00 to $2.50. Even with these decreases, the Reserve Banks project 
that the noncash collection service will recover 108.4 percent of total 
costs, including imputed expenses and targeted ROE, in 2000. Total 
expenses are projected to decline approximately $0.3 million, or 13.3 
percent, in 2000, due to a projected volume decline of 29.3 percent. 
Total revenues are projected to decline approximately $1.0 million, or 
33 percent, because of the projected volume decline and the fee 
reductions. Volume declines will continue as the number of 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.

H. Special Cash

    Table 15 presents the actual 1998, estimated 1999, and projected 
2000 cost recovery performance for the special cash service.

[[Page 476]]



                                             Table 15.--Special Cash Pro Forma Cost and Revenue Performance
                                                                      [$ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Special
                                                                Operating     Special                                             Recovery     project
                                                                costs and     project       Total      Net income                rate after     costs
                      Year                          Revenue      imputed       costs       expense     (ROE)  [1-   Target ROE   target ROE    deferred
                                                                 expenses    recovered      [2+3]          4]                    [1/(4+6)]       and
                                                                                                                                 (percent)     financed
                                                            1            2            3            4            5            6            7            8
--------------------------------------------------------------------------------------------------------------------------------------------------------
1998............................................          2.7          2.5          0.0          2.5          0.1          0.1        102.9          0.0
1999 (Est)......................................          2.9          2.6          0.0          2.6          0.2          0.0        106.2          0.0
2000 (Bud)......................................          2.1          2.0          0.0          2.0          0.1          0.1        101.8          0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Priced special cash services represent a very small portion (less 
than one percent) of overall cash services provided by the Reserve 
Banks to depository institutions. Special cash services include wrapped 
coin, packaging of nonstandard currency orders and deposits as well as 
coin deposits, and registered mail shipments of currency and coin.
1. 1998 Performance
    In 1998, the special cash service recovered 102.9 percent of total 
expenses (including imputed expenses and targeted ROE) compared with a 
targeted recovery rate of 103.1 percent. In May 1998, the uniform cash 
access policy was implemented. Due to the governmental nature of this 
function, the costs and revenue associated with nonstandard access are 
now treated as a nonpriced service.
2. 1999 Performance
    Through October 1999, the special cash service recovered 103.6 
percent of total expenses, including imputed expenses and targeted ROE. 
For full-year 1999, the Reserve Banks estimate that the special cash 
service will recover 106.2 percent of total expenses, compared with a 
targeted recovery rate of 105.8 percent. Revenue in 1999 is estimated 
to increase approximately $.2 million, or 7.4 percent from 1998 levels, 
due mainly to stronger-than-anticipated volume in coin-wrapping in the 
Helena office and the entrance of the Chicago office in the business of 
nonstandard packaging of currency orders and deposits.
3. 2000 Pricing
    For 2000, the Reserve Banks project that the special cash service 
will recover 101.8 percent of costs, including imputed expenses and 
targeted ROE. Total costs in 2000 are projected to decline $.6 million, 
or 21.6 percent, from the 1999 level. Revenue in 2000 is expected to 
decline $.8 million, or 27.6 percent, from the 1999 level.
    The Fourth District's decision to exit the coin-wrapping business 
in April 2000 is the primary factor in both the overall anticipated 
revenue reduction and cost reduction for the year. With Cleveland's 
departure from coin wrapping, registered mail is likely to constitute 
approximately 65 percent of special cash revenue.
    The Helena office will reduce the fee per box of wrapped coin from 
$2.50 to $2.25, and the nonstandard packaging fee per coin bag 
deposited from $3.00 to $2.00.
    Changes to surcharges for registered mail shipments of currency 
reflect a System effort to standardize the method for pricing this 
product. To that end, the El Paso office will reduce the registered 
mail surcharge from $80.00 to $31.00, while the Helena office will 
increase the surcharge from $8.50 to $14.00, and the Tenth District 
will increase the surcharge for all offices from $12.00 to $13.00. The 
San Antonio office discontinued registered mail service in April 1999.

