[Federal Register Volume 70, Number 41 (Thursday, March 3, 2005)]
[Notices]
[Pages 10402-10404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4110]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1214]


Reserve Bank Withdrawal From Noncash Collection Service

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved the withdrawal of the Federal Reserve 
Banks from the noncash collection service. The noncash collection 
service involves the collection and processing of definitive municipal 
bonds and coupons issued by state and local governments. The withdrawal 
from this service is prompted by the declining volume of definitive 
municipal securities, the expected underrecovery of costs in future 
years, and the availability of alternate service providers and 
substitutable services.

DATES: Items for deposit will be accepted until September 30, 2005, and 
withdrawal will be completed on December 30, 2005.

FOR FURTHER INFORMATION CONTACT: Kent Owens, Manager (202/728-5848), or 
Lyndsay Huot, Financial Services Analyst (202/452-5238), Division of 
Reserve Bank Operations and Payment Systems; for the hearing impaired 
only: Telecommunications Device for the Deaf, 202/263-4869.

SUPPLEMENTARY INFORMATION

I. Background

    The Federal Reserve Banks currently provide a service to depository 
institutions for the collection of matured or called definitive 
municipal securities.\1\ Definitive municipal securities are registered 
or bearer bonds that have been issued with interest coupons in 
certificated, or physical, form by local governments, as well as by 
states and their political subdivisions and agencies.\2\ The Reserve 
Banks

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currently accept deposits of matured or called bonds and coupons from 
depository institutions, identify the appropriate paying agent, and 
present the items to the paying agent for collection. These services 
are collectively referred to as the ``noncash collection service.''
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    \1\ The Reserve Banks will accept deposits of securities up to 
30 days prior to maturity.
    \2\ Such securities are ``noncash'' items under Regulation J (12 
CFR 210.2(k)).
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    On October 19, 2004, the Board requested comment on a proposal for 
the Reserve Banks to withdraw from the noncash collection service (69 
FR 61496). Several factors support the Reserve Banks' proposal to 
withdraw from this service: (1) The volume, customers, and paying 
agents in the market for noncash collection services are in decline, 
(2) the Reserve Bank service is facing future cost-recovery challenges, 
and (3) the private sector can provide an adequate level of similar or 
substitutable services to the market.
    Municipal bond and coupon volume has been declining since the 
passage of the Tax Equity and Fiscal Responsibility Act of 1982, which 
effectively eliminated the issuance of municipal bearer bonds. In 
recent years, the decline in volume has accelerated due to the increase 
in called bonds in the low-interest rate environment. In fact, over the 
past five years volume has decreased by an average of 20 percent 
annually and is expected to decline by a further one-third in 2005. The 
noncash collection service has also experienced a decline in customers, 
and, currently, there are only about 1,000 depository institutions that 
use the Reserve Banks' service. In addition, consolidation in the 
market has reduced the number of paying agents to which the Reserve 
Banks present noncash collection items from roughly 3,500 to about 100.
    Although the Reserve Banks have recovered the costs of their 
noncash collection service over the long run, they project a 
significant underrecovery of costs beginning in 2005. The declines in 
volume and customers, described above, have led to a general decline in 
service revenue. Because the noncash collection service is subject to 
strict custody control requirements for handling physical securities, 
its costs are largely fixed. The Reserve Banks believe that the 
interaction of these factors will lead to underrecovery in 2005 and 
beyond even if they raise fees significantly.
    Depository institutions have a number of options available for the 
processing of definitive municipal securities. The Depository Trust 
Company (DTC) and some correspondent banks provide services similar to 
the Reserve Banks' noncash collection service. Noncash collection 
customers that are also participants in DTC would be able to use DTC's 
coupon collection service as an alternative. If a customer is not 
already a participant in DTC, the benefits of using DTC for its 
municipal securities processing may not outweigh the cost of becoming a 
participant.\3\ These customers could use a correspondent bank to 
obtain noncash collection services. These correspondent institutions 
may, in turn, use DTC services, if they are participants, or they may 
present directly to the paying agents. These options should supply an 
adequate level of the same, or similar, services to customers that want 
to continue to use a service provider for a fee.
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    \3\ Based on the published 2004 fee schedule, the fee for a DTC 
participant account is $760 per account per month for the first five 
accounts.
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    In addition to the alternate service providers available, 
depository institutions have the option of presenting directly to the 
paying agent for the redemption of their definitive municipal 
securities. While depository institutions may incur additional internal 
resource costs to present directly, paying agents do not charge 
presenters for the redemption of their coupons or bonds. To facilitate 
the identification of paying agents, the Reserve Banks will make their 
paying agent database available on the Federal Reserve Financial 
Services Web site at http://www.frbservices.org. This database will 
include securities descriptions and contact information for the 
associated paying agents, including phone numbers and addresses. This 
option should reasonably meet the needs of customers that want to use 
their own resources to process definitive municipal securities, rather 
than use a fee-based service provider.

