[Federal Register Volume 83, Number 231 (Friday, November 30, 2018)]
[Rules and Regulations]
[Pages 61509-61523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25267]
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Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 83, No. 231 / Friday, November 30, 2018 /
Rules and Regulations
[[Page 61509]]
FEDERAL RESERVE SYSTEM
12 CFR Part 210
[Regulation J; Docket No. R-1599]
RIN 7100-AE98
Collection of Checks and Other Items by Federal Reserve Banks and
Funds Transfers Through Fedwire
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is publishing final amendments to Regulation J. The amendments clarify
and simplify certain provisions Regulation J, remove obsolete
provisions, and align the rights and obligations of sending banks,
paying banks, and Federal Reserve Banks (Reserve Banks) with the
Board's recent amendments to Regulation CC to reflect the virtually
all-electronic check collection and return environment. The final rule
also amends Regulation J to clarify that terms used in financial
messaging standards, such as ISO 20022, do not confer legal status or
responsibilities.
DATES: Effective January 1, 2019.
FOR FURTHER INFORMATION CONTACT: Clinton N. Chen, Senior Attorney (202)
452-3952, Legal Division; or Ian C.B. Spear, Manager (202) 452-3959;
Division of Reserve Bank Operations and Payment Systems; for users of
Telecommunication Devices for the Deaf (TDD) only, contact 202-263-
4869; Board of Governors of the Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Background
Subpart A of Regulation J governs the collection of checks and
other items by the Reserve Banks. This subpart includes the warranties
and indemnities that are given to the Reserve Banks by parties that
send items to the Reserve Banks for collection and return, as well as
the warranties and indemnities for which the Reserve Banks are
responsible in connection with the items they handle. Subpart A also
describes the methods by which the Reserve Banks may recover for losses
associated with their collection of items. Subpart A authorizes the
Reserve Banks to issue operating circulars governing the details of the
collection of checks and other items and provides that such operating
circulars have binding effect on all parties interested in an item
handled by a Reserve Bank. The Reserve Banks' Operating Circular No. 3,
``Collection of Cash Items and Returned Checks'' (OC 3),\1\ is the
operating circular that is most relevant to the Reserve Banks' check
collection activities. Subpart B of Regulation J provides rules to
govern funds transfers through the Reserve Banks' Fedwire Funds
Service. This service is also governed by the Reserve Banks' Operating
Circular No. 6, ``Funds Transfers through the Fedwire Funds Service''
(OC 6).\2\
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\1\ See, https://www.frbservices.org/assets/resources/rules-regulations/072315-operating-circular-3.pdf.
\2\ See, https://www.frbservices.org/assets/resources/rules-regulations/operating-circular-6-102917.pdf.
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II. Overview of Proposal and Comments
In March 2018, the Board published a notice of proposed rulemaking
(``proposal'') intended to align subpart A of Regulation J with the
Board's 2017 amendments to Regulation CC and cross reference certain
provisions (83 FR 11431). The proposal also included amendments to
subpart B of Regulation J to clarify that terms used in financial
messaging standards, such as ISO 20022, do not confer legal status or
responsibilities. The Board received 25 comments in response to its
proposal during the comment period from a variety of commenters,
including financial institutions, trade associations, clearinghouses,
and private individuals. The Board has considered all comments received
and has adopted amendments to Regulation J as described below.
A. Alignment With Regulation CC Amendments Addressing Electronic Checks
Under subpart A of Regulation J, Reserve Banks handle ``items,''
which are defined to include ``electronic items.'' Regulation J
currently defines an ``electronic item'' as an electronic image of, and
information describing, an item that a Reserve Bank agrees to handle
pursuant to an operating circular. Regulation J also sets forth certain
warranties provided to the Reserve Banks by the sender of an electronic
item and certain warranties provided by the Reserve Banks when sending
or presenting an electronic item. Specifically, Regulation J provides
that for electronic items, the sender and the Reserve Banks make
warranties (1) as set forth in the Uniform Commercial Code (U.C.C.) and
Regulation CC as if the electronic item were subject to their terms;
and (2) similar to those made for substitute checks under the Check 21
Act (``Check-21-like warranties''). Regulation J also currently
provides similar provisions related to checks that are returned as
electronic items.
In 2017, the Board published a final rule amending Regulation CC to
reflect the virtually all-electronic check collection and return
environment (82 FR 27552). Among other things, the amendments created a
regulatory framework for the collection and return of electronic items
(i.e., electronic images and electronic information derived from a
paper item) by defining the terms ``electronic check'' and ``electronic
returned check,'' creating Check-21-like warranties for electronic
checks and electronic returned checks, and applying existing paper-
check warranties to electronic checks and electronic returned checks.
In its proposal, the Board proposed to remove the term ``electronic
item'' from Regulation J and define ``check'' and ``returned check'' to
include an electronic check and electronic returned check as defined in
Sec. 229.2 of Regulation CC. The proposal defined the term ``item'' to
include an electronic check as defined in Regulation CC. The Board also
proposed to eliminate duplicative provisions by removing the Check-21-
like warranties currently provided under Regulation J by the sender and
the Reserve Banks. Instead, the proposal provided that the sender of an
item (including an electronic check) and the Reserve Banks would (as
applicable and unless otherwise provided) make all the warranties and
indemnities set forth in and subject to the terms of subparts C and D
in
[[Page 61510]]
Regulation CC. The Board proposed similar amendments to the provisions
of Regulation J that currently address returning checks as electronic
items.
Commenters generally supported aligning Regulation J with
Regulation CC's amendments regarding electronic checks. The Board
received specific comments on cross referencing Regulation CC
electronic check warranties and indemnities, which is discussed in
detail in the relevant section-by-section analysis. The Board has
revised proposed Sec. Sec. 210.6(b)(3) and 210.12(e) to extend the
warranties with respect to electronic checks and electronic returned
checks provided by Reserve Banks to the same scope of recipients as in
Regulation CC, as discussed in detail in the relevant section-by-
section analyses.
B. Electronically Created Items
In the 2017 amendments to Regulation CC, the Board included certain
indemnities with respect to electronically-created items (ECIs), which
are check-like items created in electronic form that never existed in
paper form. ECIs can be difficult to distinguish from electronic images
of paper checks. As a practical matter, a bank receiving an ECI often
handles it as if it were derived from a paper check. However, because
there was no original paper check corresponding to the ECI, the
warranties, indemnities, and other provisions of Regulation CC would
not apply to those items. As the Board explained in the 2017 Regulation
CC amendments, the payee and the depositary bank are in the best
position to know whether an item is electronically created and to
prevent the item from entering the check-collection system. Therefore,
to protect banks that receive ECIs during the check collection process,
the Board's Regulation CC amendments provided indemnities that
ultimately shift liability for losses to the depositary bank. These
losses could arise because the ECI (1) is not derived from a paper
check, (2) was unauthorized, or (3) was transferred or presented for
payment more than once.\3\ As described above, the final rule cross
references Regulation CC's warranties and indemnities in Regulation J,
including Regulation CC's ECI indemnities.
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\3\ 12 CFR 229.34(g) provides that each bank that transfers or
presents an electronically-created item and receives a settlement or
other consideration for it shall indemnify, as set forth in Sec.
229.34(i), each transferee bank, any subsequent collecting bank, the
paying bank, and any subsequent returning bank against losses that
result from the fact that (1) the electronic image or electronic
information is not derived from a paper check; (2) the person on
whose account the electronically-created item is drawn did not
authorize the issuance of the item in the amount stated on the item
or to the payee stated on the item (for purposes of paragraph
(g)(2), ``account'' includes an account as defined in Sec. 229.2(a)
as well as a credit or other arrangement that allows a person to
draw checks that are payable by, through, or at a bank); or (3) a
person receives a transfer, presentment, or return of, or otherwise
is charged for an electronically-created item such that the person
is asked to make payment based on an item or check it has already
paid.