II. Private Sector Adjustment Factor

A. Overview

    As required by the Monetary Control Act, the Reserve Bank'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 method 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.

B. Discussion

    The PSAF for 2000 of $192.6 million represents an increase of $76.8 
million, or 66 percent, from the PSAF of $115.8 million for 1999. The 
large increase in the PSAF for 2000 is due mainly to recognition of the 
effect of including pension assets and postretirement/postemployment 
benefit liabilities in the PSAF balance sheet and, therefore, in the 
computation of imputed asset financing costs and return on equity 
inherent in the PSAF. Estimates of the priced pension credit were 
included in pricing decisions beginning in 1993 when accounting 
standards were implemented to recognize postretirement benefit expenses 
based on actuarial estimates. Results of actual pension credits and 
other benefit costs have been included in published pro forma financial 
statements for the priced services since the inception of the related 
accounting requirements for pension plans in 1987. The same pension 
asset and postretirement/postemployment liability have not previously 
been reflected in balance sheet accounts for PSAF calculation purposes 
since the pension asset is self-financed through actual income 
generated by the plan's assets, not through imputed long-term debt and 
equity factors inherent in the PSAF. 15 The same cumulative 
effect of income and expenses from pension and other benefits 
accounting procedures is,

[[Page 477]]

however, included in the balance sheets of bank holding companies 
(BHCs) used to compute financing rates and return on equity rates 
applied to Reserve Bank assets to be financed for the 2000 PSAF. These 
items should be included in the Federal Reserve's PSAF calculation. 
Including the net cumulative effect of these items in the PSAF would 
add $60.5 million of additional imputed costs to the 2000 PSAF. Had 
this net cumulative asset been included historically in PSAF 
calculations, the ten-year cost recovery amount for 1989-1998 would 
have been 99.9 percent rather than the 100.7 percent originally 
calculated. In the future, cost recovery percentages that incorporate 
these additional financing costs for each rolling ten-year period will 
be cited.
---------------------------------------------------------------------------

    \15\ In addition, contributions to fund the Federal Reserve's 
retirement plan were recognized in expenses when paid and subject to 
recovery through explicit fees or other recovery methods in those 
years.
---------------------------------------------------------------------------

1. Asset Base
    The total estimated value of Federal Reserve assets to be used in 
providing priced services in 2000 is reflected in table 16. Table 17 
shows that the assets assumed to be financed through debt and equity 
are projected to total $1,116.5 million. This represents a net increase 
of $465.1 million, or 71.4 percent, from 1999 assets of $651.4 million, 
as shown in table 17. More than three quarters of this increase results 
from including net pension assets (prepaid costs less postretirement/ 
postemployment liabilities) of $361.5 million in priced assets to be 
financed through the PSAF, with building projects in two Districts and 
check standardization and imaging initiatives accounting for the 
remaining increase.
2. Cost of Capital, Taxes, and Other Imputed Costs
    Table 17 also shows the financing and tax rates and the other 
required PSAF recoveries for 2000 and compares the 2000 rates with the 
rates used for developing the PSAF for 1999. The pretax return on 
equity rate decreased slightly from 23.5 percent for 1999 to 23.3 
percent for 2000. The decrease is a result of lower 1998 BHC financial 
performance included in the 2000 BHC model relative to the 1993 BHC 
financial performance used in the 1999 BHC model.
3. Capital Adequacy
    As shown in table 18, the amount of capital imputed for the 2000 
PSAF totals 30.0 percent of risk-weighted assets and 4.82 percent of 
total assets. The capital to risk-weighted asset ratio and the capital 
to total assets ratio exceed regulatory guidelines for adequately 
capitalized institutions and the BHCs.

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.'' 16 
Under this policy, Board assesses whether the 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 Board 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.
---------------------------------------------------------------------------

    \16\  FRRS 7-145.2.
---------------------------------------------------------------------------

    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 similar to that earned on average by large 
bank holding companies during the past five years. Moreover, the 
recommended 2000 fee schedules will enable the Reserve Banks to 
continue to recover all actual and imputed costs of providing priced 
services over the long run. The Board, however, is evaluating changes 
to certain price and service levels that affect private-sector ACH 
operators and their customers to determine whether such changes may 
better promote competition within the market for ACH services (64 FR 
27793, May 21, 1999).

