[Federal Register Volume 65, Number 223 (Friday, November 17, 2000)]
[Notices]
[Pages 69538-69556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29384]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1086]


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 2001 of $206.9 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 January 2, 2001.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee 
schedules: Erik Kiefel, Financial Services Analyst, Retail Payments, 
(202/721-4559); Susan Foley, Senior Financial Services Analyst, ACH 
Payments, (202/452-3596); Cynthia Yablon, Financial Services Analyst, 
Funds Transfer and Book-Entry Securities Services, (202/452-2046); 
Donna DeCorleto, Financial Services Project Leader, Noncash Collection 
Service, (202/452-3956); Michael Lambert, Senior Financial Services 
Analyst, Special Cash Services, (202/452-3376); or Paul Grabow, Senior 
Information Technology Analyst (electronic connections), (202/452-
2830), Division of Reserve Bank Operations and Payment Systems. For 
questions regarding the PSAF: Gregory Evans, Manager, Financial 
Accounting, (202/452-3945), Division of Reserve Bank Operations and 
Payment Systems. For users of Telecommunications Device for the Deaf 
(TDD) only, please contact Janice Simms (202/872-4984). Copies of the 
2001 fee schedules for the check service are available from the Board, 
the Reserve Banks, or the Federal Reserve Banks' financial services web 
site at www.frbservices.org.

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 1990 through 1999, the Reserve Banks 
recovered 99.7 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\
    For 2000, the Reserve Banks estimate that they will recover 100.4 
percent of the costs of providing priced services. They project a 98.0 
percent recovery rate in 2001, largely due to transition costs 
associated with the check modernization project and the transition to a 
new cost-allocation method for the book-entry service. The primary 
risks to the 2001 projection are the Reserve Banks' ability to meet 
aggressive revenue and cost targets in the check service, because of 
the impact of the check modernization project; the uncertain effects of 
price-structure and service-level changes being implemented for 
automated clearinghouse (ACH) interoperator transactions; and increased 
competition for ACH and funds-transfer services.
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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, 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. This ten-year recovery 
rate is based upon 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 offsets to costs related to the transition to financial 
accounting standards number 87 (FAS 87) that have not been included 
in the 1999 repricing pro forma in this memorandum. Beginning in 
2000, the PSAF includes additional financing costs associated with 
pension assets used by priced services. This ten-year cost-recovery 
amount has been computed as if these costs historically had been 
included in the PSAF calculations. If this modification were not 
applied to prior periods, the ten-year recovery rate would increase 
to 101.1 percent. In order to provide a more accurate comparison 
against the targeted return on equity that was used for establishing 
prices within those services, the 1999 service-line recovery data in 
this memorandum do not reflect the revisions to the PSAF method.
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    In their 2001 fee schedules, the Reserve Banks include changes that 
continue to provide an economic incentive for depository institution 
customers to make greater use of electronic payment services. In 
particular, the price index for electronic payment services (ACH, funds 
transfer and net settlement, book-entry securities, and electronic 
check) and electronic connections is projected to decline approximately 
1.9 percent in 2001. The index for paper-based payment services (check, 
special cash, and noncash collection) is expected to increase 6.4 
percent. The overall 2001 price index for all Federal Reserve priced 
services is projected to increase 4.2 percent, the same as the increase 
in 2000. Since 1996, the overall price index has increased only half a 
percent.\2\
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    \2\ These estimates are based on a chained Fisher Ideal price 
index. This index provides customers with a representation of the 
total price or cost of Reserve Bank services, offering a more 
complete picture than is possible solely from comparing changes in 
individual service fees over time. This index is not adjusted for 
quality changes in Federal Reserve priced services. Data elements 
used in calculating the index include explicit fee revenue from 
priced services products and services and electronic connections to 
the Reserve Banks, volumes associated with those products and 
services, and imputed income associated with clearing balances 
through the Reserve Banks. The price index is calculating using the 
actual, estimated, or projected full-year revenues and volumes. For 
2001, the year-over-year percentage change in the index results from 
a comparison of the 2001 projections to the 2000 estimates for 
priced services revenues and volumes. The Reserve Banks delayed 
implementing the fee changes for 2000 until April to minimize 
changes for depository institution customers during the period 
surrounding the century rollover. The 2001 index, therefore, does 
not directly compare the impact of the prices implemented on April 
2000 against the 2001 prices because the 2000 estimate includes 
revenues and volumes from the first quarter of 2000. The changes in 
the price index since 1996 are calculated with full-year 2001 
projected and 1996 actual revenues and volumes.
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    The following are changes in fee structures and levels for priced 
services in 2001:
     The Reserve Banks will make no changes to fees for the 
Fedwire funds transfer and national net settlement services. The price 
index for Fedwire

[[Page 69539]]

funds transfers has declined more than 46 percent since 1996.
     The Reserve Banks will increase the surcharge for an off-
line Fedwire book-entry securities transfer 39 percent in 2001 to $25. 
The fee change is expected to cost customers approximately $197,000 
next year. Other book-entry fees will remain at 2000 levels. Including 
the fee change for 2001, the price index for the book-entry securities 
service has declined more than 9 percent since 1996.
     The Reserve Banks will retain current prices for customers 
of the FedACH service. The Reserve Banks are initiating discussions 
with private-sector operators (PSOs) to negotiate deposit deadlines and 
fees for transactions that they exchange with each other. The new 
deadlines will be in place no later than June 2001, and the price 
structure modifications will be implemented no later than September 
2001. Since 1996, the price index for the ACH service has decreased 
almost 49 percent.
     The Reserve Banks will increase transaction fees for all 
check products 2.6 percent compared with current prices or 3.9 percent 
compared with April 2000 fees. Transaction fees for paper check 
products are projected to increase 2.6 percent over current prices or 
3.9 percent compared to April 2000 fees. Paper check products include 
forward-processed, fine-sort, and returned checks. Reserve Banks are 
standardizing paper check products and implementing a more-consistent 
pricing structure across the Reserve Banks. Reserve Banks also will 
introduce new prices designed to encourage the accuracy of qualified 
returned checks and discourage the use of large-dollar checks. 
Transaction fees for payor bank services, which include electronic 
check products, will increase 2.9 percent from current prices or 3.7 
percent from April 2000 fees. Electronic check products include 
electronic check presentment, image services, and electronic 
information. The price index for all check products, which includes 
imputed fees and other product and service fees not captured in the 
comparison of the individual transaction fees, is projected to increase 
5.9 percent in 2001. The price index for paper check products is 
increasing 6.3 percent, while that for payor bank and check electronic 
connection services is decreasing 2.2 percent. Including the fee 
changes in 2001, the price index for the entire check service has 
increased almost 23 percent since 1996. Aggregate check service fee 
increases in 2001 are expected to cost depository institution customers 
approximately $50 million, assuming no changes to current customer 
processing choices.\3\
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    \3\ The volume-weighted fee calculations for 2001 are based on a 
comparison of current and April 2000 transaction fees with the 2001 
fees for check products, all weighted using the projected 2001 
volumes. These volume-weighted calculations summarize changes in 
specific check product transaction fees while the chained Fisher 
Ideal price index includes the all-in costs to a customer of 
purchasing a market basket of Federal Reserve check products. The 
fees being introduced to encourage the accuracy of qualified 
returned checks and the greater use of electronic payment systems 
instead of large dollar checks are not included in the calculations 
of these transaction fee changes.
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B. Discussion

    Table 1 presents an overview of the budgeted 2000, estimated 2000, 
and projected 2001 cost-recovery performance for all priced services.

[[Page 69540]]



                                     Table 1.--Priced Services Cost Recovery
                                                    [Percent]
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                         Priced service                             2000 Budget    2000 Estimate    2001 Budget
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All services....................................................            99.0           100.4            98.0
    Check.......................................................            98.7           100.3            97.7
    ACH.........................................................           100.0           100.1           100.2
    Funds transfer..............................................           100.4           100.0           100.1
    Book-entry..................................................           101.3           102.4            94.9
    Noncash collection..........................................           108.5           110.8           102.2
    Special cash................................................           101.6           103.4           100.6
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    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 2000 estimated priced services costs 
attributable to each service.

