Federal Register, Volume 77 Issue 217 (Thursday, November 8, 2012)

[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 66980-67007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26864]

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FEDERAL RESERVE SYSTEM

[Docket No. OP-1448]

Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
has approved the private sector adjustment factor (PSAF) for 2013 of
$14.1 million and the 2013 fee schedules for Federal Reserve priced
services and electronic access. These actions were taken in accordance
with the requirements of the Monetary Control Act of 1980, which
requires that, over the long run, fees for Federal Reserve priced
services be established on the basis of all direct and indirect costs,
including the PSAF.

DATES: The new fee schedules become effective January 2, 2013.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee
schedules: Susan V. Foley, Associate Director, (202/452-3596); Samantha
J. Pelosi, Manager, Retail Payments, (202/530-6292); Linda S. Healey,
Senior Financial Services Analyst, (202/452-5274), Division of Reserve
Bank Operations and Payment Systems. For questions regarding the PSAF
and earnings credits on clearing balances: Gregory L. Evans, Deputy
Associate Director, (202/452-3945); Brenda L. Richards, Manager,
Financial Accounting, (202/452-2753); or John W. Curle, Senior
Financial Analyst, (202/452-3916), Division of Reserve Bank Operations
and Payment Systems. For users of Telecommunications Device for the
Deaf (TDD) only, please call 202/263-4869. Copies of the 2013 fee
schedules for the check service are available from the Board, the
Federal Reserve Banks, or the Reserve Banks' financial services web
site at www.frbservices.org.

SUPPLEMENTARY INFORMATION:

I. Private Sector Adjustment Factor and Priced Services

A. Overview--Each year, as required by the Monetary Control Act of
1980, the Reserve Banks set fees for priced services provided to
depository institutions. These fees are set to recover, over the long
run, all direct and indirect costs and imputed costs, including
financing costs, taxes, and certain other expenses, as well as the
return on equity (profit) that would have been earned if a private
business firm provided the services. The imputed costs and imputed
profit are collectively referred to as the PSAF.\1\ From 2002 through
2011, the Reserve Banks recovered 98.6 percent of their total expenses
(including imputed costs) and targeted after-tax profits or return on
equity (ROE) for providing priced services.\2\³
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\1\ The methodology for computing imputed profit and imputed
costs was changed for 2013 (see Attachment I). This change follows
the elimination of the clearing balance program (77 FR 21846, April
12, 2012). In the 2012 methodology, investment income is imputed and
netted with related direct costs associated with clearing balances
to estimate net income on clearing balances (NICB).
\2\ The ten-year recovery rate is based on the pro forma income
statement for Federal Reserve priced services published in the
Board's Annual Report. Effective December 31, 2006, the Reserve
Banks implemented Statement of Financial Accounting Standards (SFAS)
No. 158: Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans [Accounting Standards Codification (ASC) 715
Compensation--Retirement Benefits], which resulted in recognizing a
reduction in equity related to the priced services' benefit plans.
Including this reduction in equity results in cost recovery of 95.3
percent for the ten-year period. This measure of long-run cost
recovery is also published in the Board's Annual Report.
\3\ Over this period, the Reserve Banks have undertaken a range
of cost-reduction and revenue-generation initiatives as part of
their long-term business strategy. These initiatives have included
streamlining management structures, reducing staffing levels,
increasing productivity, and selectively raising fees. These
initiatives largely involved the check service, which contributes
significantly to overall cost recovery and drove several years of
under recovery earlier in the time period. For instance, the Reserve
Banks restructured the number of offices at which paper checks were
processed from forty-five at the beginning of 2003 to one location
in 2010. The System's electronic check processing was also
consolidated at one Federal Reserve site.

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[[Page 66981]]

Table 1 summarizes 2011 actual, 2012 estimated, and 2013 budgeted
cost-recovery rates for all priced services. Cost recovery is estimated
to be 101.4 percent in 2012 and budgeted to be 102.7 percent in 2013.
The check service accounts for nearly half of the total cost of priced
services and thus significantly influences the aggregate cost-recovery
rate.

Table 1--Aggregate Priced Services Pro Forma Cost and Revenue Performance a
[$ millions]
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1 \b\ 2 \c\ 3 4 \d\ 5 \e\
Year Revenue Total expense Net income Targeted roe Recovery rate
(roe) after targeted
[1-2] roe [1/(2+4)]
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2011 (actual)................... 478.6 444.4 34.1 16.8 103.8%
2012 (estimate)................. 446.3 431.0 15.3 9.1 101.4%
2013 (budget)................... 423.6 408.3 15.3 4.2 102.7%
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\a\ Calculations in table 1 and subsequent pro forma cost and revenue tables may be affected by rounding.
\b\ For 2011 and 2012, revenue includes net income on clearing balances (NICB). Clearing balances were assumed
to be invested in short-term Treasury securities and federal funds. NICB equals the imputed income from these
investments less earnings credits granted to holders of clearing balances. The cost of earnings credits is
based on the discounted three-month Treasury bill rate. For 2013, revenue includes imputed investment income
from additional equity imputed to meet minimum capital requirements.
\c\ The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses
include taxes, FDIC insurance, Board of Governors' priced services expenses, the cost of float, and interest
on imputed debt, if any. Credits or debits related to the accounting for pension plans under FAS 158 [ASC 715]
are also included.
\d\ Targeted ROE is the after-tax ROE included in the PSAF. For the 2012 estimate and 2011 actuals, the targeted
ROE reflects average actual clearing balance levels through July 2012 and December 2011, respectively. The
clearing balance program was eliminated in 2012; therefore, the clearing balances are not included in the 2013
budget.
\e\ The recovery rates in table 1 and subsequent tables do not reflect the unamortized gains or losses that must
be recognized in accordance with FAS 158 [ASC 715]. Future gains or losses, and their effect on cost recovery,
cannot be projected.

Table 2 portrays an overview of cost-recovery performance for the
ten-year period from 2002 to 2011, 2011 actual, 2012 budget, 2012
estimate, and 2013 budget by priced service.

