[Federal Register Volume 76, Number 201 (Tuesday, October 18, 2011)]
[Proposed Rules]
[Pages 64259-64264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-26811]


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FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-1434]
RIN 7100 AD 84


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire: Elimination of ``As-of Adjustments'' 
and Other Clarifications

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice of proposed rulemaking; request for public comment.

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SUMMARY: The Board is requesting public comment on proposed amendments 
to Regulation J (Collection of Checks and Other Items by Federal 
Reserve Banks and Funds Transfers through Fedwire). The proposed 
changes would eliminate references to ``as-of adjustments'' consistent 
with the Board's proposed amendments to Regulation D to simplify 
reserves administration. The proposed amendments would also clarify 
that an institution's Administrative Reserve Bank is deemed to have 
accepted deposit of a check or other item even if the institution sends 
the item directly to another Federal Reserve Bank. The proposed 
amendments would further clarify that Regulation J continues to apply 
to a Fedwire funds transfer even if the funds transfer also meets the 
definition of ``remittance transfer'' under the Electronic Fund 
Transfer Act.

DATES: Comments must be submitted by December 19, 2011.

ADDRESSES: You may submit comments, identified by Docket No. R-1434 and 
RIN 7100 AD 84, by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information.
    Public comments may also be viewed electronically or in paper in 
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) 
between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Kara Handzlik, Senior Attorney (202) 
452-3852, Legal Division; Margaret Gillis DeBoer, Assistant Director 
(202) 452-3139, or Heather Wiggins, Senior Financial Analyst (202) 452-
3674, Division of Monetary Affairs; or Joseph Baressi, Project Leader, 
Division of Reserve Bank Operations and Payment Systems (202) 452-3959; 
for users of Telecommunications Device for the Deaf (TDD) only, contact 
(202) 263-4869; Board of Governors of the Federal Reserve System, 20th 
and C Streets, NW., Washington, DC 20551.

SUPPLEMENTARY INFORMATION: 

I. Background

    Subpart A of Regulation J governs the collection of checks and 
other items by the Federal Reserve Banks (Reserve Banks), including the 
types of checks or other items that may be sent to Reserve Banks, the 
order in which they are deemed to be handled, and the related 
warranties and indemnities. Subpart B of Regulation J sets forth the 
terms and conditions under which Reserve Banks receive and deliver 
payment orders from and to depository institutions over the Reserve 
Banks' Fedwire[reg] Funds Service (Fedwire).
    The Board is proposing amendments to Regulation J that would 
eliminate references throughout Regulation J to a Reserve Bank's use of 
``as-of adjustments.'' \1\ These amendments are consistent with the 
Board's proposed amendments to Regulation D, published elsewhere in the 
Federal Register, which would simplify reserves administration.\2\ The 
Board is also proposing amendments to subpart A of Regulation J to 
clarify where a check or other item is deemed to be accepted when it is 
sent to a Reserve Bank. Specifically, these amendments would clarify 
that when an institution sends a check or other item for collection to 
a Reserve Bank, the institution's Administrative Reserve Bank is deemed 
to have accepted deposit of the item even if the item was sent directly 
to another Reserve Bank.\3\ In addition, the Board is proposing 
amendments that would clarify the application of subpart B of 
Regulation J. Under these amendments, subpart B of Regulation J would 
continue to apply to a Fedwire funds transfer even if that funds 
transfer also meets the definition of ``remittance transfer'' under the 
recently revised Electronic Fund Transfer Act (``EFTA'').
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    \1\ If the Board eliminates references to as-of adjustments in 
its Regulations D and J, the Reserve Banks would make conforming 
changes to their operating circulars that set forth the terms of 
their services. The Reserve Banks' operating circulars are available 
at http://www.frbservices.org/regulations/operating_circulars.html.
    \2\ The proposed amendments to Regulation D, designed to reduce 
the administrative and operational costs associated with reserve 
requirements, would discontinue as-of adjustments for deposit 
revisions and replace all other as-of adjustments with direct 
compensation. The amendments would also create a common two-week 
maintenance period for all depository institutions, create a 
penalty-free band around reserve balance requirements in place of 
carryover and routine waivers, and eliminate the contractual 
clearing balance program.
    \3\ An institution's Administrative Reserve Bank is the Reserve 
Bank in whose District the institution is located. 12 CFR 210.2(c), 
see section 204.3(g) of Regulation D, 12 CFR 204.3(g) (location of 
depository institutions).
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II. Overview of Proposed Amendments