BILLING CODE 6210-01-P

[[Page 69541]]

[GRAPHIC] [TIFF OMITTED] TN17NO00.006


[[Page 69542]]


    Table 2 summarizes the cost and revenue performance for priced 
services since 1999.

                                Table 2.--Pro Forma Cost and Revenue Performancea
                                            [In millions of dollars]
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                                                                                                    5  Recovery
              Year                 1 Revenue\b\      2  Total      3  Net income     4  Target      rate after
                                                    expense\c\         (ROE)          ROE\d\       target ROE\e\
                                                                           [1-2]                       [1/(2+4)]
                                                                                                       (percent)
                                 -------------------------------------------------------------------------------
1999............................           867.6           787.0            80.6            56.0           102.9
2000 (Estimate).................           920.5           818.7           101.7            98.4           100.4
2001 (Budget)...................           978.5           889.4            89.1           109.3           98.0
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a Calculations on this table and subsequent pro forma cost and revenue tables may be affected by rounding.
b Includes net income on clearing balances.
c The calculation of total expense on this and subsequent pro forma cost and revenue tables includes operating
  expenses and imputed costs plus special project costs recovered during the year. Imputed costs include
  interest on debt, taxes, FDIC insurance, Board of Governors expenses related to priced services, and the cost
  of float. Credits for prepaid pension costs under SFAS 87 are also included. In 1999, the book-entry service
  recovered $1.7 million in special project costs related to the completion of the automation consolidation
  project. In 2000, the check service estimates that it will recover fully $6.3 million in special project costs
  related to the ongoing check modernization initiative. In 2001, the check service projects that it will
  recover fully $15.1 million in special project costs related to check modernization.
d Target ROE is based on the ROE included in the PSAF and has been adjusted for taxes, which are included in
  column 2.
e If the PSAF method used to calculate the 2000 and 2001 aggregate priced service cost in this table were
  applied to the actual 1999 calculations, the recovery rate would decline to 100.4 percent.

1. 2001 Price Index
    The price index for electronic payment services and electronic 
connections is projected to decline approximately 1.9 percent in 2001, 
and the index for paper-based payment services is expected to increase 
6.4 percent. The overall 2001 price index for Federal Reserve services 
is projected to increase 4.2 percent, the same as the increase in 2000. 
The overall price index has increased half a percent since 1996. The 
higher overall price index in 2001 is attributable mainly to increased 
check prices. Figure 2 compares the Federal Reserve's price index for 
priced services with the gross domestic product price deflator, which 
shows that the cost of Federal Reserve priced services has historically 
increased more slowly than that of the deflator.
    The decline in the price index for electronic payments services 
since 1996 has reflected, 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.
BILLING CODE 6210-01-P

[[Page 69543]]

[GRAPHIC] [TIFF OMITTED] TN17NO00.007

BILLING CODE 6210-01-C
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, the 
priced services portion of 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.\4\ To 
a small 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. In 2000, the assignment 
of corporate overhead costs to individual priced services supported the 
Reserve Banks' strategic check modernization project. In 2001, the 
overhead costs will be assigned along the traditional expense-ratio 
basis. Table 3 shows the assignment of corporate overhead costs for the 
years 1999-2001.
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    \4\ Under the new Reserve Bank cost accounting method, corporate 
overhead costs for 2001 include all of the following activities: 
corporate administration functions, budget preparation and control, 
expense accounting, and general ledger accounting. Corporate 
overhead costs for 1999 and 2000 also included all or a portion of 
central mail operations, legal, records management and contingency 
planning, motor vehicles, and audit, which have now become support 
costs.

                                               Table 3.--Corporate Overhead Allocations to Priced Services
                                                                [In millions of dollars]
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                                                                                                              Noncash
                  Year                         Check            ACH       Funds transfer    Book-entry      collection     Special cash        Total
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1999 Actual.............................            38.8             3.7             6.0             0.0             0.1             0.2            48.8
2000 (Estimate).........................            55.6             2.4             3.1             0.8             0.1             0.1            62.1
2001 (Budget)...........................            45.1             4.2             2.9             1.1             0.1             0.1            53.5
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3. 2001 Projected Performance
    The Reserve Banks project that they will recover 98.0 percent of 
total expenses related to priced services, including imputed expenses 
and target ROE, in 2001. The 2001 fees for priced services will result 
in a net income of $89.1 million, compared with a target ROE of $109.3 
million. The check

[[Page 69544]]

service will recover fully the approximately $15.1 million of 2001 
priced services costs associated with the check modernization special 
project.
4. 2000 Estimated Performance
    The Reserve Banks estimate that priced services will yield a net 
income of $101.7 million in 2000, compared with a target ROE of $98.4 
million. In 2000, the Reserve Banks estimate that they will recover 
100.4 percent of the costs of providing priced services, including 
imputed expenses, all check modernization special project costs, and 
target ROE, compared with a target recovery rate of 99.0 percent.\5\
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    \5\ Through August 2000, the Reserve Banks recovered 101.5 
percent of total priced services expenses, including imputed 
expenses, check modernization special project costs, and target ROE.
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5. 1999 Performance
    In 1999, the Reserve Banks'' priced services revenue yielded a net 
income of $80.6 million, compared with a targeted ROE of $56.0 million. 
The Reserve Banks recovered 102.9 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 101.0 percent. The Reserve Banks recovered a larger-
than-expected percentage of costs because of higher volumes, midyear 
increases in check prices, and increased pension credits.
    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.

C. Check

    Table 4 presents the actual 1999, estimated 2000, and projected 
2001 cost-recovery performance for the check service.

                             Table 4.--Check Pro Forma Cost and Revenue Performance
                                            [In millions of dollars]
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                                                                                                    5  Recovery
              Year                  1  Revenue       2  Total      3  Net income   4  Target ROE    rate after
                                                      expense          (ROE)                        target ROE
                                                                           [1-2]                       [1/(2+4)]
                                                                                                       (percent)
                                 -------------------------------------------------------------------------------
1999............................           707.3           649.8            57.5            45.1           101.8
2000 (Estimate).................           762.2           678.9            83.3            80.8           100.3
2001 (Budget)...................           816.1           745.2            70.9            90.3            97.7
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1. 1999 Performance
    The check service recovered 101.8 percent of total costs in 1999, 
including imputed expenses and targeted ROE. Higher-than-anticipated 
volume growth at most Reserve Banks and midyear price increases helped 
actual cost recovery to exceed the targeted rate of 101.0 percent. The 
volume of checks collected increased 3.0 percent from 1998 levels 
because of several factors, including the increased reliance on Reserve 
Bank check processing by some banks during merger-related operational 
changes and the introduction of new check products.
2. 2000 Performance
    Through August 2000, the check service has recovered 101.0 percent 
of total costs, including imputed expenses and target ROE.\6\ The 
Reserve Banks estimate that the check service will recover 100.3 
percent of its costs for the full year compared with the target 2000 
recovery rate of 98.7 percent. The higher recovery rate is due to 
improved cost controls implemented by Reserve Banks, midyear price 
increases at a number of Reserve Banks, and increased pension credits.
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    \6\ Total costs include special project costs of $15.1 million. 
None of those costs are deferred and financed.
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    Volume growth within paper check products through August 2000 has 
varied from the original budget projections. Growth of the volume of 
forward-processed items slowed substantially from the 1999 pace as some 
merger and acquisition volumes that were outsourced to the Reserve 
Banks reverted back to the merged institutions' processing platforms. 
Return-item volume has been higher than anticipated Systemwide as 
several correspondents have stopped providing return-check services. 
Table 5 summarizes the year-to-date and full-year estimated growth 
rates for all paper check products.