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In its proposal, the Board explained that although Regulation J
does not explicitly address ECIs, the definition of item in Regulation
J does not encompass ECIs and therefore Regulation J does not allow for
the handling of ECIs by the Reserve Banks. Specifically, Regulation J
defines an item, in part, as ``an instrument or a promise or order to
pay money, whether negotiable or not'' that meets several other
requirements.\4\ The terms ``instrument,'' ``promise,'' and ``order''
are defined under the U.C.C. as requiring a writing.\5\ Because they
never existed in tangible form and therefore do not qualify as
writings, ECIs are not ``items'' as defined in Regulation J.
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\4\ 12 CFR 210.2(i).
\5\ Terms not otherwise defined in Regulation J or Regulation CC
have the meanings set forth in the U.C.C. Under the U.C.C.,
``instrument'' means a ``negotiable instrument'' which is defined in
part as ``unconditional promise or order to pay a fixed amount of
money.'' U.C.C. 3-104. ``Promise'' is defined as ``a written
undertaking to pay money signed by the person undertaking to pay.''
U.C.C. 3-103. ``Order'' is defined as ``a written instruction to pay
money signed by the person giving the instruction.'' U.C.C. 3-103.
``Writing'' and ``written'' are defined as including ``printing,
typewriting, or any other intentional reduction to tangible form.''
U.C.C. 1-201.
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To provide greater clarity that Regulation J does not allow for the
handling of ECIs by the Reserve Banks, the Board proposed to amend the
definition of ``item'' in subpart A of Regulation J to state explicitly
that the term does not include an ECI as defined in Regulation CC.
Furthermore, because Regulation J is intended to provide rules for the
collection and return of items by the Reserve Banks, the Board proposed
to allow the Reserve Banks to require senders to provide warranties and
indemnities that only ``items'' and any ``noncash items'' the Reserve
Banks have agreed to handle will be provided to the Reserve Banks. The
Board's proposal also permitted the Reserve Banks to provide a
subsequent collecting bank and a paying bank the warranties and
indemnities provided by the sender. The Board requested comment on
possible implications that this clarification and change related to
ECIs in Regulation J may have on financial institutions or the industry
more broadly. The Board also requested comment on whether, and to what
extent, the Board should consider amending Regulation J as part of a
future rulemaking to permit the Reserve Banks to accept ECIs.
Three commenters, including a Federal Reserve Bank and a comment
letter submitted by a group of trade associations (``group letter''),
supported the Board's proposal on ECIs. The Reserve Bank commenter
noted that it is aware that some advocates support allowing ECIs to be
handled in the same manner as checks and has worked with these
advocates to explore the possibility of making legal and operational
changes to support ECIs. However, the Reserve Bank commenter stated
that there is currently no consensus among industry participants to
change laws or adopt standards necessary to support ECIs. In the
absence of such laws and standards supporting ECIs, the Reserve Bank
commenter believes that ECIs represent an unacceptable level of risk to
financial institutions. Similarly, the group letter stated that ECIs
lack legal status under existing laws and expose financial institutions
to risks that cannot be effectively mitigated. The group letter stated
that due to ECIs uncertain legal status, it is important to protect
financial institutions that receive ECIs during the check collection
process from damage or loss arising from the fact that ECIs are not
derived from paper checks. Therefore, the group supported the Board's
proposal to allow Reserve Banks to require senders to provide
warranties and indemnities with respect to ECIs and did not support
additional rulemaking to allow the handling of ECIs by the Reserve
Banks.
Fourteen commenters, including a joint commenter letter submitted
by businesses, financial institutions, and industry associations
(``joint letter''), generally did not support the Board's proposed
amendments on ECIs. The joint letter stated that the Board's proposal
concerning ECIs is not in line with the Board's recent payment system
improvement efforts.\6\ Another commenter stated that the Board's
proposal limited consumer choice because ECIs may be initiated by
consumers that do not have access to a debit or credit card. Commenters
stated that the Board's proposal discouraged the evolution of the check
system to an all-electronic payment system that would result in lower
barriers to entry, lower cost, increased speed, and increased parity
among financial institutions. Two commenters requested
[[Page 61511]]
the Board to conduct further studies on ECIs. One commenter expressed
concern that institutions would be unable to identify ECIs and
requested that the Board provide guidance on how banks can recognize
ECIs. Another commenter requested that the Board expressly set out
rules for alternative methods of direct exchange of ECIs in its final
rule and guidance.
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\6\ The joint letter specifically cited the Federal Reserve's
2013 consultation paper. The Federal Reserve Banks, Payment System
Improvement--Public Consultation Paper (2013).
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The Board has considered the comments received and has adopted the
amendments concerning ECIs as proposed in its final rule. The Board
notes that numerous comments erroneously viewed the Board's proposed
amendments as substantive modifications that created a new prohibition
on ECIs. However, as discussed above, ECIs are not ``items'' under the
Board's current Regulation J and therefore cannot be handled by the
Reserve Banks. This exclusion of ECIs under current Regulation J is
already reflected in current OC 3, which requires that an ``electronic
item'' contain an image and data captured from a paper check. The
Board's amendments to the definition of ``item'' are intended only to
provide additional clarity regarding these existing exclusions and do
not create any new prohibitions. The Board believes this existing
exclusion shifts liability to parties better positioned to know whether
a purported item is electronically created and that can either prevent
the ECI from entering the check-collection system or assume the risk of
sending it forward. Moreover, the Board's amendments would not prevent
entities that desire to exchange ECIs from doing so by agreement using
direct exchange relationships or other methods not involving the
Reserve Banks.
The Board appreciates comments regarding the Federal Reserve's
payment system improvement efforts and continues to support
technological innovation in the payments system. However, as set forth
in the Federal Reserve's Strategies for Improving the U.S. Payment
System paper,\7\ the Federal Reserve is committed to improving the
speed and efficiency of the U.S. payment system from end-to-end while
maintaining a high level of safety and accessibility. As explained in
that paper, ``credit-push payments,'' which allow the paying bank to
authenticate the customer and confirm ``good funds'' are available to
support the transaction, have become the expectation when making
electronic person-to-person, business-to-business and certain bill
payments. Unlike ``credit-push payments,'' ``debit-pull payments'' such
as ECIs have a higher risk profile because they generally do not have
the same authentication processes and may allow unauthorized parties
who have access to a payer's account information to fraudulently pull
funds out of the payer's account. To date, there has not been the
industry support or necessary investment to address the heightened risk
profiles created by processing electronically-created debit instruments
through the check collection system. Moreover, there is legal
uncertainty as to the status of ECIs that are processed as if they were
checks under the U.C.C. and the Electronic Funds Transfer Act. The
Board believes that the heightened risk profile and legal uncertainty
surrounding ECIs currently outweigh the potential benefits of ECIs
mentioned by the commenters and, accordingly, will not conduct further
studies on ECIs at this time.
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\7\ Federal Reserve System, Strategies for Improving the U.S.
Payment System (2016).
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The Board does not believe it is appropriate to adopt guidance to
clarify how banks can distinguish ECIs from electronic checks. As it
stated in its proposal, the Board recognizes that a bank receiving an
electronic image generally cannot distinguish an image that is derived
from a paper check from an ECI. This inability to distinguish ECIs from
electronic images of paper checks is the reason the Board adopted
indemnities with respect to ECIs in Regulation CC. The parties in the
best position to know whether a purported item is electronically
created are also in the best position to assess and take on any
associated risks that may arise from ECIs entering the check collection
system and can also address such risk in agreements with their
customers that deposit ECIs.