[[Page 478]]



  Table 16.--Comparison of Pro Forma Balance Sheets for Federal Reserve
                             Priced Services
                 [millions of dollars--average for year]
------------------------------------------------------------------------
                                               2000            1999
------------------------------------------------------------------------
Short-term assets:
    Imputed reserve requirement on                $762.2          $757.7
     clearing balances..................
    Investment in marketable securities.         6,859.5         6,819.6
    Receivables \17\....................            74.2            69.1
    Materials and supplies \17\.........             3.4             4.1
    Prepaid expenses \17\...............            21.4            20.2
    Items in process of collection......         3,804.2         3,470.7
                                         -------------------------------
        Total short-term assets.........        11,524.9        11,141.4
Long-term assets:
    Premises \17\ \18\..................           411.7           386.6
    Furniture and equipment 17..........           180.1           150.3
    Leasehold improvements and long-term            64.2            21.1
     prepayments 17.....................
    Prepaid Pension Costs 17............           599.8  ..............
                                         -------------------------------
        Total long-term assets..........         1,255.8           558.1
Total assets............................       $12,780.7       $11,699.5
                                         ===============================
Short-term liabilities:
    Clearing balances and balances              $7,621.7        $7,577.3
     arising from early credit of
     uncollected items..................
    Deferred credit items...............         3,804.2         3,470.7
    Short-term debt 19..................            99.0            93.4
                                         -------------------------------
        Total short-term liabilities....        11,524.9        11,141.4
Long-term liabilities:
    Postemployment/retirement benefits             238.3  ..............
     17.................................
    Long-term debt 19...................           400.9           207.6
                                         -------------------------------
        Total long-term liabilities.....           639.2           207.6
                                         -------------------------------
Total liabilities.......................        12,164.1        11,349.0
Equity 19...............................           616.6           350.5
                                         -------------------------------
Total liabilities and equity............       $12,780.7       $11,699.5
 Note: Details may not add to totals due
              to rounding.
------------------------------------------------------------------------
\17\ Financed through PSAF; other assets are self-financing.
\18\ Includes allocations of Board of Governors' assets to priced
  services of $0.5 million for 2000 and $0.4 million for 1999.
\19\ Imputed figures represent the source of financing for certain
  priced services assets.


[[Page 479]]


                                 Table 17.--Derivation of the 2000 and 1999 PSAF
                                              [millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                              2000                                     1999
----------------------------------------------------------------------------------------------------------------
A. Assets to be financed: 20
    Short-term................                                  $99.0                                    $93.4
    Long-term 21..............                                1,017.5                                    558.1
                                                        ----------------                         ---------------
                                                             $1,116.5                                   $651.4
B. Weighted average cost:
    1. Capital Structure 22
        Short-term debt.......                                    9.0%                                    14.8%
        Long-term debt........                                   35.8%                                    31.7%
        Equity................                                   55.1%                                    53.5%
    2. Financing rates/costs
     22
        Short-term debt.......                                    5.1%                                     5.1%
        Long-term debt........                                    6.6%                                     6.6%
        Pre-tax equity 23.....                                   23.3%                                    23.5%
    3. Elements of capital
     costs:
        Short-term debt.......         $99.0  x  5.1% =          $5.0           $93.4  x  5.1% =          $4.8
        Long-term debt........         400.9  x  6.6% =          26.5           207.6  x  6.6% =          13.7
        Equity................        616.6  x  23.3% =         143.7          350.5  x  23.5% =          82.4
                                                        ----------------                         ---------------
                                                               $175.2                                   $100.8
C. Other required PSAF
 recoveries:
    Sales taxes...............                                  $10.3                                     $8.7
    Federal Deposit Insurance                                     2.9                                      2.8
     assessment...............
    Board of Governors                                            4.2                                      3.4
     expenses.................
                                                        ----------------                         ---------------
                                                                 17.4                                     14.9
                                                        ================                         ===============
D. Total PSAF recoveries:                                      $192.6                                   $115.8
                                                        ----------------                         ---------------
    As a percent of capital...                                   17.2%                                    17.8%
    As a percent of expenses                                     28.5%                                    18.2%
     24.......................
E. Tax rate...................                                   31.5%                                    32.0%
----------------------------------------------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.
\20\ Priced service asset base is based on the direct determination of assets method.
\21\ Consists of total priced long-term assets less postretirement/postemployment benefit liabilities (for 2000
  only).
\22\ All short-term assets are assumed to be financed with short-term debt. Of the total long-term assets for
  2000, 39.4% are assumed to be financed with long-term debt and 60.6% with equity.
\23\ The pre-tax rate of return on equity is based on the average after-tax rate of return on equity, adjusted
  by the effective tax rate to yield the pre-tax rate of return on equity for each bank holding company for each
  year. These data are then averaged over five years to yield the pre-tax return on equity for use in the PSAF.
\24\ Systemwide 2000 budgeted priced service expenses less shipping are $675.0 million.