Table 2--Priced Services Cost Recovery
[Percent]
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2002-2011 2011 2012 2012 2013
Priced service .............. Actual Budget Estimate Budget \a\
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All services.................... 98.6 103.8 101.2 101.4 102.7
Check........................... 97.6 105.4 102.2 103.8 107.2
FedACH.......................... 102.4 100.8 100.7 100.3 100.4
Fedwire Funds and NSS........... 101.8 103.0 99.2 98.3 98.0
Fedwire Securities.............. 102.2 103.1 102.6 98.2 100.9
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\a\ 2013 budget figures reflect the initial budget submissions from the Reserve Banks. The Reserve Banks will
transmit final budget data to the Board in November 2012, for Board consideration in December 2012. 2012
budget figures reflect the final budget as approved by the Board in December 2011.

1. 2012 Estimated Performance--The Reserve Banks estimate that they
will recover 101.4 percent of the costs of providing priced services in
2012, including imputed costs and targeted ROE, compared with a
budgeted recovery rate of 101.2 percent, as shown in table 2. Overall,
the Reserve Banks estimate that they will fully recover actual and
imputed costs and earn net income of $15.3 million, compared with the
target of $9.1 million. While the check service and the FedACH Service
are expected to achieve full cost recovery in 2012, the Fedwire Funds
and National Settlement Services and the Fedwire Securities Service are
expected to recover 98.3 and 98.2 percent of their costs, respectively.
The shortfalls are due to both lower revenue, associated with less-
than-anticipated volume growth, and greater costs, associated with
technological upgrades. Greater-than-expected check volume processed by
the Reserve Banks has been the single most significant factor
influencing priced services cost recovery.
2. 2013 Private Sector Adjustment Factor--The 2013 PSAF for Reserve
Bank priced services is $14.1 million. This amount represents a
decrease of $8.7 million from the revised 2012 PSAF estimate of $22.8
million. This reduction is primarily the result of a decrease in the
cost of equity, which is due to a lower amount of imputed equity
associated with the elimination of clearing balances, and the
elimination of the FDIC assessment.\4\ ⁵
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\4\ In October 2011, the Board approved a budgeted 2012 PSAF of
$29.9 million, which was based on the July 2011 clearing balance
level of $2,661.1 million. The 2012 estimated PSAF of $22.8 million,
which is based on actual average clearing balances that were
$2,073.3 at July 2012, reflects the elimination of the clearing
balance program effective July 12, 2012 (77 FR 21846, April 12,
2012). Clearing balances after July 12, 2012 were zero.
\5\ The Board has changed its methodology for calculating the
PSAF from a correspondent bank model to a publicly traded firm (PTF)
model. These changes affect the comparative analysis of the 2013 and
2012 PSAF. (Published elsewhere in today's Federal Register.)

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[[Page 66982]]

3. 2013 Projected Performance--The Reserve Banks project that the
check, FedACH, and Fedwire Securities Services will fully recover their
costs in 2013. The Reserve Banks also project that the Fedwire Funds
and National Settlement Service will achieve close to full-cost
recovery. Overall, the Reserve Banks project a priced services cost-
recovery rate of 102.7 percent in 2013, with a net income of $15.3
million, compared to a targeted ROE of $4.2 million.
The primary risks to the Reserve Banks' ability to achieve their
targeted cost recovery rates are unanticipated volume and revenue
reductions and the potential for cost overruns or delays with
technological upgrades. In light of these risks, the Reserve Banks will
continue to refine their business and operational strategies to manage
aggressively operating costs, take advantage of efficiencies gained
from technological upgrades, and increase product revenue.
4. 2013 Pricing--The following summarizes the Reserve Banks'
changes in fee schedules for priced services in 2013:

Check

The Reserve Banks will retain at current levels FedForward
and FedReturn fees for checks presented and returned electronically. At
the same time, the Reserve Banks will increase fees for items destined
for endpoints that receive substitute checks for forward items and for
return items.\6\ The per item fee charged for electronic deposits that
are presented as substitute checks will increase from $0.12 to $0.15
and the per item fee charged for electronic returns that are delivered
to the depositary bank as substitute checks will increase from $1.40 to
$1.45. The effective average fee for collecting a check destined to a
substitute check endpoint is expected to be $.1564, an increase of 19
percent, for forward items and $1.4500, an increase of 4 percent, for
return items.
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\6\ A substitute check is a paper reproduction of an original
check that contains an image of the front and back of the original
check and is suitable for automated processing in the same manner as
the original check.
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The projected weighted effective average price to collect
a check deposited electronically in 2013 will decline 4 percent to
$0.0186 and the weighted effective average price to return a check
deposited electronically will decline 3 percent to $0.6505. Virtually
all forward and return items are now delivered electronically.
The Reserve Banks also will simplify the fee structure for
paper check forward and return collection deposits. The Reserve Banks
will charge for two categories of forward collection deposits: encoded
and unencoded. The fees are $10.00 per cash letter and $2.00 for each
encoded item and $3.00 for each unencoded item. Additionally, the
Reserve Banks will charge for two categories of return item deposits:
qualified and unqualified. The fees are $15.00 per cash letter and
$5.00 for each qualified item and $12.00 for each unqualified return.
The fee to encode Canadian items will increase from $0.50 to $1.00 per
item.
The Reserve Banks project that approximately 0.01 percent
of check forward deposit volume and approximately 0.53 percent of
return check volume will be in paper-based products. The weighted
effective average price for clearing a forward paper item and
processing a return paper item in 2013 is projected to be $6.76 and
$7.89 (increases of 55 and 5 percent), respectively, which reflects the
high costs of handling the remaining paper volume.
The Reserve Banks will reduce their forward presentment
and return delivery options to FedReceipt Plus, PDF (for returns only),
and paper.\7\ Additionally, the Helena Pilot, in which paying banks in
the former Helena zone received FedReceipt Plus at no charge, will be
discontinued.\8\
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\7\ FedReceipt is electronic presentment with accompanying
images of all items delivered to a paying bank or depositary bank.
\8\ The Helena pilot was put in place in mid-2007 before the
Helena office closed to encourage Helena zone customers to move to
FedReceipt Plus, which would minimize the transportation costs
associated with delivering paper items once the office closed.
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The Reserve Banks also will introduce incentive pricing
for depository institutions that designate the Reserve Banks as their
electronic presentment and return point. Such depository institutions
will receive discounts on fees charged for electronically deposited and
returned items of $0.002 and $0.10, respectively. To receive the
discounts, depository institutions will be required to register for the
incentive, which will then begin the first full month after
registration.
With the 2013 fees, the price index for the total check
service will have increased 54 percent since 2003. In comparison, since
2005, the first full year in which the Reserve Banks offered Check 21
services, the price index for Check 21 services will have decreased
about 51 percent.