C. Settlement and Payment
Regulation J currently provides that settlement with a Reserve Bank
for cash items ``shall be made by debit to an account on the Reserve
Bank's books, cash, or other form of settlement'' to which the Reserve
Bank has agreed.\8\ With respect to noncash items, Regulation J
provides that a Reserve Bank may require settlement by cash, by a debit
to an account on a Reserve Bank's books or ``by any of the following
that is in a form acceptable to the collecting Reserve Bank: Bank
draft, transfer of funds or bank credit, or any other form of payment
authorized by State law.'' \9\ Regulation J also currently provides
that a Reserve Bank may require a nonbank payor to settle for items by
cash, or by ``any of the following that is in a form acceptable to the
Reserve Bank: Cashier's check, certified check, or other bank draft or
obligation.'' \10\ In order to facilitate the efficient collection of
items, the Reserve Banks' current practice is generally to settle for
items by debit to an account on the Reserve Bank's books. The use of
cash is rare, typically only done in emergency situations, and could be
covered by a provision allowing ``other form of settlement to which the
Reserve Bank agrees.''
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\8\ 12 CFR 210.9(b)(5).
\9\ 12 CFR 210.9(c).
\10\ 12 CFR 210.9(d).
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The Board proposed to revise certain settlement provisions of
Regulation J to remove references to cash and other specified forms of
settlement (e.g., cashier's checks or certified checks) and instead
state that the Reserve Banks may settle by a debit to an account on the
Reserve Bank's books, or another form of settlement acceptable to the
Reserve Banks. The Board requested comment on possible implications
that the proposed changes may have on financial institutions with which
the Reserve Banks settle for the presentment of items.
The Board received one comment supporting the proposal and no
opposing comments. The Board has adopted these amendments as proposed
in the final rule.
D. Legal Status of Terms Used in Financial Messaging Standards
Financial messaging standards provide a common format that allows
different financial institutions to communicate. The Board has
separately requested comment on the Federal Reserve Banks' plan to
migrate to the ISO 20022 financial messaging standard for the Fedwire
Funds Service.\11\ ISO 20022 is an international standard that employs
terminology that differs in key respects from that used in U.S. funds-
transfer law, including Regulation J. The Board proposed an amendment
to subpart B of Regulation J that would clarify that terms used in
financial messaging standards, such as ISO 20022, do not confer or
connote legal status or responsibilities.
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\11\ 83 FR 31391 (July 5, 2018).
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The Board received four comments supporting these proposed changes
and no opposing comments. The Board has adopted these amendments as
proposed.
[[Page 61512]]
III. Section-by-Section Analysis
Subpart A--Collection of Checks and Other Items by Federal Reserve
Banks
Section 210.2 Definitions
1. Section 210.2(h)--Check
Regulation J defines the term ``check'' as a draft as defined in
the U.C.C. drawn on a bank and payable on demand. The Board proposed to
revise the definition of ``check'' to mean a ``check'' and an
``electronic check'' as those terms are defined in Regulation CC. This
amendment aligns the terminology in the two regulations.
Regulation J also includes the term ``check as defined in 12 CFR
229.2(k)'' (the Regulation CC definition of ``check''). This term is
used in Regulation J in those provisions that require specific
references to the Regulation CC definition of ``check.'' (See
Sec. Sec. 210.2(m), 210.7(b)(2), and 210.12(a)(2).) The Board proposed
to delete the definition of ``check as defined in 12 CFR 229.2(k)''
because it was no longer needed in light of the proposed revision of
the Regulation J definition of ``check'' to cross-reference the
Regulation CC definition. The Board also proposed to revise the three
provisions where it is used by deleting the reference to ``check as
defined in 12 CFR 229.2(k).''
Six commenters, including the group letter, were generally
supportive of the Board's proposed changes to align Regulation J with
Regulation CC. The Board did not receive specific comments on proposed
Sec. 210.2(h) or any opposing comments. The Board has adopted these
changes as proposed.
2. Section 210.2(i)--Item
Regulation J uses the term ``item'' to refer to the instruments and
electronic images that the Reserve Banks handle. Regulation J uses the
term ``electronic item'' to refer to an electronic image of an item,
and information describing that item, that a Reserve Bank agrees to
handle as an item pursuant to an operating circular. To align the
terminology of Regulation J with Regulation CC, the Board proposed to
delete the definition of ``electronic item'' and revise the definition
of ``item'' in Sec. 210.2(i) to include a check, which, under the
proposed amendment discussed above would include both a check and an
electronic check as defined in Regulation CC. The Board also proposed
to add a clarifying statement that the term ``item'' does not include
an ECI as defined in Sec. 229.2 of Regulation CC.
Six commenters, including the group letter, were generally
supportive of alignment between Regulation J and Regulation CC. With
respect to ECIs in particular, three commenters supported the Board's
proposed amendments, while fourteen commenters generally opposed
amendments that restricted the Reserve Banks' handling of ECIs. For
reasons described in the overview section, the Board has adopted Sec.
210.2(i) as proposed.
3. Section 210.2(m)--Returned Check
Current Sec. 210.2(m) defines a ``returned check'' as ``a cash
item or a check as defined in 12 CFR 229.2(k) returned by a paying
bank.'' To align the definition of ``returned check'' with ``check,''
the Board proposed to delete the reference to ``check as defined in 12
CFR 229.2(k)'' and instead refer to the definition of ``electronic
returned check'' in Regulation CC. The Board did not receive any
comments on proposed Sec. 210.2(m). The Board has adopted these
changes as proposed.
4. Section 210.2(n)--Sender
A ``sender'' under Sec. 210.2(n) is any of several listed entities
that sends an item to a Reserve Bank for forward collection. The Board
proposed to add ``member bank, as defined in section 1 of the Federal
Reserve Act'' in Sec. 210.2(n)(2) to include a bank or trust company
that is a member of one of the Federal Reserve Banks to ensure
inclusion of any member bank that does not fall under the existing
definition. The Board proposed to redesignate current Sec.
210.2(n)(2)-(6) to Sec. 210.2(n)(3)-(7) to accommodate the insertion.
One commenter requested that the Board clarify whether its proposed
changes to Sec. 210.2(n) would expand the types of institutions that
may directly participate as a sender in the Fedwire services subject to
subpart B of Regulation J, such as nondepository trust companies. The
commenter noted that revising the definition of sender to capture
member nondepository trust companies would prompt concerns regarding
payment system risk with respect to access to Federal Reserve financial
services. The Board's proposed changes to the definition of ``sender''
does not affect the rights of any particular type of entity to obtain
access to Federal Reserve services. (In any case, the definition of
``sender'' in Sec. 210.2(n) applies only to the collection of checks
and other items by the Reserve Banks and not to the Fedwire Funds
Service.) As stated in the Board's proposal, proposed Sec. 210.2(n) is
intended to ensure inclusion of any member bank that does not fall
under the existing list of entities that send items to a Reserve Bank
for forward collection. Whether any particular member bank, including a
nondepository trust company, obtains an account and access to Reserve
Bank check services continues to be governed by existing laws, rules,
and policies, including the Federal Reserve Act, the Board's Policy on
Payment System Risk and the Reserve Banks' internal risk analysis. The
Board intends no expansion of rights by this technical change. The
Board has adopted the amendments as proposed.
