[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30195-30197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13980]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1109]


Policy Statement on Payments System Risk; Modifications to 
Daylight Overdraft Posting Rules for Electronic Check Presentments

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Request for comment on policy.

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SUMMARY: The Board is requesting comment on a change to the procedures 
for measuring daylight overdrafts in depository institutions' Federal 
Reserve accounts. The Board proposes to modify the procedures to allow 
debits associated with electronic check presentment (ECP) transactions 
to post at 1:00 p.m. local time.\1\ The current posting times for ECP 
transactions often create a disincentive for depository institutions to 
use Federal Reserve electronic check presentment services, and the 
Board proposes to remove barriers that may discourage their use.
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    \1\ In the event an electronic check presentment is delayed past 
12:00 p.m. local time, the Reserve Banks will post the transaction 
on the next clock hour that is at least one hour after presentment 
takes place but no later than 3:00 p.m. local time.

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EFFECTIVE DATE: Comments must be received by August 6, 2001.

ADDRESSES: Comments, which should refer to Docket No. R-1109, may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551 or 
mailed electronically to [email protected]. Comments 
addressed to Ms. Johnson also may be delivered to the Board's mailroom 
between 8:45 a.m. and 5:15 p.m. and to the security control room 
outside of those hours. Both the mailroom and the security control room 
are accessible from the courtyard entrance on 20th Street between 
Constitution Avenue and C Street, NW. Comments may be inspected in Room 
MP-500 between 9:00 a.m. and 5:00 p.m. weekdays, pursuant to 
Sec. 261.12, except as provided in Sec. 261.14, of the Board's Rules 
Regarding Availability of Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Paul Bettge, Associate Director (202/
452-3174), Stacy Coleman, Manager (202/452-2934), or Jeffrey Yeganeh, 
Senior Financial Services Analyst (202/728-5801), Division of Reserve 
Bank Operations and Payment Systems.

SUPPLEMENTARY INFORMATION: This is one of five notices regarding 
payments system risk that the Board is issuing for public comment 
today. Two near-term proposals concern the net debit cap calculation 
for U.S. branches and agencies of foreign banks (Docket No. R-1108) and 
the book-entry securities transfer limit (Docket No. R-1110). In 
addition, the Board is requesting comment on the benefits and drawbacks 
to several potential longer-term changes to the Board's payments system 
risk (PSR) policy, including lowering self-assessed net debit caps, 
eliminating the two-week average caps, implementing a two-tiered 
pricing system for collateralized and uncollateralized daylight 
overdrafts, and rejecting payments with settlement-day finality that 
would cause an institution to exceed its daylight overdraft capacity 
level (Docket No. R-1111). The Board is also issuing today an interim 
policy statement and requesting comment on the broader use of 
collateral for daylight overdraft purposes (Docket No. R-1107). 
Furthermore, to reduce burden associated with the PSR policy, the Board 
recently rescinded the

[[Page 30196]]

interaffiliate transfer (Docket No. R-1106) and third-party access 
policies (Docket No. R-1100).
    The Board requests that in filing comments on these proposals, 
commenters prepare separate letters for each proposal, identifying the 
appropriate docket number on each. This will facilitate the Board's 
analysis of all comments received.