FedACH

The Reserve Banks will raise the fee charged to receivers
of ACH returns from $0.005 to $0.0075. The Reserve Banks will also
increase the FedACH monthly settlement fee from $45 to $50 per routing
number and the monthly international ACH transaction (IAT) output file
sort fee from $50 to $75 per routing number. The fee for facsimile
exception return and notification of change will rise from $30 to $45.
The Reserve Banks will also introduce volume-tiered
package pricing for the FedACH Risk Management and FedPayments Reporter
Services, to make more attractive the usage of these services.
With the 2013 fees, the price index for the FedACH service
will have decreased 6 percent since 2003.

Fedwire Funds and National Settlement

The Reserve Banks will implement a new per item fee of
$0.30 on all transfers sent and received that exceed $100 million
(high-value transfer surcharge). The Reserve Banks will also increase
the end-of-day origination surcharge from $0.20 to $0.21, the surcharge
for offline transfers from $40 to $45, and the monthly fee for the
usage of the FedPayments Manager import/export tool from $20 to $30.\9\
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\9\ This fee is charged to any Fedwire Funds participant that
originates a Fedwire Funds transfer message via the FedPayments
Manager (FPM) Funds tool and has the import/export processing option
setting active at any point during the month.
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The Reserve Banks will increase the Tier 1 per item pre-
incentive fee from $0.58 to $0.65 per transaction, the Tier 2 per item
pre-incentive fee from $0.24 to $0.25, and the Tier 3 per item pre-
incentive fee from $.0135 to $.0145.\10\
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\10\ The per item pre-incentive fee is the fee that the Reserve
Banks charge for transfers that do not qualify for incentive
discounts. The Tier 1 per item pre-incentive fee applies to the
first 14,000 transfers, the Tier 2 per item pre-incentive fee
applies to the next 76,000 transfers, and the Tier 3 per item pre-
incentive fee applies to any additional transfers. The Reserve Banks
apply an 80 percent incentive discount to every transfer over 50
percent of a customer's historic benchmark volume.
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The Reserve Banks will increase the National Settlement
Service's settlement file charge from $21 to $25 and the settlement
charge per entry from $1.00 to $1.20. The Reserve Banks will also
increase the National Settlement Service's surcharge for offline file
origination from $40 to $45.
With the 2013 fees, the price index for the Fedwire Funds
and National

[[Page 66983]]

Settlement Services will have increased 77 percent since 2003.

Fedwire Securities

The Reserve Banks will increase the online transfer fee
from $0.45 to $0.54.
The Reserve Banks will increase the monthly issue
maintenance fee from $0.45 to $0.54 per issue. The Reserve Banks will
also increase the claim adjustment fee from $0.66 to $0.75.
With the 2013 fees, the price index for the Fedwire
Securities Service will have increased 65 percent since 2003.

FedLine Access Solutions

The Reserve Banks will increase the fees on legacy
services, such as an additional $10 per month for FedMail Fax, $450 per
month for FedLine Direct (56K), and $100 per month for the Dial-Only
VPN surcharge. The Reserve Banks will also increase the monthly fees
for basic cash management reports within the accounting services.
The Reserve Banks will increase the monthly fees for
FedLine Direct Plus (256K) and FedLine Direct Premier (T1) by $100 and
$300, respectively. Fees for additional 256K and T1 connections will
also increase by $50, as well as the fees for additional FedLine
Command and FedLine Direct certificates by $20 per month. The Reserve
Banks will also increase FedMail Email by $10 per month. Monthly fees
for enhanced cash management reports, which include respondent and
subaccount activity will also increase.
Although the Reserve Banks will not change published fees,
they will raise certain volume thresholds for FedComplete packages,
which will improve the business case for customers.
Electronic access fees are allocated to each priced
service and are not separately reflected in comparison with the GDP
price index.
5. 2013 Price Index--Figure 1 compares indexes of fees for the
Reserve Banks' priced services with the GDP price index. Compared with
the price index for 2012, the price index for all Reserve Bank priced
services is projected to increase less than 1 percent in 2013. The
price index for total check services is projected to decrease
approximately 4 percent. The price index for Check 21 services is
projected to decrease approximately 5 percent, reflecting a slight
decrease in the effective prices paid to collect and return checks
using Check 21 services and wide adoption of electronic check services.
The price index for all other check services is projected to increase
less than 1 percent. The price index for electronic payment services,
which include the FedACH Service, Fedwire Funds and National Settlement
Services, and Fedwire Securities Service, is projected to increase
approximately 3 percent. For the period 2003 to 2013, the price index
for all priced services is expected to increase 64 percent. In
comparison, for the period 2003 to 2011, the GDP price index increased
20 percent.

[[Page 66984]]

[GRAPHIC] [TIFF OMITTED] TN08NO12.044

B. Private Sector Adjustment Factor--The method for calculating the
financing and equity costs in the PSAF requires determining the
appropriate imputed levels of debt and equity and then applying the
applicable financing rates. In this process, a pro forma balance sheet
using estimated assets and liabilities associated with the Reserve
Banks' priced services is developed, and the remaining elements that
would exist are imputed, as if these priced services were provided by a
private business firm. The same generally accepted accounting
principles that apply to commercial-entity financial statements apply
to the relevant elements in the priced services pro forma financial
statements.
The portion of Federal Reserve assets that will be used to provide
priced services during the coming year is determined using information
on actual assets and projected disposals and acquisitions. The priced
portion of these assets is determined based on the allocation of the
related depreciation expense. The priced portion of actual Federal
Reserve liabilities consists of pension and other benefits, accounts
payable, and other liabilities.
The equity financing rate is the targeted ROE rate produced by the
capital asset pricing model (CAPM). In the CAPM, the required rate of
return on a firm's equity is equal to the return on a risk-free asset
plus a market risk premium. To implement the CAPM, the risk-free rate
is based on the three-month Treasury bill; the beta is assumed to equal
1.0, which approximates the risk of the market as a whole; and the
monthly returns in excess of the risk-free rate over the most recent 40
years are used as the market risk premium. The resulting ROE influences
the dollar level of the PSAF because this is the return a shareholder
would require in order to invest in a private business firm.
For simplicity, given that federal corporate income tax rates are
graduated, state income tax rates vary, and various credits and
deductions can apply, an actual income tax expense is not calculated
for Reserve Bank priced services. Instead, the Board targets a pretax
ROE that would provide sufficient income to fulfill the priced
services' imputed income tax obligations. To the extent that actual
performance results are greater or less than the targeted ROE, income
taxes are adjusted using an imputed income tax rate.
The Board has changed its methodology for calculating the PSAF from
a correspondent bank model to a publicly traded firm (PTF) model. These

