[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67007-67012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26918]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1447]


Federal Reserve Bank Services Private Sector Adjustment Factor

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved modifications to its method for 
calculating the private-sector adjustment factor (PSAF). The PSAF is 
part of the Board's calculation, as required by the Monetary Control 
Act of 1980 (MCA), to establish the fees that Federal Reserve Banks 
(Reserve Banks) charge for certain financial services provided to 
depository institutions. Because the Federal Reserve priced services 
have historically had characteristics most analogous to correspondent 
banks, clearing balances held by depository institutions at Reserve 
Banks were a primary component in computing the PSAF. The clearing 
balance program was largely modeled after similar programs offered by 
correspondent banks, wherein banks maintain balances with their 
correspondents. The Board was prompted to consider a new PSAF 
methodology because clearing balances held at Reserve Banks were 
declining following the Board's implementation of the payment of 
interest on required reserve and excess balances held at Reserve Banks. 
Effective July 2012, the Board eliminated the contractual clearing 
balance program in connection with its simplification of reserve 
policies. Changes in the priced services market and the elimination of 
clearing balances have made the correspondent bank analogy less 
applicable to the priced services provided by the Federal Reserve. 
Accordingly, the Board is adopting a publicly traded firm model to set 
the PSAF. Use of the new methodology is reflected in priced services 
fees for 2013, which is published elsewhere in today's Federal 
Register.

DATES: Effective Date: November 8, 2012. The revised method will be 
used to calculate the PSAF that is reflected in the 2013 priced 
services fees.

FOR FURTHER INFORMATION CONTACT: Gregory L. Evans, Deputy Associate 
Director (202) 452-3945, Brenda L. Richards, Manager (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), contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    Under the MCA, the Federal Reserve Banks must establish fees for 
``priced services,'' to recover, over the long run, all direct and 
indirect costs actually incurred in providing these services as well as 
the imputed costs that would have been incurred had the services been 
provided by a private-sector firm.\1\ 2 The imputed costs--
sales and income taxes, debt costs, and a required return on equity 
(profit)--are collectively referred to as the PSAF and are an 
additional cost considered when setting fees and determining cost 
recovery.
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    \1\ These priced services include check, FedACH[supreg], 
Fedwire[supreg] Funds, and Fedwire[supreg] Securities services (for 
activity unrelated to Treasury).
    \2\ 12 U.S.C. 248a(c)(3).
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    The Board's current method for calculating the PSAF involves 
developing an estimated Federal Reserve priced services pro forma 
balance sheet using actual priced services assets and liabilities. The 
remaining components on the balance sheet, such as equity, are imputed 
as if these services were provided by a correspondent bank. Equity is 
imputed at a level necessary for a well-capitalized depository 
institution and the target return on equity capital (ROE) is estimated 
based on the capital asset pricing model (CAPM). Finally, the PSAF 
includes an estimated share of the Board of Governors' expenses 
incurred to oversee Reserve Bank priced services, imputed sales and 
income taxes, and an imputed Federal Deposit Insurance Corporation 
(FDIC) assessment.
    The methodology underlying the PSAF is reviewed periodically to 
ensure that it is appropriate and relevant in light of Reserve Bank 
priced services activities, accounting standards, finance theory, and 
regulatory and business practices.\3\ The Board considers five 
principles when reviewing the PSAF methodology: (1) Providing a 
conceptually sound basis for efficient pricing in the market for 
payments services, (2) using Reserve Bank financial information as 
applicable, (3) maintaining consistency with private-sector practice, 
(4) using data in the public domain to make the PSAF replicable, and 
(5) avoiding any undue cost or complexity of the PSAF methodology.
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    \3\ The previous review of the PSAF was completed in 2005 and 
changes were implemented for the 2006 PSAF. 70 FR 60341 (Oct. 17, 
2005).
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    Under the current correspondent bank model, clearing balances 
maintained by Reserve Bank customers have been a significant component 
of the pro forma financial statements and an important driver in 
calculating nearly all of the imputed costs considered in setting fees 
for priced services. Similar to how a correspondent bank would use its 
respondent balances, the clearing balances are a funding source for 
short- and long-term assets, including investments, and affect the 
level of imputed equity. Clearing balance levels, therefore, affect the 
overall size of the balance sheet, influence the need to impute debt 
funding, and contribute to total cost recovery through imputed net 
income on clearing balances.
    The payment of interest on balances in Federal Reserve accounts and 
related monetary policy actions have affected the level of clearing 
balances and the similarity between correspondent banks and Federal 
Reserve priced services.\4\ Following the implementation of interest on 
required reserve and excess balances, the Board recognized a 
significant decline in clearing balances and anticipated that the trend 
would continue.
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    \4\ In 2008, Congress amended the Federal Reserve Act to 
authorize Reserve Banks to pay interest on balances of eligible 
institutions. (See section 19 of the Federal Reserve Act (12 U.S.C. 
461(b).) Since then, interest has been paid on balances maintained 
to satisfy reserve balance requirements and excess reserves at a 
rate determined by the Board (currently 25 basis points for required 
and excess reserve balances).
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    The Board requested comment on modifications to its computation of 
the PSAF in April 2009 \5\ (2009 notice) and in October 2011 \6\ (2011 
notice) (concurrent with the Board's request for comment on reserves 
simplification). Because clearing balances were a significant component 
of the pro forma balance sheets under the current method and because of 
the decline in clearing balance levels, the Board requested in its 2009 
notice comment on the anticipated level of clearing balances given 
certain interest rate scenarios, the relevance of the clearing balance 
program, and whether the clearing balance program should continue.\7\ 
The Board requested comment on whether a new methodology and its 
associated data sources and computations would be

