[Federal Register Volume 78, Number 237 (Tuesday, December 10, 2013)]
[Notices]
[Pages 74130-74142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-28745]
[[Page 74130]]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1472]
Federal Reserve Policy on Payment System Risk; Procedures for
Measuring Daylight Overdrafts
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Policy Statement; request for comment.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is requesting comment on multiple changes to part II of the Federal
Reserve Policy on Payment System Risk (PSR policy) related to the
procedures for measuring balances intraday in institutions' accounts at
the Federal Reserve Banks (Reserve Banks). The proposed changes relate
to the Board's procedures for posting debit and credit entries to
institutions' Federal Reserve accounts for automated clearing house
(ACH) debit and commercial check transactions. Elsewhere in the Federal
Register under Docket No. R-1473, the Board is also proposing necessary
related changes to the Board's Regulation J regarding the timing of
when paying banks settle for check transactions presented to them by
the Reserve Banks. Additionally, in this notice, the Board is
requesting comment on a set of principles for establishing future
posting rules for the Reserve Banks' same-day ACH service. The Board is
also requesting comment on a change in language in section II.G.3 of
the PSR policy intended to clarify the Reserve Banks' administration of
the policy for U.S. branches and agencies of foreign banking
organizations.
DATES: Comments on the proposed changes must be received on or before
February 10, 2014.
ADDRESSES: You may submit comments, identified by Docket No. OP-1472,
by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/apps/foia/proposedregs.aspx as submitted,
except as necessary for technical reasons. Accordingly, your comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets NW.) between
9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Susan V. Foley, Senior Associate
Director (202) 452-3596, Jeffrey Walker, Assistant Director (202) 721-
4559, or Michelle D. Olivier, Financial Services Analyst (202) 452-
2404, Division of Reserve Bank Operations and Payment Systems, Board of
Governors of the Federal Reserve System; for users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
I. Background
Technology and processing improvements have enabled payment systems
and institutions to achieve significant efficiencies relative to twenty
years ago when the Board's procedures for measuring institutions'
intraday Federal Reserve account balances were established. Payment
innovations have enabled both the introduction of new payment services
and networks and the enhancement of legacy payment systems (such as
checks and ACH). In particular, interbank check-processing has
undergone a remarkable period of change, from few checks being
exchanged electronically 10 years ago to virtually 100 percent today.
The ACH system has also recently made progress in defining same-day
clearing and settlement, and the Reserve Banks are now offering a same-
day service on a limited basis.\1\
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\1\ The Reserve Banks currently offer a same-day ACH service
that allows institutions to opt-in to send and receive ACH credit or
debit transactions during the processing day in addition to the
overnight cycle. In section III of this notice, the Board proposes a
set of principles for establishing future posting rules for the
Reserve Banks' same-day ACH service. The Board does not contemplate
that it would ordinarily request comment on changes to the ACH
posting rules that are consistent with these principles.
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The Federal Reserve believes that ongoing innovation is necessary
to ensure safe, efficient, and accessible payment systems in a changing
economic environment. In support of this broad objective, the Board is
currently working to align and modernize the procedures for measuring
account balances associated with ACH and check transactions to reflect
enhancements in technology and the Reserve Banks' current operations
and processing times. The Board's PSR policy establishes the
procedures, referred to as posting rules, for the settlement of debits
and credits to institutions' Federal Reserve accounts for different
payment types.\2\ The application of these posting rules determines an
institution's intraday account balance and whether it has incurred a
negative balance (daylight overdraft).
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\2\ The Board's PSR policy is available at
www.federalreserve.gov/paymentsystems/psr_policy.htm.
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Under the current posting rules for commercial and government ACH
transactions established in 1994, ACH debit transactions post at 11:00
a.m. Eastern time (ET), and ACH credit transactions post at 8:30 a.m.
ET.\3\ The Board delayed the posting of ACH debit transactions to allow
receiving institutions time to obtain funds after the opening of the
Reserve Banks' Fedwire Funds Service, which at that time opened at 8:30
a.m. Since then, the Fedwire Funds Service opening has been moved
earlier, first in 1997 and again in 2005, and the service now opens at
9:00 p.m. the previous evening. Continuing the practice of delaying the
settlement of ACH debit transactions until 11:00 a.m. is no longer
necessary and may retard efforts by institutions to expedite funds
settlements.
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\3\ All times are eastern time unless otherwise specified.
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In 2008, the Board requested comment on moving the posting time of
ACH debit transactions from 11:00 a.m. to 8:30 a.m. to coincide with
the posting of ACH credit transactions but decided not to pursue the
change because of economic conditions at the time and the additional
costs and liquidity pressures that could be placed on some
institutions.\4\ Commenters' concerns included the costs associated
with funding their accounts earlier in the day, the loss of interest
income from holding higher overnight account balances rather than
investing in the market, and the additional staffing costs that might
be incurred to manage accounts before normal business hours,
particularly for small institutions outside of the eastern time
zone.\5\
[[Page 74131]]
Although it chose not to pursue the simultaneous posting of ACH debit
and credit transactions in 2008, the Board said that it would
reconsider the proposed posting rule change in the future because it
believed that the simultaneous posting of ACH credit and debit
transactions at 8:30 a.m. would enhance the efficiency of the payment
system in the long run. The Board also recognized that the potential
burden of the posting rule change on institutions would be reduced
through the payment of interest on Federal Reserve account balances and
the implementation of a proposed (at that time) PSR policy change that
would allow institutions eligible to incur intraday credit to
collateralize all or a portion of their daylight overdrafts to reduce
or eliminate any daylight overdraft fees.\6\
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\4\ The request for comment and the subsequent notice of the
Board's decision not to pursue the proposed changes can be found,
respectively, at 73 FR 12443 (Mar. 7, 2008) and 73 FR 79127 (Dec.
24, 2008).
\5\ Institutions have the option either to hold higher balances
overnight or to arrange for sufficient funding before 8:30 a.m. for
any transactions that process overnight and post early in the
morning; eligible institutions may also incur daylight overdrafts.
\6\ Edge and agreement corporations, bankers' banks that have
not waived their exemption from reserve requirements, limited-
purpose trust companies, government-sponsored enterprises including
Federal Home Loan Banks (FHLBs), and international organizations do
not have regular access to the discount window and are not permitted
to incur daylight overdrafts in their Federal Reserve accounts.
Voluntary collateralization of daylight overdrafts and the $150 fee
waiver are not available to these institutions.
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Since the initial 2008 proposal, the payment of interest on Federal
Reserve account balances and the proposed PSR policy changes have been
implemented, and the economic climate has improved. Interest on Federal
Reserve account balances reduces institutions' costs of holding higher
account balances overnight to fund an earlier posting of ACH debits.\7\
The current PSR policy, implemented in March 2011, allows eligible
institutions to collateralize their daylight overdrafts to reduce or
eliminate any daylight overdraft fees associated with the proposed
posting rule change. In addition, for each two-week reserve maintenance
period, institutions receive a $150 fee waiver, reducing the burden on
institutions that incur small amounts of uncollateralized daylight
overdrafts. Although these changes alleviate the potential burden of
the proposed ACH posting rule change for eligible institutions, for
those institutions whose account balances may be adversely affected by
the posting rule change and are ineligible for intraday credit and
interest on balances in Federal Reserve accounts, the effect of moving
to an 8:30 a.m. posting time for ACH debit transactions has not changed
since the Board's proposal in 2008, and these institutions would need
to hold higher balances overnight or manage their accounts before 8:30
a.m.
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\7\ Payment of interest on Federal Reserve account balances was
implemented in October 2008. FHLBs are not eligible to earn interest
on balances in Federal Reserve accounts, but can act as pass-through
correspondents. As set out in Regulation D (12 CFR 204.10), in cases
of balances maintained by pass-through correspondents that are not
interest-eligible institutions, Reserve Banks shall pay interest
only on the balances maintained to satisfy a reserve balance
requirement of one or more respondents, and the correspondents shall
pass back to its respondents interest paid on balances in the
correspondent's account.
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Currently, the Board's posting rules for commercial check
transactions reflect a presumption that banks generally handle checks
in paper form and do not reflect banks' widespread use of electronic
check-processing methods.\8\ As a consequence, the Board's posting
rules align with the processing of less than one-tenth of 1 percent of
checks that the Reserve Banks handle. The Board believes that
settlement practices should reflect the speed of clearing as well as
the timing of deposits and presentments, and that its posting rules
should be updated to align with today's electronic check-processing
environment.
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\8\ Commercial check transactions include all non-government
check transactions. Treasury checks, postal money orders, local
Federal Reserve Bank checks, and savings bond redemptions in
separately sorted deposits already post at 8:30 a.m. and are not
affected by the posting rules proposed in today's Federal Register
notice.
The posting rules reflect a paper-processing era in which
collecting banks, such as the Reserve Banks, generally had multiple
daily paper deposit deadlines and in which banks used airplanes and
couriers specifically dedicated to delivering paper checks. Today,
by contrast, the Reserve Banks have only one paper deposit deadline
per day but multiple electronic deadlines, and paper checks are
generally delivered to banks by U.S. mail or other common carrier.
