[Federal Register Volume 73, Number 248 (Wednesday, December 24, 2008)]
[Notices]
[Pages 79127-79130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30628]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
[Docket No. OP-1346]
Policy on Payment System Risk; Daylight Overdraft Posting Rules
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Board has decided not to pursue at this time its proposal
to change the posting time to 8:30 a.m. for commercial and government
automated clearinghouse (ACH) debit transfers that are processed by the
Federal Reserve Banks' (Reserve Banks) FedACH service. (All times are
eastern time.) The proposal would have aligned the posting time for ACH
debit transfers with the posting time for ACH credit transfers, which
are currently posted at 8:30 a.m. on the settlement date. Commercial
and government ACH debit transfers processed by the Reserve Banks'
FedACH service will continue to be posted at 11 a.m., while commercial
and government ACH credit transfers will continue to be posted at 8:30
a.m. The credit and debit accounting entries associated with ACH credit
transfers and ACH debit transfers are posted simultaneously at the
appointed posting time. In line with this decision, the Board will not
move the posting time for Treasury Tax and Loan (TT&L) investments
associated with Electronic Federal Tax Payment System (EFTPS) ACH debit
transfers. These transactions will continue to be posted at 11 a.m. The
Board will reconsider the proposal in the future.
FOR FURTHER INFORMATION CONTACT: Jeffrey Marquardt, Deputy Director
(202-452-2360) or Susan Foley, Assistant Director (202-452-3596),
Division of Reserve Bank Operations and Payment Systems, Board of
Governors of the Federal Reserve System; for users of
Telecommunications Device for the Deaf (``TDD'') only, contact (202)
263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
On March 7, 2008, the Board requested comment on changing the
posting time for commercial and government ACH debit transfers that are
processed by the Reserve Banks' FedACH service to 8:30 a.m. (from 11
a.m.) on the settlement date to coincide with the posting time for
commercial and government ACH credit transfers.\1\ The Board outlined
four potential benefits from shifting earlier the posting time for ACH
debit transfers. First, for institutions that originate large values of
ACH debit transfers, the liquidity needed to fund the settlement of ACH
credit originations at 8:30 a.m. could be largely or entirely offset by
the receipt of funds from the settlement of ACH debit transfers also at
8:30 a.m.\2\ Second, the change could increase liquidity for
institutions that originate ACH debit transfers over the Electronic
Payments Network (EPN), the other ACH operator, but have transfers
delivered to receiving depository institutions over the FedACH network
(inter-operator transactions).\3\ All ACH debit transfers would settle
at 8:30 a.m. (with all ACH credit transfers) regardless of the operator
through which the transfer is originated. Third, moving the posting
time for ACH debit transfers to 8:30 a.m. would align the Reserve
Banks' FedACH settlement times with those of EPN. The Reserve Banks'
Retail Payments Office, which has primary responsibility for FedACH,
believed that this change would remove competitive disparities between
the two ACH operators and their participants that arise from different
settlement times for ACH debit transfers. Fourth, the change would
conform more closely to the Board's guidelines for measuring daylight
overdrafts, specifically the principle that encourages posting times to
be as close as possible to the delivery of payments to the receiving
institution. Because FedACH payments are processed in the early morning
hours, usually between 2 a.m. and 4 a.m., and payment advices are sent
to depository institutions generally by 6 a.m., posting ACH debit
transfers at 8:30 a.m. would shift the settlement time closer to the
payment delivery time.
---------------------------------------------------------------------------
\1\ See 73 FR 12443, March 7, 2008.
\2\ Liquidity refers to balances and intraday credit available
in Federal Reserve accounts to make payments.
\3\ Inter-operator transactions are posted to the Federal
Reserve accounts of the originating and receiving institutions
according to the Board's posting rules for the underlying ACH
transfers.
---------------------------------------------------------------------------
In its proposal, the Board also recognized that the simultaneous
posting of ACH debit and credit transfers would reduce, on average, the
available balances between 8:30 a.m. and 10:59 a.m. for the majority of
FedACH participants (approximately 95 percent). The majority of FedACH
participants currently gain balances from the posting of ACH credit
transfers at 8:30 a.m. If ACH debit transfers are also posted at 8:30
a.m., the gain in balances for these institutions will either diminish
or be eliminated. Many institutions would need to fund their Federal
Reserve accounts through daylight overdrafts or other funding sources.
The vast majority of
[[Page 79128]]
institutions that would need to fund their accounts are eligible to
incur daylight overdrafts, but the Board estimated that there are at
least thirty-five institutions affected that do not have access to
intraday credit.