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changes affect the comparative analysis of the 2013 and 2012 PSAF.
(Published elsewhere in today's Federal Register.)
Capital structure. In the new PTF model, the capital structure is
imputed based on the funding need (assets less liabilities), subject to
minimum equity constraints. If estimated assets are in excess of
estimated liabilities, the Board imputes first debt funding (either
short- or long-term) and then equity to meet the capital structure of
the U.S. publicly traded firm market or minimum equity constraints.
Minimum equity follows the FDIC requirements for a well-capitalized
institution of at least 5 percent of total assets and 10 percent of
risk-weighted assets. If minimum equity constraints are not met after
imputing equity based on all other financial statement components,
additional equity is imputed to meet these constraints. Additional
equity imputed to meet minimum equity requirements is imputed as
invested in Treasury securities.
The capital structure in the correspondent bank model was derived
from the portion of Federal Reserve assets and liabilities associated
with priced services. Short-term debt was imputed only when short-term
liabilities were insufficient to fund short-term assets. Long-term debt
was imputed only when core clearing balances, other long-term
liabilities, and equity were not sufficient to fund long-term
assets.\11\ Short-term debt was imputed only when other short-term
liabilities and clearing balances not used to finance long-term assets
were insufficient to fund short-term assets. A portion of clearing
balances was used as a funding source for short-term priced-services
assets. In addition, long-term assets have been partially funded from
core clearing balances. Imputed equity was set to meet the FDIC
requirements for a well-capitalized institution for insurance premium
purposes and represents the market capitalization, or shareholder
value, for Reserve Bank priced services.\12\
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\11\ For 2012, $1 billion of core clearing balances were
considered the portion of the balances that has remained stable over
time without regard to the magnitude of actual clearing balances.
\12\ For 2013 and 2012 PSAF, the FDIC requirements for a well-
capitalized depository institution are 1) a ratio of total capital
to risk-weighted assets of 10 percent or greater, 2) a ratio of Tier
1 capital to risk-weighted assets of 6 percent or greater, and 3) a
leverage ratio of Tier 1 capital to total assets of 5 percent or
greater. The priced services balance sheet has no components of Tier
1 or total capital other than equity; therefore, requirements 1 and
2 are essentially the same measurement.
As used in this context, the term ``shareholder'' does not refer
to the member banks of the Federal Reserve System, but rather to the
implied shareholders that would have an ownership interest if the
Reserve Banks' priced services were provided by a private firm.
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Effective tax rate. As with the imputed capital structure, the
effective tax rate in the PTF model is based on data from U.S. publicly
traded firms. This tax rate is the mean of the weighted average rates
of the U.S. publicly traded firm market over the past 5 years.
The effective tax rate used in the correspondent bank model was an
imputed income tax rate that is the median of the rates paid by the top
50 bank holding companies based on deposit balances over the past five
years, adjusted to the extent that they invested in tax-free municipal
bonds.
Debt and equity financing. In the PTF model, the imputed short- and
long-term debt financing rates are derived from nonfinancial commercial
paper rates from the Federal Reserve Board's H.15 Selected Interest
Rates release and the annual Merrill Lynch Corporate & High Yield Index
rate, respectively. The rates for debt and equity financing are applied
to the priced services estimated imputed liabilities and imputed equity
derived from the target capital structure. In the correspondent bank
model, the debt financing rate, where applicable, was based on the debt
financing rate observed from data from the top 50 bank holding
companies.
Net income on clearing balances. In 2012, the correspondent bank
model imposed investment constraints based on interest rate
fluctuations. Because of cost recovery sensitivity constraints to
interest rate fluctuations, the investment of clearing balances in 2012
was limited to three-month Treasury bills (with no additional imputed
constant spread from an imputed investment portfolio). Clearing
balances were eliminated in July 2012, and therefore are no longer a
factor in calculating the PSAF.
1. Calculating Cost Recovery--In 2012, the PSAF and NICB are
incorporated into the projected and actual cost-recovery calculations
for Reserve Bank priced services. When calculating actual cost recovery
for the priced services at the end of each year, the Board historically
has used the PSAF derived during the price-setting process with only
minimal adjustments for actual rates or balance levels.\13\ Beginning
in 2009, in light of the uncertainty about the long-term effect that
the payment of interest on reserve balances would have on the level of
clearing balances, the Board adjusted the PSAF used in the actual cost-
recovery calculation to reflect the actual clearing balance levels
maintained throughout the year.
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\13\ The largest portion of the PSAF, the target ROE,
historically has been fixed. Imputed sales tax, income tax, and the
FDIC assessment (where applicable) are recalculated at the end of
each year to adjust for actual expenditures, net income, and
clearing balance levels.
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The NICB in the correspondent bank model was imputed based on the
assumption that the Reserve Banks invest clearing balances net of an
imputed reserve requirement and balances used to finance priced
services assets.\14\ The Reserve Banks imputed a constant spread,
determined by the return on a portfolio of investments, over the three-
month Treasury bill rate and applied this investment rate to the net
level of clearing balances.\15\ A return on the imputed reserve
requirement, which was based on the level of clearing balances on the
pro forma balance sheet, was imputed to reflect the return that would
be earned on a required reserve balance held at a Reserve Bank. The
clearing balance program was eliminated effective July 12, 2012 as a
part of reserve simplification efforts.\16\
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\14\ Reserve requirements are the amount of funds that a
depository institution must hold, in the form of vault cash or
deposits with Federal Reserve Banks, in reserve against specified
deposit liabilities. The dollar amount of a depository institution's
reserve requirement is determined by applying the reserve ratios
specified in the Board's Regulation D to the institution's
reservable liabilities. The Reserve Banks priced services impute a
reserve requirement of 10 percent, which is applied to the amount of
clearing balances held with the Reserve Banks and to credit float.
\15\ The allowed portfolio of investments is comparable to a
bank holding company's investment holdings, such as short-term
Treasury securities, government agency securities, federal funds,
commercial paper, long-term corporate bonds, and money market funds.
The investments imputed for 2012 are three-month Treasury bills and
federal funds.
\16\ 77 FR 21846, April 12, 2012.
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The calculation also involved determining the priced services cost
of earnings credits (amounts available to offset service fees) on
contracted clearing balances held, net of expired earnings credits,
based on a discounted three-month Treasury bill rate. Rates and
clearing balance levels used in the 2012 estimated NICB were based on
July 2012 rates and clearing balance levels.
2. Analysis of the 2013 PSAF--The decrease in the 2013 PSAF is due
primarily to the elimination of the clearing balance program and the
resulting reduction in the level of imputed investments and equity.
Projected 2013 Federal Reserve priced-services assets, reflected in
table 3, have decreased $3,324.3 million as compared to 2012, as a
result of the decline in imputed investments associated with the
elimination of clearing balances.
Credit float, which represents the difference between items in
process of