5. Section 210.2(q)--Fedwire
Current Sec. 210.2(q) defines ``Fedwire'' as having the same
meaning set forth in Sec. 210.26(e). The Board proposed to amend this
definition to refer to both ``Fedwire Funds Service and Fedwire'' to
conform to the proposed amendment to Sec. 210.26(e). The Board did not
receive any comments on proposed Sec. 210.2(q) and has adopted the
revisions as proposed.
Section 210.3 General Provisions
Section 210.3(a) provides general provisions concerning the
obligations of Reserve Banks and the role of operating circulars. As
discussed in the overview section on ECIs, the Board proposed to add a
sentence to Sec. 210.3(a) to permit Reserve Banks to require a sender
to provide warranties and indemnities that only items and any noncash
items the Reserve Banks have agreed to handle will be sent to the
Reserve Banks. Additionally, in order to allow the Reserve Banks to
pass any such warranties and indemnities forward, the Board proposed to
authorize the Reserve Banks to provide to a subsequent collecting bank
and to the paying bank any warranties and indemnities provided by the
sender pursuant to this paragraph.
The Board received one comment, the group letter, supporting the
proposal. The Board did not receive any comments opposing these
particular amendments, although as discussed in the overview section,
fourteen commenters generally opposed amendments that restricted the
Reserve Banks' handling of ECIs. For the reasons described in the
overview section, the Board has adopted these revisions as proposed.
Section 210.4 Sending Items to Reserve Banks
Section 210.4(a) sets forth the rule for determining the Reserve
Bank to which an item should be sent. The Board proposed to clarify
this paragraph to provide that a sender's Administrate Reserve Bank may
direct a sender (other than a Reserve Bank) to send any item to a
specified Reserve Bank, whether or
[[Page 61513]]
not the item is payable in the Reserve Bank's district. This amendment
reflects current practice in the Reserve Banks' check service and is
not expected or intended to have a substantive affect. The Board also
proposed to capitalize the term ``Administrative Reserve Bank''
wherever it appears to conform to the defined term in Sec. 210.2(c).
The Board did not receive any comments on proposed Sec. 210.4 and
has adopted the revisions as proposed.
Section 210.5 Sender's Agreement; Recovery by Reserve Bank
1. Section 210.5(a)--Sender's Agreement
Current Sec. 210.5(a) lists the warranties, authorizations, and
agreements made by a sender. The first two paragraphs (current Sec.
210.5(a)(1) and (2)) apply to all items and require the sender to
authorize the Reserve Banks to handle the item sent and warrant that
the sender is entitled to enforce the item, that the item has not been
altered, and that the item bears the indorsements applied by all prior
parties. The Board did not propose to revise these paragraphs. Current
Sec. 210.5(a)(3) and (4) set out warranties for electronic items and
electronic items that are not representations of substitute checks,
respectively. These warranties are now specified in Regulation CC, and
the Board proposed to revise Regulation J accordingly. Specifically,
the Board proposed to amend Sec. 210.5(a)(3) to require the sender to
make all applicable warranties and indemnities set forth in Regulation
CC and the U.C.C. The proposal retained the existing requirement that
the sender make all warranties set forth in and subject to the terms of
U.C.C. 4-207 for an electronic check as if it were an item subject to
the U.C.C. The proposed changes were intended to streamline Regulation
J, align Sec. 210.5(a) with the Regulation CC provisions that set out
warranties and indemnities for electronic checks, and ensure a seamless
chain of warranties for the items handled by the Reserve Banks.
The Board also proposed to require a sender to make any warranties
or indemnities regarding the sending of items that the Reserve Banks
include in an operating circular issued in accordance with Sec.
210.3(a) to ensure that only items and any noncash items the Reserve
Banks have agreed to handle will be sent to the Reserve Banks (proposed
Sec. 210.5(a)(4)). Finally, the Board proposed to add a reference to
``indemnities'' to the introductory text of Sec. 210.5(a) to reflect
the coverage of sender indemnities in proposed Sec. 210.5(a)(3) and
(4).
One commenter, the group letter, requested that the Board add
commentary concerning the cross referencing of Regulation CC's image
quality warranty. Under Regulation CC, each bank that transfers an
electronic check warrants that ``the electronic image accurately
represents all of the information on the front and back of the original
check as of the time the original check was truncated and the
electronic information includes an accurate record of all MICR line
information required for a substitute check under Sec. 229.2(aa) and
the amount of the check.'' \12\ The group letter requests that the
Board add commentary in Regulation J to clarify that the warranty does
not require that the electronic check capture those characteristics of
the paper check, such as watermarks, microprinting, or other physical
security features, that cannot survive the imaging process.
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\12\ 12 CFR 229.34(a)(1)(i).
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The Board acknowledges that the warranty in Sec. 229.34(a)(1)(i)
does not require that the electronic check capture those
characteristics of the paper check that cannot survive the imaging
process. The commentary to Sec. 229.34(a)(1)(i) states that the
electronic check warranties correspond to the warranties made by a bank
that transfers, presents, or returns a substitute check.\13\ The
commentary to the corresponding substitute check warranty states ``a
substitute check need not capture other characteristics of the check,
such as watermarks, microprinting, or other physical security features
that cannot survive the imaging process or decorative images, in order
to meet the accuracy requirement.'' \14\ The Board's amendments to
Regulation J requiring the sender to make all applicable warranties and
indemnities set forth in Regulation CC also cross reference the
relevant commentary in Regulation CC. Accordingly, the Board does not
believe it is necessary to add additional commentary in Regulation J
and adopts the revisions as proposed.
---------------------------------------------------------------------------
\13\ See Regulation CC, Official Staff Commentary Section
229.34(a)-2.
\14\ See Regulation CC, Official Staff Commentary Section
229.51(a)-3; see also First Am. Bank v. Fed. Reserve Bank of
Atlanta, 842 F.3d 487 (7th Cir. 2016).
---------------------------------------------------------------------------
2. Section 210.5(a)(5)--Sender's Liability to Reserve Bank
Current Sec. 210.5(a)(5) sets out the sender's liability to
Reserve Banks. The Board proposed to amend this paragraph to align this
paragraph to changes elsewhere in the proposed rule.
Current Sec. 210.5(a)(5)(i)(C) states that the sender agrees to
indemnify the Reserve Bank for any loss or expense resulting from
``[a]ny warranty or indemnity made by the Reserve Bank under Sec.
210.6(b), part 229 of this chapter, or the U.C.C.'' The Board proposed
to amend this provision to provide that the sender will also indemnify
a Reserve Bank for any loss or expense sustained resulting from any
warranties and indemnities regarding the sending of ``items'' required
by the Reserve Bank in an operating circular issued pursuant to
proposed Sec. 210.3(a).
Current Sec. 210.5(a)(5)(ii) specifies conditions and limitations
to a sender's liability for warranties and indemnities that a Reserve
Bank makes for a substitute check, a paper or electronic representation
thereof, or any other electronic item. The Board proposed to delete the
term ``electronic item'' in current Sec. 210.5(a)(5)(ii) and replace
it with ``electronic check.''
Current Sec. 210.5(a)(5)(ii)(A) provides that a sender of an
original check is not liable for any amount that the Reserve Bank pays
under subpart D of Regulation CC for a subsequently created substitute
check or under Sec. 210.6(b)(3) for an electronic item, absent the
sender's agreement to the contrary. The Board proposed to delete the
reference to current Sec. 210.6(b)(3), which lists warranties and an
indemnity for an electronic item that is not a representation of a
substitute check, and replace it with a reference to Sec. 229.34 of
Regulation CC with respect to an electronic check, consistent with
other proposed amendments to Sec. 210.6(b) described below.