                                   Table 5.--Paper Check Product Growth Rates
                                                    [Percent]
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                                                                                   Volume growth
                                                                   Budgeted 2000  through August  Estimated 2000
                                                                      growth           2000           growth
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Total forward-collected.........................................             4.5             0.7             1.9
    Forward-processed...........................................             4.7             2.4             3.0
    Fine-sort a.................................................             2.6           -10.2            -9.3
Returns.........................................................            -2.3             1.3           -1.6
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a Electronic fine-sort volume is excluded from these numbers. Electronic fine-sort is a service that allows
  depository institutions to exchange fine-sort information electronically among themselves while also
  exchanging the actual checks. Including the electronic fine-sort product offered at one Reserve Bank, budgeted
  2000 fine-sort volume growth is actually targeted to decrease 1.6 percent, with the estimated 2000 volume
  growth decreasing 14.2 percent.


[[Page 69545]]

    The Board considers the Reserve Banks' 2000 volume estimates for 
forward-processed items to be reasonable. The Board believes, based 
upon year-to-date trends, that return-volume growth may be understated.
    Continuing a trend over the last few years, the Reserve Banks have 
seen steadily increasing demand for electronic check products. Reserve 
Banks provide electronic check data or images provided to paying bank 
for about 35 percent of checks they collect. Year-to-date 2000 demand 
for image products has grown to approximately 800 million items, or 7 
percent of checks collected by the Reserve Banks in 2000. Growth and 
penetration rates for electronic check products are summarized in table 
6. Given the current volume growth through August, the Board believes 
that Reserve Banks are underestimating demand for electronic check 
services.

                         Table 6.--Electronic Check Product Penetration and Growth Rates
                                          [Percent of checks collected]
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                                                                    Penetration   Year-over-year
                                                                   rate through   growth through  Estimated 2000
                                                                    August 2000     August 2000       growth
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Electronic check presentment....................................            20.6            10.2             5.6
    Truncation..................................................             5.4             9.8             4.5
    Non-truncation..............................................            15.2            10.4             6.0
Electronic check information....................................             7.3            -7.4           -11.9
Images..........................................................             6.9            46.2            34.8
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3. 2001 Pricing
    For the coming year, the Reserve Banks will focus on the check 
modernization initiatives to standardized check processing across all 
Reserve offices. The Board expects the Reserve Banks to incur 
significant transition costs associated with these initiatives over the 
next several years. These initiatives include
     Check standardization--implement a standard, centrally 
managed, check-processing environment at all Reserve Banks
     Enterprise-wide adjustments--implement a standard, 
centrally managed, enterprise-wide adjustments system at all offices
     Image services system--redesign the current image-
processing infrastructure based on a standard, centrally managed, 
single platform
     Electronic access and delivery--design and execute a 
strategy to provide customers with remote electronic access and 
delivery of check services over the Internet.
    The check modernization initiatives are expected to reduce costs 
and improve service over the long term. This effort will lead to better 
quality and more technologically advanced products and services for 
customers, greater flexibility and responsiveness to customer needs and 
requirements, and more consistent price and product structures across 
the Reserve Banks. Ultimately, the efficiencies gained through the 
modernization initiatives should lead to cost savings at the Reserve 
Banks.
    In 2001, per-item and cash-letter fees for all check products are 
increasing 3.9 percent on a volume-weighted basis compared with fees 
introduced in April 2000 and 2.6 percent compared with current fees. 
Per-item and cash-letter fees for paper-based check products are 
increasing at about the same rate. This increase was driven by price 
adjustments for both forward and return products. On a volume-weighted 
basis, the average per-item and fixed fees for payor bank services will 
increase 3.7 percent compared with April 2000 fees and 2.9 percent 
compared with current fees.
    Table 7 provides details on the 2000 price changes.

                      Table 7.--2001 Price Changes
                                [Percent]
------------------------------------------------------------------------
                                                             2001 vs.
                Products                  2001 vs. April   current 2000
                                           3, 2000 fees        fees
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All check products......................             3.9             2.6
Total paper products....................             3.9             2.6
    Forward-processed...................             3.6             2.5
    Fine-sort...........................             7.0             5.1
    Returns.............................             3.7             2.9
Payor bank services.....................             3.7             2.9
    Electronic check presentment........             0.4             0.1
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    Table 8 summarizes ranges of key check fees for 2001.

                                                              Table 8.--Selected Check Fees
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                                                       2000 price ranges (per item)                            2001 price ranges (per item)
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Items:
    Forward-processed:
        City............................  $0.004 to 0.081.......................................  $0.005 to 0.079.
        RCPC............................  $0.004 to 0.180.......................................  $0.004 to 0.200.

[[Page 69546]]

 
    Forward fine-sort:
        City............................  $0.004 to 0.015.......................................  $0.005 to 0.020.
        RCPC............................  $0.0025 to 0.018......................................  $0.004 to 0.019.
     Qualified returned checks:
        City............................  $0.17 to 1.11.........................................  $0.17 to 1.10.
        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 5.55.
Cash letters:...........................  (per cash letter).....................................  (per cash letter)
    Forward-processed a.................  $1.75 to 9.25.........................................  $2.00 to 13.50.
    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    $0.0012-0.0060.
    Electronic presentment..............  $3-$14    $0.001-0.0045                                 $2-$11    $0.0010-0.0100.
    Truncation..........................  $3-$25    $0.004-0.0170                                 $2-$10    $0.0060-0.0180.
    Image...............................    ....................................................  $2-$15    $0.0020-0.0200.
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a Includes a fifty-cent check-relay surcharge due to higher fuel costs. Both bounds of the price range would decrease $0.50 if this surcharge were not
  included.

    The Reserve Banks will adopt several pricing strategies that are 
designed to increase the efficiency of Reserve Bank operations, improve 
the quality of return-check deposits, and reduce the risk associated 
with the check payments system. In turn, these improvements will 
decrease the costs associated with processing payments, and the savings 
will ultimately be passed along to customers in the form of lower 
transaction fees. Specifically, the Reserve Banks will price for 
certain categories of return-item exceptions that can be identified in 
Reserve Bank processing operations. The Reserve Banks also will charge 
for processing commercial checks with a value of $10 million or more to 
depositing customers. It is expected that this charge will encourage 
customers to use electronic payment systems, such as funds transfer and 
ACH, for large-dollar payments. These prices will be introduced during 
the second quarter of 2001.
    For 2001, the Reserve Banks project that the check service will 
recover 97.7 percent of total costs, including imputed expenses, costs 
associated with the check automation standardization special project, 
and target ROE. Total expenses are projected to increase approximately 
$66.3 million, or 9.9 percent, from estimated 2000 expenses. Total 
expenses for 2001 include approximately $67.6 million for the four 
check modernization projects and a special project for related 
extraordinary expenses, a total increase of $44 million from the 2000 
estimate.
    The check service is projected to have revenue in 2001 of $816.1 
million from forward collection and return-item processing (81.4 
percent), payor bank services (10.8 percent), and other operating and 
imputed revenues (7.8 percent). Total revenue is expected to increase 
approximately $53.9 million, or 7.1 percent, in 2001 as a result of 
increased service revenue ($53.4 million).
    In 2001, forward-processed volume is projected to be 15.5 billion, 
an increase of 1.6 percent compared with the 2000 estimate. Fine-sort 
volumes, without electronic fine-sort, are estimated to be 1.3 billion, 
or 5.2 percent, less than the 2000 estimate. Fine-sort volumes 
including electronic fine-sort are estimated to be 2.0 billion, or 3.5 
percent, less than the 2000 estimate. Total returns are projected to be 
175.8 million, an increase of 0.5 percent from the 2000 estimate.
    MICR presentment and MICR presentment plus volume are projected to 
be 2.9 billion, reflecting growth of about 17 percent in 2001. 
Truncation volume is expected to be 987.0 million, an increase of 
almost 10 percent, and image services volume is budgeted to be 1.5 
billion, reflecting growth of nearly 27 percent in 2001. MICR 
information is projected to decrease by 1.0 billion items or about 13 
percent in 2001.
    The Board believes that the costs of check modernization 
initiatives present the greatest risk to the cost projections for the 
check service. In particular, staffing costs may be greater than 
anticipated given the competitive labor markets that exist nationwide. 
Further, operational costs, productivity, and service quality are at 
risk if there are slippages in the transition schedules or 
unanticipated increases in the costs for the modernization initiatives.