Eliminate References to As-of Adjustments

    Regulation J defines ``as-of adjustment'' for purposes of subpart B 
of the regulation as ``a debit or credit, for reserve- or clearing-
balance maintenance purposes only, applied to the reserve or clearing 
balance of a bank that either sends a payment order to a Federal 
Reserve Bank, or that receives a payment order from a Federal Reserve 
Bank, in lieu of an interest charge or

[[Page 64260]]

payment.'' \4\ Under Regulation J, a Reserve Bank may use either an as-
of adjustment or direct compensation (at the federal funds rate) to 
compensate for an error in transaction processing or other damages owed 
in connection with a Fedwire funds transfer. An as-of adjustment 
corrects the average level of balances maintained by the depository 
institution to the level that would have resulted had the error not 
been made. As-of adjustments (and direct compensation) are based on the 
principle that a depository institution should not gain or lose in its 
reserve or clearing balance position as a result of a Reserve Bank 
accounting or administrative error or a Reserve Bank delay in 
processing transactions. Regulation J also provides in subpart A that a 
Reserve Bank's operating circulars may include procedures for paying 
interest in the form of as-of adjustments in relation to the collection 
of checks and other items.
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    \4\ 12 CFR 210.26(b).
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    As noted above, the Board is proposing to amend Regulation D to 
simplify the rules governing the administration of reserve 
requirements. The proposed Regulation D amendments include 
discontinuing as-of adjustments related to deposit reporting revisions 
and replacing all other as-of adjustments with direct compensation. 
Direct compensation is either a debit or credit applied to an account 
to offset the effect of an error. Consistent with the Regulation D 
proposal, the Board is proposing to amend sections 210.3(a), 210.26(b), 
and 210.32(b) (along with the corresponding commentary) of Regulation J 
to eliminate references to as-of adjustments. Under the proposal, a 
Reserve Bank would continue to be able to pay direct compensation to a 
depository institution based on the federal funds rate in accordance 
with section 210.32(b) section 4A-506 of article 4A of the Uniform 
Commercial Code (UCC), as incorporated into Regulation J.\5\ The Board 
requests comment on whether use of the federal funds rate for the 
calculation of direct compensation is appropriate, and if not, the rate 
that the Board should use.\6\ The Board further requests comment on 
whether the Board should eliminate section 210.32(b)(1) of Regulation J 
entirely, as the Reserve Banks could simply pay direct compensation 
based on the provisions of UCC section 4A-506, which is already 
incorporated into Regulation J.
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    \5\ The Board has incorporated Article 4A of the UCC, a uniform 
state law governing funds transfers, into Regulation J, appendix B. 
In the event of any inconsistency between subpart B of Regulation J 
and Article 4A, subpart B of Regulation J shall prevail. 12 CFR 
210.25(b)(1).
    \6\ Article 4A-506(b) states that if the amount of interest is 
not determined by an agreement or rule, the applicable federal funds 
rate would apply.
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Acceptance of Deposits of Items

    Section 210.4 of Regulation J governs the sending and handling of 
checks and other items sent to Reserve Banks. Section 210.4 currently 
specifies the identity and order of the parties that are deemed to 
handle an item sent to a Reserve Bank for purposes of determining the 
rights and liabilities of the parties under Regulation J, Regulation CC 
(12 CFR part 229), and the UCC.
    The Reserve Banks have long permitted institutions to send checks 
and other items for collection directly to a Reserve Bank other than 
the institution's Administrative Reserve Bank. These ``direct sends'' 
have facilitated a more efficient and less costly check-processing 
infrastructure for depository institutions as well as for Reserve 
Banks. Approximately 99.9 percent of checks sent to the Reserve Banks 
for collection are sent as electronic items. In response to the 
continued nationwide decline in check usage and institutions' pervasive 
use of electronic check-clearing methods, the Reserve Banks have 
eliminated all but one of their paper-check-processing offices and have 
consolidated electronic check processing in a single location. An 
institution must send checks to the applicable location (depending on 
whether the check is deposited in paper or electronic form) even if it 
is not an office of the institution's Administrative Reserve Bank.
    Regulation J currently sets forth the order in which Reserve Banks 
are deemed to have handled a check or other item, whether it is 
deposited electronically or in paper form. Specifically, section 210.4 
provides that, for an item sent to a Reserve Bank for collection, the 
following parties are deemed to have handled the item in the following 
order: (1) The initial sender; (2) the initial sender's Administrative 
Reserve Bank; (3) the Reserve Bank that receives the item from the 
initial sender (if different from the initial sender's Administrative 
Reserve Bank); and (4) another Reserve Bank, if any, that receives the 
item from a Reserve Bank. The Board is proposing to amend section 
210.4(b)(1)(ii) to clarify that the ``handling'' of an item by the 
initial sender's Administrative Reserve Bank includes accepting the 
item for deposit. Thus, for purposes of determining the rights and 
liabilities of parties that send and handle checks and other items sent 
to a Reserve Bank, the Administrative Reserve Bank is deemed to have 
accepted deposit of the item from the initial sender even if the sender 
sends the item directly to another Reserve Bank. Proposed 210.4(b)(3) 
would further clarify that, in addition to Regulation J, Regulation CC, 
and the UCC, the identity and order of the parties in section 210.4(b) 
also determines the relationships and the rights and liabilities of the 
parties for purposes of sections 13(1) and 16(13) of the Federal 
Reserve Act, which govern deposits to Reserve Banks.\7\
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    \7\ 12 U.S.C. 342 and 360.
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Application of Regulation J to ``Remittance Transfers''