Current Sec. 210.5(a)(5)(ii)(B) provides that nothing in
Regulation J alters the liability structure that applies to substitute
checks and paper or electronic representations of substitute checks
under subpart D of Regulation CC. The Board proposed to add that this
subpart also does not alter the liability of a sender of an electronic
check under Sec. 229.34 of Regulation CC, consistent with the other
proposed revisions to Regulation J.
Current Sec. 210.5(a)(5)(ii)(C) provides that a sender of an
electronic item that is not a representation of a substitute check is
not liable for any related warranties or indemnities that a Reserve
Bank pays that are attributable to the Reserve Bank's own lack of good
faith or failure to exercise ordinary care. The Board proposed to
broaden this provision by applying the limitation on liability to all
senders for any amount that the Reserve Bank pays that is attributable
to the Reserve Bank's own lack of good faith or failure to exercise
[[Page 61514]]
ordinary care under Regulation J or Regulation CC. The Board proposed
to redesignate this paragraph as Sec. 210.5(a)(5)(iii) and make
conforming changes to cross-references.
The Board did not receive any comments on proposed Sec. 210.5(a).
As discussed in the overview section, the Board received numerous
comments generally supporting aligning Regulation J with Regulation CC.
The Board has adopted these revisions as proposed.
3. Section 210.5(c) & (d)--Recovery by Reserve Bank and Methods of
Recovery
Section 210.5(c) sets out the procedures by which a Reserve Bank
may recover against a sender if certain actions or proceedings related
to the sender's actions are brought against (or defense is tendered to)
a Reserve Bank. A portion of this paragraph was inadvertently dropped
from the Code of Federal Regulations. The Board proposed to reinstate
the dropped language, which provides that, upon entry of a final
judgment or decree, a Reserve Bank may recover from the sender the
amount of attorneys' fees and other expenses of litigation incurred, as
well as any amount the Reserve Bank is required to pay because of the
judgment or decree or the tender of defense, with interest. In
addition, the Board proposed to correct cross-references to this
provision in Sec. 210.5(d).
The Board did not receive any comments on proposed Sec. 210.5(c) &
(d). The Board has adopted these revisions as proposed.
4. Section 210.5(e)--Security Interest
Current Sec. 210.5(e) provides that when a sender sends an item to
a Reserve Bank, the sender and any prior collecting bank grant to the
sender's Administrative Reserve Bank a security interest in all of
their respective assets in the possession of, or held for the account
of, any Reserve Bank to secure their respective obligations due or to
become due to the Administrative Reserve Bank under this subpart or
subpart C of part 229 (Regulation CC). The Board proposed to amend this
paragraph to refer to subpart D of Regulation CC in addition to subpart
C, as senders may have obligations to Reserve Banks under that subpart
as well.
The Board did not receive any comments on proposed Sec. 210.5(e).
The Board has adopted these revisions as proposed.
Section 210.6 Status, Warranties, and Liability of Reserve Bank
1. Section 210.6(a)(2)--Limitations on Reserve Bank Liability
Section 210.6(a)(2) limits a Reserve Bank's liability with respect
to an item to three instances: (1) The Reserve Bank's own lack of good
faith or failure to exercise ordinary care, (2) as provided in this
section of Regulation J, and (3) as provided in subparts C and D of
Regulation CC. The Board proposed to expand this list to provide that a
Reserve Bank may be liable under any warranties and indemnities
provided in an operating circular issued in accordance with Sec.
210.3(a) regarding the sending of items.
The Board received one comment, the group letter, supporting its
proposal to allow the Reserve Banks to address warranties and
indemnities for eligible items and non-cash items in the operating
circular. The Board did not receive any opposing comments. The Board
has adopted these revisions as proposed.
2. Section 210.6(b)--Warranties and Liability
Section 210.6(b) sets forth the warranties and indemnities made by
a Reserve Bank when it presents or sends an item. In alignment with the
Board's proposed amendments to the sender's warranties in Sec.
210.5(a), the Board proposed to replace current Sec. 210.6(b)(2) and
(3), which provide warranties and indemnities for electronic items and
electronic items that are not representations of substitute checks,
respectively. Those warranties are now covered by Regulation CC. The
Board also proposed to make a conforming amendment to Sec.
210.6(b)(1)(iii) to eliminate the unnecessary reference to ``paper or
electronic form.''
The Board proposed a new Sec. 210.6(b)(2) to provide that a
Reserve Bank would make any warranties or indemnities regarding the
sending of items as set forth in an operating circular issued pursuant
to proposed Sec. 210.3(a). This language corresponds to the similar
proposed provision for sender liability in Sec. 210.5(a)(4).
The Board proposed a new Sec. 210.6(b)(3) to provide that the
Reserve Bank makes to a subsequent collecting bank and to the paying
bank all the warranties and indemnities set forth in subparts C and D
for Regulation CC. Proposed Sec. 210.6(b)(3) would retain the existing
application of U.C.C. 4-207 warranties to electronic items (now called
electronic checks).
In Sec. 210.6(b)(4), the Board proposed to retain the existing
Reserve Bank indemnity for substitute checks created from electronic
checks, which is in current Sec. 210.6(b)(3)(ii). This provision
provides an indemnity chain for substitute check indemnity claims under
Regulation CC, enabling receiving banks (and, in turn, Reserve Banks)
to pass the loss on such claims to the bank whose choice to handle an
item electronically necessitated the later creation of a substitute
check.
The Board received one comment, the group letter, on proposed Sec.
210.6(b)(3). The group letter noted that the persons that receive the
electronic check warranties from the Reserve Banks appeared to be more
limited than the persons that receive the electronic check warranties
under Regulation CC. Specifically, proposed Sec. 210.6(b)(3) does not
extend the electronic check warranties to the drawer of the check on
the forward side, unlike the warranties in Regulation CC. The group
letter noted, however, that proposed Sec. 210.6(a)(2)(iv) provides
that a Reserve Bank does not assume any liability with respect to an
item or its proceeds ``except as provided under subparts C and D of
Regulation CC.'' The group letter requested that the Board clearly
require that the Reserve Banks provide the same scope and recipients of
the new electronic check warranties in Regulation J as provided under
Regulation CC.
The Board agrees with the group letter that Reserve Banks should
provide the electronic check and electronic returned check warranties
to the same scope of recipients in Regulation J as in Regulation CC,
including to drawers and owners of checks. The Board believes that
extending the warranties to the drawers and owners is consistent with
the warranty flow set forth in section 5 of the Check 21 Act for
substitute checks and will protect parties outside the banking system
from any undesirable consequences resulting from check truncation. The
Board has revised proposed Sec. 210.6(b)(3) accordingly in the final
rule. Otherwise, the Board has adopted Sec. 210.6(b) as proposed, with
minor revisions to correct typographical errors in Sec. 210.6(b)(2) &
(3).
3. Section 210.6(c)--Limitation on Liability
The limitations on Reserve Bank liability are set forth in proposed
(and current) Sec. 210.6(a)(2). The Board proposed to delete paragraph
(c) as it is redundant and to redesignate current paragraph (d) as
paragraph (c). The Board did not receive any comments on proposed Sec.
210.6(c). The Board has adopted these revisions as proposed.
[[Page 61515]]
Section 210.7 Presenting Items for Payment
Section 210.7(b) provides the places of presentment for a Reserve
Bank or subsequent collecting bank. Current Sec. 210.7(b)(2) states
``In the case of a check as defined in 12 CFR 229.2(k), in accordance
with 12 CFR 229.36.'' In alignment with the Board's proposed deletion
of the defined term ``check as defined in 12 CFR 229.2(k),'' the Board
proposed to delete the use of that term in Sec. 210.7(b)(2), as it is
no longer needed, and make other minor edits.