In addition to proposing the change to the posting rules for ACH
debit transfers, the Board also intended, in consultation with the U.S.
Treasury, to move the posting of TT&L investments associated with EFTPS
ACH debit transfers to 8:30 a.m. The U.S. Treasury uses TT&L accounts
to collect taxes and invest excess Treasury balances with depository
institutions, including EFTPS tax payments collected through either ACH
credit or debit transfers. The TT&L investments are currently posted at
the same time as their respective ACH credit and debit transfers, at
8:30 a.m. and 11 a.m. The simultaneous posting for the collection of
these tax payments and investment of excess tax funds collected is
intended to minimize the effect of the daily tax collection on
aggregate reserve balances of the banking system. The Board intended to
shift the posting of TT&L investments associated with EFTPS ACH debit
transfers to the same time as ACH debit transfers to continue to
minimize the effect of fluctuations in government receipts on the
intraday reserve balances of the banking industry.
II. Summary of Comments and Analysis
The Board received twenty-seven comment letters on its proposed
policy to change the daylight overdraft posting rules. The commenters
included eight commercial banking organizations, nine bankers' banks
(including corporate credit unions), one government-sponsored entity
(GSE), one Reserve Bank, one private-sector clearing and settlement
system, and seven industry organizations. Nine commenters, including
commercial banking organizations, the Reserve Banks' Retail Payments
Office, and industry organizations, were generally supportive of the
proposed changes to help reduce the intraday liquidity needs of certain
depository institutions for ACH transfers. While supportive of the
proposal, several of these commenters raised concerns about other
institutions--particularly smaller institutions, institutions in
western time zones, and those that do not have access to intraday
credit--that would incur costs associated with the proposed change.
Seventeen commenters, including commercial banking organizations,
bankers' banks, industry organizations, and a GSE, opposed the proposed
change to posting rules. These commenters stated that the proposed
change would increase daylight overdrafts and create significant
funding and other costs for their institutions or members. Some of
these commenters either do not have or represent those that do not have
regular discount window access and thus do not have access to intraday
credit under the Board's Policy on Payment System Risk (PSR).\4\ These
institutions would need to hold higher balances overnight at the
Reserve Banks or find alternative sources to supply funding before 8:30
a.m. to avoid incurring daylight overdrafts and thereby avoid violating
the PSR policy and incurring daylight overdraft penalty fees.
---------------------------------------------------------------------------
\4\ See the PSR policy at http://www.federalreserve.gov/paymentsystems/psr/default.htm.
---------------------------------------------------------------------------
One commenter, a private-sector clearing and settlement system,
indicated that it had no objection to the proposed change but noted
that some depository institutions might incur greater daylight
overdrafts. This commenter, as well as several others, recommended
implementing the posting-rule change simultaneously with the proposed
changes to the PSR policy.\5\ The proposed PSR policy changes would
allow institutions to pledge voluntarily collateral and obtain a zero
daylight overdraft fee on the resulting collateralized daylight
overdrafts. Institutions that might incur daylight overdrafts from
earlier posting of ACH debit transfers would have the opportunity to
collateralize all or a portion of their daylight overdrafts to reduce
or eliminate daylight overdraft fees associated with the posting-rule
change.
---------------------------------------------------------------------------
\5\ The Board issued a separate proposal to address broad
changes to the PSR policy. See 73 FR 12417, March 7, 2008. The final
rule for these broad policy changes is published elsewhere in
today's Federal Register.
---------------------------------------------------------------------------
In responding to the proposal, the majority of commenters also
addressed the questions raised by the Board on competitive disparities,
availability of funds to customers of depository institutions,
liquidity concerns, cost estimates, and implementation time frames.
The Board asked whether the differences in settlement times caused
competitive disparities between the ACH operators or institutions that
use one or the other operator. Eight commenters stated that they
believed that there are no competitive disparities between ACH
operators or their participating depository institutions or that the
disparity resulting from the differences in settlement times is
negligible. Three of these commenters mentioned that they consider a
number of factors, including price and service levels, in choosing an
operator and believed others use similar criteria in making a decision
about what operator to use. Five commenters, however, believed that
FedACH and large originating depository institutions using FedACH would
be in a better position if they received credits earlier for the ACH
debit transfers they originate. These commenters generally believed
that FedACH and its customers are competitively disadvantaged relative
to EPN and its customers because of differences in settlement timing.