[[Page 480]]


               Table 18.--Computation of 2000 Capital Adequacy for Federal Reserve Priced Services
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                      Assets      Risk  weighted  Weight  assets
----------------------------------------------------------------------------------------------------------------
Imputed reserve requirement on clearing balances................          $762.2             0.0            $0.0
Investment in marketable securities.............................         6,859.5             0.0             0.0
Receivables.....................................................            74.2             0.2            14.8
Materials and supplies..........................................             3.4             1.0             3.4
Prepaid expenses................................................            21.4             1.0            21.4
Items in process of collection..................................         3,804.2             0.2           760.8
Premises........................................................           411.7             1.0           411.7
Furniture and equipment.........................................           180.1             1.0           180.1
Leases, leasehold improvements & long-term prepayments..........            64.2             1.0            64.2
Prepaid Pension Costs...........................................           599.8             1.0           599.8
                                                                 -----------------------------------------------
    Total.......................................................       $12,780.7  ..............        $2,056.3
Imputed Equity for 2000.........................................          $616.6
Capital to Risk-Weighted Assets.................................           30.0%
Capital to Total Assets.........................................           4.82%
 
----------------------------------------------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.


[[Page 481]]

Automated Clearinghouse Fee Schedule \25\

------------------------------------------------------------------------
                                                                  Fees
------------------------------------------------------------------------
Origination (per item or record):
    Items in small files \26\................................    $0.0055
    Items in large files \27\................................    $0.0045
    Addenda record...........................................    $0.002
Receipt (per item or record):
    Item.....................................................    $0.007
    Addenda record...........................................    $0.002
Input file processing fees (per file):
    Small file...............................................    $1.75
    Large file...............................................    $6.75
Monthly fees:
    Account servicing fee (per routing number)...............   $25.00
    Information extract file.................................   $10.00
Return item/notification of change (NOC) fees \28\:
    Voice response return/NOC \29\...........................    $2.00
Nonelectronic input/output fees \30\:
    Tape input/output........................................   $25.00
    Paper output.............................................   $15.00
    Diskette output..........................................   $15.00
    Facsimile return/NOC \31\................................   $15.00
------------------------------------------------------------------------
\25\ The Reserve Banks will delay implementing the coming year's price
  and service level changes until April 3, 2000. The delay is intended
  to minimize changes during the period surrounding the century
  rollover. Current Reserve Bank prices and products will remain
  applicable through the first quarter of next year.
\26\ Small files contain fewer than 2,500 items.
\27\ Large files contain 2,500 or more items.
\28\ The Reserve Banks also assess a $15 fee for every government paper
  return/NOC they process. This service is not considered a priced
  service. The fee includes the transaction fee in addition to the
  conversion fee.
\29\ The fee includes the transaction fee in addition to the voice-
  response fee.
\30\ These services are offered in contingency situations only.
\31\ The fee includes the transaction fee in addition to the conversion
  fee.