D. Automated Clearinghouse (ACH)

    Table 9 presents the actual 1999, estimated 2000, and projected 
2001 cost-recovery performance for the commercial ACH service.

                              Table 9.--ACH Pro Forma Cost and Revenue Performance
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                     5  Recovery
                                                                2  Total      3  Net     4  Target    rate after
                      Year                        1  Revenue    expense       income        ROE       target ROE
                                                                              (ROE)                   (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                 [1-2]                 [1/(2+4)]
----------------------------------------------------------------------------------------------------------------
1999...........................................         67.8         55.9         11.9          4.5        112.3
2000 (Estimate)................................         70.5         61.4          9.1          8.0        101.6

[[Page 69547]]

 
2001 (Budget)..................................         75.5         66.4          9.1          8.9        100.2

1. 1999 Performance
    The ACH service recovered 112.3 percent of total expenses, 
including imputed expenses and targeted ROE, in 1999. Commercial ACH 
volume was 12.5 percent higher than 1998 volume, slightly greater than 
the 12.0 percent increase originally projected for 1999. During the 
year, ACH lowered all origination fees by $0.0005.
2. 2000 Performance
    Through August 2000, the ACH service recovered 103.4 percent of 
total expenses, including imputed expenses and target ROE. For the full 
year, Reserve Banks estimate that the service will recover 101.6 
percent of total expenses compared with the target 2000 recovery rate 
of 100.0 percent. The estimated over-recovery is due to lower total 
expenses of 1.4 percent, which is being caused by a reduction in 
national support costs. The increase in total expenses since 1999 is 
mainly attributable to ACH's assuming a larger allocation of joint 
priced corporate overhead to support the check modernization 
initiatives.
    Through August 2000, commercial ACH volume has increased 13.5 
percent from the same period in 1999. For the full year, Reserve Banks 
expect commercial volume to increase 11.6 percent compared with the 
13.9 percent increase originally projected for 2000. The Reserve Banks 
cite consolidation in the financial services industry as a partial 
driver for the lower-than-expected volumes and anticipate further 
volume reductions as competitive pressures increase. The Board 
questions whether the significantly slower growth rate that is expected 
through year-end reasonably reflects the effect of these competitive 
pressures. The Board believes that the expected growth rate may be 
understated.
3. 2001 Pricing
    The Board recently approved modifications to the Reserve Banks' 
deposit deadlines and pricing practices for transactions they exchange 
with private-sector operators (PSOs). (65 FR 66249, November 3, 2000). 
The Reserve Banks are working collaboratively with ACH operators to 
establish interoperator deposit deadlines by which the Reserve Banks 
and the PSOs would exchange interoperator transactions. Further, the 
Reserve Banks are initiating discussions with the PSOs to negotiate the 
structure and level of fees that will be charged by the Reserve Banks 
as well as those fees that the Reserve Banks will pay the PSOs. The new 
deadlines and price structure for PSOs are intended to address the 
competitive concerns that have been raised by industry representatives. 
The new deadlines will be implemented no later than June 2001 and the 
price structure modifications will be implemented no later than 
September 2001. The specific implementation date for each of these 
modifications will be announced well in advance of the effective dates. 
The Reserve Banks will also assess a monthly settlement fee of $20 (per 
routing number), rather than the current monthly account-servicing fee, 
to depository institutions that send and receive all their transactions 
to and from the Reserve Banks through PSOs. The Reserve Banks no longer 
plan to assess origination or receipt fees directly to these depository 
institutions. Additionally, the Reserve Banks will charge ACH operators 
half the published electronic connection fee to reflect the use of the 
connection by both ACH operators and the Reserve Banks to send each 
other interoperator transactions. These changes will only apply to any 
intermediary that is defined as an operator under National Automated 
Clearing House Association (NACHA) rules. The Reserve Banks will retain 
the 2001 ACH prices at the current levels, except for the changes for 
interoperator transactions.
    The Reserve Banks project that the ACH service will recover 100.2 
percent of its costs in 2001, including imputed expenses and target 
ROE. Total expenses are projected to increase $5.9 million, or 8.5 
percent, from the 2000 estimate because of growth in support and 
overhead costs, particularly those related to business development. 
Total revenue in 2001 is projected to increase $4.9 million, or 7.0 
percent more than the 2000 estimate. The higher revenue is attributable 
to projected commercial volume growth and increased revenue from 
electronic connections, offset somewhat by lost revenue from the new 
pricing of interoperator transactions.
    ACH volume in 2001 is projected to increase 12.1 percent from 2000 
estimates. The 2001 volume projection assumes a rate of growth between 
the 12.5 percent experienced in 1999 and expected growth in 2000, which 
is estimated at 11.6 percent. This growth rate, revenues, and cost 
recovery, however, do not account for several risks in 2001. The major 
risks include the uncertain effects of price-structure and service-
level changes being implemented for interoperator transactions, the 
increased competitive pressures from PSOs, and future consolidations in 
the financial services industry. The Board believes that a 12.1 percent 
growth rate may be difficult to achieve because this rate may not fully 
reflect these risks.

E. Funds Transfer and Net Settlement

    Table 10 presents the actual 1999, estimated 2000, and projected 
2001 cost-recovery performance for the funds transfer and net 
settlement services.

[[Page 69548]]



               Table 10.--Funds Transfer and Net Settlement Pro Forma Cost and Revenue Performance
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                     5  Recovery
                                                                2  Total      3  Net     4  Target    rate after
                                                  1  Revenue    expense       income        ROE       target ROE
                                                                              (ROE)                   (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                 [1-2]                 [1/(2+4)]
----------------------------------------------------------------------------------------------------------------
1999...........................................         69.2         61.3          7.8          5.2        104.0
2000 (Estimate)................................         65.1         57.6          7.5          7.5        100.0
2001 (Budget)..................................         63.1         55.6          7.5          7.5        100.1

1. 1999 Performance
    For 1999, the funds transfer and net settlement services recovered 
104.0 percent of total costs, including imputed expenses and targeted 
ROE, compared with a targeted recovery rate of 102.0 percent. This 
over-recovery was primarily due to expenses $3.2 million (4.5 percent) 
less than original budget projections; the decrease in expenses 
resulted from an 11.2 percent and a 3.2 percent decrease in direct and 
support costs, respectively. Service revenue for 1999 was approximately 
$1.8 million (2.6 percent) less than original budget projections. A 
$0.9 million (27.7 percent) decrease in net income on clearing balances 
accounted for almost half of the deficit. In addition, electronic 
connection revenue was $0.6 million (6.2 percent) lower than 
anticipated due to fewer than anticipated customers signing on to 
services related to electronic access. The rest of the revenue 
shortfall was due to lower-than-anticipated volume in the highest-
priced (low-volume) tier. Funds transfer volume increased 4.7 percent 
from the 1998 level, compared with a budgeted 5.8 percent growth.
2. 2000 Performance
    Through August 2000, the funds transfer and net settlement services 
recovered 103.9 percent of total costs, including imputed expenses and 
target ROE. For full-year 2000, the Reserve Banks estimate that the 
funds transfer and net settlement services will recover 100.0 percent 
of total expenses, compared with a target recovery rate of 100.4 
percent. The Board believes the Reserve Banks' estimated 2000 cost 
recovery is too low given year-to-date experience.
    Funds transfer volume through August 2000 has increased 6.5 percent 
relative to the same period in 1999. For the full year, the Reserve 
Banks estimate a 5.7 percent volume increase compared with a budgeted 
increase of 6.0 percent.
3. 2001 Funds Transfer Pricing
    The Reserve Banks will retain the current per-transfer fees and 
thresholds for volume-based discounts. The average (volume-weighted) 
per-transfer price would be $0.223. In addition, the Reserve Banks will 
retain the off-line surcharge at its current level.
    Reserve Banks project that the Fedwire funds transfer service will 
recover 100.1 percent of total costs, including imputed expenses and 
target ROE, in 2001. Total costs are expected to decline $2.0 million 
(3.1 percent) from the 2000 estimate, primarily due to reduced 
operating costs of $1.4 million (2.4 percent) and a decrease in PSAF 
costs of $0.5 million (3.6 percent). The reduction in operating costs 
is mainly due to staff reductions.
    Funds transfer volume is expected to decrease 1.2 percent from 2000 
estimated levels, due primarily to potential shifts in volume to CHIPS. 
In first quarter 2001, CHIPS will introduce a new intraday finality 
service that will provide more risk controls and thus reduce the 
impediments to the use of CHIPS for some payments that are currently 
processed via Fedwire. The Reserve Banks anticipate a 3.0 percent 
decline in funds transfer volume from high-volume customers that are 
also CHIPS participants, partially offset by increases in volume from 
middle-tier customers. Revenue is projected to decline $2.0 million 
(3.1 percent) in 2001 compared with the 2000 estimate because of 
slightly lower 2001 volume and the full-year effects of the April 2000 
on-line fee reductions.
4. 2001 Net Settlement Pricing
    The Reserve Banks will retain the local and enhanced net settlement 
fees at the 2000 price levels. The enhanced net settlement service will 
be fully implemented during 2001 as local settlement services are 
phased out by year-end.