The Board also requested feedback on whether customers of
depository institutions would benefit from earlier availability of
funds. Two respondents noted that the posting-rule change could have
the opposite effect for the availability of funds for customers of
bankers' banks. Such customers would need to hold a higher value of
funds overnight and in the morning in order to cover the earlier debit
for ACH debit transfers, which would reduce the availability of funds
for those customers. Three commenters responded that the proposed
change would not have an effect on the availability of funds to their
customers and believed that there would be no change for most
depository institutions. Some of these commenters and one additional
commenter, however, acknowledged that the change could improve the
availability of funds to customers at certain depository institutions.
To the extent funds would be made available earlier, one commenter
stated that businesses would be able to manage their cash positions
earlier in the day and use those funds for other purposes.
The Board asked whether the proposed broad PSR policy changes,
which include a zero fee for collateralized daylight overdrafts, might
mitigate the liquidity concerns of originating institutions of ACH
debits without changing the posting rules. The simultaneous posting of
ACH credit and debit transfers could reduce the use of intraday
liquidity for certain originating depository institutions because they
would only need to fund the net amount at 8:30 a.m. Three commenters
noted that the broad PSR policy changes alone would be sufficient to
alleviate liquidity issues for most originating institutions. While in
agreement with these three commenters, another respondent stated that
liquidity concerns of large originating institutions could be best
mitigated if both the proposed broad PSR policy changes and the
proposed posting-rule change were adopted
[[Page 79129]]
simultaneously. This commenter and the other eight supporters of the
proposed change noted that simultaneous posting of ACH debits with ACH
credits would reduce the liquidity certain originating depository
institutions would need.
In addition, the Board sought feedback on whether the proposed
broad PSR changes would mitigate liquidity pressures for receiving
institutions if the posting-rule change were adopted. Six commenters
stated that the simultaneous adoption of the broad PSR policy and
posting-rule changes could mitigate liquidity issues created by the
posting-rule change for receiving institutions. Most of these
commenters, however, expressed concern about whether institutions,
especially large receiving depository institutions, would have
sufficient collateral to pledge to offset increases in daylight
overdrafts. In addition to these commenters, four other commenters
stated that either they or others do not have access to intraday credit
and thus the proposed PSR policy changes would not mitigate the effect
of the posting-rule change for those institutions. Two commenters
requested that the Federal Reserve allow bankers' banks that do not
have access to intraday credit to pledge collateral and receive
collateralized intraday credit at a zero fee. Under the current
eligibility criteria, collateralized credit at a zero fee would be
restricted to accountholders that have access to intraday credit.
In response to questions on costs, four commenters stated that the
cost of increased daylight overdrafts might not be significant if the
broad PSR policy changes were simultaneously implemented, although two
of these commenters indicated that some institutions, particularly
large receivers of ACH debit transfers, might not have sufficient
collateral or might not have access to daylight overdrafts and would
incur increased costs. A range of commenters identified interest-
related and other costs associated with the proposed posting-rule
change. Fifteen commenters believed that institutions without access to
intraday credit as well as their customers would be especially likely
to suffer lost interest income. Several of these commenters discussed
the opportunity cost of needing to fund their accounts the previous
night, including over weekends and holidays, rather than investing in
the market. Others discussed pursuing arrangements for the early return
of fed funds loans. Commenters expressed doubt that counterparties
would be willing to return fed funds loans before 8:30 a.m. and stated
that reduced rates would be associated with such arrangements, if
counterparties were willing.\6\ One commenter also raised the option of
holding greater contractual clearing balances to increase its earnings
credits for Reserve Banks' services but stated the earnings credits
would exceed its needs for Reserve Bank-provided priced services and
would be at a rate lower than alternative investments.
---------------------------------------------------------------------------
\6\ Today, a typical agreement for the early return of fed funds
loans includes a reduced rate and delivery by 9 a.m.
---------------------------------------------------------------------------
Eight respondents also highlighted the daily variability that makes
it difficult for receivers of ACH debit transfers to predict with
certainty their net debit positions before the day of settlement. This
variability might require institutions to hold higher overnight
balances than actually needed to ensure sufficient funds to cover ACH
debit transfers. For some, an alternative to holding overnight balances
or obtaining the early return of fed funds loans would be to hold
reserves voluntarily (and thus gain access to the discount window and
eligibility for intraday credit), but commenters indicated that holding
reserves would also entail significant costs.\7\ In addition, three
commenters noted that depository institutions located outside the
eastern time zone, particularly smaller institutions, might incur
additional staffing costs in order to manage their accounts before
normal business hours.
---------------------------------------------------------------------------
\7\ Bankers' banks, including corporate credit unions, are
depository institutions that are not required to maintain reserves
under the Board's Regulation D (12 CFR 204) because they are
organized solely to do business with other financial institutions,
are owned primarily by the financial institutions with which they do
business, and do not do business with the general public. Such
bankers' banks also generally are not eligible for Reserve Bank
discount window credit under the Board's Regulation A (12 CFR
201.2(c)(2)) and thus are not eligible for intraday credit under the
Board's PSR policy. Bankers' banks may waive their exemption from
reserve requirements under Regulation D to gain regular access to
the discount window and eligibility for intraday credit.