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The Reserve Banks' check-processing is almost 100 percent
electronic today. Indeed, more than 99.9 percent of checks that
depositary banks sent to the Reserve Banks are now sent electronically,
and more than 99.9 percent of checks the Reserve Banks presented to
paying banks are presented electronically.\9\ The Board, however, last
revised its posting rules for commercial check transactions in 2002,
before the effective date of the Check Clearing for the 21st Century
Act (Check 21 Act).\10\ In 2002, the Board was interested in removing
barriers that might discourage institutions from agreeing to accept
electronic check presentments. The posting rules were modified to allow
debits associated with electronic check presentments to begin posting
at 1:00 p.m. local time rather than 11:00 a.m. to ensure that
institutions would not be debited earlier for electronic check
presentments than for paper check presentments.\11\
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\9\ Statistics are for forward deposits and presentments only.
In September 2013, over 98 percent of returned checks were deposited
electronically, and over 96 percent of returned checks were
delivered electronically by the Reserve Banks. A depositary bank is
the bank into which a check is deposited; a paying bank is the bank
on which a check is drawn.
\10\ In 2002, depositary banks sent virtually all checks to the
Reserve Banks in paper form, and the Reserve Banks, in turn,
delivered about 75 percent of checks to paying banks in paper form.
The Reserve Banks presented less than 25 percent of their check
volume electronically by agreement with the paying bank.
The Check 21 Act, which became effective in October 2004, was
designed to enhance payment system efficiency by reducing legal
impediments to processing checks electronically. The Check 21 Act
facilitated processing checks electronically by creating a new type
of paper instrument, called a substitute check, which is the legal
equivalent of the original check for all purposes. As a result, a
collecting bank could receive an electronic file and create
substitute checks from check images in the file to present to paying
banks that did not accept electronic check presentment.
\11\ Before the change, debits associated with all commercial
check transactions, whether paper or electronic, were posted on the
next clock hour that was at least one hour after presentment,
beginning at 11:00 a.m. Because Reserve Banks generally delivered
electronic check presentment files early in the morning, the
corresponding debits would occur at 11:00 a.m. for many
institutions, earlier than the posting times associated with paying
banks receiving paper check presentments. The Board was concerned
that this timing difference may have created modest and undesirable
incentives for paying banks to continue to require that checks be
presented in paper form.
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The posting rules for commercial check presentments also allow for
at least a one-hour window between presentment and posting of the
associated debits to allow institutions time for limited verification
of cash letters (batches of checks).\12\ The Board adopted the current
one-hour window between presentment and settlement in 1992 when the
Reserve Banks presented paper to paying banks. Electronic delivery of
checks and computerized handling within institutions should facilitate
a paying institution's ability to verify the receipt of cash letters
sooner than when presentment was predominately in paper form.
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\12\ The one-hour window between presentment and settlement is
also specified in subpart A of Regulation J. Elsewhere in the
Federal Register, the Board is proposing necessary related changes
to this and another provision in the Board's Regulation J.
The one-hour window allowed the paying bank to verify that the
cash letter had been received, but was not intended to allow the
paying bank to examine individual checks prior to settling for the
cash letter. Cash letters include a group of checks packaged as
paper items or electronic records that are presented to the paying
bank. A cash letter includes physical documentation or electronic
records containing the depositor routing number, a list detailing
the amount of each check, and the total amount and the number of all
checks in the cash letter.
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The Board also recognizes that there may be certain Reserve Bank
operational processes that need modification to eliminate exceptions to
faster clearing and settlement. In particular, the Reserve Banks have
worked with institutions over the years to develop
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flexible electronic file presentment schedules. These schedules covered
the timing and frequency of electronic check presentments and were
designed to encourage banks to accept electronic presentments. For some
institutions, the Reserve Banks have been creating a single file that
includes all of the institution's check activity for the day that is
presented late in the day (but before 2:00 p.m. local time of the
institution).\13\ The Reserve Banks, however, have taken a recent step
in advancing the speed of check clearing that now will likely result in
all institutions receiving multiple presentment files beginning January
2, 2014.\14\ Any posting rule change to align settlement with today's
clearing practices would also likely result in multiple presentments,
and such presentments would begin early in the day. If not, those
institutions that receive all check activity in a late day presentment
file would be able to gain an intraday liquidity advantage by delaying
presentment and consequently debits, while benefiting from the earlier
availability of credits from deposited checks. To mitigate the effects
of these changes, institutions may choose for business or other reasons
not to access presentment files made available until specific times in
the day, but the Reserve Banks would still settle those transactions
based on presentment having been made.\15\
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\13\ For most institutions, the Reserve Banks make available
multiple electronic check presentments beginning early in the
morning.
\14\ On October 3, 2013, the Reserve Banks announced a new
product that will likely result in institutions receiving an
additional presentment file. Specifically, the Reserve Banks will be
adding an additional FedReturn image cash letter deposit deadline at
12:30 p.m. beginning on January 2, 2014. Any FedReturn file
deposited with the Reserve Banks before 12:30 p.m. will be delivered
to the depositary bank by 2:00 p.m. local time. For more
information, see http://www.frbservices.org/files/communications/pdf/check/100313_deposit_deadline.pdf.
\15\ The Reserve Banks send institutions presentment
notifications with the value of presentments by FedMail or make them
available on FedLine Web. Institutions also have access to
information through Account Management Information.
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II. Discussion of Proposed Changes
1. Commercial and Government ACH Debit Transactions
Consistent with its proposal in 2008, the Board proposes to move
the posting times for ACH debit transactions processed overnight to
8:30 a.m. from 11:00 a.m. to coincide with the posting time for ACH
credit transactions processed overnight. Other types of ACH
transactions, including same-day ACH and certain ACH return items,
would not be affected and would continue to post at 5:00 p.m.
Posting ACH debit transactions according to the proposed posting
rules would
Simplify account management by allowing institutions to
fund the net of all ACH activity at a single posting time, rather than
funding debit and credit transactions separately
Increase liquidity early in the day for institutions that
originate ACH debit transactions over the FedACH network, and for those
institutions that originate ACH debit transactions over the Electronic
Payments Network (EPN), the other ACH operator, but have transactions
delivered to receiving institutions over the FedACH network (inter-
operator transactions) \16\
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\16\ Liquidity refers to balances in Federal Reserve accounts to
make payments. An increase in liquidity involves higher account
balances, which could result in fewer daylight overdrafts.
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Align the Reserve Banks' FedACH settlement times with
those of the other ACH operator, EPN
Increase the efficiency of the ACH by aligning the
processing of ACH debit transactions with settlement
The proposed ACH posting rules would also better conform to the
Board's principles for measuring daylight overdrafts, which the Board
developed in the early 1990s to guide the development of posting rules.
By posting ACH credit and debit transactions simultaneously to
Federal Reserve accounts, institutions' balances would increase or
decrease by only the net amount of funds from daily ACH settlements.
Debits associated with the receipt of ACH debit transactions could be
simultaneously offset by credits from the receipt of ACH credit
transactions, and vice versa. Among other benefits, the netting of ACH
credit and debit transactions would enhance the efficiency of the
payment system by reducing the potential for intraday liquidity demands
from institutions with a concentration of activity in certain types of
ACH transactions. Additionally, simultaneously posting the majority of
ACH activity at 8:30 a.m. would reduce the burden of separately
monitoring and funding net ACH credit transactions and net ACH debit
transactions at 8:30 a.m. and 11:00 a.m., respectively.
As a consequence of the proposed change, institutions that
originate debit transactions would benefit from the earlier
availability of credits associated with ACH debit transactions. For
example, an institution that originates a large value of ACH credit and
debit transactions may be net positive for daily ACH activity but under
current posting rules may require intraday credit between 8:30 a.m. and
11:00 a.m. to fund the earlier posting of ACH credit transactions.
Although only approximately 2 percent of institutions, or roughly 75
institutions, are net receivers of funds from ACH debit transactions,
the impact on liquidity of the later posting of ACH debit transactions
can be significant because of the large value of debit transactions
that they originate.
The existing later settlement time of ACH debit transactions also
introduces the possibility of a competitive disparity between the
Reserve Banks' FedACH service and EPN, because EPN's practice is to
post both ACH credit and debit transactions at 8:30 a.m., which may be
a more attractive service for large originators. Aligning the
settlement times between FedACH and EPN would remove any resulting
competitive disparities related to settlement times between the two ACH
operators. Although most commenters in 2008 believed that FedACH's
disadvantage relative to EPN was minimal, the competitive landscape
between the operators continues to evolve, and the Board is interested
in ensuring that its posting rules do not create a competitive
disadvantage for either operator.
When considering changes to the posting rules, the Board evaluates
proposals against its principles for measuring daylight overdrafts.
These principles were formalized in the early 1990s to guide the
development of the posting rules to measure daylight overdrafts and
continue to be relevant today.
The four principles are:
(1) To the extent possible, the measurement procedures should not
provide intraday float to participants.
(2) The measurement procedures should reflect the times at which
payor institutions are obligated to pay for transfers.
(3) The users of payment services should be able to control their
use of intraday credit.
(4) The Reserve Banks should not obtain any competitive advantage
from the measurement procedures.