    As noted above, Fedwire funds transfers are governed by subpart B 
of Regulation J. A funds transfer, which is made up of a series of 
payment orders, may originate outside of the Fedwire system and be 
carried out only partly over Fedwire.\8\ Subpart B of Regulation J 
currently ``governs a funds transfer that is sent through Fedwire * * * 
even though a portion of the funds transfer is governed by the 
Electronic Fund Transfer Act [EFTA], but the portion of such funds 
transfer that is governed by the [EFTA] is not governed by'' Regulation 
J.\9\ This provision is slightly different from (and supersedes) the 
scope of UCC Article 4A-108, which provides that Article 4A does not 
apply ``to a funds transfer, any part of which is governed by the 
[EFTA].'' Until recently, the exclusion from Regulation J and Article 
4A of transactions governed by the EFTA did not create any gaps or 
overlap, because the EFTA excludes from the definition of ``electronic 
fund transfer'' wire transfers over systems that are not designed 
primarily for consumer transfers.\10\ The recently enacted Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), 
however, added a new section 919 to the EFTA. The new section 919 of 
the EFTA creates new protections for consumers who send remittance 
transfers to designated recipients located in a foreign country. 
Section 919 defines ``remittance transfer'' to include an electronic 
transfer of funds requested by a U.S. consumer sender through a 
remittance transfer provider, whether or not the

[[Page 64261]]

remittance transfer is also an electronic fund transfer as defined in 
the EFTA. Therefore, a Fedwire funds transfer could potentially be part 
of a remittance transfer under the new section 919 of the EFTA.\11\
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    \8\ A payment order is an unconditional instruction of a sender 
to a receiving bank to pay, or to cause another bank to pay, a fixed 
or determinable amount of money to a beneficiary. A funds transfer 
is a series of payment orders made for the purpose of making payment 
to the beneficiary of the order. See UCC Article 4A-103(a)(1) and 
4A-104(a) as incorporated into Regulation J, Appendix B.
    \9\ 12 CFR 210.25(b)(3).
    \10\ 15 U.S.C. 1693a(6)(B).
    \11\ See the Board's proposed amendments to Regulation E (12 CFR 
part 205) to implement section 919 of the EFTA. (76 FR 29902 (May 
23, 2011).) The Regulation E rulemaking will be completed by the 
Consumer Financial Protection Bureau in accordance with the 
provisions of the Dodd-Frank Act, which transferred rulemaking 
responsibility for most of the EFTA from the Board to the Bureau.
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    Consequently, under Regulation J's existing scope provision 
(section 210.25(b)(3)), Fedwire funds transfers that meet the EFTA's 
definition of ``remittance transfer'' could be viewed as ``governed 
by'' the EFTA and therefore not governed by Regulation J. The Board 
believes that this result would lead to legal uncertainty with respect 
to the rights and liabilities of the parties to a Fedwire funds 
transfer that is also a ``remittance transfer.'' Specifically, the EFTA 
governs disclosures and other rights with respect to the consumer 
senders of remittance transfers, but does not address the interbank 
rights and obligations that are established in Regulation J. To avoid a 
gap in coverage for Fedwire funds transfers, the Board is proposing to 
amend section 210.25 of Regulation J to clarify that Regulation J 
continues to apply to ``remittance transfers'' as defined by the EFTA, 
to the extent there is not an inconsistency between Regulation J and 
section 919 of the EFTA (in which case section 919 would prevail). This 
proposed clarification would ensure that the provisions of Regulation 
J, and therefore Article 4A of the UCC, apply to all Fedwire funds 
transfers, except to the extent that section 919 of the EFTA and rules 
established thereunder apply. The proposal would include clarifications 
in the commentary to section 210.25 as well.