[[Page 482]]

Funds Transfer and Net Settlement Fee Schedule \32\

------------------------------------------------------------------------
                                                             Fees
------------------------------------------------------------------------
Funds transfer:
    Volume-based pricing fees (originations and
     receipts)
        Per transfer for the first 2,500 transfers                 $0.33
         per month..................................
        Per transfer for additional transfers up to                $0.24
         80,000 per month...........................
        Per transfer for every transfer over 80,000                $0.17
         per month..................................
    Surcharge
        Off-line transfer originated................              $15.00
        Telephone notification......................              $15.00
Net settlement:
    Basic fee
        Settlement charge per entry.................               $0.95
        Settlement file charge......................              $12.00
    Surcharge
        Off-line origination per file \33\..........              $15.00
        Telephone notification per file.............              $15.00
    Minimum monthly fee.............................              $60.00
    Fedwire-based, small-dollar arrangement per                  $100.00
     settlement day \34\............................
    Fedwire-based, large-dollar arrangement per        $100.00--$175.00
     settlement day \34\............................
------------------------------------------------------------------------
\32\ The Reserve Banks will delay implementing the coming year's price
  and service level changes until April 3, 2000. The delay is intended
  to minimize changes during the period surrounding the century
  rollover. Current Reserve Bank prices and products will remain
  applicable through the first quarter of next year.
\33\ The off-line origination surcharge will be waived by Reserve Banks
  that do not provide an electronic submission capability for the
  settlement sheet service.
\34\ Participants in arrangements and settlement agents are also charged
  the applicable Fedwire funds transfer fee for each transfer into and
  out of the settlement account.


[[Page 483]]

Book-Entry Securities Fee Schedule \35\

 
------------------------------------------------------------------------
                                                                  Fees
------------------------------------------------------------------------
Book-entry securities transfer:
    Basic transfer fee:
        Transfer originated..................................      $0.70
        Transfer received....................................       0.70
        Reversal originated..................................       0.70
        Reversal received....................................       0.70
    Surcharge:
        Off-line transfer originated or received.............      18.00
        Off-line reversal originated or received.............      18.00
    Monthly maintenance fees:
        Account maintenance (per account)....................      15.00
        Issues maintained (per issue/per account)............       0.45
Purchase & sale:
    Transaction fee..........................................     40.00
------------------------------------------------------------------------
\35\ The Reserve Banks will delay implementing the coming year's price
  and service level changes until April 3, 2000. The delay is intended
  to minimize changes during the period surrounding the century
  rollover. Current Reserve Bank prices and products will remain
  applicable through the first quarter of next year.

Noncash Collection Fee Schedule \36\

------------------------------------------------------------------------
                                                                  Fees
------------------------------------------------------------------------
Coupon collection:
    Cash letters:
        With five or fewer coupon envelopes..................      $7.50
        With six to fifty coupon envelopes...................      15.00
    Coupon envelopes:
        With five or fewer coupon envelopes..................       4.75
        With six to fifty coupon envelopes...................       2.50
    Return items.............................................      15.00
Bond collection (per bond):..................................  \37\ 40.0
                                                                       0
------------------------------------------------------------------------
\36\ The Reserve Banks will delay implementing the coming year's price
  and service level changes until April 3, 2000. The delay is intended
  to minimize changes during the period surrounding the century
  rollover. Current Reserve Bank prices and products will remain
  applicable through the first quarter of next year.
\37\ Plus actual shipping costs.


[[Page 484]]

Special Cash Services Fee Schedule \38\

------------------------------------------------------------------------
                                                                  Fee
------------------------------------------------------------------------
Wrapped Coin (per box \39\)
    All Fourth District offices--Discontinued April 2000
    Helena office............................................      $2.25
Nonstandard Packaging
    All Seventh District offices (per currency order or        \40\ 12.0
     deposit)................................................          0
    Helena office (per coin bag deposited)...................       2.00
    El Paso office (Express Cash Orders).....................  \41\ 60.0
                                                                       0
------------------------------------------------------------------------
\38\ The Reserve Banks will delay implementing the coming year's price
  and service level changes until April 3, 2000. The delay is intended
  to minimize changes during the period surrounding the century
  rollover. Current Reserve Bank prices and products will remain
  applicable through the first quarter of next year.
\39\ There are fifty rolls of coin in each box.
\40\ This service only applies to the $1 through $20 denominations.
\41\ El Paso's Express Cash Order Fee applies only to orders that need
  same day preparation and delivery.