The Board did not receive any comments on proposed Sec. 210.7. The
Board has adopted these revisions as proposed.
Section 210.9 Settlement and Payment
1. Section 210.9(b)(5), (c), and (d)--Manner of Settlement, Noncash
Items, and Nonbank Payor
Current Sec. 210.9(b)(5) requires that settlement for cash items
with a Reserve Bank be made by debit to an account on the Reserve
Bank's books, cash, or other form of settlement to which the Reserve
Bank agrees. The Board proposed to amend this provision by removing the
reference to cash as a means of settlement. The Board also proposed to
make conforming amendments to Sec. 210.9(c) and (d), as well as to
remove the references to other rarely-used forms of settlement
(cashier's checks, certified checks, or other bank drafts or
obligations). The Board proposed to correct cross-references and to
capitalize the term ``Administrative Reserve Bank'' wherever it appears
to conform to the defined term in Sec. 210.2(c).
As discussed in the overview section, the Board received one
comment, the group letter, supporting the proposal. The Board did not
receive any opposing comments. The Board has adopted the revisions as
proposed.
2. Section 210.9(e)--Handling of Payment
Current Sec. 210.9(e) states that a Reserve Bank may handle a bank
draft or other form of payment it receives in payment of a cash item as
a cash item and that a Reserve Bank may handle a bank draft or other
form of payment it receives in payment of a noncash item as either a
cash item or a noncash item. The Board proposed to delete this
paragraph as it is now obsolete.
The Board did not receive any comments on proposed Sec. 210.9(e)
and has deleted this paragraph as proposed.
3. Section 210.9(f)--Liability of Reserve Bank
Current Sec. 210.9(f) states that a Reserve Bank that acts in good
faith and exercises ordinary care shall not be liable for the
nonpayment of, or failure to realize upon, any bank draft or other form
of payment that it accepts pursuant to Sec. 210.9(b)-(d). The Board
proposed to renumber this paragraph as Sec. 210.9(e) and to replace
the reference to ``bank draft or other form of payment'' with ``any
non-cash form of payment'' to conform to the proposed changes to the
other provisions of this section.
The Board did not receive any comments on proposed Sec. 210.9(f).
The Board has adopted these revisions as proposed.
Section 210.10 Time Schedule and Availability of Credits for Cash Items
and Returned Checks
Section 210.10(a) states that each Reserve Bank shall ``include in
its operating circulars'' its time schedules for availability of cash
items and returned checks and, correspondingly, when credits can be
counted toward reserve balance requirements for purposes of Regulation
D (12 CFR part 204). The Reserve Banks' practice is to publish the time
schedules on the Federal Reserve website for financial services.
Accordingly, the Board proposed to amend this paragraph to delete the
requirement that time schedules be included in the operating circulars
and, instead, require only that the time schedules be published.
The Board did not receive any comments on proposed Sec. 210.10.
The Board has adopted these revisions as proposed.
Section 210.11 Availability of Proceeds of Noncash Items; Time Schedule
1. Section 210.11(b)--Time Schedule
Section 210.11(b) states that a Reserve Bank may give credit for
the proceeds of a noncash item subject to payment in actually and
finally collected funds in accordance with a time schedule included in
its operating circulars. To conform to amendments made in proposed
Sec. 210.10, the Board proposed to delete the reference to operating
circulars and require only that the time schedule be published.
The Board did not receive any comments on proposed Sec. 210.11(b).
The Board has adopted these revisions as proposed.
2. Section 210.11(c)--Handling of Payment
Current Sec. 210.11(c) prohibits a Reserve Bank from providing
credit for a bank draft or other form of payment for a noncash item
until it receives payment in actually and finally collected funds. The
Board proposed to delete this paragraph, as actually and finally
collected funds are already required by Sec. 210.11(a).
The Board did not receive any comments on proposed Sec. 210.11(c)
and has adopted these revisions as proposed.
Section 210.12 Return of Cash Items and Handling of Returned Checks
Section 210.12 sets out provisions governing the handling of
returned checks. It is the counterpart to Sec. Sec. 210.5 and 210.6,
which govern the handling of items for forward collection.
1. Section 210.12(a)--Return of Items
Current Sec. 210.12(a)(2) sets out the procedures by which a
paying bank may return checks not handled by Reserve Banks and refers
to ``check as defined in Sec. 229.2(k) of this chapter (Regulation
CC).'' In alignment with the Board's proposal to delete the defined
term ``check as defined in Sec. 229.2(k)'' in Sec. 210.2(h), the
Board proposed to delete the use of this term in this paragraph, as it
is no longer needed, and to use the term ``check'' instead.
The Board did not receive any comments on proposed Sec. 210.12(a)
and has adopted these revisions as proposed.
2. Section 210.12(c)--Paying Bank's and Returning Bank's Agreement
Current Sec. 210.12(c) provides the warranties, authorizations,
and agreements related to returned checks made by paying banks and
returning banks. The Board proposed amendments to this paragraph that
are parallel to the proposed amendments for forward-collection items
with respect to the liability of the sender (Sec. 210.5(a)(3)) and the
Reserve Banks (Sec. 210.6(b)(2)). Specifically, the Board proposed to
replace current Sec. 210.12(c)(3) and (4), which provide warranties
for all returned checks that are electronic items and warranties for
returned checks that are electronic items that are not representations
of substitute checks, respectively, with a provision that requires the
paying bank or returning bank to make all the warranties and
indemnities as set forth in Regulation CC, as applicable (proposed
Sec. 210.12(c)(3)).
Current Sec. 210.12(c)(5) sets out the conditions under which a
paying bank
[[Page 61516]]
or returning bank is liable to a Reserve Bank. The Board proposed to
redesignate this paragraph as Sec. 210.12(c)(4) and amend the
paragraph to correspond with the proposed amendments to the section on
sender's liability to a Reserve Bank (Sec. 210.5(a)(4)). The proposed
amendments were intended to create consistent liability provisions for
senders, paying banks, and returning banks.
The Board did not receive any comments on proposed Sec. 210.12(c)
and has adopted these revisions as proposed, with a minor revision to
correct a typographical error in Sec. 210.12(c)(1).
3. Section 210.12(d)--Liability Under Other Law
Current Sec. 210.12(d) is titled ``Preservation of other
warranties and indemnities.'' The Board proposed to change the title of
this paragraph to ``Returning bank's or paying bank's liability under
other law'' to mirror the heading for the corresponding paragraph for
senders (Sec. 210.5(b)).
The Board did not receive any comments on proposed Sec. 210.12(d).
The Board has adopted these revisions as proposed.
4. Section 210.12(e)--Warranties by and Liability of Reserve Bank
Current Sec. 210.12(e) sets forth a Reserve Bank's liability when
it handles a returned check, including warranties and liabilities. The
Board proposed to amend this paragraph to correspond to the amendments
proposed in Sec. 210.6(b) related to the warranties and liabilities
that are made by Reserve Banks when presenting or sending an item.
The Board receive one comment, the group letter, on proposed Sec.
210.12(e). Corresponding to the comment discussed in the section-by-
section analysis for Sec. 210.6(b)(3), the group letter stated that
the proposed Regulation J does not extend the electronic check
warranties for returns to the owner of the check, unlike the warranties
in Regulation CC. The group letter requested that the Board require the
Reserve Banks provide in Regulation J the same scope and recipients of
the new electronic check warranties as provided under Regulation CC.