[[Page 67008]]

appropriate for the priced services. The Board also requested comment 
on the appropriate term for the risk-free rate that is used to 
calculate the target ROE.\8\
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    \5\ 74 FR 15481 (Apr. 6, 2009).
    \6\ 76 FR 64250 (Oct. 18, 2011).
    \7\ 74 FR at 15484.
    \8\ Id. at 15488.
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    In the 2009 notice, the Board proposed a publicly traded firm (PTF) 
model for calculating the imputed costs that factor into priced 
services fees and cost recovery.\9\ The imputed PSAF costs under the 
proposed PTF model were principally based on the U.S. publicly traded 
firm market and not limited to one sector of the market. Because the 
analogy between correspondent banks and the Reserve Banks' priced 
services had become less applicable with the decline in the level of 
clearing balances held and in Reserve Bank paper check collection 
volume for which correspondent banks were the primary competitors, the 
design of the PTF model uses the U.S. publicly traded firm market to 
simplify the peer group assumption. This simplifying assumption is 
intended to address the limited comparable private sector firm data in 
the public domain as well as avoid undue cost or complexity.
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    \9\ Id. at 15489-15490.
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    In the 2009 notice, the Board also considered and requested comment 
on two other PSAF models: the user-owned utility model, which 
incorporated the financial characteristics of a user-owned utility to 
derive its priced services balance sheet, and the cost plus model, 
which incorporated a markup to the priced services operating expenses 
for the year. In addition, the Board considered and requested comment 
on whether it should continue using the correspondent bank model.
    In the 2011 notice, the Board requested comment on eliminating the 
contractual clearing balance program, the appropriate level of minimum 
equity for the previously proposed PTF model, and whether the level of 
float should be considered before replacing the correspondent bank 
model.\10\ Although the level of clearing balances did not decline to 
the degree anticipated in 2009, the contractual clearing balance 
program was subsequently eliminated in 2012 as part of the Board's 
reserves simplification.\11\
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    \10\ 76 FR at 64255-64256.
    \11\ 77 FR 21846 (Apr. 12, 2012).
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    In these notices, the Board proposed and requested comment on the 
following considerations and elements of the new PSAF methodology:
     Adopting an imputed capital structure, effective tax rate, 
and debt financing rates of the priced services based on the U.S. 
publicly traded firm market using specific market data and time frames;
     Basing the capital structure on the most recent full-year 
value-weighted average capital structure (that is, total long-term debt 
to total long-term debt plus equity) of all U.S. publicly traded firms 
included in the Standard & Poor's Compustat[supreg] database; \12\
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    \12\ The Standard & Poor's Compustat database contains 
information on more than 6,000 U.S. publicly traded firms, which 
approximate the entirety of the U.S. market.
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     Basing the long-term debt financing rate on the five-year 
mean of the Aaa and Baa Moody's bond yields published on the Federal 
Reserve Board's H.15 Statistical Release and the reasonableness of 
including only investment grade bonds in the calculation; \13\
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    \13\ http://www.federalreserve.gov/releases/h15/update/.
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     When short-term assets exceed short-term liabilities, 
imputing short-term debt financing rate on the average of the three-
month AA and A2/P2 nonfinancial commercial paper rates as published on 
the Federal Reserve Board's Commercial Paper Release; \14\
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    \14\ Id.
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     Basing the imputed effective income tax rate on the five-
year mean of the value-weighted average ratios of current tax expense 
to total net income for all U.S. publicly traded firms in the financial 
database; and
     Considering the user-owned utility model, the cost-plus 
model, or a continuation of the correspondent bank model as alternative 
methodologies to the PTF model.