Effective Date

    The Board proposes that the Regulation J amendments that would 
eliminate references to as-of adjustments be effective on the same date 
as the corresponding amendments to Regulation D. The Board proposes 
that these amendments take effect no earlier than the first quarter of 
2012. The Board believes that the other proposed amendments to 
Regulation J would not require institutions to take any action or incur 
any cost. Therefore, the Board proposes that these amendments take 
effect 30 days after the Board adopts a final rule. The Board requests 
comment on whether the proposed effective dates are appropriate.

III. Competitive Impact Analysis

    As a matter of policy, the Board subjects all operational and legal 
changes that could have a substantial effect on payment system 
participants to a competitive impact analysis.\12\ Pursuant to this 
policy, the Board assesses whether such proposed changes ``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 
because of a dominant market position of the Federal Reserve deriving 
from such legal differences.'' If as a result of this analysis the 
Board identifies an adverse effect on the ability to compete, the Board 
then assesses whether the associated benefits--such as improvements to 
payment system efficiency or integrity--can be achieved while 
minimizing the adverse effect on competition.
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    \12\ See ``The Federal Reserve in the Payments System,'' Fed. 
Res. Reg. Svc. ]] 9-1550, 9-1558 (Apr. 2009).
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    The proposed amendments that eliminate the use of as-of adjustments 
would require Reserve Banks to pay compensation in the form of explicit 
interest under UCC Article 4A-506, as is required of private-sector 
service providers. The proposed amendments to section 210.4, clarifying 
the status of the administrative Reserve Bank of a sender of a check, 
would not affect the competitive position of the Reserve Banks vis-
[agrave]-vis private-sector service providers. The proposed amendments 
to section 210.25, clarifying the applicability of Regulation J to 
remittance transfers as defined in the Electronic Fund Transfer Act, do 
not rely on legal powers unique to the Federal Reserve; private-sector 
service providers of funds transfer service have the ability to 
similarly amend their rules. Therefore, the Board does not believe the 
proposed changes to Regulation J would have any direct and material 
adverse effect on the ability of other service providers to compete 
with the Reserve Banks.

IV. Initial Regulatory Flexibility Analysis

    Congress enacted the Regulatory Flexibility Act (the ``RFA'') (5 
U.S.C. 601 et seq.) to address concerns related to the effects of 
agency rules on small entities and the Board is sensitive to the impact 
its rules may impose on small entities. The RFA requires agencies 
either to provide an initial regulatory flexibility analysis with a 
proposed rule or to certify that the proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
In accordance with section 3(a) of the RFA, the Board has reviewed the 
proposed regulation. In this case, the proposed rule would apply to all 
depository institutions. Based on current information, the Board 
believes that the proposed rule would not have a significant economic 
impact on a substantial number of small entities (5 U.S.C. 605(b)). 
Nonetheless, an Initial Regulatory Flexibility Analysis has been 
prepared in accordance with 5 U.S.C. 603 in order for the Board to 
solicit comment. The Board will, if necessary, conduct a final 
regulatory flexibility analysis after consideration of comments 
received during the public comment period.

1. Statement of the Need for, Objectives of, and Legal Basis for, the 
Proposed Rule

    The proposed amendments to Regulation J would eliminate references 
to ``as-of adjustments'' consistent with the Board's proposed 
amendments to Regulation D (12 CFR part 204), which simplify reserves 
administration. The proposed amendments would also clarify that an 
institution's Administrative Reserve Bank is deemed to have accepted 
deposit of a check or other item even if the institution sends the item 
directly to another Federal Reserve Bank. The proposed amendments would 
further clarify that Regulation J continues to apply to a Fedwire funds 
transfer even if the funds transfer also meets the definition of 
``remittance transfer'' under the Electronic Fund Transfer Act.

2. Small Entities Affected by the Proposed Rule

    The proposed rule would affect all institutions that use Federal 
Reserve Bank check or wire transfer services. Pursuant to regulations 
issued by the Small Business Administration (the ``SBA'') (13 CFR 
121.201), a ``small banking organization'' includes a depository 
institution with $175 million or less in total assets. Based on data 
reported as of March 31, 2011, the Board believes that there are 
approximately 10,723 small depository institutions, approximately 2,808 
of which have a master account with the Federal Reserve.

3. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The proposed rule would eliminate references to as-of adjustments 
and

[[Page 64262]]

replace the use of as-of adjustments with direct compensation based on 
the federal funds rate. As noted above, a depository institution should 
not be harmed by this amendment because the depository institution 
would continue to be compensated for a transaction error; the payment 
for the error would simply be in the form of direct compensation 
instead of an as-of adjustment. The other proposed amendments to 
Regulation J are clarifications and do not impose new requirements on 
depository institutions. The Board seeks information and comment on any 
costs that would arise from the application of the proposed rule.

4. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules

    The Board does not believe that any Federal rules duplicate, 
overlap, or conflict with the proposed rule. The proposed amendment to 
subpart B is intended to conform to proposed changes to Regulation D. 
The Board seeks comment regarding any statutes or regulations that 
would duplicate, overlap, or conflict with the proposed rule.

5. Significant Alternatives to the Proposed Rule

    The Board is unaware of any significant alternatives to the 
proposed rule that accomplish the stated objectives of the Board. The 
Board welcomes comment on any significant alternatives that would 
minimize the impact of the proposal on small entities.

V. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 appendix A.1), the Board reviewed the 
proposed rule under the authority delegated to the Board by the Office 
of Management and Budget (OMB). No collections of information pursuant 
to the PRA are contained in the proposed rule.
    Comments related to PRA review of this rulemaking should be sent to 
Cynthia Ayouch, Federal Reserve Board Clearance Officer, Division of 
Research and Statistics, Mail Stop 95-A, Board of Governors of the 
Federal Reserve System, Washington, DC 20551, with copies of such 
comments sent to the Office of Management and Budget, Paperwork 
Reduction Project (Regulation J), Washington, DC 20503.

List of Subjects in 12 CFR Part 210

    Banks, banking.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation J, 12 CFR part 210, as follows:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

    1. The authority citation for part 210 continues to read as 
follows:

    Authority: 12 U.S.C. 248(i), (j), and (o), 342, 360, 464, 4001-
4010, and 5001-5018.

    2. In Sec.  210.3, revise paragraph (a) to read as follows:


Sec.  210.3  General provisions.

    (a) General. Each Reserve Bank shall receive and handle items in 
accordance with this subpart, and shall issue operating circulars 
governing the details of its handling of items and other matters deemed 
appropriate by the Reserve Bank. The circulars may, among other things, 
classify cash items and noncash items, require separate sorts and 
letters, provide different closing times for the receipt of different 
classes or types of items, provide for instructions by an 
administrative Reserve Bank to other Reserve Banks, set forth terms of 
services, and establish procedures for adjustments on a Reserve Bank's 
books, including amounts, waiver of expenses, and payment of 
compensation.
* * * * *
    3. Section 210.4 is revised to read as follows:


Sec.  210.4  Sending items to Reserve Banks.

    (a) Sending of items. A sender, other than a Reserve Bank, may send 
any item to any Reserve Bank, whether or not the item is payable within 
the Reserve Bank's District, unless the sender's administrative Reserve 
Bank directs the sender to send the item to a specific Reserve Bank.
    (b) Handling of items.
    (1) The following parties, in the following order, are deemed to 
have handled an item that is sent to a Reserve Bank for collection:
    (i) The initial sender;
    (ii) The initial sender's administrative Reserve Bank (which is 
deemed to have accepted deposit of the item from the initial sender);
    (iii) The Reserve Bank that receives the item from the initial 
sender (if different from the initial sender's administrative Reserve 
Bank); and
    (iv) Another Reserve Bank, if any, that receives the item from a 
Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of 
this section is not a person that handles an item and is not a 
collecting bank with respect to an item.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), section 13(1) and section 16(13) of the Federal Reserve Act, and 
the Uniform Commercial Code. An initial sender's administrative Reserve 
Bank that is deemed to accept an item for deposit or handle an item is 
also deemed to be a sender with respect to that item. The Reserve Banks 
that are deemed to handle an item are deemed to be agents or subagents 
of the owner of the item, as provided in Sec.  210.6(a) of this 
subpart.
    (c) Checks received at par. The Reserve Banks shall receive cash 
items and other checks at par.
    4. In Sec.  210.25, revise paragraphs (b)(1) and (b)(3) to read as 
follows:


Sec.  210.25  Authority, purpose, and scope.