[[Page 66986]]

collection and deferred credit items, decreased to $550.0 million in
2013 from $1,100.0 million in 2012.\17\ The decrease is primarily a
result of decreased use of products that tend to generate credit float.
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\17\ Credit float occurs when the Reserve Banks present
transactions to the paying bank prior to providing credit to the
depositing bank.
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As previously mentioned, the clearing balance program was
discontinued in 2012, eliminating clearing balances as a funding source
in 2013. The PTF methodology for calculating PSAF in 2013 does not
incorporate clearing balances; therefore, funding for assets is derived
exclusively from debt and equity. In 2013, $14.4 million in short-term
debt was imputed to meet financing needs of short-term assets.
Additional equity was imputed to meet the minimum capital to risk-
weighted asset ratio constraint of the PTF model. In 2012, clearing
balances are available as a funding source for priced-services assets.
As shown in table 4, in 2012, $19.2 million in clearing balances was
used as a funding source for short-term assets. Long-term liabilities
and equity exceeded long-term assets by $124.9 million; therefore, no
core clearing balances were used to fund long-term assets. In 2013,
additional equity imputed was $58.1 million and the corresponding
investment income was $0.1 million.
In 2013, minimum equity constraints were not met after imputing
equity based on all other financial statement components. The
calculation of cost recovery included imputing investment income
associated with additional equity that resulted from imputing equity to
meet the equity constraints in the model. If additional equity is
imputed to meet these constraints, it is invested in Treasury
securities.
As shown in table 3, the amount of equity imputed for the 2013 PSAF
is $72.3 million, a decrease of $162.4 million from the imputed equity
for 2012. In accordance with FAS 158 [ASC 715], this amount includes an
accumulated other comprehensive loss of $615.3 million. In 2013, the
capital-to-total-assets ratio and the capital-to-risk-weighted-assets
ratio must be equal to or greater than the regulatory requirements for
a well-capitalized depository institution. The ratio of capital to
risk-weighted assets is calculated at 10 percent, and equity exceeds 5
percent of total assets.\18\ For 2013, with the replacement of the
correspondent bank model, the FDIC assessment no longer applies. For
2012, the Reserve Banks imputed an FDIC assessment of $2.2 million for
the priced services based on the FDIC's assessment rates and the level
of total priced services assets on the pro forma balance sheet.\19\
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\18\ In December 2006, the Board, the FDIC, the Office of the
Comptroller of the Currency, and the Office of Thrift Supervision
announced an interim ruling that excludes FAS 158 [ASC 715]-related
accumulated other comprehensive income or losses from the
calculation of regulatory capital. The Reserve Banks, however,
elected to include accumulated other comprehensive income or losses,
as indicated above, until the regulators announce a final ruling.
\19\ The FDIC changed the base of its assessments from deposits
to total assets. For information on the FDIC assessment rates, see
the Final Rule at http://www.fdic.gov/news/news/press/2011/pr11028.html.
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Table 5 shows the imputed PSAF elements for 2013 and 2012,
including the pretax ROE and other required PSAF costs. The $13.1
million decline in the 2012 ROE of $19.9 million is mainly caused by a
lower amount of imputed equity. Imputed sales taxes decreased to $3.3
million in 2013 from $3.7 million in 2012. The effective income tax
rate used in 2013 increased to 38.5 percent from 30.9 percent in 2012.
The priced services portion of the Board's expenses decreased $0.1
million to $4.0 million in 2013 from $4.1 million in 2012.
BILLING CODE 6210-01-P

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C. Check Service--Table 8 shows the 2011 actual, 2012 estimated,
and 2013 budgeted cost recovery performance for the commercial check
service.

[[Page 66991]]