II. Summary of Comments and Analysis

    The Board received eight comments in response to its 2009 notice. 
Comments were submitted by three bankers' banks, two industry groups, 
one bank holding company, one association, and one individual. Overall, 
the comments on the proposed PSAF methodology were mixed. Some 
commenters disagreed with the proposed methodology and suggested 
alternative approaches that required using financial data that are not 
publicly available. Three of the four who commented on the overall 
proposed PSAF methodology did not support the proposed PTF model. One 
of these commenters supported a continuation of the correspondent bank 
model and one supported a cost-plus model. One commenter supported the 
PTF model but encouraged evaluation of the cost-plus methodology for 
computing the PSAF. The remaining four commenters expressed neither 
support for nor opposition to the proposed PTF model but provided 
other, more general comments. Four commenters requested an extension of 
the comment period for further analysis or dialogue. The Board received 
one response to its October 2011 request for comment related to the 
PSAF. This commenter stated that the Board should conduct further 
analysis and provide the public with additional information before 
adopting a new methodology.

A. The Contractual Clearing Balance Program

    The Board requested comment on the general relevance of the 
clearing balances in the computation of PSAF as a consequence of 
anticipated continued declines in clearing balance levels. Three 
commenters acknowledged the effect interest on required reserve and 
excess balances would have on the level of clearing balances maintained 
when the rates paid on required and excess reserve balances are greater 
than the earnings credit rate on clearing balances. Subsequently, the 
Board eliminated the clearing balance program. As a result, there is no 
longer a need to consider the levels of balances as they relate to the 
PSAF calculation.

B. Publicly Traded Firm Model

    In response to its request for comment, the Board received various 
comments regarding the proposed assumptions used in the PTF model 
related to peer group benchmarking, capital structure, effective tax 
rate, and debt financing.
(1) Peer Group Benchmarking
    The cost of equity, a key component of priced services cost 
structure, is computed based on the CAPM, which uses the U.S. publicly 
traded firm market to determine the average risk premium. Three 
commenters stated that the U.S. publicly traded firm market was too 
broad of a benchmark and suggested narrowing the peer group to specific 
financial institutions or publicly-traded payments processors. One of 
these three commenters recommended a list of participants in the 
payment processing industry as a peer group benchmark and also 
suggested commissioning a peer-group study to benchmark payment 
processing industry costs.
    Because of the concentration of the market activity of the 
suggested peer group in a few entities, the financial results of such a 
peer group would likely be volatile.\15\ The Board found