F. Book-Entry Securities

    Book-entry securities includes purchase and sale activity. Table 11 
presents the actual 1999, estimated 2000, and projected 2001 cost-
recovery performance for the book-entry securities service.\7\
---------------------------------------------------------------------------

    \7\ 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 Treasury Department 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 11.--Book-Entry Securities Transfer Pro Forma Cost and Revenue Performance
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                      5 Recovery
                                                                2 Total       3  Net      4 Target    rate after
                      Year                        1  Revenue    expense       income        ROE       target ROE
                                                                              (ROE)                   (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                 [1-2]                 [1/(2+4)]
----------------------------------------------------------------------------------------------------------------
1999...........................................         17.3         15.1          2.2          1.0        107.4

[[Page 69549]]

 
2000 (Estimate)................................         18.0         15.7          2.3          1.9        102.4
2001 (Budget)..................................         19.9         18.6          1.3          2.3         94.9

1. 1999 Performance
    The book-entry securities service recovered 107.4 percent of total 
costs in 1999, including imputed expenses, automation consolidation 
special project costs budgeted for recovery, and targeted ROE, compared 
with a targeted recovery rate of 105.2 percent.\8\ Service revenue for 
1999 was approximately $650,000 (3.9 percent) greater than original 
budget projections. Origination volume increased 0.6 percent from the 
1998 level, compared with an expected decrease of 5.7 percent. The 
increase in volume resulted from a general increase in mortgage-debt 
refinancing and a higher-than-expected issuance of mortgage-backed 
securities.
---------------------------------------------------------------------------

    \8\ In 1999, the book-entry service recovered the last $1.7 
million remaining from the Reserve Banks' automation consolidation 
special project. All costs associated with this special project have 
now been fully recovered.
---------------------------------------------------------------------------

2. 2000 Performance
    Through August 2000, the book-entry securities service recovered 
106.4 percent of total costs, including imputed expenses and target 
ROE. For full-year 2000, the Reserve Banks estimate that the book-entry 
securities service will recover 102.4 percent of total costs, compared 
with a target recovery rate of 101.3 percent. This higher-than-budgeted 
recovery rate reflects revenue that is 6.1 percent greater than budget. 
The increase in revenue is due to higher-than-expected volumes.
    Book-entry securities transfer volume has increased 7.5 percent 
from February 2000 to August 2000 compared with the same period in 
1999.\9\ The full-year growth rate for origination volume is expected 
to be 4.8 percent more than actual 1999 volumes, compared with the flat 
projections originally forecast at the beginning of the year. Like the 
increase in 1999, this volume increase is due to an increase in 
mortgage-debt refinancing and greater use of agency securities as a 
hedge against other investment risks.
---------------------------------------------------------------------------

    \9\ Before February 1999, the Federal Reserve did not charge 
customers for book-entry receipts. Therefore, the volume data before 
February 1999 includes only originations whereas the data after 
February 1999 includes both originations and receipts. A comparison 
of volumes using January 1999 data would skew the results.
---------------------------------------------------------------------------

3. 2001 Pricing
    Except as noted below, the Reserve Banks will retain all fees in 
2001 at their current levels. There will be a $7 increase to the off-
line surcharge to originate and receive a transfer, to $25, to better 
reflect the costs of providing off-line transfers for book-entry 
securities.
    The purchase and sale service represents less than 1 percent of the 
costs and revenues of the book-entry securities service line. Provision 
of this 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 94.9 percent of costs in 2001, including imputed expenses 
and target ROE. Excluding target ROE, expenses are projected to 
increase $2.9 million (18.3 percent) from the 2000 estimate. This is 
primarily due to the implementation of the new book-entry cost 
allocation model that will shift more costs to the priced portion of 
the service.
    Book-entry securities transfer volume is projected to increase 8.9 
percent compared with the 2000 estimate. The 18.3 percent increase in 
total book-entry expenses is expected to be partially offset by a $1.8 
million (10.2 percent) increase in revenue from the projected start of 
the conversion of Government National Mortgage Association (Ginnie Mae) 
securities to the National Book-Entry System (NBES) during the fourth 
quarter of 2001. Full recovery under the new cost-allocation approach 
is expected in 2002 when the conversion of Ginnie Mae to NBES has been 
completed.

G. Noncash Collection

    Table 12 lists the actual 1999, estimated 2000, and projected 2001 
cost-recovery performance for the noncash collection service.

                      Table 12.--Noncash Collection Pro Forma Cost and Revenue Performance
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                     5  Recovery
                                                                2  Total      3  Net     4  Target    rate after
                      Year                        1  Revenue    Pexpense      income        ROE       target ROE
                                                                              (ROE)                   (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                 [1-2]                 [1/(2+4)]
----------------------------------------------------------------------------------------------------------------
1999...........................................          3.0          2.0          1.0          0.1        140.3
2000 (Estimate)................................          2.4          2.0          0.4          0.2        110.8
2001 (Budget)..................................          2.0          1.7          0.2          0.2        102.2


[[Page 69550]]

1. 1999 Performance
    The noncash collection service recovered 140.3 percent of total 
expenses in 1999 (including imputed expenses and targeted ROE) compared 
with a targeted recovery rate of 118.6 percent. Volume for 1999 
decreased 18.8 percent from 1998 levels compared with a 26.6 percent 
budgeted volume decline. The volume decline was less than budgeted 
levels because of both unexpected called-bond activity and higher-than-
expected coupon volume.
2. 2000 Performance
    Through August 2000, the noncash collection service recovered 119.3 
percent of its costs. For full-year 2000, the Reserve Banks estimate 
that the noncash collection service will recover 110.8 percent of 
costs, including imputed expenses and target ROE, compared with the 
target recovery rate of 108.5 percent. Through August, volume declined 
15 percent compared with the same period in 1999, while the overall 
industry experienced a volume decline of 18 to 20 percent for the same 
period. The Reserve Banks estimate that full-year 2000 volume will 
decline 17.1 percent from 1999 levels compared with a 31.5 percent 
budgeted decline. Volume decline is expected to be lower than budgeted 
in part because the service received unexpected volume from existing 
and new customers as well as higher-than-budgeted bond collections from 
called and maturing securities. The estimated volume decline for the 
year is slightly greater than the actual decline for the first eight 
months of the year because of the recent withdrawal of volume by the 
System's largest depositor of noncash items.
3. 2001 Pricing
    The Reserve Banks will increase one fee relative to 2000 fee 
levels. Specifically, the Reserve Banks will increase the return-item 
fee from $15 to $20 for items that are returned to the depositor as 
uncollected. The Reserve Banks project that the noncash collection 
service will recover 102.2 percent of total costs, including imputed 
expenses and target ROE, in 2001.
    Total expenses are projected to decline approximately $0.2 million, 
or 10.8 percent, in 2001. Despite the higher return-item fee, the 
Reserve Banks project that revenue will decline approximately $0.4 
million, or 17.7 percent, in 2001, because of a projected volume 
decline of 20.9 percent. The projection is based on the recent loss of 
the Reserve Banks' largest depositor, which has begun to process its 
own volume, and the overall industry volume decline.
    New issues of bearer municipal securities effectively ceased in 
1983 when the Tax Equity and Fiscal Responsibility Act of 1982 removed 
the tax advantage for investors. Volume declines will continue as the 
number of unmatured bearer municipal securities declines. The Reserve 
Banks' Cash Fiscal Product Office estimates that in a few years, the 
steadily declining number of bearer securities will make full cost 
recovery in this service unlikely. The Board is working with the 
Reserve Banks to determine the long-term strategy for this service.