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1. 2012 Estimate--For 2012, the Reserve Banks estimate that the
check service will recover 103.8 percent of total expenses and targeted
ROE, compared with the budgeted recovery rate of 102.2 percent. The
Reserve Banks expect to recover all actual and imputed costs of
providing check services and earn a net income of $12.2 million (see
table 8). Greater-than-expected check volume processed by the Reserve
Banks has influenced significantly the check services cost recovery as
additional fee revenue has exceeded the costs of processing new
volumes.\34\
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\34\ The greater-than-expected check volume is attributed to two
new FedForward deposit options, which were introduced in late 2011:
premium mixed and select mixed. The premium mixed option allows
customers to send forward collection items in a mixed cash letter
for a higher cash letter fee and lower electronic per-item fee. The
select mixed option offers similar incentives; however, the customer
sends forward collection items drawn on specific forward collection
routing numbers in separate cash letters.
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The general decline in the number of checks written continues to
influence the decline in checks collected by the Reserve Banks. Through
August, total forward check volume and return check volume is 3 percent
and 19 percent lower, respectively, than for the same period last year.
For full-year 2012, the Reserve Banks estimate that their total forward
check collection volume will decline nearly 5 percent and return check
volume will decline 21 percent from 2011 levels.\35\ The proportion of
checks deposited and presented electronically continues to grow (see
table 9). The Reserve Banks expect that year-end 2012 FedForward
deposit and FedReceipt presentment penetration rates will exceed 99.9
percent.\36\ The Reserve Banks also expect that year-end 2012 FedReturn
and FedReceipt Return volume penetration rates will reach 99.2 percent
and 95.0 percent, respectively.\37\
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\35\ Total Reserve Bank forward check volumes are expected to
drop from roughly 6.7 billion in 2011 to 6.4 billion in 2012. Total
Reserve Bank return check volumes are expected to drop from roughly
60.4 million in 2011 to 47.7 million in 2012.
\36\ FedForward is the electronic forward check collection
product. FedReceipt is electronic presentment with accompanying
images.
\37\ FedReturn is the electronic check return product.
FedReceipt Return is the electronic delivery of returned checks with
accompanying images.
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[[Page 66992]]

2. 2013 Pricing--In 2013, the Reserve Banks project that the check
service will recover 107.2 percent of total expenses and targeted ROE.
Revenue is projected to be $185.3 million, a decline of 15 percent from
2012. This decline is driven largely by projected reductions in both
forward check collection and return check volume. Total expenses for
the check service are projected to be $171.1 million, a decline of 17
percent from 2012. The reduction in check costs is driven primarily by
the cost savings associated with a mature electronic check environment
and the implementation of a more efficient check processing
platform.\38\
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\38\ The Reserve Banks are scheduled to complete a multi-year
check platform modernization initiative in October 2012.
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The Reserve Banks estimate that total Reserve Bank forward check
volumes will decline approximately 8 percent to 5.9 billion and return
check volumes will decline approximately 16 percent to 40.2 million.
The decline in Reserve Bank check volume can be attributed to the
continued decline in check use nationwide.\39\
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\39\ In addition, return items have declined due to posting
practices at paying banks.
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The Reserve Banks will retain at current levels FedForward and
FedReturn fees for checks presented and returned electronically. At the
same time, the Reserve Banks will increase fees for items destined for
endpoints that receive substitute checks for forward items and for
return items.\40\ The per item fee charged for FedForward items that
are presented as substitute checks will increase from $0.12 to $0.15
and the per item fee charged for FedReturn items that are delivered to
the depositary bank as substitute checks will increase from $1.40 to
$1.45. The effective average fee for collecting a check for a
substitute check endpoint is expected to be $.1564, an increase of 19
percent, for forward items and $1.4500, an increase of 4 percent, for
return items.
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\40\ A substitute check is a paper reproduction of an original
check that contains an image of the front and back of the original
check and is suitable for automated processing in the same manner as
the original check.
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\41\ The weighted average prices are dependent on deposit
product mix, deadlines, and electronic receipt penetration rates.
The weighted average fees are based on continued movement to lower
priced deposit options and increased electronic receipt penetration
rates for full year 2012 and projected for full year 2013.
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The Reserve Banks will also simplify the fee structure for paper
check forward and return collection deposits. The Reserve Banks will
charge for two categories of forward collection deposits: encoded and
unencoded. The fees are $10.00 per cash letter and $2.00 for each
encoded item and $3.00 for each unencoded item. Additionally, the
Reserve Banks will charge for two categories of return item deposits:
qualified and unqualified. The fees are $15.00 per cash letter and
$5.00 for each qualified item and $12.00 for each unqualified. The fee
to encode Canadian items will increase from $0.50 to $1.00 per item.
The Reserve Banks project that approximately 0.01 percent of check
forward deposit volume and approximately 0.53 percent of return check
volume will be in paper-based products. The weighted effective average
price for clearing a forward paper item and processing a return paper
item in 2013 is projected to be $6.7586 and $7.8891 (increases of 55
and 5 percent), respectively, which reflects the high costs of handling
the remaining paper volume.
The Reserve Banks will reduce their forward presentment and return
delivery options to FedReceipt Plus, PDF (for Returns only), and
paper.\42\ Additionally, the Helena Pilot, in which paying banks in the
former Helena zone received FedReceipt Plus at no charge, will be
discontinued.\43\
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\42\ FedReceipt is electronic presentment with accompanying
images of all items delivered to a paying bank or depositary bank.
For those depository institutions that do not have the ability to
accept forward or return items in X9.37 format, the Reserve Banks
can send a PDF file of the depository institution's inclearings and
incoming returns directly to a printer located at the depository
institution. The PDF file takes the place of physical delivery of
paper checks.
\43\ The Helena pilot was put in place in mid-2007 before the
Helena office closed to encourage Helena zone customers to move to
FedReceipt Plus, which would minimize the transportation costs
associated with delivering paper items once the office closed.
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The Reserve Banks will introduce incentive pricing for depository
institutions that designate the Reserve Banks as their electronic
presentment and return point. Such depository institutions will receive
discounts on fees charged for electronically deposited and returned
items of $0.002 and $0.10, respectively. To receive the discounts,
depository institutions will be required to register for the incentive,
which will then begin the first full month after registration.
Risks to the Reserve Banks' ability to achieve budgeted 2013 cost
recovery for the check service include greater-than-expected check
volume losses to correspondent banks, aggregators, and direct
exchanges, which would result in lower-than-anticipated revenue, and
higher-than-expected support and overhead costs.
D. FedACH Service--Table 11 shows the 2011 actual, 2012 estimate,
and 2013 budgeted cost-recovery performance for the commercial FedACH
service.
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[[Page 66993]]