[[Page 67009]]

that one entity accounted for approximately 43 percent of the group's 
total assets and the range of the individual effective tax rates of the 
entities was broad (from 18 to 71 percent). The Board believes that a 
peer group or proxy for competitors to Federal Reserve priced services 
should consist of enough participants with publicly available financial 
data to mitigate the potentially volatile effects of the financial 
characteristics of a few firms. Because of the challenges in 
identifying a viable peer group, the U.S. publicly traded firm market 
is an attractive alternative. The use of averages based on the U.S. 
publicly traded firm market minimizes the effect of extreme or 
anomalous financial characteristics in the PTF model.
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    \15\ Although the MCA's requirement for cost recovery over the 
long run allows the Board to set fees to over- or under-recover 
costs in a given year to minimize price volatility in imputed costs 
makes the pricing process more complex. As a result, the Board has 
typically preferred to adopt PSAF methodologies that provide for 
stable rather than volatile imputed costs.
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    In reviewing appropriate peer group benchmarks for computing the 
PSAF, the Board considered adopting a user-owned utility model, which 
recognizes that the Reserve Banks' major competitors in the provision 
of priced services are increasingly user-owned utilities rather than 
traditional correspondent banks. One commenter noted that the 
definition of user-owned utilities was not adequately described in the 
request for comment. Another commenter requested additional insight on 
the Board's conclusion that user-owned utilities have become its 
predominant competitors. None of the commenters specifically supported 
a user-owned utility model.
    Financial information regarding some significant user-owned 
utilities is not publicly available. The primary user-owned utility 
that provides services similar to those provided by the Reserve Banks 
is The Clearing House Payments Company, LLC, which operates CHIPS, the 
primary competitor for the Reserve Bank's Fedwire[supreg] Funds 
Service, and the Electronic Payments Network, the only private-sector 
automated clearinghouse operator.\16\ Establishing the method to 
calculate the requisite imputed elements--capital structure, debt 
financing rates, and income taxes--using theoretical assumptions or 
academic studies could be challenging. In the absence of publicly 
available data on a significant number of user-owned utilities or 
substantial academic literature regarding the financial characteristics 
of these organizations, the Board does not consider adopting user-owned 
utilities to be an appropriate peer group benchmark.
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    \16\ The Board identified 15 user-owned utilities, 4 of which 
have some membership ownership.
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    The Board also considered continuing to use the correspondent bank 
model, without clearing balances and with minor modifications, to 
impute costs. One commenter supported the continued use of the 
correspondent bank model and stated that private market participants 
are affected by factors similar to the Federal Reserve in setting fees 
for services. One commenter noted that a reduction in clearing balances 
does not necessarily indicate a failure of the PSAF and that the 
correspondent bank model has been reasonably effective over time. 
Others who commented on the proposal did not comment on the Board's 
continued use of this model.
    A principal disadvantage of the correspondent bank model is the 
decreasing similarity between the characteristics of the Reserve Bank 
priced services without the contractual clearing balance program and 