In evaluating the proposed posting rule change against its
principles for measuring daylight overdrafts, the Board notes that
neither the existing nor the proposed posting rules provide intraday
float, because both the credit and debit entries associated with each
type of ACH transaction post simultaneously. However, the earlier
posting time of 8:30 a.m. for ACH debit transactions would conform more
closely with the second principle that
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posting times should reflect the time at which the payor institution is
obligated to pay. The purpose of the second principle is to minimize as
much as possible the period between when the payments are delivered to
the institution and when the payment is settled. The Reserve Banks'
FedACH processing day extends from 3:00 a.m. to 2:59 a.m. on the next
calendar day. The FedACH payments settling on a given processing day
are usually processed by 4:00 a.m., and payment advices are sent to
institutions by 6:00 a.m. By moving the posting time of ACH debit
transactions from 11:00 a.m. to 8:30 a.m., the posting rules would
reduce the window between when receivers of ACH debit transactions
receive ACH debit files and when they are obligated to settle these
payments.
The third principle specifies that institutions should be able to
control their use of intraday credit and monitor their accounts to
comply with limits and other restrictions related to daylight
overdrafts. As discussed previously, this principle motivated the later
posting of ACH debit transactions to allow institutions time to fund
their ACH debit activity over Fedwire. Because the Fedwire Funds
Service now opens at 9:00 p.m. the previous calendar day, institutions
have the operational ability to fund ACH debit activity before 8:30
a.m. Lastly, the proposed posting rules for ACH debit transactions
align with the fourth principle that the Reserve Banks should not
obtain a competitive advantage from the measurement procedures, because
the proposed settlement time of 8:30 a.m. for ACH debit transactions is
within the settlement window available to private-sector operators
using the National Settlement Service (NSS) service.\17\
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\17\ NSS is a multilateral settlement service owned and operated
by the Reserve Banks. The service is offered to institutions that
settle for participants in clearinghouses, financial exchanges, and
other clearing and settlement groups. Settlement agents, acting on
behalf of those institutions in a settlement arrangement,
electronically submit settlement files to the Reserve Banks. Files
are processed upon receipt, and entries are automatically posted to
the institutions' Federal Reserve accounts. The NSS operating hours
are currently 8:30 a.m. to 5:00 p.m.
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Despite the benefits associated with the earlier posting of ACH
debit transactions, because of the concentration of ACH debit
origination activity, most institutions are receivers of ACH debit
transactions, and, as a result, the Board recognizes that the posting
rule change would reduce, on average, account balances between 8:30 and
10:59 a.m. for most FedACH participants. Based on second-quarter 2013
payment data, 98 percent of approximately 3,300 participants on average
would experience lower balances over the quarter.\18\ The average
change in balances on days with affected payments for institutions
eligible and ineligible to receive intraday credit would be $5 million
and $76 million, respectively.\19\ Out of those institutions that would
experience lower balances, less than one-half of 1 percent, only 13
institutions, would incur overdraft fees in any of the six two-week
reserve maintenance periods (RMP) within the quarter analyzed.\20\
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\18\ Although most institutions with master accounts are
involved in both ACH and commercial check activity, approximately
half of these participants settle their activity to a correspondent
rather than their own master account.
Analysis in this notice is intended to be illustrative only and
reflect activity at the master account level from the second quarter
2013. All institutions should consider their own historical payment
activity when evaluating the effect of the proposed posting rule
changes.
\19\ Ninety-seven percent of these institutions are community
banks and credit unions with assets of less than $10 billion. These
data are similar to the results for the proposed commercial check
posting rules discussed later in the notice.
The average balance calculation only includes days in the second
quarter of 2013 for which institutions had ACH debit transactions.
The simulation of balances under the proposed posting rules focuses
only on balances held at 8:30 a.m., while the analysis of fees and
collateral takes into account balances held and collateral pledged
over the entire 21.5-hour Fedwire operating day.
\20\ In response to the Board's 2008 proposal to post ACH debit
transactions at 8:30 a.m., several commenters, although generally
supportive of the proposals, raised concerns about institutions
located in western time zones that would likely incur costs
associated with the proposed change. Based on the current data
analysis, the institutions that would incur increased fees are not
disproportionally located in any single time zone. These data are
similar to the results for the proposed commercial check posting
rules discussed later in the notice.
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Nine of the 13 institutions that would incur higher fees are
eligible to incur daylight overdrafts. The average increase in fees
over the quarter would be $33 per RMP, and the largest average fee
increase per RMP for an institution was estimated at $132.\21\ To avoid
fee increases, these institutions could pledge on average $7 million of
(additional) collateral.\22\ Alternatively, they could hold higher
balances and receive interest on their Federal Reserve balances, or
arrange early morning funding.
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\21\ The average calculation includes all RMPs in the quarter.
\22\ The average calculation only includes RMPs for which
institutions required (additional) collateral.
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Additionally, 4 of the 13 institutions are ineligible to receive
intraday credit and would incur overdrafts under the proposed rules. To
avoid violating the PSR policy and incurring fees, these institutions
would need to increase funding in their accounts on average by $33
million either overnight or through early morning funding.\23\ These
institutions include bankers' banks and Federal Home Loan Banks, and
not all would be eligible to earn interest on their Federal Reserve
balances.
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\23\ These institutions are not eligible to collateralize
daylight overdrafts. The average additional funding relates only to
RMPs for which institutions required additional funds.
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Overall, the Board believes that accelerating the settlement of ACH
debits from 11:00 a.m. to 8:30 a.m. promotes the efficiency of the ACH
network and strategically aligns the payment system for future
advancements in the speed of clearing and settlement. The Board also
believes that the reduction in potential liquidity extensions by the
Reserve Banks to large originators, simplified account management, the
alignment of settlement times between FedACH and EPN, and the
improvement gained in measuring daylight overdrafts relative to the
Board's principles provide benefits that outweigh the increase in
funding costs or overdraft fees that may be incurred by less than one-
half of 1 percent of affected institutions. Additionally, the Board
believes that the majority of these institutions could avoid increased
fees by pledging (additional) collateral, and for most institutions
that choose to hold higher balances, interest paid on balances in
Federal Reserve accounts would reduce the costs associated with doing
so.
Questions
In response to the Board's proposal to change the posting times for
ACH debit transactions, the Board requests comment on the benefits and
drawbacks. In particular,
(1) What additional costs would institutions expect to incur in
order to fund their Federal Reserve accounts by 8:30 a.m. for ACH debit
transactions? Are there significant differences in the anticipated
effect on those institutions eligible and ineligible to receive
intraday credit or earn interest on balances in Federal Reserve
accounts?
(2) What are the expected benefits from posting ACH debit
transactions earlier?
(3) Would the proposed changes affect the availability of funds to
institutions' customers' accounts? Would the proposed changes affect
the debiting of funds from institutions' customers' accounts?
(4) What additional costs would institutions expect to incur if ACH
credit and debit transactions were posted between 6:00 a.m. and 8:30
a.m.? If the Reserve Banks' NSS operating hours did not open before
8:30 a.m.
[[Page 74134]]
would that create a competitive disadvantage for private-sector
operators?
2. Commercial Check Transactions
Under the current posting rules, commercial check credits post
according to one of two options: (1) All credits post at a single,
float-weighted posting time, or (2) fractional credits post between the
hours of 11:00 a.m. and 6:00 p.m., depending on the institution's
preference.\24\ Both crediting options are based on surveys of check
presentment times and vary across time zones. Commercial check debits
are posted on the next clock hour at least one hour after presentment
beginning at 11:00 a.m. for paper checks and 1:00 p.m. local time for
electronic checks, and ending at 3:00 p.m. local time.
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\24\ The first option allows an institution to receive all of
its check credits at a single time for each type of cash letter.
This time may not necessarily fall on the clock hour. The second
option lets the institution receive a portion of its available check
credits on the clock hours between 11:00 a.m. and 6:00 p.m. The
option selected applies to all check deposits posted to an
institution's account. Reserve Banks calculate crediting fractions
and float-weighted posting times for each time zone based on
surveys.
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In order to reflect today's electronic check-processing
environment, the Board proposes to post commercial check transactions,
both credits and debits, at 8:30 a.m., 1:00 p.m., and 5:30 p.m., with
the specific posting time depending on when the check was deposited
with the Reserve Banks (for credits) or presented by the Reserve Banks
(for debits).\25\ Credits associated with any commercial checks
received by the Reserve Banks' deposit deadlines would post on a
rolling basis at the next available posting time at least 30 minutes
after receipt by the Reserve Banks.\26\ Currently, the Reserve Banks'
electronic check deposit deadlines are 9:00 p.m. on the previous
business day, and 1:00 a.m., 5:00 a.m. and 10:00 a.m. on the settlement
day. The paper check deposit deadline is 7:00 p.m. on the previous
business day. As a result, depositary banks could expect credit for all
electronic items deposited for the 9:00 p.m., 1:00 a.m., and 5:00 a.m.
deposit deadlines to post at 8:30 a.m., and credit for electronic items
deposited for the 10:00 a.m. deadline to post at 1:00 p.m. Paper items
deposited by 7:00 p.m. on the previous day would post at 8:30 a.m.
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\25\ Foreign checks are not affected by the proposed posting
rules for commercial check transactions, and credits for foreign
checks deposited and debits to subsequent collecting banks into
which the Reserve Banks deposit would continue to post after the
close of Fedwire. Additionally, as is the case today, credit to
institutions for foreign checks deposited may be delayed until these
checks clear depending on the value and point of origination of the
check. To clarify treatment of foreign checks, the posting rule for
transactions that post after the close of the Fedwire Funds Service
has been updated to include a reference to foreign checks.