I. Background

    The Board's PSR policy establishes maximum limits (net debit caps) 
and fees on daylight overdrafts in depository institutions' accounts at 
Federal Reserve Banks. When the Board adopted daylight overdraft fees, 
the Federal Reserve Banks began measuring depository institutions' 
intraday account balances according to a set of ``posting rules'' 
established by the Board. These rules comprise a schedule for the 
posting of debits and credits to institutions' Federal Reserve accounts 
for different types of payments.\2\ The Board's objectives in designing 
the posting rules include minimizing intraday float, facilitating 
depository institutions' monitoring and control of their cash balances 
during the day, and reflecting the legal rights and obligations of 
parties to payments. The Board's objective of minimizing intraday float 
is especially important in light of the daylight overdraft fee, which 
gives intraday credit an explicit value. The posting rules attempt to 
eliminate aggregate Federal Reserve intraday float because such float 
would be equivalent to unpriced Federal Reserve daylight credit.
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    \2\ See ``Federal Reserve Policy Statement on Payments System 
Risk,'' section I.A (57 FR 47093, October 14, 1992).
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    As part of a broad review of its PSR policies, the Board evaluated 
the effectiveness of the current posting rules and found these rules to 
be generally effective and well understood by the industry. In 
reviewing the posting rules, however, the Board found that the posting 
times for ECP transactions often create a disincentive for depository 
institutions to use Federal Reserve electronic check services. The 
Federal Reserve Banks deliver the majority of electronic check 
presentments in the morning, and the delivery of the ECP files 
constitutes legal presentment of the checks under the terms of the 
Federal Reserve's uniform Operating Circular 3. In accordance with the 
Board's objectives in designing the posting rules, the current posting 
rules stipulate that debits to depository institutions' Federal Reserve 
accounts for check presentments occur on the next clock hour that is at 
least one hour after presentment takes place, beginning at 11:00 a.m. 
Eastern Time (ET) and no later than 3:00 p.m. local time.\3\ Because 
the Reserve Banks generally deliver electronic check presentments in 
the morning, the corresponding debits occur at 11:00 a.m. ET. As a 
result, for many depository institutions, the posting times for 
electronic check presentments are earlier than the posting times 
associated with their paper check presentments.
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    \3\ On the day a paying bank receives a cash item from a Reserve 
Bank, it shall settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank, or 
return the item, by the latest of (1) the next clock hour that is at 
least one hour after the paying bank receives the item; (2) 9:30 
a.m. Eastern Time; or (3) such later time as provided in the Reserve 
Banks' operating circulars (12 CFR 210.9(b)).
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    The often earlier debit posting times associated with electronic 
check presentments have caused some depository institutions to incur 
daylight overdrafts earlier in the day and, in many cases, for longer 
periods of time. Because the Reserve Banks charge depository 
institutions a fee for the amount and duration of their Federal Reserve 
daylight credit use, the daylight overdraft charges of some 
institutions that have moved to electronic check services have grown 
substantially. As a result, some depository institutions have asserted 
that the increases in their daylight overdraft charges have reduced or 
eliminated the benefits of using Federal Reserve electronic check 
services.
    The Federal Reserve is interested in removing barriers that may 
discourage depository institutions from using electronic check 
services. For several years, the Federal Reserve has been working on 
various initiatives to apply electronic technologies to the check 
collection process to gain efficiencies and to reduce the associated 
costs and risks. Electronic check services provide operational 
efficiencies, improve accuracy of information, reduce costs, improve 
the likelihood of timely presentment, and improve opportunities for 
accessing and using cash management information. The Board is 
requesting comment on a proposed change to the posting times for ECP 
transactions to remove a barrier to the use of ECP.
    The Board also notes that its daylight credit policies are 
primarily intended to address intraday risk to the Federal Reserve 
arising from daylight overdrafts. Most transactions that lack 
settlement-day finality, such as checks, however, pose primarily 
interday, rather than intraday, risk. Modifying the posting times 
associated with ECP transactions should not create significant, if any, 
additional credit risk for the Reserve Banks.

II. Posting Times for ECP Transactions

    The Board proposes modifying the daylight overdraft posting rules 
to allow debits associated with ECP transactions to post at 1:00 p.m. 
local time in order to remove the disincentive created by the current 
posting rules for depository institutions to use Federal Reserve 
electronic check presentment services.\4\ A 1:00 p.m. local time 
posting time should remove the disincentive to move to electronic check 
presentment services created by the current posting rules. The Reserve 
Banks generally deliver electronic check presentment files by 10:00 
a.m. ET; and, therefore, many depository institutions currently receive 
the related debits at 11:00 a.m. ET.\5\ For many depository 
institutions, especially those not located in the Eastern Time zone, 
the 11:00 a.m. ET posting time is substantially earlier than the 
posting times associated with their paper check presentments. A posting 
time of 1:00 p.m. local time should reduce or eliminate the increase in 
daylight overdraft charges potentially created by the difference 
between the posting times of ECP and paper check presentment 
transactions.
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    \4\ The Reserve Banks would modify the operating circulars as 
necessary.
    \5\ The Reserve Banks usually deliver electronic check 
presentment files by 12:00 p.m. ET in the Pacific Time zone.
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    The Board also considered posting ECP debits at the time the paying 
bank's paper check presentments would have been posted. The problem 
with matching the posting times of ECP and paper check presentments is 
that, over time, as electronic check presentments replace the physical 
delivery of the paper checks for a larger proportion of banks and 
courier routes are modified or eliminated, there is no longer a 
reasonable basis for determining specific ECP posting times for each 
depository institution. Moreover, a single debit posting time in each 
time zone for ECP transactions is more straightforward than a debit 
posting time that matches the posting time of paper check presentments. 
In determining a single debit posting time, the Board considered the 
aggregate value of checks posted to depository institutions' Federal 
Reserve accounts by each hour of the day. Currently, the Reserve Banks 
post the vast majority of check transactions, on average approximately 
90 percent, by 1:00 p.m. local time. Because the Reserve Banks already 
post most checks by 1:00 p.m.

[[Page 30197]]