1. 2012 Estimate--The Reserve Banks estimate that the FedACH
service will recover 100.3 percent of total expenses and targeted ROE.
The Reserve Banks expect to recover all actual and imputed costs of
providing FedACH services and earn net income of $2.7 million. Through
August, FedACH commercial origination volume was nearly 4 percent
higher than it was during the same period last year. For the full year,
the Reserve Banks estimate that volume growth will continue at current
trends.
2. 2013 Pricing--The Reserve Banks project that the FedACH service
will recover 100.4 percent of total expenses and targeted ROE in 2013.
Total revenue is expected to increase $1.5 million from the 2012
estimate, primarily due to projected growth in FedACH commercial
origination and receipt volume of 3.0 percent. Total expenses are
budgeted to increase $3.7 million from the 2012 estimate, generally due
to costs associated with development of a new FedACH technology
platform.
The Reserve Banks will maintain core transaction fees at current
levels with one exception. The Reserve Banks will increase the per item
fee charged to receivers of ACH returns from $0.005 to $0.0075. In
addition, the Reserve Banks will increase fees for select FedACH
services. Specifically, the Reserve Banks will increase monthly fees
for FedACH settlement and IAT output file sort, as well as, the per
item fees for facsimile exception return and notification of change.
The Reserve Banks will also introduce volume-tiered package pricing for
the FedACH Risk Management and FedPayments Reporter Services, to make
these services more attractive to customers. The Reserve Banks will
also standardize the on-demand report fee for the FedPayments Reporter
Service.
The primary risk to the Reserve Banks' ability to achieve budgeted
2013 cost recovery for the FedACH service is higher-than-expected
support and overhead costs. Other risks include lower-than-expected
volume due to unanticipated mergers and acquisitions, direct exchanges,
and the competitive environment, which would result in lower-than-
anticipated revenue, and cost overruns associated with unanticipated
problems with technology upgrades.
E. Fedwire Funds and National Settlement Services--Table 12 shows
the 2011 actual, 2012 estimate, and 2013 budgeted cost-recovery
performance for the Fedwire Funds and National Settlement Services.
[GRAPHIC] [TIFF OMITTED] TN08NO12.052

1. 2012 Estimate--The Reserve Banks estimate that the Fedwire Funds
and National Settlement Services will recover 98.3 percent of total
expenses and targeted ROE, compared with a 2012 budgeted recovery rate
of 99.2 percent. The lower-than-projected recovery rate is primarily
attributed to higher-than-expected information technology costs.
Through August, average daily Fedwire Funds volume was up 4.3 percent
from the same period in 2011. For the full year, the Reserve Banks
estimate that Fedwire Funds volume will increase by 2.5 percent. With
respect to the National Settlement Service, the volume of settlement
files increased 29.4 percent and the volume of settlement files
increased 21.5 percent through August.\44\ For the full year, the
Reserve Banks estimate that the volume of settlement files will
increase by 20.0 percent while the volume of settlement entries will
increase by 15.1 percent. The Board believes full-year volume growth
will likely exceed the Reserve Banks' volume projections, which would
raise marginally the 2012 cost recovery rate.
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\44\ Although large in percentage terms, the increase in
National Settlement Service activity is relatively small in
magnitude. For instance, the 29.4 percent increase in settlement
files represents about 7 new files per day.
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2. 2013 Pricing--The Reserve Banks expect the Fedwire Funds and
National Settlement Services to recover 98.0 percent of total expenses
and targeted ROE. The Reserve Banks project total expenses to increase
$9.8 million from the 2012 estimate. This increase is primarily due to
their ongoing projects to upgrade the Fedwire application and related
information technology infrastructure. The Reserve Banks project total
revenue to increase $7.5 million from the 2012 estimate. This projected
revenue increase is primarily the result of price increases for the
Fedwire Funds and the National Settlement Services and a 2.0 percent
projected growth in Fedwire Funds volume.
The Reserve Banks will introduce a $0.30 surcharge for transfers
exceeding $100 million.\45\ The Reserve Banks believe that high-value
transfer surcharges are an equitable way to shift more of the cost
associated with Fedwire resiliency to those high-value payments that
drive the need for such resiliency.
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\45\ In 2012, the Reserve Banks introduced a $0.12 high-value
surcharge for both the senders and receivers of transfers exceeding
$10 million and outlined plans to introduce additional high-value
surcharges in future years.
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The Reserve Banks will also adjust various existing fees for the
Fedwire Funds Service. First, the Reserve Banks will increase the Tier
1 per item pre-incentive fee (the fee before volume discounts are
applied) from $0.58 to $0.65, the Tier 2 per item pre-incentive fee
from $0.24 to $0.25, and the Tier 3 per item pre-incentive fee from
$0.135 to $0.145. Second, the Reserve Banks will increase the late-day
(after 5 p.m. ET) origination surcharge from $0.20 to $0.21. Third, the
Reserve Banks will increase the Fedwire Funds offline transfer fee from
$40 to $45. Lastly, the Reserve Banks will increase the FedPayments
Manager import/export

[[Page 66994]]

monthly fee from $20 to $30. The Reserve Banks estimate that the new
surcharge and price increases will result in an approximate 9.4 percent
average price increase for Fedwire Funds customers.
With respect to the National Settlement Service, the Reserve Banks
will increase the settlement file fee from $21 to $25, the settlement
entry fee from $1.00 to $1.20, and the offline origination fee per file
from $40 to $45. In calculating projected revenue, the Reserve Banks
project no volume growth.
F. Fedwire Securities Service--Table 13 shows the 2011 actual, 2012
estimate, and 2013 budgeted cost recovery performance for the Fedwire
Securities Service.\46\
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\46\ The Reserve Banks provide transfer services for securities
issued by the U.S. Treasury, federal government agencies,
government-sponsored enterprises, and certain international
institutions. The priced component of this service, reflected in
this memorandum, consists of revenues, expenses, and volumes
associated with the transfer of all non-Treasury securities. For
Treasury securities, the U.S. Treasury assesses fees for the
securities transfer component of the service. The Reserve Banks
assess a fee for the funds settlement component of a Treasury
securities transfer; this component is not treated as a priced
service.
[GRAPHIC] [TIFF OMITTED] TN08NO12.053