\26\ Immediate credit would not be passed for deferred-
availability deposit products. Customer availability for files
deposited for these services would be the same as if the file were
received at a deposit deadline before 8:00 a.m. the next business
day.
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Similarly, debits associated with electronic check transactions
would post on a rolling basis at the next available posting time that
is at least 30 minutes after presentment to the paying bank. Paper
presentments are made to institutions by mail or courier, and delivered
one to two business days after leaving the Reserve Banks, usually
before 2:00 p.m. local time. To accommodate the extra time required to
make paper presentments, the few remaining paper commercial check debit
transactions, which account for less than one-tenth of 1 percent of
checks processed by the Reserve Banks, would post at the final posting
time of 5:30 p.m. on the day the paper check is presented to the paying
bank.\27\
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\27\ The posting of electronic presentments earlier than paper
check presentments may contribute marginally to a given paying
bank's incentive to require that checks be presented to it in paper
form. Electronic check presentment is now pervasive, however, and
the Board does not believe that a paying bank that receives
presentments electronically would be swayed by the later posting
time to return to paper presentment.
Credits for checks presented in paper form would not be delayed
to accommodate the extra time required for presentment, and would
post at the next available posting time at least 30 minutes after
receipt by the Reserve Banks.
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Under the current posting rules and Regulation J, at least one hour
(versus the proposed 30 minutes) must elapse between presentment and
posting to allow limited verification of cash letters. In September
2013, almost 100 percent of checks were presented electronically by the
Reserve Banks, and 98 percent of routing numbers received forward check
presentments electronically.\28\ As a result of the widespread use of
electronic check-handling methods and the extremely small value of
paper presentments, the Board believes 30 minutes is now sufficient for
institutions to verify cash letters.\29\
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\28\ Although some participants only have one routing number,
other participants may have multiple (in some cases more than 100)
routing numbers to facilitate their payments processing.
\29\ The Board is also issuing a separate notice requesting
comment on proposed changes to Regulation J, under which a paying
bank would be required to settle for an item by as early as 8:30
a.m. and as soon as one half-hour after it receives the item from
the Reserve Banks.
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The Reserve Banks would present multiple electronic files per day
to institutions that receive electronic presentments, with the first
presentment by 8:00 a.m. for settlement at 8:30 a.m. and subsequent
presentment files made based on an institution's check activity for the
day.\30\ Although checks are available for presentment today by 8:00
a.m., as discussed earlier, the Reserve Banks have been holding back
presentment for some institutions until later in the day to accumulate
all check activity into one presentment file. That file is often made
available after 12:00 p.m. local time. The proposed posting rules would
likely result in the first presentment file received by institutions to
be by 8:00 a.m. Other changes already announced by the Reserve Banks
will likely result in institutions receiving multiple files per day and
would eliminate the exception arrangements of only one presentment
file. For business, technology, or other reasons, institutions may
choose not to access these presentment files until a specific time in
the day. The Reserve Banks, however, would continue to settle those
transactions based on presentment having been made, and institutions
would need to manage their Federal Reserve accounts accordingly.
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\30\ The timing and frequency of presentments is subject to
change by the Reserve Banks to align better with processing
advancements and product type.
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The Board is also proposing to revise the posting rules for large-
value check corrections and adjustments. Currently, corrections and
credit adjustments amounting to $1 million or more post at 11:00 a.m.
and hourly thereafter, coinciding with the current posting rules for
commercial checks, while large-value debit adjustments post after the
close of the Fedwire Funds Service. In alignment with the proposed
posting times for commercial check transactions, the Board proposes to
move the settlement of large-value credit corrections and adjustments
to begin at 8:30 a.m. and hourly thereafter on the half-hour. Moving
the settlement of large-value credit corrections and adjustments to
8:30 a.m. in combination with the earlier posting of commercial check
transactions would ensure prompt credit for any discrepancies detected
by the Reserve Banks or an institution. The Board also proposes to post
large-value debit corrections at the same time as large-value debit
adjustments after the close of the Fedwire Funds Service. Posting debit
corrections after the close of Fedwire Funds would ensure that
institutions would only benefit intraday from detected processing
errors and that an institution would not receive a large-value debit
correction before the associated check transaction posted.
[[Page 74135]]
The magnitude of the proposed change would be minimal because of the
limited occurrences of large-value check corrections in Reserve Bank
processing. For example, in June 2013, 7 large-value debit corrections
were initiated for a total value of $4.5 million.
Posting commercial check transactions according to the proposed
posting rules would:
Give earlier availability for items deposited with the
Reserve Banks based on an institution's deposit behavior as well as
provide earlier credit for adjustments and corrections identified
simplify the posting rules structure and, as a result,
reduce its administrative burden to institutions and Reserve Banks
reduce the amount of intraday float currently provided by
the Reserve Banks based on posting rules that do not reflect current
processing
align the posting rules with the significant shift over
the past decade to electronic check clearing
The commercial check posting rules would also better conform to the
Board's principles for measuring daylight overdrafts, which the Board
uses to guide the development of posting rules.
Under the proposed posting rules, institutions would benefit from
the prompt availability of credits from check activity. The
availability of funds from checks also would reflect individual
institutions' deposit behavior. According to recent data on deposits
received by the Reserve Banks, almost all check credits would post at
the 8:30 a.m. posting time.
By posting credits and debits at the next available posting time at
least 30 minutes after deposit or presentment, commercial check posting
rules would be conceptually much simpler and would allow institutions
to identify more easily the value and posting time of check credits and
debits. All check credits and debits would post at one of the three set
posting times regardless of time zone, with the vast majority posting
at 8:30 a.m., reflecting actual deposit and processing activity. An
institution could easily determine the time at which funds associated
with commercial check transactions would be made available, either 8:30
a.m. or 1:00 p.m., based on current deposit deadlines. Additionally,
the proposed rules would be operationally less burdensome because the
Reserve Banks would not need to survey periodically check presentment
times to determine when check credits would post, and any evolution in
typical deposit behavior by institutions or presentment cycles at the
Reserve Banks would be automatically accounted for by the proposed
rules.
As with all posting rule changes, the Board evaluated this posting
rule proposal against its principles for measuring daylight overdrafts.
With regard to the first principle that the measurement procedures do
not provide intraday float, under the current posting rules, check
credits and paper check debits begin posting at 11:00 a.m., whereas
electronic check debits begin posting at 1:00 p.m. local time. As a
result, the current measurement procedures provide intraday float
during the day, which has increased over time as electronic deposits
and presentments have expanded. Under the proposed posting rules, the
likelihood of intraday float would be minimized by facilitating the
prompt, largely simultaneous settlement of both check credits and debit
entries at each posting time. Minimal intraday float may be generated
because of operational delays in presentments. Additionally, the Board
estimates that the Reserve Banks would incur a de minimis amount of
overnight float per day, representing about 0.3 percent of the value of
checks that the Reserve Banks process each day, because of paper
presentments, presentments to regions over the International Date Line,
and priced presentment products offered by the Reserve Banks.\31\
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\31\ For example, an institution that provides corporate cash
management services may opt for a premium presentment service that
allows the institution to establish a morning cutoff time for its
presentments. All presentments to be made to the institution after
the cutoff time would be held and presented to the institution on
the following business day. Credit to the depositary bank, however,
would be passed on the current business day. The Board expects that
very few checks would be held over as a result of such services.
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With respect to the Board's second principle, the proposal would,
overall, decrease the time between presentment of checks and the paying
bank's obligation to settle. The current posting rules for commercial
check continue to reflect the time required to physically process and
present checks, and do not take into consideration the efficiencies
gained from electronic processing and presentment. Furthermore, the
rules allow for relatively long lags between when checks are processed
and when the associated transactions settle, including the delayed 1:00
p.m. local time posting of electronic debits and a minimum one-hour
window between presentment and posting of debits. On average, over 90
percent of the value of forward electronic checks is available to be
presented by 8:00 a.m., but the associated debits do not begin to
settle until 1:00 p.m. local time.\32\ Likewise, check credits
associated with these transactions do not begin posting until 11:00
a.m. By crediting and debiting institutions at 8:30 a.m. for the bulk
of daily check activity and reducing the window between presentment and
posting to 30 minutes, the proposed posting rules would align much more
closely with when the Reserve Banks are able to process and present
commercial checks to paying banks.
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\32\ Actual value of check presentments made by 8:00 a.m. is
approximately 82 percent because some institutions do not have
presentment arrangements before 8:00 a.m.
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Both the current and proposed posting rules conform to the third
principal that users of intraday credit should be able to manage their
usage of intraday credit by establishing set posting times when
institutions can expect to be credited or debited. Under the proposed
rules, institutions would have the ability to determine when they would
receive credits by choosing to deposit at an earlier or later deposit
deadline. Institutions could readily calculate the value of credits or
debits that would post to their Federal Reserve accounts at each of the
three posting times by the value of check deposits made or presentments
received at least 30 minutes before the next posting time. Similar to
the earlier proposed posting time for ACH debit transactions,
institutions may need to adjust their account management due to the
earlier posting of check transactions. To estimate their potential
liquidity need at 8:30 a.m. and throughout the day, institutions could
consider their historical deposit patterns and presentment times.\33\
Ultimately, some institutions may need to hold higher balances
overnight, arrange early morning funding, or incur daylight overdrafts,
if eligible, to fund the earlier posting of check transactions.