traditional correspondent banks. Historically, the Board recognized 
that the financial characteristics of correspondent banks were not 
driven primarily by the payment services that compete with those 
offered by Reserve Banks, but considered correspondent banks as an 
appropriate peer group because both entities held customer balances for 
the purpose of facilitating payments services and they were the primary 
competitors to the Reserve Banks' check services. Because the 
contractual clearing balance program was eliminated and the check 
service has declined as a percentage of the Reserve Banks' priced 
services revenue and expenses, comparing priced services to 
correspondent banks for the purpose of establishing a PSAF methodology 
is increasingly difficult. Accordingly, the Board has determined that 
the peer group of correspondent banks is no longer appropriate to 
impute priced services costs.
    Based on its review of possible benchmarks, the Board believes the 
use of market wide averages of U.S. publicly traded firms is an 
appropriate proxy that avoids the challenges associated with the 
potential financial data volatility associated with the small size of 
the peer group of payment processors or user-owned utilities, the lack 
of public financial data of user-owned utilities, and the decreasing 
similarity between the characteristics of the Reserve Banks' priced 
services and correspondent banks. The use of the publicly-traded firm 
model builds on the approach used in the current PSAF methodology that 
uses the U.S. publicly traded firm market to determine the average risk 
premium in determining the cost of capital.
(2) Capital Structure
    In the PTF model, the capital structure will be derived from the 
U.S. publicly traded firm market, subject to minimum equity constraints 
consistent with those required by the FDIC for a well-capitalized 
institution. One commenter, who supported the correspondent bank model 
for computing the PSAF, objected to the absence of an FDIC assessment, 
related capital requirements, and regulatory overhead. Although the PTF 
methodology does not model depository institution requirements, the 
Board requested comment on whether it should use FDIC minimum equity 
requirements, but did not receive any comments on this matter. To 
ensure a reasonable level of equity is imputed to protect against 
financial, operating, and business risks, the Board will use the 
minimum equity constraints established by the FDIC, with equity set at 
a level of at least five percent of assets or ten percent of risk 
weighted assets. The Board, however, will not include an FDIC 
assessment, because the peer group is not composed primarily of 
depository institutions.
(3) Effective Tax Rate
    In the PTF model, the imputed effective income tax rate will be the 
five-year mean of the value-weighted average ratios of current tax 
expense to total net income for all U.S. publicly traded firms in 
Standard & Poor's Compustat[supreg] database. One commenter assumed an 
upward trend of tax rates and objected to the tax rate derivation from 
historical data rather than future tax rates. To maintain consistency 
in the PTF model, the Board will use tax rates from the U.S. publicly 
traded firm market. The Board considered alternatives to calculating 
the tax rate, including expanding the period of the mean calculation 
from five to ten or twenty years, filtering key parameters on tax 
expense or total net income, and using additional statistical measures. 
Because the results of the alternative approaches reflected only a 
small subset of the U.S. publicly traded firm market, the Board did not 
adopt these alternatives.
(4) Debt Financing
    Due to the elimination of clearing balances, a key source of 
financing of priced services assets in the correspondent bank model, 
the Board recognizes that additional debt and equity may need to be 
imputed in the PTF model to meet funding needs. The