Registered Mail Fees \42\

 
                                 Surcharge        Insurance fee \43\
------------------------------------------------------------------------
    First District............       $30.00  $0.80
    Helena office \44\........        14.00  ...........................
    All Tenth District offices        13.00  0.27
    El Paso office............        31.00  0.26
    San Antonio office--
     Discontinued April 1999
    All Twelfth District              14.00  0.20 (Cont. U.S.)
     offices.
                                ...........  0.30 (Other)
42 Depository institutions also pay any postage fees incurred for
  registered mail. Postage fees are billed separately from Federal
  Reserve Bank surcharges and insurance fees.
\43\ Insurance fees are per $1,000 shipped via the registered mail
  service in excess of the first $25,000, which is covered by the U.S.
  Postal Service.
\44\ The Helena office only ships registered mail packages valued up to
  $25,000, so no additional insurance is needed in excess of the $25,000
  covered by the U.S. Postal Service.


[[Page 485]]

Electronic Connection Fee Schedule \45\, \46\

    The Reserve Banks charge fees for the electronic connections used 
by depository institutions to access priced services and allocate the 
cost and revenue associated with electronic access to the various 
priced services. At this time, electronic access fees for 2000 remain 
at their 1999 levels.

----------------------------------------------------------------------------------------------------------------
                                                                                     Fees
----------------------------------------------------------------------------------------------------------------
Connection types:
    Dial--receive and send (FedLine).......................  $75.00 per month.
    Link encrypted dial....................................  $200.00 per month.
    High-speed dial @ 56 kbps..............................  $350.00 per month.
    Multidrop leased line..................................  $450.00 per month.
    Dedicated leased line (to 9.6 kbps)....................  $750.00 per month.
    High-speed leased line @ 19.2 kbps.....................  $850.00 per month.
    High-speed leased line @ 56 kbps.......................  $1,000.00 per month.
    High-speed leased line @ 128 kbps......................  $1,800.00 per month.
    High-speed leased line @ 256 kbps......................  $2,000.00 per month.
    Cross-district.........................................  Actual cost.47
Contingency testing options: 48
    Premium dedicated dial test connection.................  $500.00 per month.
    Basic dedicated dial test connection...................  $250.00 per month.
    Shared dial test connection............................  $150.00 per month.
    Third-party contingency site dial test connection......  $45.00 per month.
----------------------------------------------------------------------------------------------------------------
\45\ Installation, training, contingency hardware, and software certification are not considered priced
  services, and the fees for these services are not listed here. For a copy of the full electronic access fee
  schedule, contact the local Federal Reserve Bank.
\46\ The Reserve Banks will delay implementing the coming year's price and service level changes until April 3,
  2000. The delay is intended to minimize changes during the period surrounding the century rollover. Current
  Reserve Bank prices and products will remain applicable through the first quarter of next year.
\47\ The customer pays the actual costs of the circuit and a monthly surcharge to cover an equitable share of
  expenses associated with customer support, depreciation of hardware (that is, link encryption units), and
  other overhead expenses. At a minimum, this fee must be equivalent to the standard fee for the particular type
  of leased line connection.
\48\ Use of Dial Test connections should not exceed 60 hours per month for the Premium service and 120 hours per
  year for the Basic and Shared services. Customers exceeding this guideline should establish a Dedicated Leased
  Line connection for testing.

    The Reserve Banks anticipate introducing frame relay as an 
electronic access service during the second half of 2000. Frame relay 
will provide higher throughput and enhanced security to leased-line 
customers. With the deployment of frame relay, the Reserve Banks will 
develop an additional fee schedule for those customers wanting to 
migrate to the new network, while still providing access through the 
current system at the fee levels for those that do not.

    By order of the Board of Governors of the Federal Reserve 
System, December 28, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 00-42 Filed 1-4-00; 8:45 am]
BILLING CODE 6210-01-P