local time, the Board believes that applying this posting time to ECP 
transactions should minimize any disincentive created by the posting 
rules to move to electronic check presentment services.
    The primary drawback of posting ECP debits later in the day is the 
associated shift in posting credits to depository institutions' Federal 
Reserve accounts for check deposits to later in the day.\6\ 
Institutions must choose one of two check credit posting options: (1) 
All credits posted at a single float-weighted posting time or (2) 
fractional credits posted throughout the day. The first option allows 
an institution to receive all of its check credits at a single time, 
which may not necessarily fall on a clock hour, for each type of cash 
letter. The second option lets the institution receive a portion of its 
available check credits on the clock hours between 11:00 a.m. and 6:00 
p.m. ET. The option selected by an institution applies to all of its 
check deposits, including those for its respondents. Because the 
crediting fractions and single float-weighted posting times are based 
upon the Reserve Banks' ability to present checks and obtain settlement 
from payor institutions, posting times for check credits would become 
concentrated around 1:00 p.m. local time as more depository 
institutions began using Federal Reserve electronic check services. 
Consequently, depository institutions would receive their check credits 
somewhat later than they do today.\7\ In addition, changes to the 
posting rules might entail some costs for depository institutions that 
may have developed internal monitors and controls for the management of 
their daily account balances around current posting times; however, the 
Board believes that such costs would be minimal.
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    \6\ The Federal Reserve calculates the posting times for check 
credits based on surveys of check presentments in each time zone.
    \7\ If the Board modifies the posting rules to permit Reserve 
Banks to post debits for ECP transactions at 1:00 p.m. local time, 
the Federal Reserve will update the credit schedule concurrent with 
the effective date of the policy change and, as needed, thereafter. 
As a result, aggregate net intraday float would continue to be close 
to zero because the amounts of intraday credit and debit float 
created for brief periods generally would offset one another.
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III. Request for Comment

    The Board proposes changing the posting times associated with ECP 
transactions to 1:00 p.m. local time. This revised posting time would 
allow the Federal Reserve to remove the barriers associated with the 
current posting rules for ECP transactions while providing a single and 
straightforward posting time that should not adversely affect 
depository institutions' account management procedures and practices or 
Federal Reserve credit risk. The Board requests comment on all aspects 
of the proposed modification to the posting rules. The Board is also 
requesting specific comments on the following questions:
    1. Are there significant benefits or drawbacks associated with a 
posting time of 1:00 p.m. local time not identified in this notice?
    2. Does the proposed posting time provide Federal Reserve Banks an 
inappropriate competitive advantage relative to the ability of private-
sector banks or other service providers to compete in the provision of 
check collection services? If so, how?

IV. Competitive Impact Analysis

    The Board has established procedures for assessing the competitive 
impact of rule or policy changes that have a substantial effect on 
payments system participants.\8\ Under these procedures, the Board 
assesses whether a change would have a direct and material adverse 
effect on the ability of other service providers to compete effectively 
with the Federal Reserve in providing similar services due to differing 
legal powers or constraints, or due to a dominant market position of 
the Federal Reserve deriving from such differences. If no reasonable 
modifications would mitigate the adverse competitive effects, the Board 
will determine whether the expected benefits are significant enough to 
proceed with the change despite the adverse effects.
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    \8\ These procedures are described in the Board's policy 
statement ``The Federal Reserve in the Payments System,'' as revised 
in March 1990. (55 FR 11648, March 29, 1990).
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    To obtain settlement from paying banks for checks presented, the 
Reserve Banks debit directly the account of the paying bank or its 
designated correspondent (12 CFR 210.9(b)(5)). In contrast, a paying 
bank settles for checks presented by a private-sector bank for same-day 
settlement by sending a Fedwire funds transfer to the presenting bank 
or by another agreed-upon method (12 CFR 229.36(f)(2)). In addition, 
the Reserve Banks have the right to debit the account of the paying 
bank for settlement of checks on the next clock hour that is at least 
one hour after presentment (12 CFR 210.9(b)(2)) whereas a paying bank 
becomes accountable to a private-sector collecting bank if it does not 
settle for the check by the close of Fedwire on the day of presentment 
(12 CFR 229.36(f)(2)). In March 1998, the Board requested comment on 
whether these legal differences between the Reserve Banks and the 
private sector provided the Reserve Banks with a competitive advantage 
and, if so, whether these legal differences should be reduced or 
eliminated (63 FR 12700, March 16, 1998). Based on an analysis of the 
comments received, the Board concluded that these legal disparities do 
not materially affect the efficiency of or competition in the check 
collection system (63 FR 68701, December 14, 1998). The proposed 
posting rule change for ECP transactions decreases, rather than 
exacerbates, the legal disparities between the Reserve Banks and the 
private sector. The Board, therefore, believes that the proposed change 
would not have a direct or material adverse effect on the ability of 
other service providers to compete effectively with the Reserve Banks' 
payments services.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
ch. 3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the policy 
statement under the authority delegated to the Board by the Office of 
Management and Budget. No collections of information pursuant to the 
Paperwork Reduction Act are contained in the policy statement.

VI. Policy Statement on Payments System Risk

    The Board proposes to amend section I.A. under the heading 
``Modified Procedures for Measuring Daylight Overdrafts'' as follows 
with changes identified by italics:
* * * * *

Modified Procedures for Measuring Daylight Overdrafts \3\

Opening Balance (Previous Day's Closing Balance)
Post at 1:00 p.m. Local Time:
    --Electronic check presentments

    \3\ The posting changes do not affect the overdraft restrictions 
and overdraft-measurement provisions for nonbank banks established 
by the Competitive Equality Banking Act of 1987 and the Board's 
Regulation Y (12 CFR 225.52).

    By order of the Board of Governors of the Federal Reserve 
System, May 30, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-13980 Filed 6-4-01; 8:45 am]
BILLING CODE 6210-01-P