H. Special Cash

    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 the 
provision of wrapped coin, packaging of nonstandard currency orders and 
deposits as well as coin deposits, and shipping of currency and coin by 
registered mail. Table 13 presents the actual 1999, estimated 2000, and 
projected 2001 cost-recovery performance for the special cash service.

                         Table 13.--Special Cash Pro Forma Cost and Revenue Performance
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                     5  Recovery
                                                                2  Total      3  Net     4  Target    rate after
                      Year                        1  Revenue    expense       income        ROE       target ROE
                                                                              (ROE)                   (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                 (1-2)                 [1/(2+4)]
----------------------------------------------------------------------------------------------------------------
1999...........................................          3.0          2.9          0.2          0.0        103.8
2000 (Estimate)................................          2.2          2.1          0.2          0.1        103.4
2001 (Budget)..................................          1.8          1.7          0.1          0.1        100.6

1. 1999 Performance
    In 1999, the special cash service recovered 103.8 percent of total 
expenses, including imputed expenses and targeted ROE, compared with a 
targeted recovery rate of 105.8 percent.
2. 2000 Performance
    Through August 2000, the special cash service recovered 99.3 
percent of total expenses, including imputed expenses and target ROE. 
For full-year 2000 the Reserve Banks estimate, however, that the 
special cash service will recover 103.4 percent of total expenses, 
compared with a target recovery rate of 101.6 percent. Revenue is 
estimated to decrease approximately $0.8 million, or 26.1 percent, and 
total costs in 2000 are estimated to decrease slightly more than $0.8 
million, or 28.9 percent, compared with 1999 costs. The estimated 
revenue and cost decreases are due mainly to the elimination of the 
wrapped-coin business in Cleveland and of the registered mail business 
in the Dallas and San Francisco Districts.
3. 2001 Pricing
    For 2001, the Reserve Banks project that the special cash service 
will recover 100.6 percent of costs, including imputed expenses and 
target ROE. Total costs in 2001 are projected to decline $0.3 million, 
or 15.4 percent, from the 2000 level. Revenue in 2001 is expected to 
decline $0.4 million, or 18.3 percent.
    The anticipated revenue and cost reductions are due primarily to 
the full-year effects of the Fourth District's decision to exit the 
coin-wrapping business in April 2000 and the Eleventh and Twelfth 
Districts' decisions to exit the registered mail business in late 
August 2000.
    Beginning in 2001, the El Paso office will increase the fee for 
Express Cash Orders from $60.00 to $80.00. Boston will increase the 
surcharge for registered mail from $30 to $45 and decrease the 
insurance fee from $0.80 to $0.50 per $1,000 in excess of the first 
$25,000. The Tenth District will increase the surcharge for registered 
mail from $13 to $16 and the insurance fee from $0.27 to $0.32.

[[Page 69551]]

II. Private-Sector Adjustment Factor

A. Background

    Each year, as required by the Monetary Control Act, the Reserve 
Banks set fees for ``priced services'' to depository institutions. 
These fees are set to recover all direct and indirect costs and imputed 
costs, such as financing costs, return on capital, taxes, and certain 
other expenses that would have been paid had the services been provided 
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 (asset size) bank holding companies 
(BHCs). The imputed costs and imputed profit are collectively referred 
to as the private-sector adjustment factor (PSAF).
1. Cost of Capital
    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, the financing mix used to fund them, 
and the rates paid for this financing. Assets are determined using 
Reserve Bank information on actual assets and projected disposals and 
acquisitions. The priced portion of mixed-use assets is determined 
based on the allocation of the related depreciation expense. Short-term 
assets are assumed to be financed with short-term liabilities and long-
term assets are assumed to be financed with a combination of long-term 
debt and equity.
    The long-term debt and equity rates are based on the average of 
these elements for 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.
2. Income Taxes
    For simplicity, given that federal corporate tax rates are 
graduated, various credits and deductions can apply and state taxes 
vary, a specific tax rate is not calculated for Federal Reserve priced 
services. Instead, imputed taxes are captured by using a pretax return 
on equity (ROE). This result influences the dollar level of the PSAF 
and Federal Reserve price levels because this is the return a 
shareholder would expect in order to invest in a private business firm. 
The use of the pretax return on equity assumes a 100 percent recovery 
of expenses, including the target return on equity, will be achieved. 
The PSAF is, therefore, based on a precise matching of revenues and 
actual and imputed costs. Should the pretax earnings be over or under 
the target ROE, the PSAF is adjusted (``variable PSAF'') for the tax 
expense or savings associated with the adjusted recovery. The tax rate 
is the median of the rates paid by the BHCs over the past five years 
adjusted to the extent that BHCs are invested in municipal bonds.
3. Other
    The PSAF also comprises the estimated expenses of the Board of 
Governors related to priced services. An assessment for FDIC insurance 
is imputed based on current FDIC rates and projected clearing balances 
held with the Federal Reserve.

B. Discussion

    The increase in the 2001 PSAF is due to higher priced service asset 
levels, primarily the net pension asset. Partially offsetting the 
increase in asset levels is the inclusion of short-term payables as a 
source for financing short-term assets.
1. Asset Base
    The total estimated value of Federal Reserve assets to be used in 
providing priced services in 2001 is reflected in Table 14. Table 15 
shows that the assets assumed to be financed through debt and equity 
are projected to total $1,162.4 million. This amount represents an 
increase of $45.9 million, or 4.1 percent, from the assets financed in 
2000. Growth of $105.1 million in the net pension asset accounts for 
the majority of the increase, while higher Reserve Bank building and 
equipment assets account for an additional $20.9 million.
    Partially offsetting the increase in asset levels is a reduction of 
$80.1 million resulting from the inclusion of short-term payables as a 
financing source. Only those short-term assets that cannot be financed 
with actual (rather than imputed) short-term liabilities, such as 
sundry items payable, earnings credits due depository institutions, and 
accrued expenses, are financed with short-term debt. This is a change 
for 2001, recognizing that these non-imputed liabilities could be used 
to finance assets, which resulted in a $4.0 million decrease in PSAF.
2. Cost of Capital and Taxes
    Table 15 also shows the financing and tax rates and the other 
required PSAF recoveries for 2001 and the rates used for developing the 
PSAF for 2000. The pretax ROE rate increased from 23.3 percent for 2000 
to 24.0 percent for 2001. The effective tax rate to be used in 2001 
remains unchanged from the 2000 rate at 31.5 percent.
3. Capital Adequacy and FDIC Assessment
    As shown in table 16, the amount of capital imputed for the 2001 
PSAF totals 30.8 percent of risk-weighted assets and 5.3 percent of 
total assets. The capital to risk-weighted asset ratio and the capital 
to total assets ratio both exceed regulatory guidelines for well-
capitalized institutions and BHCs. As a result of these capital ratios, 
the FDIC assessment decreased from $2.9 million for 2000 to zero for 
2001.