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\33\ In assessing the effect of the proposed posting rules,
institutions receiving only one presentment file per day today would
need to adjust their current presentment times to reflect the
earlier posting time and receipt of multiple files.
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Lastly, the fourth principle requires that Reserve Banks do not
obtain a competitive advantage from the measurement procedures. Under
Regulation J, the Reserve Banks have the legal and operational ability
to debit paying banks for paper presentments of checks earlier in the
day than private-sector collecting banks and, in turn, pass credits for
deposited checks earlier in the day without incurring significant
intraday float. In March 1998, the Board requested comment on whether
these legal differences between the Reserve Banks and the private
sector provided the Reserve Banks with a competitive advantage and, if
so, whether these legal differences should be reduced or
[[Page 74136]]
eliminated. Based on the analysis of the comments received, the Board
concluded then and continues to believe that these legal disparities do
not materially affect the efficiency of or competition in the check-
collection system. Furthermore, the vast majority of check activity is
now electronic, and banks have the ability to directly exchange checks
electronically with banks with which they have agreements to do so. As
part of these agreements, depositary and paying banks may determine the
timing and method of settlement. Additionally, private-sector check
clearinghouses have the option to use NSS to effect settlement of
checks or may settle by directing their members to initiate funds
transfers over the Reserve Banks' Fedwire Funds Service. NSS's
operating hours extend from 8:30 a.m. to 5:00 p.m.; Fedwire Funds
operating hours begin at 9:00 p.m. the previous calendar day and end at
6:30 p.m. The Reserve Banks today settle commercial check transactions
(including corrections and adjustments) from 11:00 a.m. to 6:30 p.m.
within the Fedwire Funds operating day. From a payment system risk
perspective, the Board has traditionally encouraged the use of NSS for
multilateral settlement arrangements and is seeking comment on whether
the Reserve Banks should consider extending NSS hours to accommodate a
somewhat later settlement time by private-sector clearinghouses.
Lastly, the earlier posting of check credits and debits may be viewed
as more or less advantageous depending on an institution's net check
activity for the day, but it is unlikely to be a material consideration
because of its minimal effect on Federal Reserve account balances and
variability over time. As a result, the Board believes the fourth
principle would continue to be met.
By posting check debits and credits according to the proposed
posting rules, most institutions could expect that the value of checks
credited and debited at 8:30 a.m. would largely reflect their net daily
check activity. For approximately 36 percent of the 3,100 check
participants, account balances at 8:30 a.m. would be higher on average
under the proposed rules due to the earlier availability of funds
received from checks.\34\ For the 64 percent of participants with lower
average balances at 8:30 a.m. under the proposed rules, the average
change in balances for institutions eligible and ineligible to receive
intraday credit would be $5 million and $21 million, respectively. Only
22 institutions, however, would incur overdraft fees in any of the six
RMPs within the quarter analyzed.
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\34\ The average balance calculation only includes days in the
second quarter of 2013 for which institutions had commercial check
payment activity. The simulation of balances under the proposed
posting rules focuses only on balances held at 8:30 a.m., while the
analysis of fees and collateral takes into account balances held and
collateral pledged over the entire 21.5-hour Fedwire Funds operating
day.
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Twenty-one of the 22 institutions that would incur higher fees are
eligible to incur daylight overdrafts. The average increase in fees
over the quarter would be $104 per RMP; these data include one
institution whose average RMP fee increase was estimated at $1,027,
$756 higher than the institution with the next largest average RMP fee
increase.\35\ To avoid fee increases, these institutions could pledge
on average $14 million of (additional) collateral.\36\ Alternatively,
they could hold higher balances and receive interest on Federal Reserve
account balances, or arrange for early morning funding.
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\35\ The average calculation includes all RMPs in the quarter.
The average increase in fees over the quarter would be $58 per RMP
if the data excluded that one institution.
\36\ The average calculation only includes RMPs for which
institutions required (additional) collateral.
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Additionally, 1 of the 22 institutions is ineligible to receive
intraday credit and would incur overdrafts under the proposed rules. To
avoid violating the PSR policy and incurring fees, the institution
would need to increase funding in its account on average by $24 million
either overnight or through early morning funding.\37\ This institution
would be eligible to receive interest on Federal Reserve account
balances.
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\37\ This institution is not eligible to collateralize daylight
overdrafts. The average additional funding relates only to RMPs for
which the institution required additional funds.
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Overall, the Board believes that the proposed posting rules for
check transactions are necessary to reflect the speed of electronic
check-processing and to remove antiquated provisions based on the
previous environment of paper processing. Furthermore, the proposed
posting rules will position the Reserve Banks to make further
enhancements to the speed of processing by aligning the clearance and
settlement of check payments. In addition, the posting rules would
benefit participants by providing earlier availability of funds that
reflect their deposit behavior and reduce the administrative burden of
the current regime. The Board believes these benefits outweigh the
increase in funding costs or overdraft fees that may be incurred by
less than three-quarters of 1 percent of affected institutions.
Additionally, the Board believes that these institutions could avoid
increased fees by pledging (additional) collateral or holding higher
balances, which would receive interest on Federal Reserve account
balances.
Questions
In response to the Board's proposals to change the posting times
for commercial check transactions and large-value corrections and
credit adjustments, the Board requests comment on the benefits and
drawbacks. In particular,
(1) What additional costs would institutions expect to incur in
order to fund their Federal Reserve accounts by 8:30 a.m. for
commercial check transactions? Are there significant differences in the
anticipated effect on those institutions eligible and ineligible to
receive intraday credit or earn interest on balances in Federal Reserve
accounts?
(2) What are the expected benefits from posting commercial check
transactions earlier?
(3) Would the proposed changes affect the availability of funds to
institutions' customers' accounts? Would the proposed changes impact
the debiting of funds from institutions' customers' accounts?
(4) Would posting check debits at 5:30 p.m., after the current
close of NSS, give the Reserve Banks a material competitive advantage
relative to private-sector clearinghouses? Should the Reserve Banks
consider expanding the operating hours of NSS to 5:30 p.m. to support
the needs of private-sector clearinghouses or collecting banks?
(5) For those institutions receiving paper presentments, would a
posting time after the close of the Fedwire Funds Service be better
than 5:30 p.m.? \38\ What are the reasons?
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\38\ Because of operational limitations and for account
management reasons, the operating hours for NSS could not be
extended to 6:30 p.m. for a comparable settlement option. The
operating hours for NSS would need to close sufficiently before 6:00
p.m. to ensure that the Fedwire Funds 6:00 p.m. third-party close
and the Fedwire Funds 6:30 p.m. settlement close would not be
delayed. In addition, historically, NSS has closed well before the
Fedwire Funds third-party close to allow for contingency settlement
on Fedwire Funds in the event that normal settlement procedures on
NSS were unsuccessful. Posting debits for paper presentments after
the close of Fedwire would be consistent with the posting of foreign
checks, which is a paper-based process.
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(6) What additional costs would institutions expect to incur if
commercial check transactions posted between 6:00 a.m. and 8:30 a.m.?
Would NSS hours need to expand to ensure that the earlier posting would
not result in a material competitive disparity
[[Page 74137]]
between the Reserve Banks and private-sector operators?
(7) Although Reserve Banks are already making changes that will
result in paying banks receiving at least two presentment files per
day, would adding one, two, three, or more additional presentment files
increase costs materially?
(8) Would 15 minutes, rather than the 30 minutes proposed for
limited verification of cash letters, be sufficient time given that
most cash letters are processed electronically? For consistency, should
the Reserve Banks establish in their Operating Circular a minimum 15-
or 30-minute window between established distribution times for ACH
debit transaction files and posting to ensure institutions can view the
amount settling in their accounts before it is debited? \39\
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\39\ Operating Circular 4 applies to the clearing and settlement
of commercial ACH credit and debit transactions for the Reserve
Banks' ACH service.
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(9) Would the earlier posting of electronic presentments materially
incent institutions to accept only paper presentments?
Combined Effect of Proposed Posting Rules for ACH Debit and Commercial
Check Transactions
The Board assessed the combined effect of the changes to both the
ACH debit and commercial check transaction posting rules on
institutions' account balances and daylight overdraft fees. Most
institutions would experience an increase in settlement activity at
8:30 a.m. Overall, the combined posting rule proposals would reduce, on
average, account balances held in Federal Reserve accounts at 8:30 a.m.
for most institutions, but the vast majority of those institutions
would not incur daylight overdraft fees as a result. The low incidence
of fees can be attributed to the current levels of pledged collateral
and collateralized daylight overdrafts receiving a zero fee, the $150
fee waiver covering modest amounts of uncollateralized overdrafts, and
the historically high balances held in Federal Reserve accounts.
Table--Combined Effect of Proposals on Institutions' Balances \40\
----------------------------------------------------------------------------------------------------------------
Number of Average change
Institution type Change in balances at 8:30 a.m. institutions (millions)
----------------------------------------------------------------------------------------------------------------
Eligible to incur daylight overdrafts.... Higher........................... 200 55
Lower............................ 3,251 -7
Daylight overdrafts incurred..... 919 -10
Ineligible to incur daylight overdrafts.. Higher........................... 4 1,611
Lower............................ 23 -81
Daylight overdrafts incurred..... 5 -102
----------------------------------------------------------------------------------------------------------------
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\40\ All data presented are based on the second quarter 2013.