[[Page 67010]]

Board initially proposed using the five-year mean of the Aaa and Baa 
Moody's bond yield for the long-term debt financing rate. To include 
non-investment grade debt in the PTF model, however, the Board will use 
the five-year mean of the annual Merrill Lynch Corporate & High Yield 
Index rate. Using the corporate and high yield index rating is also 
consistent with the Board's assumption of comparing the priced services 
to the U.S. publicly traded firm market. The Board will use a five-year 
mean when imputing a debt financing rate to maintain consistency with 
the effective tax rate and to reduce year-to-year volatility due to 
changes in the yield curve.

C. Alternative Methodology--The Cost-Plus Model

    In response to previous Board proposals related to the PSAF, some 
commenters have suggested adopting variations on a cost-plus model. In 
2005, while commenting on proposed changes to the PSAF methodology for 
calculating the ROE, two commenters suggested a cost-plus model as a 
simple, straightforward method for calculating the PSAF. The Board 
reconsidered this methodology in its 2009 notice. One commenter noted 
that the Board should consider using a cost-plus model, but expressed 
concern that its estimated 700 percent increase in the PSAF under a 
cost-plus model compared to the correspondent bank model may be too 
much to impose on the financial-services industry. In implementing a 
cost-plus PSAF model, the Board considered deriving the MCA-required 
imputed costs by establishing a fixed markup over operating expenses. 
Each time the Board has considered this model, developing a viable 
method for calculating the markup has been challenging.
    The Board considered a cost-based model with the markup percentage 
derived from either historical PSAF values or the income statement 
operating margins of all U.S. publicly traded firms. The Board 
evaluated the PSAF results after applying a markup over expenses ratio 
based on value-weighted average data for all publicly traded U.S. firms 
in the Standard & Poor's Computstat[supreg] database and applying a 
markup over expenses ratio based on historical PSAF. Although a cost-
plus model is simple, transparent, and replicable by the public, it 
also has limitations. A cost-plus model based on historical PSAF values 
is static and assumes continued use of the current correspondent bank 
model, which is of diminishing relevance. In addition, basing a cost-
plus model on accounting-based values captures only book, not market, 
values of financing and other costs, which is not consistent with 
current finance theory. Accordingly, the Board does not consider this a 
viable alternative model to the correspondent bank model.

D. Other General Comments

    The Board received comments that focused on the Federal Reserve 
priced services involvement in payment services more generally. Four 
commenters suggested that the Federal Reserve work to further lower 
costs. Three of these four commenters believe that the Federal Reserve 
should continue to provide payment services. Two commenters requested 
that the Federal Reserve explicitly state its intent regarding 
continuing involvement in payment systems and the proposed PSAF 
methodology changes. Two commenters addressed the effect of proposed 
changes on market competition, pricing, and payment systems generally.
    The Board received other comments that requested additional 
analysis or information related to the notice and requests for comment. 
Two commenters requested more specific information on the effect of the 
PSAF changes to the Federal Reserve's price schedule. One commenter 
recommended that the notice and request for comment include the effect 
of the proposed changes on community banks. One commenter requested 
illustrative example calculations to demonstrate how the PSAF would be 
affected by shrinking contractual clearing balances. The same commenter 
also stated that it would be informative to the public if the Board 
provided a side-by-side comparison of the correspondent banking model 
with the PTF model, displaying numerical results of the financial 
models under different scenarios. One commenter suggested that the PTF 
model leaves too much to interpretation.
    Consistent with MCA requirements, the Board evaluates and considers 
the costs of priced services, competitive factors, and the adequacy of 
payment services nationwide when approving the prices of Federal 
Reserve Bank services.\17\ Because the Federal Reserve seeks to recover 
only its actual and imputed costs, the effect of the PSAF changes on 
Reserve Bank prices can be approximated by estimating the impact of the 
PSAF change to total costs. The effect of the PSAF methodology changes 
on a variety of organizations, including community banks, is largely 
dependent on the extent to which an organization uses payment services 
provided by the Federal Reserve.\18\ With respect to comments 
requesting additional information and the degree of interpretation in 
the PTF model, the Board believes that the analyses it has conducted, 
and the information provided in this and previous notices, have 
provided the analysis and information necessary for the public to 
understand its proposal.
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    \17\ 12 U.S.C. 248a (c)(3) & (d).
    \18\ A side-by-side comparison of the correspondent bank model 
and the PTF model was provided in the 2009 notice (74 FR at 15494).
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    The Board received other comments on issues not related to the 
proposal and are not addressed in this notice.
    After considering the comments received, the Board has adopted the 
PTF methodology for the 2013 PSAF. The PTF methodology is transparent, 
consistent with current financial theory and practice, and is 
conceptually sound as a basis for efficient pricing in the market of 
payment services. It uses relevant Reserve Bank financial information 
as input to the model, and can be replicated by the public. In its 
analysis, the Board evaluated computations in the models considered for 
imputing the capital structure, effective tax rate, and long- and 
short-term debt financing rates. The Board evaluated the advantages and 
obstacles surrounding the use of each alternative methodology. The 
Board believes the new methodology is appropriate in light of the 
elimination of clearing balances and the evolution of payment system 
providers beyond commercial banking.