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.'' \10\ Under 
this policy, the 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.
---------------------------------------------------------------------------

    \10\ FRRS 7-145.2.
---------------------------------------------------------------------------

    The Board does not believe that these 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, these fees are set to provide the Federal 
Reserve a return on equity similar to that earned by large BHCs and 
provide for full cost recovery over the long run.

[[Page 69552]]



  Table 14.--Comparison of Pro Forma Balance Sheets for Federal Reserve
                             Priced Services
               [In millions of dollars--average for year]
------------------------------------------------------------------------
                                               2001            2000
------------------------------------------------------------------------
Short-term assets:
    Imputed reserve requirement on                $742.4          $762.2
     clearing balances..................
    Investment in marketable securities.         6,681.9         6,859.5
    Receivables \11\....................            77.3            74.2
    Materials and supplies \11\.........             3.6             3.4
    Prepaid expenses \11\...............            23.4            21.4
    Items in process of collection......         3,606.7         3,804.2
                                         -------------------------------
      Total short-term assets...........        11,135.3        11,524.9
Long-term assets:
    Premises 11 12......................           417.5           411.7
    Furniture and equipment \11\........           185.5           180.1
    Leasehold improvements and long-term            73.9            64.2
     prepayments \11\...................
    Prepaid pension costs \11\..........           718.5           599.8
                                         -------------------------------
      Total long-term assets............         1,395.4         1,255.8
                                         ===============================
        Total Assets....................        12,530.7        12,780.7
Short-term liabilities:
    Clearing balances and balances               7,424.3         7,621.7
     arising from early credit of
     uncollected items..................
    Deferred credit items...............         3,606.7         3,804.2
    Short-term debt \13\................            18.9            99.0
    Short-term payables \14\............            85.4             0.0
                                         -------------------------------
      Total short-term liabilities......        11,135.3        11,524.9
Long-term liabilities:
    Postemployment/retirement benefits             251.9           238.3
     \11\...............................
    Long-term debt \13\.................           479.1           400.9
                                         -------------------------------
      Total long-term liabilities.......           731.0           639.2
Total liabilities.......................        11,866.3        12,164.1
Equity \13\.............................           664.4           616.6
                                         -------------------------------
    Total liabilities and equity........        12,530.7       12,780.7
------------------------------------------------------------------------
Note: Details may not add to totals due to rounding.
\11\ Financed through PSAF; other assets are self-financing.
\12\ Includes allocations of Board of Governors' assets to priced
  services of $0.7 million for 2001 and $0.5 million for 2000.
\13\ Imputed figures represent the source of financing for certain
  priced services assets.
\14\ For the 2001 PSAF, short-term payables attributable to priced
  services are included as a financing source for short-term assets such
  as receivables, materials and supplies, and prepaid expenses.


                                 Table 15.--Derivation of the 2001 and 2000 PSAF
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                  2001                          2000
----------------------------------------------------------------------------------------------------------------
A. Assets to be financed \15\:
    Short-term \16\.................................                         $18.9                         $99.0
    Long-term \17\..................................                       1,143.5                       1,017.5
                                                     -----------------------------------------------------------
                                                                           1,162.4                       1,116.5
B. Weighted average costs:
    1. Capital Structure \18\:
        Short-term debt (percent)...................                           1.6                           8.9
        Long-term debt (percent)....................                          41.2                          35.9
        Equity (percent)............................                          57.2                          55.2
    2. Financing rates/costs \18\:
        Short-term debt (percent)...................                           4.7                           5.1
        Long-term debt (percent)....................                           6.5                           6.6
        Pretax equity (percent).....................                          24.0                          23.3
    3. Elements of capital costs:
        Short-term debt.............................             $18.9 x 4.7%=$0.9            $99.0 x 5.1%=$ 5.0
        Long-term debt..............................            $479.1 x 6.5%=31.1            $400.9 x 6.6%=26.5
        Equity \19\.................................          $664.4 x 24.0%=159.5          $616.6 x 23.3%=143.7
                                                     -----------------------------------------------------------
                                                                            $191.5                        $175.2
C. Other required PSAF recoveries:
    Sales taxes.....................................                         $10.5                         $10.4
    Federal Deposit Insurance assessment............                           0.0                           2.9
    Board of Governors expenses.....................                           4.9                           4.2
                                                     -----------------------------------------------------------

[[Page 69553]]

 
                                                                              15.4                          17.5
                                                     ===========================================================
D. Total PSAF recoveries............................                        $206.9                        $192.6
                                                     -----------------------------------------------------------
As a percent of assets..............................                          17.8                          17.3
As a percent of expenses \20\.......................                          24.5                          28.5
E. Tax Rate (percent)...............................                          31.5                         31.5
----------------------------------------------------------------------------------------------------------------
Note: Details may not sum to totals due to rounding.
\15\ Priced service assets are based on the direct determination of assets method.
\16\ For 2001, short-term assets consist only of those short-term assets that are not financed with short-term
  payables.
\17\ Consists of total priced long-term assets less postretirement/postemployment benefit liabilities.
\18\ For 2001, net short-term assets are assumed to be financed with short-term debt, for 2000 all short-term
  assets are assumed to be financed with short-term debt. Of the total long-term assets for 2001, 41.9% are
  assumed to be financed with long-term debt and 58.1% with equity.
\19\ The pretax 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 pretax rate of return on equity for each bank holding company for each
  year. These data are then averaged over five years to yield the pretax return on equity for use in the PSAF.
\20\ System 2001 budgeted priced service expenses less shipping are $842.8 million.


   Table 16.--Computation of 2001 Capital Adequacy for Federal Reserve
                             Priced Services
                          (millions of dollars)
------------------------------------------------------------------------
                                                Risk weight
                                      Assets       assets      Weighted
------------------------------------------------------------------------
 Imputed reserve requirement on         $742.4          0.0         $0.0
 clearing balances...............
 Investment in marketable              6,681.9          0.0          0.0
 Securities......................
 Receivables.....................         77.3          0.2         15.5
 Materials and supplies..........          3.6          1.0          3.6
 Prepaid expenses................         23.4          1.0         23.4
 Items in process of collection..      3,606.7          0.2        721.3
 Premises........................        417.5          1.0        417.5
 Furniture and equipment.........        185.5          1.0        185.5
 Leases, leasehold improvements &         73.9          1.0         73.9
 long-term prepayments...........
 Prepaid pension costs...........        718.5          1.0        718.5
ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½ï¿½
       Total.....................     12,530.7                   2,159.2
 Imputed equity for 2001.........       $664.4
 Capital to risk-weighted assets          30.8
 (percent).......................
 Capital to total assets                   5.3
 (percent).......................
------------------------------------------------------------------------
Note: Details may not sum to totals due to rounding.


               Automated Clearing House Fee Schedule \21\
------------------------------------------------------------------------
                                                               Fees
------------------------------------------------------------------------
Origination (per item or record) \22\:
    Items in small files................................         $0.0055
    Items in large files................................          0.0045
    Addenda record......................................          0.0020
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 \23\:
    Voice response return/NOC \24\......................            2.00
Nonelectronic input/output fees\25\:
    Tape input/output...................................           25.00
    Paper output........................................           15.00
    Diskette output.....................................           15.00
    Facsimile return/NOC \26\...........................           15.00
Cross-border fees:
    Cross-border item...................................           0.037
    Same-day recall of item at receiving gateway                    3.50
     operator...........................................
    Same-day recall of item not at receiving gateway                5.00
     operator...........................................
    Item trace..........................................            5.00

[[Page 69554]]

 
    Microfiche..........................................            3.00
    Delivery by courier \27\............................          10.00
------------------------------------------------------------------------
\21\ This fee schedule does not reflect the price changes for
  interoperator transactions.
\22\ Small files contain fewer than 2,500 items and large files contain
  2,500 or more items.
\23\ 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 and conversion fee.
\24\ The fee includes the transaction fee in addition to the voice-
  response fee.
\25\ These services are offered in contingency situations only.
\26\ The fee includes the transaction fee in addition to the conversion
  fee.
\27\ The courier charge is in addition to the fee charged by the Reserve
  Banks.