The balances for one institution eligible to incur daylight
overdrafts were unchanged at 8:30 a.m. between the current and
proposed posting rules.
---------------------------------------------------------------------------
As indicated in the table, approximately 200 institutions (6
percent) would incur an increase in available cash balances in their
Federal Reserve accounts at 8:30 a.m. from the combined posting rule
changes. The earlier credit for commercial check transactions is a
large contributor to the higher balances at 8:30 a.m. for most of these
institutions; large originators of ACH debit transactions also benefit
(on average balances increase approximately $163 million) from the
earlier posting of these transactions. At the same time, almost 3,300
institutions (94 percent) of the approximate 3,500 participants in ACH
and commercial check on average would experience lower balances at 8:30
a.m.\41\ The primary driver for this reduction is that the vast
majority of these institutions are community banks or credit unions
with assets of less than $10 billion that receive rather than originate
most ACH debit transactions.\42\ Those institutions' accounts would be
debited earlier in the day than the current posting rules. The average
change in balances for institutions with lower balances at 8:30 a.m.
would be $7 million for institutions eligible to receive intraday
credit and $81 million for ineligible institutions.
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\41\ The average balance calculation only includes days in the
second quarter of 2013 for which institutions had ACH debit or
commercial check payment activity. The simulation of balances under
the proposed posting rules focuses only on balances held at 8:30
a.m., while the analysis of fees and collateral takes into account
balances held and collateral pledged over the entire 21.5-hour
Fedwire Funds operating day.
\42\ Of these institutions with lower balances, 97 percent are
small banking organizations (assets of $500 million or less) or
community banks or credit unions with assets between $500 million
and $10 billion.
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Of the 23 institutions that would incur lower balances and are
ineligible to receive intraday credit, only 5 would incur daylight
overdrafts under the proposed posting rules. On average these 5
institutions would incur daylight overdrafts in four of the six RMPs in
the quarter analyzed. These 5 institutions would need to make account
management changes to either increase funding held in their Federal
Reserve accounts overnight or arrange for early morning funding. Some,
but not all, of these institutions would be eligible to earn interest
on Federal Reserve balances for higher balances held overnight.
In addition, of the 3,250 institutions that would experience lower
balances and are eligible to incur daylight overdrafts, approximately
919 would also incur daylight overdrafts or incur them at higher
levels. At the same time, less than 1 percent, only 28 institutions,
would incur any daylight overdraft fees associated with the proposed
posting rules in any of the six RMPs within the quarter.
[[Page 74138]]
[GRAPHIC] [TIFF OMITTED] TN10DE13.378
As illustrated in the figure, 3,423 institutions that are eligible
to incur daylight overdrafts would not incur an increase in fees
charged, while 28 institutions would incur higher fees. These 28
institutions would incur increased fees on average in three of the six
RMPs in the quarter analyzed. The average increase in fees over the
quarter would be $103 per RMP (the difference between the current and
potential average fees); these data include one institution whose
average RMP fee increase was estimated at $1,035, $764 higher than the
institution with the next largest average RMP fee increase.\44\ The
average increase in fees over the quarter would be $68 per RMP if the
data excluded that one institution. Some of these institutions (about
43 percent) are already incurring fees under the current posting rules.
In addition, almost all of these institutions have a de minimis or
self-assessed net debit cap, permitting these institutions to incur
daylight overdrafts up to 40 percent of their capital if de minimis or
multiples of their capital if self-assessed.\45\ Only one institution
has an exempt cap, which is the lowest level of daylight overdraft
capacity available to institutions. Of the 28 institutions that would
incur higher fees, 23 are community banks and credit unions with assets
between $500 million and $10 billion, and 3 are small banking
organizations with assets of $500 million or less. To avoid fee
increases, these 28 institutions could pledge on average $15 million of
(additional) collateral.\46\ Alternatively, they could hold higher
balances and receive interest on Federal Reserve account balances, or
arrange for early morning funding.
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\43\ Different institutions incurred the highest average fees
per RMP under the current and proposed posting rules.
\44\ The average calculation includes all RMPs in the quarter.
\45\ The PSR policy establishes a limit on the amount of
intraday credit that an institution may incur during any given day;
this limit is called a net debit cap.
\46\ The average calculation only includes RMPs for which
institutions required (additional) collateral.
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Institutions that would incur higher fees are evenly distributed
across time zones, including the Pacific time zone. In an earlier
proposal, commenters raised concerns that institutions located in
western time zones might incur disproportional higher costs associated
with earlier posting times. Of the 28 institutions with higher fees,
the greatest concentration is located in the Eastern time zone.
The Board recognizes that a limited number of institutions would
need to take proactive steps to manage their Federal Reserve accounts
to minimize increased fees or to avoid daylight overdrafts (if
ineligible for intraday credit). These institutions might incur
increased costs related to managing their Federal Reserve accounts
under the proposed posting rules. Most of these institutions, however,
would be able to take actions to avoid increased fees through posting
(additional) collateral or holding higher balances, and interest on
balances in Federal Reserve accounts would help compensate most
institutions (91 percent) that choose to increase balances held
overnight in their Federal Reserve accounts. Three institutions would
be the most adversely affected as they are not eligible for intraday
credit or interest on balances in Federal Reserve accounts. Ultimately,
the Board believes that it is no longer appropriate to maintain posting
rules that reflect outdated practices and do not strategically position
the payment system for the future of faster clearing and settlement.
The Board believes these changes are necessary for the long-run
efficiency of the payment system.
Implementation of Proposed Posting Rules for ACH Debit and Commercial
Check Transactions
Adoption of an earlier posting time for ACH debit transactions and
check transactions could be implemented
[[Page 74139]]
relatively quickly by the Reserve Banks. The Board, however,
understands that a small number of institutions might need to make
account management changes to arrange for sufficient funding or to
pledge (additional) collateral, if eligible. The Board proposes an
effective date six months from the final rule to give institutions
sufficient time to make any necessary changes.
Questions
In response to the Board's proposals to implement changes to the
PSR policy related to the procedures for posting debit and credit
entries for ACH debit and commercial check transactions, the Board
requests comment on the collective benefits and drawbacks. In
particular,
(1) Are there any additional costs as a result of the combined
effect of the ACH debit and commercial check posting rule proposals
that institutions would expect to incur in order to fund their Federal
Reserve accounts by 8:30 a.m.?
(2) Are there any additional expected benefits from the combined
effect of the ACH debit and commercial check posting rule proposals?
(3) What additional costs as a result of the combined effect of the
ACH debit and commercial check posting rule proposals would
institutions expect to incur if both ACH and commercial check
transactions posted between 6:00 a.m. and 8:30 a.m.?
(4) Is six months sufficient lead time for implementation? If not,
why not? What lead time would be needed if greater than six months?
Alternatively, is less implementation time, such as three months,
sufficient?
(5) Are there any additional posting rules in the PSR policy that
would benefit from changes or that need clarification?
III. Other Revisions to the PSR Policy
Principles for Future Posting Rules for the Reserve Banks' Same-Day ACH
Service
Advancements in technology and business processes will continue to
enable improvements in the ACH system and institutions' back-end
processing capabilities and infrastructures. The ACH system has already
begun to see changes, albeit on a limited basis, in faster clearing and
settlement. In 2010, the Reserve Banks began offering a limited,
voluntary, same-day service for certain ACH debit transactions and
recently expanded that service to allow for almost all credit and debit
transaction types.\47\ The Board expects that this service will evolve
over time, with the potential establishment of additional processing
cycles that require new posting times for settlement.\48\
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\47\ The Reserve Banks' service is voluntary in the sense that
both the sending institution and the receiving institution must have
``opted in'' to the Reserve Banks' service in order for the Reserve
Banks to treat an eligible ACH transaction as a same-day
transaction. The same-day ACH service includes all types of ACH
credit and debit transactions with the exception of international
ACH transactions and certain check truncation transactions.
\48\ The current processing schedule has a 2:00 p.m. deadline
for submitting same-day, forward transactions for settlement at 5:00
p.m. Return transactions post at 5:30 p.m.
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The Board proposes to establish a set of principles that would be
applied to any new same-day ACH posting rules. The Board does not
contemplate that it would ordinarily request public comment on changes
to the posting rules that conform to such principles, but would request
comment should it consider implementing posting rules that deviate from
the principles. Such principles would apply to the Reserve Banks'
voluntary (opt-in), same-day ACH service and to any future same-day ACH
service, such as a universal same-day ACH service that may be
incorporated into NACHA rules.\49\ These proposed principles, which
would apply in addition to the current four posting-rules principles
formulated in the 1990s, are as follows: \50\
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\49\ NACHA is a not-for-profit association that manages the
development, administration, and governance of the ACH network for
participating depository institutions. In 2011, NACHA proposed
amendments to its operating rules to enable ACH debit and credit
transfers to be cleared and settled on the same day that they are
originated. The expedited service would require the participation of
all receiving institutions in the ACH network, going beyond the
Reserve Banks' voluntary service. Although the majority of NACHA's
voting members were in favor of the proposal, NACHA did not receive
the 75 percent positive vote required for passage.
\50\ These four posting-rule principles are outlined earlier in
this notice.