E. Future Industry and Regulatory Changes

    The MCA requires the Federal Reserve Banks to impute costs that 
would have been incurred had the services been provided by a private 
sector firm. Accordingly, the Board considers industry and regulatory 
changes relevant to the private sector. The Board applies its payment 
system risk policies, which incorporate relevant international risk-
management standards to the Federal Reserve Banks' Fedwire[supreg] 
Funds and Fedwire[supreg] Securities services. In considering revisions 
to payment system risk policies to address the new Principles for 
Financial Market Infrastructures (PFMI), the Board will also consider 
whether revisions to the PSAF are necessary.\19\
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    \19\ The PFMI are available at http://www.bis.org/publ/cpss101a.pdf.
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III. Summary and Effect of New PSAF Methodology

    Based on comments received and further consideration of the issues

[[Page 67011]]

around the appropriate computation of the PSAF, the Board has adopted 
the PTF model for computing the PSAF as proposed with a minor 
adjustment.\20\ The Board will develop pro forma financial statements 
under the PTF model using an estimate of assets and liabilities used in 
priced services and incorporate the following elements:
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    \20\ The PTF model will incorporate the Merrill Lynch Corporate 
& High Yield Index rate instead of the Aaa and Baa Moody's bond 
yield as initially proposed.
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     Peer Group Benchmarking: The imputed capital structure, 
debt and ROE rates, and effective income tax rate will be based on data 
for the U.S. publicly traded firm market and calculated using time 
frames that minimize volatility from year-to-year. The model will 
incorporate a one-year period for elements that historically have been 
more stable and, to minimize volatility, a five-year average period for 
elements that have been more volatile historically. When averaging 
data, the Board will use value-weighted averages to more accurately 
reflect the financial characteristics of the U.S. publicly traded firm 
market rather than those of the simple average firm in the market. Data 
for computing the market-based debt-to-equity ratios and effective tax 
rates will be derived from Standard & Poor's Compustat[supreg] 
database. The database contains information on more than 6,000 U.S. 
publicly traded firms, which approximates the entirety of the U.S. 
market.
     Capital Structure: The capital structure will be imputed 
based on the net funding (assets less liabilities), subject to minimum 
equity constraints. If estimated assets are in excess of estimated 
liabilities, the Board will impute first debt funding (either short- or 
long-term) and then equity funding to meet the capital structure of the 
U.S. publicly traded firm market or minimum equity constraints. Minimum 
equity will follow FDIC requirements 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.
     Effective Tax Rate: As with the imputed capital structure, 
the effective tax rate will be based on data from the U.S. publicly 
traded firm market. This tax rate will be the mean of the weighted 
average rates of the U.S. publicly traded firm market over the past 
five years.
     Debt and Equity Financing: The imputed short- and long-
term debt financing rates will be derived from the Federal Reserve 
Board's release of nonfinancial commercial paper rates from the H.15 
Selected Interest Rates release and the annual Merrill Lynch Corporate 
& High Yield Index rate, respectively.\21\ There will be no change to 
the methodology for computing the ROE rate. The Board will continue 
calculating the required rate of ROE using the CAPM with a beta of 1.0 
and a 40-year average historical market premium with a 3-month Treasury 
rate. The rates for debt and equity financing will be applied to the 
priced services' estimated imputed liabilities and imputed equity 
derived from the target capital structure. Additional equity imputed to 
meet minimum equity requirements will be invested solely in Treasury 
securities.
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    \21\ Data for the H.15 Selected Interest Rates release is 
supplied by The Depository Trust & Clearing Corporation, a national 
clearinghouse for the settlement of securities trades and a 
custodian for securities. The Merrill Lynch US Corporate & High 
Yield Index tracks the performance of U.S. dollar denominated 
investment grade and below investment grade corporate debt publicly 
issued in the U.S. domestic market. Index constituents are 
capitalization-weighted based on their current amount outstanding.
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    Using the 2012 PSAF for illustrative purposes, the data below 
illustrate the effect of implementing a PTF model approach. For 
comparative purposes, amounts illustrated for the correspondent bank 
model exclude the effect of clearing balances. The tax rate computation 
differences between the correspondent bank model and the PTF model are 
reflected in the pretax ROE. Equity under both models is imputed at 
five percent of assets to satisfy the FDIC minimum equity requirements 
for well-capitalized institutions.