             Funds Transfer and Net Settlement Fee Schedule
------------------------------------------------------------------------
                                                               Fees
------------------------------------------------------------------------
Funds transfer:
    Volume-based pricing fees (originations and
     receipts):
        Per transfer for the first 2,500 transfers per             $0.33
         month..........................................
        Per transfer for additional transfers up to                 0.24
         80,000 per month...............................
        Per transfer for every transfer over 80,000 per             0.17
         month..........................................
    Surcharge:
        Off-line transfer originated....................           15.00
        Telephone notification..........................           15.00
Net settlement:
    Basic fee (settlement sheet and enhanced NSS):
        Settlement charge per entry.....................            0.95
        Settlement file charge..........................           12.00
    Surcharge:
        Off-line origination per file \28\ (settlement             15.00
         sheet).........................................
        Telephone notification per file (settlement                15.00
         sheet and enhanced NSS)........................
    Minimum monthly fee.................................           60.00
        Fedwire-based, small-dollar arrangement per               100.00
         settlement day \29\............................
        Fedwire-based, large-dollar arrangement per       100.00-175.00
         settlement day \29\............................
------------------------------------------------------------------------
\28\ The off-line origination surcharge will be waived by Reserve Banks
  that do not provide an electronic submission capability for the
  settlement sheet service.
\29\ 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.


                   Book-Entry Securities Fee Schedule
------------------------------------------------------------------------
                                                               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........           25.00
        Off-line reversal originated or received........           25.00
    Monthly maintenance fees:
        Account maintenance (per account)...............           15.00
        Issues maintained (per issue/per account).......            0.45
    Purchase & sale:
        Transaction fee.................................           40.00
------------------------------------------------------------------------


                     Noncash Collection Fee Schedule
------------------------------------------------------------------------
                                                               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........................................           20.00

[[Page 69555]]

 
Bond collection (per bond):.............................        30 40.00
------------------------------------------------------------------------
30 Plus actual shipping costs.


                                       Special Cash Services Fee Schedule
----------------------------------------------------------------------------------------------------------------
                                                                                 Fee
----------------------------------------------------------------------------------------------------------------
Wrapped coin (per box 31):
    All Fourth District offices...................  Discontinued April 2000.
    Helena........................................  $2.25.
Nonstandard packaging:
    Seventh District offices (per currency order    $12.00.32
     or deposit).
    Helena (per coin bag deposited)...............  $2.00.
    El Paso (express cash orders).................  $80.00.33
----------------------------------------------------------------------------------------------------------------


 
                                                            Surcharge                    Insurance fee 35
----------------------------------------------------------------------------------------------------------------
Registered mail fees 34:
    First District.............................  $45.00                           $0.50.
    Helena 36..................................  $14.00
    Tenth District offices.....................  $16.00                           $0.32.
    El Paso....................................                     Discontinued August 2000.
    Twelfth District offices...................                     Discontinued August 2000.
----------------------------------------------------------------------------------------------------------------
31 There are 50 rolls of coin in each box.
32 This service only applies to the $1 through $20 denominations.
33 El Paso's Express Cash Order fee applies only to orders that need to be prepared on the same day as notice is
  received from depository institutions.
34 Depository institutions also pay any postage fees incurred for registered mail. Postage fees are billed
  separately from Federal Reserve Bank surcharges and insurance fees.
35 Insurance fees are based on every $1,000 shipped via the registered mail service in excess of the first
  $25,000, which is covered by the U.S. Postal Service.
36 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.

Electronic Connection Fee Schedule \37\

    The Reserve Banks charge fees for the electronic connections used 
by depository institutions to access priced services and allocate cost 
and revenue associated with electronic access to the various priced 
services.
---------------------------------------------------------------------------

    \37\ 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.

------------------------------------------------------------------------
                                                        Per month
------------------------------------------------------------------------
Current FEDNET Network:
    Dial--receive and send (FedLine).  $75.00
    Link encrypted dial........................  200.00
    High-speed dial @ 56 kbps..................  350.00
    Multi-drop leased line.....................  500.00
    Dedicated leased line (to 9.6 kbps)........  750.00
    High-speed leased line @ 19.2 kbps.........  850.00
    High-speed leased line @ 56 kbps...........  1,000.00
    High-speed leased line @ 128 kbps..........  1,800.00
    High-speed leased line @ 256 kbps..........  2,000.00
    Cross-District.............................  Actual cost \38\
Frame Relay Network:
    Frame Relay--Fedline @ up to 19.2 kbps \39\  500.00
    Frame Relay--Computer Interface (CI) @ 56    1,000.00
     kbps.
    Frame Relay--CI @ 256 kbps.................  2,000.00
    Frame Relay--CI T1.........................  2,500.00
------------------------------------------------------------------------
\38\ The customer will pay 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. This fee must be, at a minimum,
  equivalent to the standard fee for the particular type of leased line
  connection.
\39\ The Frame Relay FedLine 19.2 kbps connection is identical to the
  Frame Relay 56 kbps connection except for the following: (a) redundant
  equipment is not included with the 19.2 kbps option; and (b) the speed
  limitation of 19.2 kbps is imposed by FedLine. This connection is
  otherwise capable of operating at 56 kbps.


[[Page 69556]]

Test and Contingency Options \40\

----------------------------------------------------------------------------------------------------------------
                                                                               Full        Frame
              Connection type                       Logical split            circuit     connection   Redundant
                                                                              backup        only      components
----------------------------------------------------------------------------------------------------------------
Fedline @ up to 19.2 kbps.................  No charge....................         $500         $420          N/A
CI @ 56 kbps..............................  No charge....................          845          765          155
CI @ 256 kbps.............................  No charge....................        1,750        1,585          250
CI T1.....................................  No charge....................        2,230        2,010          270
----------------------------------------------------------------------------------------------------------------

    Logical split: Applies to production and test systems that are 
located together at the same facility. The institution could use the 
production equipment with a logical split (different port) in their 
router as a test or contingency facility. There is no additional cost 
for this option.
---------------------------------------------------------------------------

    \40\ Test and contingency options, including redundant parts, 
are only available to customers with a primary connection.
---------------------------------------------------------------------------

    Full circuit backup: Applies to production and test systems, or 
production and contingency systems, that are located at separate 
facilities, including another bank office or a third-party contingency 
site.\41\ This option replicates full production technology and costs; 
only one set of equipment components is provided.
---------------------------------------------------------------------------

    \41\ Prices shown are for full circuit backup only located at 
the customer site. Multiple customers sharing a single disaster-
recovery connection at a third-party provider will result in custom 
implementations. Districts will bill the vendor's bank for the 
contingency circuit.
---------------------------------------------------------------------------

    Frame connection only: Applies to production and test systems, or 
production and contingency systems, that are located at separate 
facilities. The institution uses a frame relay link connection with no 
ISDN dial-up backup. Only one set of equipment components is 
provided.\42\
---------------------------------------------------------------------------

    \42\ Prices shown are for frame connection only located at the 
customer site. Multiple customers sharing a single disaster recovery 
connection at a third-party provider will result in custom 
implementations. Districts will bill the vendor's bank for the 
contingency circuit.
---------------------------------------------------------------------------

    Redundant components: Includes a Cisco router, CSU/DSU, encryptor 
and rack.\43\
---------------------------------------------------------------------------

    \43\ Redundant components are available only for the following 
connections: CI 56 kbps, CI 256 kbps, and CI T1. Customers with 
FedLine 19.2 kbps connections that require redundant equipment will 
be obliged to upgrade their connection to CI 56 kbps.

    By order of the Board of Governors of the Federal Reserve 
System, November 8, 2000.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 00-29384 Filed 11-16-00; 8:45 am]
BILLING CODE 6210-01-P