For the reasons described in the section-by-section analysis for
Sec. 210.6(b), the Board has revised proposed Sec. 210.12(e)(ii) to
extend the warranties for electronic returned checks provided by
Reserve Banks to the same scope of recipients as provided in Regulation
CC. The Board has also revised proposed Sec. 210.12(e)(2)(i) to
correct a typographical error.
5. Section 210.12(f) & (g)--Recovery by Reserve Bank & Methods of
Recovery
Section 210.12(f) parallels Sec. 210.5(c) and sets out the
procedures by which a Reserve Bank may recover against a paying bank or
returning bank if certain actions or proceedings related to the paying
bank's or returning bank's actions are brought against (or defense is
tendered to) a Reserve Bank. A portion of this paragraph was
inadvertently dropped from the Code of Federal Regulations. The Board
proposed to reinstate the dropped language, which provides that, upon
entry of a final judgment or decree, a Reserve Bank may recover from
the paying bank or returning bank the amount of attorneys' fees and
other expenses of litigation incurred, as well as any amount the
Reserve Bank is required to pay because of the judgment or decree or
the tender of defense, with interest. In addition, the Board proposed
to correct cross-references and make organizational changes in Sec.
210.12(g).
The Board did not receive any comments on proposed Sec. 210.12(f)
& (g) and has adopted these revisions as proposed.
Subpart B--Funds Transfers Through Fedwire
Section 210.25 Authority, Purpose, and Scope
Section 210.25 sets out the authority, purpose, and scope for
subpart B of Regulation J, which governs Fedwire funds transfers. The
Board proposed to add a new Sec. 210.25(e) to clarify that financial
messaging standards (e.g., ISO 20022), including the financial
messaging components, elements, technical documentation, tags, and
terminology used to implement those standards, do not confer or connote
legal status or responsibilities. The proposed amendment would specify
that Regulation J, Article 4A of the U.C.C., and the operating
circulars of the Reserve Banks govern the rights and obligations of
parties to the Fedwire Funds Service and supersede any inconsistency
between a financial messaging standard adopted by the Fedwire Funds
Service. The proposal would also make a conforming change to Sec.
210.25(b)(2). Additionally, the Board proposed to add in the commentary
examples of inconsistent terminology between the ISO 20022 financial
messaging standard and U.S. funds transfer law.
The Board received four comments supporting these proposed changes
and no opposing comments. The Board has adopted these amendments as
proposed.
Section 210.26 Definitions
Section 210.2(e) defines the term ``Fedwire'' to mean the funds-
transfer system owned and operated by the Federal Reserve Banks that is
used primarily for the transmission and settlement of payment orders
governed by subpart B. The Board proposed to amend this definition so
that it applies to the official title of the service, ``Fedwire Funds
Service,'' as well as the shorthand term ``Fedwire.'' The Board also
proposed to change references to ``Fedwire'' to ``Fedwire Funds
Service'' in Sec. Sec. 210.9(b)(4)(i), 210.25(a) and (b)(3), and
210.29(b).
The Board did not receive any comments on proposed Sec. 210.26 and
has adopted these revisions as proposed.
Section 210.32 Federal Reserve Bank Liability; Payment of Interest
Current Sec. 210.32 sets out provisions that govern Federal
Reserve Bank liability and payment of interest. Section 210.32(b)
provides that compensation that is paid by Federal Reserve Banks in the
form of interest shall be calculated in accordance with section 4A-506
of Article 4A. Under section 4A-506(a), the amount of interest may be
determined by agreement between the sender and receiving bank or by
funds-transfer system rule. If there is no such agreement, under
section 4A-506(b), the amount of interest is based on the federal funds
rate. The current commentary to Sec. 210.32(b) states that ``Interest
would be calculated in accordance with the procedures specified in
section 4A-506(b).'' The Board proposed to delete this statement and
rearrange the commentary to clarify that interest can be calculated in
accordance with both section 4A-506(a) and (b).
The Board did not receive any comments on the proposed commentary
to Sec. 210.32. The Board has adopted these revisions as proposed.
IV. Competitive Impact Analysis
The Board conducts a competitive impact analysis when it considers
an operational or legal change, if that change would have a direct and
material adverse effect on the ability of other service providers to
compete with the Federal Reserve in providing similar services due to
legal differences or due to the Federal Reserve's dominant market
position deriving from such legal differences. All operational or legal
changes having a substantial effect on payments-system participants
will be
[[Page 61517]]
subject to a competitive-impact analysis, even if competitive effects
are not apparent on the face of the proposal. If such legal differences
exist, the Board will assess whether the same objectives could be
achieved by a modified proposal with lesser competitive impact or, if
not, whether the benefits of the proposal (such as contributing to
payments-system efficiency or integrity or other Board objectives)
outweigh the materially adverse effect on competition.\15\
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\15\ Federal Reserve Regulatory Service, 7-145.2.
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The Board does not believe that the amendments to Regulation J will
have a direct and material adverse effect on the ability of other
service providers to compete effectively with the Reserve Banks in
providing similar services due to legal differences. The final rule
would align the provisions in Regulation J governing Reserve Bank
services to the generally applicable provisions in Regulation CC. The
final rule would not affect the competitive position of private-sector
presenting banks vis-[agrave]-vis the Reserve Banks.
V. The Riegle Community Development and Regulatory Improvement Act of
1994
The Riegle Community Development Regulatory Improvement Act of 1994
requires that agency regulations that impose additional reporting,
disclosure, and other requirements on insured depository institutions
take effect on the first calendar quarter following publication in
final form, unless the agency determines for good cause that the
regulation should become effective before such time. 12 U.S.C. 4802(b).
Consistent with the Riegle Community Development Act, this final rule
is effective on January 1, 2019.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320, appendix A.1), the Board may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number. The Board reviewed the final rule
under the authority delegated to the Board by the OMB and determined
that it contains no collections of information under the PRA.\16\
Accordingly, there is no paperwork burden associated with the rule.
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\16\ See 44 U.S.C. 3502(3).
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VII. Regulatory Flexibility Act
An initial regulatory flexibility analysis (IRFA) was included in
the proposal in accordance with section 3(a) of the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the IRFA, the
Board requested comment on the effect of the proposed rule on small
entities and on any significant alternatives that would reduce the
regulatory burden on small entities. The Board did not receive any
comments. The RFA requires an agency to prepare a final regulatory
flexibility analysis (FRFA) unless the agency certifies that the rule
will not, if promulgated, have a significant economic impact on a
substantial number of small entities. In accordance with section 3(a)
of the RFA, the Board has reviewed the final regulation. Based on its
analysis, and for the reasons stated below, the Board certifies that
the rule will not have a significant economic impact on a substantial
number of small entities.
The final rule will apply to all depository institutions regardless
of their size.\17\ Pursuant to regulations issued by the Small Business
Administration (13 CFR 121.201), a ``small banking organization''
includes a depository institution with $550 million or less in total
assets. Based on call report data, there are approximately 9,631
depository institutions that have total domestic assets of $550 million
or less and thus are considered small entities for purposes of the RFA.
The Board's final rule generally does not have any projected reporting,
recordkeeping or other compliance requirements, as the revisions to
Regulation J align the rights and obligations of sending banks, paying
banks, and Federal Reserve Banks (Reserve Banks) with the Board's
recent amendments to Regulation CC. The final rule's warranties and
indemnities are similar to the warranties and indemnities that apply to
paper and electronic checks under existing Regulation J and other law.
The final rule does not require any bank to change the form in which it
submits checks, nor do they require any bank to submit reports,
maintain records, or provide notices or disclosures.
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\17\ The final rule would not impose costs on any small entities
other than depository institutions.