* * * * *
    (b) * * *
    (1) This subpart incorporates the provisions of article 4A set 
forth in appendix B to this subpart. In the event of an inconsistency 
between the provisions of the sections of this subpart and appendix B 
to this subpart, the provisions of the sections of this subpart shall 
prevail. In the event of an inconsistency between the provisions this 
subpart and section 919 of the Electronic Fund Transfer Act, section 
919 of the Electronic Fund Transfer Act shall prevail.
* * * * *
    (3) This subpart governs a funds transfer that is sent through 
Fedwire, as provided in paragraph (b)(2) of this section, even though a 
portion of the funds transfer is governed by the Electronic Fund 
Transfer Act, but the portion of such funds transfer that is governed 
by the Electronic Fund Transfer Act (other than section 919 governing 
remittance transfers) is not governed by this subpart.
* * * * *


Sec.  210.26  [Amended]

    5. In Sec.  210.26, paragraph (b) is removed and reserved.
    6. In Sec.  210.32, revise paragraphs (b)(1) and (b)(2), to read as 
follows:


Sec.  210.32  Federal Reserve Bank liability; payment of interest.

* * * * *
    (b) * * *

[[Page 64263]]

    (1) A Federal Reserve Bank shall satisfy its obligation, or that of 
another Federal Reserve Bank, to pay compensation in the form of 
interest under article 4A by paying compensation in the form of 
interest to its sender, its receiving bank, its beneficiary, or another 
party to the funds transfer that is entitled to such payment, in an 
amount that is calculated in accordance with section 4A-506 of article 
4A.
    (2) If the sender or receiving bank that is the recipient of an 
interest payment is not the party entitled to compensation under 
article 4A, the sender or receiving bank shall pass through the benefit 
of the interest payment by making an interest payment, as of the day 
the interest payment is effected, to the party entitled to 
compensation. The interest payment that is made to the party entitled 
to compensation shall not be less than the value of the interest 
payment that was provided by the Federal Reserve Bank to the sender or 
receiving bank. The party entitled to compensation may agree to accept 
compensation in a form other than a direct interest payment, provided 
that such an alternative form of compensation is not less than the 
value of the interest payment that otherwise would be made.
* * * * *
    7. In appendix A to subpart B:
    a. In section 210.25, revise paragraph (b).
    b. In section 210.26, revise paragraph (i).
    c. In section 210.32, revise paragraph (b).
    The revisions read as follows:

Appendix A to Subpart B of Part 210--Commentary

* * * * *

Section 210.25--Authority, Purpose, and Scope

* * * * *
    (b) Scope. (1) Subpart B of this part incorporates the 
provisions of article 4A set forth in appendix B of this part. The 
provisions set forth expressly in the sections of subpart B of this 
part supersede or preempt any inconsistent provisions of article 4A 
as set forth in appendix B of this part or as enacted in any state. 
The official comments to article 4A are not incorporated in subpart 
B of this part or this commentary to subpart B of this part, but the 
official comments may be useful in interpreting article 4A. Because 
section 4A-105 refers to other provisions of the Uniform Commercial 
Code, e.g., definitions in article 1 of the UCC, these other 
provisions of the UCC, as approved by the National Conference of 
Commissioners on Uniform State Laws and the American Law Institute, 
from time to time, are also incorporated in subpart B of this part. 
Subpart B of this part applies to any party to a Fedwire funds 
transfer that is in privity with a Federal Reserve Bank. These 
parties include a sender (bank or nonbank) that sends a payment 
order directly to a Federal Reserve Bank, a receiving bank that 
receives a payment order directly from a Federal Reserve Bank, and a 
beneficiary that receives credit to an account that it uses or 
maintains at a Federal Reserve Bank for a payment order sent to a 
Federal Reserve Bank. Other parties to a funds transfer are covered 
by this subpart to the same extent that this subpart would apply to 
them if this subpart were a ``funds-transfer system rule'' under 
article 4A that selected subpart B of this part as the governing 
law.
    (2) The scope of the applicability of a funds-transfer system 
rule under article 4A is specified in section 4A-501(b), and the 
scope of the choice of law provision is specified in section 4A-
507(c). Under section 4A-507(c), a choice of law provision is 
binding on the participants in a funds-transfer system and certain 
other parties having notice that the funds-transfer system might be 
used for the funds transfer and of the choice of law provision. The 
Uniform Commercial Code provides that a person has notice when the 
person has actual knowledge, receives notification, or has reason to 
know from all the facts and circumstances known to the person at the 
time in question. (See UCC Sec.  1-201(25).) However, under sections 
4A-507(b) and 4A-507(d), a choice of law by agreement of the parties 
takes precedence over a choice of law made by funds-transfer system 
rule.
    (3) If originators, receiving banks, and beneficiaries that are 
not in privity with a Federal Reserve Bank have the notice 
contemplated by Section 4A-507(c) or if those parties agree to be 
bound by subpart B of this part, subpart B of this part generally 
would apply to payment orders between those remote parties, 
including participants in other funds-transfer systems. For example, 
a funds transfer may be sent from an originator's bank through a 
funds-transfer system other than Fedwire to a receiving bank which, 
in turn, sends a payment order through Fedwire to execute the funds 
transfer. Similarly, a Federal Reserve Bank may execute a payment 
order through Fedwire to a receiving bank that sends it through a 
funds-transfer system other than Fedwire to a beneficiary's bank. In 
the first example, if the originator's bank has notice that Fedwire 
may be used to effect part of the funds transfer, the sending of the 
payment order through the other funds-transfer system to the 
receiving bank will be governed by subpart B of this part unless the 
parties to the payment order have agreed otherwise. In the second 
example, if the beneficiary's bank has notice that Fedwire may be 
used to effect part of the funds transfer, the sending of the 
payment order to the beneficiary's bank through the other funds-
transfer system will be governed by subpart B of this part unless 
the parties have agreed otherwise. In both cases, the other funds-
transfer system's rules would also apply to, at a minimum, the 
portion of these funds transfers going through that funds transfer 
system. Because subpart B of this part is federal law, to the extent 
of any inconsistency, subpart B of this part will take precedence 
over any funds-transfer system rule applicable to the remote sender 
or receiving bank or to a Federal Reserve Bank. If remote parties to 
a funds transfer, a portion of which is sent through Fedwire, have 
expressly selected by agreement a law other than subpart B of this 
part under section 4A-507(b), subpart B of this part would not take 
precedence over the choice of law made by the agreement even though 
the remote parties had notice that Fedwire may be used and of the 
governing law. (See 4A-507(d).) In addition, subpart B of this part 
would not apply to a funds transfer sent through another funds-
transfer system where no Federal Reserve Bank handles the funds 
transfer, even though settlement for the funds transfer is made by 
means of a separate net settlement or funds transfer through 
Fedwire.
    (4) Under section 4A-108, article 4A does not apply to a funds 
transfer, any part of which is governed by the Electronic Fund 
Transfer Act (EFTA) (15 U.S.C. 1693 et seq.). In general, Fedwire 
funds transfers to or from consumer accounts are exempt from the 
EFTA and Regulation E (12 CFR part 205). A funds transfer from a 
consumer originator or a funds transfer to a consumer beneficiary 
could be carried out in part through Fedwire and in part through an 
automated clearinghouse or other means that is subject to the EFTA 
or Regulation E. In these cases, subpart B would not govern the 
portion of the funds transfer that is governed by the EFTA or 
Regulation E. (See the commentary to section 210.26(i), ``Payment 
Order''.)
    (5) Section 919 of the EFTA, however, governs ``remittance 
transfers,'' which may include Fedwire funds transfers. Section 919 
of the EFTA sets out the obligations of remittance transfer 
providers with respect to consumer senders of remittance transfers. 
Section 919 of the EFTA generally does not affect the rights and 
obligations of financial institutions involved in a remittance 
transfer. To the extent that a Fedwire funds transfer is a 
``remittance transfer'' governed by section 919 of the EFTA, it 
continues to be governed by subpart B, except that, in the event of 
an inconsistency between the provisions of subpart B and section 919 
of the EFTA, section 919 of the EFTA shall prevail. For example, a 
consumer may initiate a remittance transfer governed by EFTA section 
919 from the consumer's account at a depository institution, and the 
depository institution may initiate that transfer by sending a 
payment order to a Reserve Bank through the Fedwire funds system. If 
the consumer subsequently exercised the right to cancel the 
remittance transfer and obtain a refund under the terms of EFTA 
section 919, the depository institution would be required to comply 
with section 919 even if the institution does not have a right to 
reverse the payment order sent to the Reserve Bank under subpart B.
    (6) Finally, section 4A-404(a) provides that a beneficiary's 
bank is obliged to pay the amount of a payment order to the 
beneficiary on the payment date unless acceptance of the payment 
order occurs on the payment date after the close of the funds-
transfer business day of the bank. The Expedited Funds Availability 
Act provides that funds received by a bank by wire transfer shall be 
available

[[Page 64264]]

for withdrawal not later than the banking day after the business day 
on which such funds are received (12 U.S.C. 4002(a)). That act also 
preempts any provision of state law that was not effective on 
September 1, 1989, that is inconsistent with that act or its 
implementing Regulation CC (12 CFR 229). Accordingly, the Expedited 
Funds Availability Act and Regulation CC may preempt section 4A-
404(a) as enacted in any state. In order to ensure that section 4A-
404(a), or other provisions of article 4A, as incorporated in 
subpart B of this part, do not take precedence over provisions of 
the Expedited Funds Availability Act, this section provides that 
where subpart B of this part establishes rights or obligations that 
are also governed by the Expedited Funds Availability Act or 
Regulation CC, the Expedited Funds Availability Act or Regulation CC 
provision shall apply and subpart B of this part shall not apply.
* * * * *