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(1) For each same-day ACH transmission deadline, the Reserve Banks
will establish expected distribution times for the same-day ACH files.
a. The Reserve Banks will post settlement for same-day ACH debit
transactions no earlier than 15 minutes after the Reserve Banks'
expected distribution times for the associated same-day ACH file.
b. The Reserve Banks will post settlement for ACH credit and debit
transactions associated with a particular same-day ACH file
distribution time at the same time.
(2) The Reserve Banks will not post settlement for same-day ACH
transactions between 6:30 p.m. and 8:30 a.m. the next processing day.
(3) The Reserve Banks will post settlement for same-day ACH
transactions exchanged with another operator to support universal same-
day ACH during the operating hours for the Reserve Banks' NSS.
The first principle is intended to ensure that institutions have
sufficient time to view the amount settling in their Federal Reserve
accounts for ACH debit transactions before their account is debited.
The principle does not address ACH credit transactions because the
originating depository financial institution, whose Federal Reserve
account is debited, has full information about the amount and timing of
settlement when they initiate the transaction. The principle would also
ensure that credit and debit transactions post simultaneously,
offsetting the liquidity needed to settle for those same-day ACH
transactions.\51\ This principle conforms to the Board's current
measurement principles that posting rules should reflect the times at
which payor institutions are obligated to pay for transfers.
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\51\ Same-day ACH credit transactions have immediate finality
consistent with the Reserve Banks' current treatment of ACH credit
transfers. See section 11.2 of the Reserve Banks' Operating Circular
4, Automated Clearing House Items, available at www.frbservices.org/files/regulations/pdf/operating_circular_4_07122012.pdf.
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The second principle requires that the same-day ACH posting rules
fall within certain business hours, mitigating the potential burden of
institutions, especially smaller, West Coast institutions, related to
monitoring and funding their account balances outside of these hours.
This principle is consistent with the Board's current principle that
users of payment services should be able to control their use of
intraday credit.
The third principle applies to a potential future state when
multiple operators provide same-day ACH services and need to exchange
items to support universal same-day ACH.\52\ To ensure competitive
equality between these operators, the private-sector operator(s) should
have the ability to settle for same-day ACH transactions, using the
Reserve Banks' NSS, at the same times the Reserve Banks post such
transactions.\53\ Because the Reserve Banks are the only provider of a
same-
[[Page 74140]]
day ACH service at this time, the principle is not currently
applicable. If in the future the Reserve Banks exchanged same-day ACH
transactions with a private-sector operator, the Reserve Banks' same-
day ACH service would need to conform to the third principle by either
modifying the posting rules to meet this requirement or expanding NSS's
operating hours to incorporate the posting times for same-day ACH.\54\
This principle conforms to the Board's current principle that Reserve
Banks should not obtain a competitive advantage from the measurement
procedures.
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\52\ The principle would not apply if a private-sector operator
introduced a same-day ACH service where it did not intend the items
to be exchanged with the Reserve Banks as another ACH operator.
\53\ Currently, the Reserve Banks' NSS is used by EPN to settle
intra-EPN transactions (i.e., ACH transactions that do not involve
the Reserve Banks' FedACH service).
\54\ The Reserve Banks currently settle same-day ACH return
transactions at 5:30 p.m., which is a half-hour after the close of
NSS's operating hours of 8:30 a.m. to 5:00 p.m.
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The Board proposes that the principles for future posting rules for
the Reserve Banks' same-day ACH service would be effective on final
approval.
Questions
In response to the Board's proposals to implement principles for
establishing future posting rules for the Reserve Banks' same-day ACH
service, the Board requests comment on the proposed principles. In
particular,
(1) Are there additional principles that the Board should consider?
(2) Are all the proposed principles necessary?
(3) Should the window between established distribution times and
posting be standard for check, ACH debit transactions, and same-day ACH
debit transactions? If so, should that standard be 15 minutes, 30
minutes, or some other time?
Language Clarification in Section II.G.3
The Board is requesting comment on a proposed language
clarification in part II of the PSR policy regarding operational
changes in the administration of the policy as it relates to U.S.
branches and agencies of foreign banking organizations (FBOs). The new
language clarifies that U.S. branches and agencies of the same foreign
bank (also referred to as an FBO family) are expected to manage their
accounts so that the daylight overdraft position in each account does
not exceed the capacity allocated to this account from the FBO family's
net debit cap.\55\ An FBO family, unlike most domestic institutions,
may have multiple master accounts across Reserve Bank Districts and may
request that all or part of its net debit cap be allocated across the
Reserve Bank Districts. In the past, the Reserve Banks monitored the
master accounts of FBO families on a consolidated basis rather than
requiring an FBO family to allocate its net debit cap if it wanted to
incur daylight overdrafts in more than one account across Reserve Bank
Districts.
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\55\ The previous language in the PSR policy that related to the
administration of multiple master accounts was somewhat ambiguous
and could have been interpreted to allow the Federal Reserve to
administer these accounts as is the current practice (separate
administration for the multiple master accounts) or the previous
practice (consolidated administration).
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The impetus for this administration change stemmed from the 2011
revision to the PSR policy that allowed healthy institutions eligible
for intraday credit to eliminate or reduce daylight overdraft fees
through the voluntary pledge of collateral.\56\ FBO families often only
pledged collateral to one Reserve Bank, and state laws governing the
resolution of foreign bank branches may limit (or ``ring-fence'') the
assets of a branch located in that state, thereby increasing the risk
that a Reserve Bank may not be able to rely on collateral held by
another Reserve Bank. In 2012, the Reserve Banks changed their
operational practices to address this risk such that an FBO family's
master accounts are treated as separate accounts for the purposes of
pricing and monitoring net debit cap compliance.\57\
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\56\ The fee for collateralized daylight overdrafts is zero
because the collateral mitigates the Reserve Banks' exposure.
\57\ As announced by the Reserve Banks in a February 2012
letter, effective April 19, 2012, the Reserve Banks would no longer
consolidate the accounts of FBO families across Reserve Bank
Districts for the purposes of pricing and ex-post monitoring of cap
compliance.
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The effective date for the proposed language change intended to
clarify the Reserve Banks' administration of the policy for U.S.
branches and agencies of FBOs would be effective on final approval.
IV. Competitive Impact Analysis
The Board conducts a competitive impact analysis when it considers
a rule or policy change that may have a substantial effect on payment
system participants, such as that being proposed for the posting of ACH
debit and commercial check transactions. Specifically, the Board
determines whether there would be a direct or material adverse effect
on the ability of other service providers to compete with the Federal
Reserve due to differing legal powers or due to the Federal Reserve's
dominant market position deriving such legal differences.\58\ The Board
believes that there are no adverse effects resulting from the proposed
changes due to legal differences.
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\58\ Federal Reserve Regulatory Service, 7-145.2.
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Shifting the posting of ACH debit transactions to 8:30 a.m. would
serve to bring the settlement of ACH debit transactions processed by
the Reserve Banks' FedACH service in line with the private-sector
operator and reduce any potential competitive disadvantage to the
Reserve Banks. The proposed posting-rule change would benefit not only
FedACH participants that originate debit transactions but also EPN
customers that originate debit transactions sent to FedACH, which
settle according to the Board's posting rules.
Under Regulation J, the Reserve Banks have the legal and
operational ability to debit paying banks for paper presentments of
checks earlier in the day than private-sector collecting banks and, in
turn, can pass credits for deposited checks earlier in the day without
incurring significant intraday float. To obtain settlement from paying
banks for paper checks presented, Regulation J permits the Reserve
Banks to debit directly the account of the paying bank or its
designated correspondent.\59\ In contrast, a paying bank settles for
checks presented by a private-sector bank for same-day settlement by
sending a Fedwire Funds transaction to the presenting bank or by
another agreed upon method.\60\ In addition, the Reserve Banks have the
right to debit the account of the paying bank for settlement of checks
on the next clock hour that is at least one hour after presentment,
whereas a private-sector collecting bank may not receive settlement
until the close of Fedwire on the day of presentment.\61\
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\59\ 12 CFR 210.9(b)(5).
\60\ 12 CFR 229.36(f)(2).
\61\ 12 CFR 210.9(b)(2); 12 CFR 229.36(f)(2).
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In March 1998, the Board requested comment on whether these legal
differences between the Reserve Banks and the private sector provided
the Reserve Banks with a competitive advantage. Most commenters
acknowledged that the regulation governing the timing and settlement
favor Reserve Banks over private-sector collecting banks. None of the
commenters, however, suggested an alternative that eliminated the
disparity while maintaining a balance between the needs of both the
paying bank and collecting banks to control some part of the settlement
process.\62\
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\62\ The request for comment and the subsequent notice of the
Board's decision can be found, respectively, at 63 FR 12700 (March
16, 1998) and 63 FR 68701 (December 14, 1998).
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Additionally, under Regulation J, Reserve Banks can obtain same-day
settlement for checks presented to a paying bank before the paying
bank's
[[Page 74141]]
cutoff hour, generally 2:00 p.m. local time or later.\63\ The same-day
settlement rule for private-sector banks, however, requires that they
make their presentments by 8:00 a.m. local time to ensure that they
receive same-day settlement by Fedwire Funds without being assessed
presentment fees. In March 1998, the Board also requested comment on
the effect of the difference in presentment deadlines for Reserve Banks
and private-sector banks. Most commenters did not believe that the six-
hour difference in presentment deadlines was a significant impediment
to the ability of private-sector banks to compete with the Reserve
Banks.