II. Summary of Comments and Analysis

    The Board has received four comments in response to this proposal--
two from bank trade associations, one from a commercial bank, and one 
from a Federal Reserve Bank. None of the commenters raised any 
objection to the proposal. One commenter requested the development of a 
transition plan for customers of the noncash collection service, 
including transition planning tools, a paying agent database, and a 
timeline for withdrawal. One commenter requested that the Reserve Banks 
begin providing customers with paying agent information on all 
collected items as they are processed and provide a listing of 
institutions that offer correspondent municipal coupon and bond 
collection services.
    In response to the request for a transition plan, the Board agrees 
with the need to provide information to customers to facilitate an 
orderly transition, and the Reserve Banks plan to provide transition 
information to their customers via the Federal Reserve Financial 
Services Web site at http://www.frbservices.org. The Reserve Banks will 
make their existing paying agent database available, in searchable 
form, to the public via the Web site by approximately midyear 2005 and 
will also coordinate opportunities for customers to receive training on 
how to use this database. The Reserve Banks will periodically update 
the database until they complete withdrawal, at which time the database 
will remain current as of the last day of the service. Additionally, 
the Board has specified the final date for acceptance of deposits, 
September 30, 2005, and the final date of the service, December 30, 
2005, to allow depository institutions to begin planning accordingly. 
The earlier cutoff date for deposits is necessary to allow the Reserve 
Banks sufficient time to process all items, including any items 
returned from paying agents, before completing withdrawal.
    In response to the request that the Reserve Banks provide customers 
information on paying agents with each processed item, the Board 
believes that the midyear availability of the paying agent database 
will allow customers sufficient time to plan to process their own items 
and, therefore, does not find it necessary to incur the cost of 
adjusting business processes in the short term. In response to the 
request for a listing of correspondent banks that offer a noncash 
collection service, the Board notes that the Reserve Banks do not have 
information on the full range of institutions that currently provide 
this service or those that may choose to enter the market. Therefore, 
the Board has concluded that it would not be appropriate to provide a 
partial list, which would discriminate among potential service 
providers. DTC is identified because of its unique role as a market 
utility that both processes and safekeeps municipal securities.

III. Competitive Impact Analysis

    The Board has established procedures for assessing the competitive 
impact of changes that 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

[[Page 10404]]

Reserve deriving from such differences.\4\ The withdrawal by the 
Reserve Banks from the noncash collection service will leave the 
provision of this service to private-sector providers; therefore, it 
will have no material, adverse effect on the ability of other service 
providers to provide similar services.
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    \4\ These procedures are described in the Board's policy 
statement ``The Federal Reserve in the Payments System,'' Federal 
Reserve Regulatory Service 9-1558.
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IV. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
ch. 3506; 5 CFR part 1320 Appendix A.1), the Board has reviewed the 
notice 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 notice.

    By order of the Board of Governors of the Federal Reserve 
System, February 28, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 05-4110 Filed 3-2-05; 8:45 am]
BILLING CODE 6210-01-P