---------------------------------------------------------------------------
For implementation, the Board stated that, if adopted, it would
specify an effective date at least six months from the announcement of
a final rule. In response, six commenters stated that six months or
less would be a sufficient lead time for implementation, while two
commenters noted that implementation in six months would be a hardship.
Eight commenters requested that the Board align the implementation time
of the posting-rule changes with the implementation of the broad PSR
policy changes, although in citing a preference for simultaneous
implementation, two of these commenters requested bankers' banks
without access to intraday credit be able to pledge collateral for a
zero fee.
Three commenters requested that the Board implement the posting-
rule change after the Reserve Banks begin paying interest on Federal
Reserve account balances. Paying interest on Federal Reserve account
balances would reduce the opportunity cost of holding balances
overnight at the Federal Reserve to cover the earlier posting of ACH
debit transfers. In some cases, the interest paid by the Federal
Reserve may be greater than rates available in the market, which would
remove the opportunity cost of holding higher balances.\8\ To the
extent that the interest paid by the Federal Reserve is less than the
interest that could be obtained in the market, however, institutions
would still incur opportunity costs of holding balances at the Reserve
Banks, but the incremental cost would be greatly reduced through the
payment of interest on these balances. Paying interest on Federal
Reserve account balances would also reduce the costs for bankers' banks
to hold reserves voluntarily (by waiving their exemption from reserve
requirements) to gain access to the discount window and eligibility for
intraday credit. In holding reserves voluntarily, bankers' banks would
have the possibility of using daylight overdrafts to cover the earlier
posting of ACH debit transfers. While the original effective date for
paying interest on Federal Reserve account balances was October 2011,
the Board was granted authority for an earlier implementation in
October 2008. The Board issued an interim final rule to outline its
initial implementation for paying interest on Federal Reserve account
balances, which began on October 9, while also requesting comment on
certain aspects of the implementation.\9\
---------------------------------------------------------------------------
\8\ The rate paid by the Federal Reserve currently exceeds the
effective rate for fed funds loans. Institutions have a significant
incentive to hold balances, in particular excess balances (balances
held in excess of required reserve balances and clearing balances),
at the Reserve Banks.
\9\ See 73 FR 59482, October 9, 2008.
---------------------------------------------------------------------------
The Board has considered the comments on the proposed posting-rule
change and has decided not to pursue the change at this time. Almost
all commenters stated that the posting-rule change would place
additional costs and liquidity pressures on many institutions,
especially those institutions that do not have access to intraday
credit at the Reserve Banks, smaller institutions, and West Coast
institutions. Most commenters indicated that they do not believe
significant competitive disparities between the ACH operators or
depository
[[Page 79130]]
institutions result from differences in settlement times. It also does
not appear that customers of depository institutions would
significantly benefit from ACH debit transfers being settled earlier in
the day. In addition, the majority of commenters opposed the proposed
change and several of those that supported the change raised
significant concerns about its effect on other institutions.
The Board, however, believes that over time the payment of interest
on Federal Reserve account balances and the broad PSR policy changes,
which were announced separately today in the Federal Register, will
significantly mitigate the concerns raised by commenters. Interest on
Federal Reserve account balances will reduce the cost of holding
balances overnight to fund earlier posting of ACH debits and may
encourage institutions to hold reserves voluntarily, which would make
them eligible for intraday credit. The broad PSR policy changes will
also mitigate the cost of incurring greater daylight overdrafts through
the voluntary pledging of collateral for a zero fee.
While not pursuing the original proposal at this time, the Board
believes that the simultaneous posting of ACH credit and debit
transfers at 8:30 a.m. would enhance the efficiency of the payment
system in the long run. Institutions that originate large values of ACH
debit transfers would benefit from the need for less liquidity to
settle their ACH transfers. Such a change also would align the
settlement times for all ACH transfers so that it would not matter
through which operator an institution originated its ACH transfers. In
addition, the change would conform more closely to the Board's
guidelines for measuring daylight overdrafts. The Board will monitor
changes in the environment as the industry adjusts to the initial
implementation of paying interest on Federal Reserve account balances
and other market events and will reconsider the proposed posting-rule
change in the future.
By order of the Board of Governors of the Federal Reserve
System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-30628 Filed 12-23-08; 8:45 am]
BILLING CODE 6210-01-P