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\63\ 12 CFR 210.9(b)(1).
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Based on the analysis of the comments received, the Board concluded
then and continues to believe that these legal disparities do not
materially affect the efficiency of or competition in the check
collection system. The costs to paying banks and their customers
associated with reducing any remaining legal disparities would outweigh
any payment system efficiency gains.
In addition, the Check 21 Act, by authorizing the creation of
substitute checks, enabled banks to send checks electronically, rather
than in paper form, to banks with which they have agreements to do so,
and the vast majority of check activity is cleared electronically
today. As a result, banks may determine, as part of the agreement
between a depositary and paying bank, the time at which settlement for
checks is required to be funded as well as the presentment deadlines.
Furthermore, for depositary and paying banks that opt to use a check
clearinghouse rather than directly exchange paper or electronic checks,
private-sector clearinghouses have the option to use NSS to effect
settlement of checks or may settle by directing their members to
initiate funds transfers over the Reserve Banks' Fedwire Funds Service.
NSS's operating hours extend from 8:30 a.m. to 5:00 p.m., while Fedwire
Funds operating hours begin at 9:00 p.m. the previous calendar day and
end at 6:30 p.m. The Reserve Banks today settle commercial check
transactions (including corrections and adjustments) from 11:00 a.m. to
6:30 p.m. From a payment system risk perspective, the Board has
traditionally encouraged the use of NSS for multilateral settlement
arrangements and is seeking comment on whether the Reserve Banks should
consider extending NSS hours to accommodate a specific later settlement
time by private-sector clearinghouses.
Under the proposed posting rules, the bulk of the Reserve Banks'
postings of credits to depositing banks and debits to paying banks for
commercial check transactions may shift to earlier in the day.
Depending on the number of checks a bank sends to the Reserve Banks and
that it receives from the Reserve Banks, the bank may receive either a
``net credit'' or a ``net debit'' earlier in the day. As a result, the
earlier posting of commercial check transactions may be viewed as more
or less attractive, depending on changes to balances. Further, private-
sector banks can achieve improvements similar to those provided by the
proposed changes through private agreements among participants, as well
as the use of the NSS.
Given the factors discussed above, the Board does not believe that
the proposed changes to the posting rules would have any direct adverse
effect on other service providers to compete effectively with Reserve
Banks in providing similar services.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR part 1320 appendix A.1), the Board reviewed the PSR policy
changes it is considering under the authority delegated to the Board by
the Office of Management and Budget. No collection of information
pursuant to the Paperwork Reduction Act are contained in the policy
statement.
VI. Federal Reserve Policy on Payment System Risk
Changes to the Posting Rules
If the Board adopts the proposed posting changes for ACH debit and
commercial check transactions, it would amend the ``Federal Reserve
Policy on Payment System Risk'' section II.A. under the subheading
``Procedures for Measuring Daylight Overdrafts'' as follows in
italics.\64\
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\64\ In addition to the italicized changes to the ``Post After
the Close of Fedwire Funds Service'' posting rule, the list of
transactions posted at that time has been reordered.
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Procedures for measuring daylight overdrafts 65
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\65\ This schedule of posting rules does not affect the
overdraft restrictions and overdraft-measurement provisions for
nonbank banks established by the Competitive Equality Banking Act of
1987 and the Board's Regulation Y (12 CFR 225.52).
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Post at 8:30 a.m. Eastern time:
+/- Term deposit maturities and accrued interest
+/- Government and commercial ACH transactions \66\
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\66\ Institutions that are monitored in real time must fund the
total amount of their commercial ACH credit originations in order
for the transactions to be processed. If the Federal Reserve
receives commercial ACH credit transactions from institutions
monitored in real time after the scheduled close of the Fedwire
Funds Service, these transactions will be processed at 12:30 a.m.
the next business day, or by the ACH deposit deadline, whichever is
earlier. The Account Balance Monitoring System provides intraday
account information to the Reserve Banks and institutions and is
used primarily to give authorized Reserve Bank personnel a mechanism
to control and monitor account activity for selected institutions.
For more information on ACH transaction processing, refer to the ACH
Settlement Day Finality Guide available through the Federal Reserve
Financial Services Web site at http://www.frbservices.org.
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+/- Commercial check transactions, including returned checks \67\
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\67\ For the three commercial check transaction posting times,
the Reserve Banks will post credits and debits to institutions'
accounts for checks deposited and presented, respectively, at least
30 minutes before the posting time.
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+ Treasury checks, postal money orders, local Federal Reserve Bank
checks, and savings bond redemptions in separately sorted deposits;
these items must be deposited by 12:01 a.m. local time or the local
deposit deadline, whichever is later
+ Advance-notice Treasury investments
- Penalty assessments for tax payments from the Treasury Investment
Program (TIP).\68\
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\68\ The Reserve Banks will identify and notify institutions
with Treasury-authorized penalties on Thursdays. In the event that
Thursday is a holiday, the Reserve Banks will identify and notify
institutions with Treasury-authorized penalties on the following
business day. Penalties will then be posted on the business day
following notification.
Post at 8:30 a.m. Eastern time and hourly, on the half-hour,
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thereafter:
+/- Main account administrative investment or withdrawal from TIP
+/- Special Direct Investment (SDI) administrative investment or
withdrawal from TIP
+ 31 CFR part 202 account deposits from TIP
+ Credit corrections amounting to $1 million or more \69\
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\69\ Corrections are account entries made to correct
discrepancies detected by a Reserve Bank during the initial
processing of checks.
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+ Credit adjustments amounting to $1 million or more\70\
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\70\ Adjustments are account entries made to correct
discrepancies detected by an institution after entries have posted
to its account and are made at the request of the institution.
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- Uninvested paper tax (PATAX) deposits from TIP
- Main account balance limit withdrawals from TIP
- Collateral deficiency withdrawals from TIP
- 31 CFR part 202 deficiency withdrawals from TIP
[[Page 74142]]
Post by 1:00 p.m. Eastern time:
+/- Commercial check transactions, including returned checks
+ Same-day Treasury investments.
Post at 5:30 p.m. Eastern time:
+/- FedACH SameDay Service return transactions.
+/- Commercial check transactions, including returned checks
Post After the Close of Fedwire Funds Service:
+/- All other transactions. These transactions include the following:
currency and coin shipments; noncash collection; term-deposit
settlements; Federal Reserve Bank checks presented after 3:00 p.m.
Eastern time but before 3:00 p.m. local time; foreign check
transactions; small-dollar credit adjustments; and all debit
adjustments and corrections. Discount-window loans and repayments are
normally posted after the close of Fedwire as well; however, in unusual
circumstances a discount window loan may be posted earlier in the day
with repayment 24 hours later, or a loan may be repaid before it would
otherwise become due.
Revisions to Section II.G.3 of the PSR Policy
The Board proposes to revise section II.G.3 of the Federal Reserve
Policy on Payment System Risk as follows:
3. Multi-District Institutions
An institution maintaining merger-transition accounts or an Edge
or agreement corporation that accesses Fedwire through master
accounts in more than one Federal Reserve District is expected to
manage its accounts so that the total daylight overdraft position
across all accounts does not exceed the institution's net debit cap.
One Reserve Bank will act as the administrative Reserve Bank and
will have overall risk-management responsibilities for an
institution maintaining master accounts in more than one Federal
Reserve District. For domestic institutions that have branches in
multiple Federal Reserve Districts, the administrative Reserve Bank
generally will be the Reserve Bank where the head office of the bank
is located.
U.S. branches and agencies of the same foreign bank (also
referred to as an FBO family) are assigned one net debit cap per FBO
family. FBO families that access Fedwire through master accounts in
more than one Federal Reserve District are expected to manage their
accounts so that the daylight overdraft position in each account
does not exceed the capacity allocated to this account from the FBO
family's net debit cap. The administrative Reserve Bank generally is
the Reserve Bank that exercises the Federal Reserve's oversight
responsibilities under the International Banking Act.71 The
administrative Reserve Bank, in consultation with the management of
the foreign bank's U.S. operations and with Reserve Banks in whose
territory other U.S. agencies or branches of the same foreign bank
are located, may recommend that these agencies and branches not be
permitted to incur overdrafts in Federal Reserve accounts.
Alternatively, the administrative Reserve Bank, after similar
consultation, may recommend that all or part of the foreign family's
net debit cap be allocated to the Federal Reserve accounts of
agencies or branches that are located outside of the administrative
Reserve Bank's District; in this case, the Reserve Bank in whose
Districts those agencies or branches are located will be responsible
for administering all or part of this policy.72
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\71\ 12 U.S.C. 3101-3108.
\72\ As in the case of Edge and agreement corporations and their
branches, with the approval of the designated administrative Reserve
Bank, a second Reserve Bank may assume the responsibility for
administering this policy regarding particular foreign branch and
agency families. This would often be the case when the payments
activity and national administrative office of the foreign branch
and agency family is located in one District, while the oversight
responsibility under the International Banking Act is in another
District. If a second Reserve Bank assumes management
responsibility, monitoring data will be forwarded to the designated
administrator for use in the supervisory process.
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* * * * *
By order of the Board of Governors of the Federal Reserve
System, November 25, 2013.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2013-28745 Filed 12-9-13; 8:45 am]
BILLING CODE P