Section 210.26--Definitions

* * * * *
    (i) Payment Order. (1) The definition of ``payment order'' in 
subpart B of this part differs from the section 4A-103(a)(1) 
definition. The subpart B definition clarifies that, for the 
purposes of Subpart B of this part, automated clearinghouse 
transfers and certain messages that are transmitted through Fedwire 
are not payment orders. Federal Reserve Banks and banks 
participating in Fedwire send various types of messages relating to 
payment orders or to other matters, through Fedwire, that are not 
intended to be payment orders. Under the subpart B definition, these 
messages, and messages involved with automated clearinghouse 
transfers, are not ``payment orders'' and therefore are not governed 
by this subpart. The operating circulars of the Federal Reserve 
Banks specify those messages that may be transmitted through Fedwire 
but that are not payment orders.
    (2) In some cases, messages sent through Fedwire, such as 
certain requests for credit transfer, may be payment orders under 
article 4A, but are not treated as payment orders under subpart B 
because they are not an instruction to a Federal Reserve Bank to pay 
money.
    (3) This subpart and article 4A govern a payment order even 
though the originator's or beneficiary's account may be a consumer 
account established primarily for personal, family, or household 
purposes. Under section 4A-108, article 4A does not apply to a funds 
transfer any part of which is governed by the Electronic Fund 
Transfer Act. That act, and Regulation E implementing it, do not 
apply to funds transfers through Fedwire (see 15 U.S.C. 1693a(6)(B) 
and 12 CFR 205.3(b)), except that section 919 of the Electronic Fund 
Transfer Act may govern a Fedwire funds transfer that is a 
``remittance transfer.'' Such remittance transfers that are Fedwire 
funds transfers continue to be governed by this subpart. Thus, this 
subpart applies to all funds transfers through Fedwire even though 
some such transfers involve originators or beneficiaries that are 
consumers. (See also section 210.25(b) and accompanying commentary.)
* * * * *

Section 210.32--Federal Reserve Bank Liability; Payment of Interest

* * * * *
    (b) Payment of interest. (1) Under article 4A, a Federal Reserve 
Bank may be required to pay compensation in the form of interest to 
another party in connection with its handling of a funds transfer. 
For example, payment of compensation in the form of interest is 
required in certain situations pursuant to sections 4A-204 (relating 
to refund of payment and duty of customer to report with respect to 
unauthorized payment order), 4A-209 (relating to acceptance of 
payment order), 4A-210 (relating to rejection of payment order), 4A-
304 (relating to duty of sender to report erroneously executed 
payment order), 4A-305 (relating to liability for late or improper 
execution or failure to execute a payment order), 4A-402 (relating 
to obligation of sender to pay receiving bank), and 4A-404 (relating 
to obligation of beneficiary's bank to pay and give notice to 
beneficiary). Under section 4A-506(a), the amount of such interest 
may be determined by agreement between the sender and receiving bank 
or by funds-transfer system rule. If there is no such agreement, 
under section 4A-506(b), the amount of interest is based on the 
federal funds rate. Section 210.32(b) requires Federal Reserve Banks 
to provide compensation through an explicit interest payment.
    (2) Interest would be calculated in accordance with the 
procedures specified in section 4A-506(b). Similarly, compensation 
in the form of explicit interest will be paid to government senders, 
receiving banks, or beneficiaries described in section 210.25(d) if 
they are entitled to interest under this subpart. A Federal Reserve 
Bank may also, in its discretion, pay explicit interest directly to 
a remote party to a Fedwire funds transfer that is entitled to 
interest, rather than providing compensation to its direct sender or 
receiving bank.
    (3) If a bank that received an explicit interest payment is not 
the party entitled to interest compensation under article 4A, the 
bank must pass the benefit of the explicit interest payment made to 
it to the party that is entitled to compensation in the form of 
interest from a Federal Reserve Bank. The benefit may be passed on 
either in the form of a direct payment of interest or in the form of 
a compensating balance, if the party entitled to interest agrees to 
accept the other form of compensation, and the value of the 
compensating balance is at least equivalent to the value of the 
explicit interest that otherwise would have been provided.

    By order of the Board of Governors of the Federal Reserve 
System, October 7, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-26811 Filed 10-17-11; 8:45 am]
BILLING CODE 6210-01-P