1. 2012 Estimate--The Reserve Banks estimate that the Fedwire
Securities Service will recover 98.2 percent of total expenses and
targeted ROE, compared with a 2012 budgeted recovery rate of 102.6
percent. The lower-than-projected recovery is primarily attributed to
higher-than-expected pension and information technology costs combined
with lower revenue due to decreased transfer volume and claims
adjustment requests. Through August, securities transfer volume was
down 13.9 percent from the same period in 2011 while claims adjustment
requests were down 48 percent. For the full year, the Reserve Banks
estimate that Fedwire Securities transfer volume will decline by 13.6
percent, reflecting lower issuance of mortgage-backed securities and
the implementation of expanded multilateral pool netting of mortgage-
backed securities by the Fixed Income Clearing Corporation (FICC).
Claims adjustments are estimated to decline by about 55 percent for the
year, reflecting corresponding declines in settlement fails in the
marketplace.
2. 2013 Pricing--The Reserve Banks project that the Fedwire
Securities Service will recover 100.9 percent of total expenses and
targeted ROE. The Reserve Banks project that revenue and expenses will
each increase by $0.5 million compared with the 2012 estimates.
In calculating projected Fedwire Securities revenue for 2013, the
Reserve Banks project that securities transfer activity will decline by
17.9 percent and the number of accounts maintained will decrease by 7.5
percent. The estimated decrease in transfer volumes reflects the
projected lower issuance of mortgage-backed securities and the full-
year impact of multilateral pool netting at FICC. The number of
accounts is also expected to continue to decrease because of prior year
account maintenance fee increases and customers continuing to assess
their account structures in light of changes to the maximum amount of
deposits insured by the Federal Deposit Insurance Corporation.\47\
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\47\ The increase in the maximum deposit insurance amount has
reduced the demand by certain Fedwire Securities customers to hold
deposits in collateral-backed accounts.
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The Reserve Banks will adjust various existing fees for the Fedwire
Securities Service. First, the Reserve Banks will increase the online
transfer fee from $0.45 to $0.54. Second, the Reserve Banks will
increase the monthly issue maintenance fee from $0.45 to $0.54 per
issue. Lastly, the Reserve Banks will increase the claim adjustment fee
from $0.66 to $0.75. The Reserve Banks' fees will represent an 11.6
percent increase in average prices to achieve a target recovery rate of
approximately 100.9 percent.
G. FedLine Access--The Reserve Banks charge fees for the electronic
connections that depository institutions use to access priced services
and allocate the costs and revenue associated with this electronic
access to the various priced services. There are currently five FedLine
channels through which customers can access the Reserve Banks' priced
services: FedMail[supreg], FedLine Web[supreg], FedLine
Advantage[supreg], FedLine Command[supreg], and FedLine
Direct[supreg].\48\ The Reserve Banks package these channels into ten
FedLine packages that are supplemented by a number of premium (or
[agrave] la carte) access and accounting information options. In
addition, the Reserve Banks offer three FedComplete packages, which are
bundled offerings of a FedLine Advantage connection and a fixed number
of FedACH, Fedwire Funds, and Check 21-enabled services.
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\48\ FedLine Direct, FedLine Command, FedLine Advantage, FedLine
Web, and FedMail are registered trademarks of the Federal Reserve
Banks. These channels may also be used to access nonpriced services
provided by the Reserve Banks.
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Attended access packages offer access to critical payment and
information services via a web-based interface. The FedMail email
package provides access to basic information services via fax or email,
while two FedLine Web packages offer FedMail email options plus online
attended access to a broad range of informational services, including
cash services, FedACH services, and check services. Three FedLine
Advantage packages expand upon the FedLine Web informational service
packages and offer attended access to transactional services: Check,
FedACH, Fedwire Funds, and Fedwire Securities.
Unattended access packages are computer-to-computer, IP-based

[[Page 66995]]

interfaces designed for medium-to high-volume customers. The FedLine
Command package offers an unattended connection to FedACH, as well as
most accounting information services. The final three packages are
FedLine Direct packages, which allow for unattended connections at one
of three connection speeds to FedACH, Fedwire Funds, and Fedwire
Securities transactional and information services and to most
accounting information services.
Many of the FedLine access solutions fee changes in 2013 are
designed to encourage customers to migrate to more efficient payments
solutions. Customers that continue to use legacy solutions will see
greater increases in fees for those services. To that end, the Reserve
Banks will increase the fees on legacy services, such as an additional
$10 per month for FedMail Fax, $450 per month for FedLine Direct (56K),
and $100 per month for the Dial-Only VPN surcharge. The Reserve Banks
will also increase the monthly fees for basic cash management reports
within the accounting services.
In addition, the Reserve Banks will make other changes to FedLine
pricing for 2013 in order to improve the alignment of value and
revenue. In particular, the Reserve Banks will increase the monthly
fees for FedLine Direct Plus (256K) and FedLine Direct Premier (T1) by
$100 and $300, respectively. Fees for additional 256K and T1
connections will also increase by $50, as well as the fees for
additional FedLine Command and FedLine Direct certificates by $20 per
month. The Reserve Banks will also increase FedMail Email by $10 per
month. Monthly fees for two enhanced cash management reports, which
include respondent and subaccount activity will also increase.
The Reserve Banks will not change published fees for FedComplete
packages; however, the Reserve Banks will raise certain volume
thresholds for each of the packages to improve the business case for
customers.

II. Analysis of Competitive Effect

All operational and legal changes considered by the Board that have
a substantial effect on payments system participants are subject to the
competitive impact analysis described in the March 1990 policy, ``The
Federal Reserve in the Payments System.'' \49\ Under this policy, the
Board assesses whether 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 because of differing legal powers or constraints or because of
a dominant market position deriving from such legal differences. If any
proposed changes create such an effect, the Board must further evaluate
the changes to assess whether the associated benefits--such as
contributions to payment system efficiency, payment system integrity,
or other Board objectives--can be achieved while minimizing the adverse
effect on competition.
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\49\ Federal Reserve Regulatory Service (FRRS) 9-1558.
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The Board projects that the 2013 fees, fee structures, and changes
in service will not have a direct and material adverse effect on the
ability of other service providers to compete effectively with the
Reserve Banks in providing similar services. The fees should permit the
Reserve Banks to earn a ROE that is comparable to overall market
returns and provide for full cost recovery over the long run.

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BILLING CODE 6210-01-P

By order of the Board of Governors of the Federal Reserve
System, October 25, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-26864 Filed 11-7-12; 8:45 am]
BILLING CODE 6210-01-C