                                                PSAF Illustration
                                                 [$ in millions]
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                                                               Pretax ROE                 Cost of
                                                               (percent)      Equity       equity        PSAF
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Correspondent Bank Model \22\...............................          8.5        $96.0         $8.2        $17.9
PTF Model \23\ (estimate)...................................          9.3         96.0          8.9         16.7
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IV. Competitive Impact Analysis

    In its March 1990 policy statement ``The Federal Reserve in the 
Payments System,'' the Board stated that all operational and legal 
changes considered by the Board that could have a substantial effect on 
payment system participants are subject to a competitive-impact 
analysis.\24\ Under this policy, the Board evaluates whether a proposed 
change would 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. These effects could be caused by 
differences in legal authority or constraints between Reserve Banks and 
private-sector competitors or by a dominant market position that the 
Reserve Banks might derive from such legal differences. If the proposed 
change creates such an effect, the Board must further evaluate the 
changes to determine whether its benefits--such as contributions to 
payment system efficiency, payment system integrity, or other Board 
objectives--can be retained while reducing the hindrances to 
competition.
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    \22\ Amounts approved by the Board in its 2012 fees were $234.7 
million, $19.9 million, and $29.9 million for imputed equity, the 
cost of equity, and total PSAF, respectively. 76 FR 68440 (Nov. 4, 
2011).
    \23\ Amounts for the PTF model were estimated.
    \24\ Federal Reserve Regulatory Service 9-1558.
---------------------------------------------------------------------------

    The intent of the PSAF, and more broadly of setting priced services 
fees to fully recover the costs (including imputed costs and profits) 
to provide them, is to facilitate competition between Reserve Banks and 
private-sector providers of payment services to foster a more efficient 
payment system. Identifying a meaningful private-sector peer group for 
the purpose of calculating the PSAF, however, has been difficult given 
the specific nature of the priced services provided by the Reserve 
Banks. The correspondent bank model historically provided a reasonable 
proxy for Reserve Bank priced services because correspondent banks hold 
balances for the purpose of facilitating payment services and they were 
the primary competitors to the Reserve Banks' check service, although

[[Page 67012]]

the Board recognized that correspondent bank balance sheets and ROE are 
typically driven largely by services that are not similar to those 
provided by the Reserve Banks. Because the contractual clearing balance 
program has been eliminated and correspondent banks are not the primary 
competitors of the Reserve Banks' priced services, correspondent banks 
no longer serve as the best PSAF benchmark peer group. User-owned 
utilities are increasingly becoming the Reserve Banks' key priced 
services competitors; however, because no reliable comparative data are 
publicly available for the user-owned utilities, it also does not 
provide a viable model for the PSAF. Lacking a more specific viable 
peer group, the Board believes modeling the PSAF on a PTF model is 
appropriate. The Board believes that such a change in the PSAF 
methodology does not have a direct and material adverse effect on the 
ability of other service providers to compete effectively with Reserve 
Banks in providing similar services. Rather, the Board believes that 
this PSAF revision will facilitate competition between the Reserve 
Banks and private-sector providers.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
ch. 3506; 5 CFR part 1320 appendix A.1), the Board has reviewed the 
proposal under the authority delegated to the Board by the Office of 
Management and Budget. The proposal contains no provisions subject to 
the Paperwork Reduction Act.

    By order of the Board of Governors of the Federal Reserve 
System, October 25, 2012.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2012-26918 Filed 11-7-12; 8:45 am]
BILLING CODE 6210-01-P