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With respect to ECIs, provisions in the final rule would allow the
Reserve Banks to require that senders provide certain warranties and
indemnities. The Board recognizes these provisions may affect the
creation and acceptance of ECIs by small entities. Neither Regulation J
nor Regulation CC would prevent private-sector collecting banks from
doing the same. In addition, the Board's final rule would not prevent
small entities that desire to exchange ECIs from doing so by agreement
using direct exchange relationships or other methods not involving the
Reserve Banks. The Board believes the final rule will help to shift
liability to parties better positioned to know whether an item is
electronically created and that can either prevent the item from
entering the check-collection system or assume the risk of sending it
forward.
Furthermore, the Board does not expect the amendments that remove
references to cash and other specified forms of settlement to burden
small entities, as the use of cash as settlement is rare and typically
only done in emergency situations. The Board's final rule will allow
use of cash as settlement in emergency situations by continuing to
permit other forms of settlement to which the Reserve Banks agree. The
Board does not expect the rule to have a significant economic impact on
a substantial number of small entities.
List of Subjects in 12 CFR Part 210
Banks, Banking, Federal Reserve System.
Authority and Issuance
For the reasons set forth in the preamble, the Board amends 12 CFR
part 210 as follows:
PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)
0
1. The authority citation for part 210 continues to read as follows:
Authority: 12 U.S.C. 248 (i), (j), and (o); 12 U.S.C. 342; 12
U.S.C. 360; 12 U.S.C. 464; 12 U.S.C. 4001-4010; 12 U.S.C. 5001-5018.
0
2. In part 210, revise all references to ``article 4A'' to read
``Article 4A.''
Subpart A--Collection of Checks and Other Items by Federal Reserve
Banks
0
3. In Sec. 210.2, revise paragraphs (h), (i), (m), (n), (q), and
(s)(1) to read as follows:
Sec. 210.2 Definitions.
* * * * *
(h) Check means a check or an electronic check, as those terms are
defined in Sec. 229.2 of this chapter (Regulation CC).
(i) Item. (1) Means--
(i) An instrument or a promise or order to pay money, whether
negotiable or not, that is--
(A) Payable in a Federal Reserve District \1\ (District);
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\1\ For purposes of this subpart, the Virgin Islands and Puerto
Rico are deemed to be in the Second District, and Guam, American
Samoa, and the Northern Mariana Islands in the Twelfth District.
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[[Page 61518]]
(B) Sent by a sender to a Reserve Bank for handling under this
subpart; and
(C) Collectible in funds acceptable to the Reserve Bank of the
District in which the instrument is payable; or
(ii) A check.
(2) Unless otherwise indicated, item includes both a cash and a
noncash item, and includes a returned check sent by a paying or
returning bank. Item does not include a check that cannot be collected
at par, or a payment order as defined in Sec. 210.26(i) and handled
under subpart B of this part. The term also does not include an
electronically-created item as defined in Sec. 229.2 of this chapter
(Regulation CC).
* * * * *
(m) Returned check means a cash item returned by a paying bank,
including an electronic returned check as defined in Sec. 229.2 of
this chapter (Regulation CC) and a notice of nonpayment in lieu of a
returned check, whether or not a Reserve Bank handled the check for
collection.
(n) Sender means any of the following entities that sends an item
to a Reserve Bank for forward collection--
(1) A depository institution, as defined in section 19(b) of the
Federal Reserve Act (12 U.S.C. 461(b));
(2) A member bank, as defined in section 1 of the Federal Reserve
Act (12 U.S.C. 221);
(3) A clearing institution, defined as--
(i) An institution that is not a depository institution but that
maintains with a Reserve Bank the balance referred to in the first
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
(ii) A corporation that maintains an account with a Reserve Bank in
conformity with Sec. 211.4 of this chapter (Regulation K);
(4) Another Reserve Bank;
(5) An international organization for which a Reserve Bank is
empowered to act as depositary or fiscal agent and maintains an
account;
(6) A foreign correspondent, defined as any of the following
entities for which a Reserve Bank maintains an account: A foreign bank
or banker, a foreign state as defined in section 25(b) of the Federal
Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency
referred to in section 14(e) of that act (12 U.S.C. 358); or
(7) A branch or agency of a foreign bank maintaining reserves under
section 7 of the International Banking Act of 1978 (12 U.S.C. 347d,
3105).
* * * * *
(q) Fedwire Funds Service and Fedwire have the same meaning as that
set forth in Sec. 210.26(e).
* * * * *
(s) * * *
(1) The terms not defined herein have the meanings set forth in
Sec. 229.2 of this chapter applicable to subpart C or D of part 229 of
this chapter (Regulation CC), as appropriate; and
* * * * *
0
4. In Sec. 210.3, revise paragraph (a) to read as follows:
Sec. 210.3 General provisions.
(a) General. Each Reserve Bank shall receive and handle items in
accordance with this subpart, and shall issue operating circulars
governing the details of its handling of items and other matters deemed
appropriate by the Reserve Bank. The circulars may, among other things,
classify cash items and noncash items, require separate sorts and
letters, provide different closing times for the receipt of different
classes or types of items, provide for instructions by an
Administrative Reserve Bank to other Reserve Banks, set forth terms of
services, and establish procedures for adjustments on a Reserve Bank's
books, including amounts, waiver of expenses, and payment of
compensation. As deemed appropriate by the Reserve Bank, the circulars
may also require the sender to provide warranties and indemnities that
only items and any noncash items the Reserve Banks have agreed to
handle will be sent to the Reserve Banks. The Reserve Banks may provide
to a subsequent collecting bank and to the paying bank any warranties
and indemnities provided by the sender pursuant to this paragraph (a).
* * * * *
0
5. In Sec. 210.4, revise paragraphs (a), (b)(1)(ii) and (iii), and
(b)(3) to read as follows:
Sec. 210.4 Sending items to Reserve Banks.
(a) Sending of items. A sender's Administrative Reserve Bank may
direct a sender other than a Reserve Bank to send any item to a
specified Reserve Bank, whether or not the item is payable in the
Reserve Bank's district.
(b) * * *
(1) * * *
(ii) The initial sender's Administrative Reserve Bank (which is
deemed to have accepted deposit of the item from the initial sender);
(iii) The Reserve Bank that receives the item from the initial
sender (if different from the initial sender's Administrative Reserve
Bank); and
* * * * *
(3) The identity and order of the parties under paragraph (b)(1) of
this section determine the relationships and the rights and liabilities
of the parties under this subpart, part 229 of this chapter (Regulation
CC), section 13(1) and section 16(13) of the Federal Reserve Act, and
the Uniform Commercial Code. An initial sender's Administrative Reserve
Bank that is deemed to accept an item for deposit or handle an item is
also deemed to be a sender with respect to that item. The Reserve Banks
that are deemed to handle an item are deemed to be agents or subagents
of the owner of the item, as provided in Sec. 210.6(a).
* * * * *
0
6. In Sec. 210.5, revise paragraphs (a), (c), (d), and (e) to read as
follows:
Sec. 210.5 Sender's agreement; recovery by Reserve Bank.
(a) Sender's agreement. The warranties, indemnities,
authorizations, and agreements made pursuant to this paragraph (a) may
not be disclaimed and are made whether or not the item bears an
indorsement of the sender. By sending an item to a Reserve Bank, the
sender does all of the following.
(1) Authorization to handle item. The sender authorizes the
sender's Administrative Reserve Bank and any other Reserve Bank or
collecting bank to which the item is sent to handle the item (and
authorizes any Reserve Bank that handles settlement for the item to
make accounting entries), subject to this subpart and to the Reserve
Banks' operating circulars, and warrants its authority to give this
authorization.
(2) Warranties for all items. The sender warrants to each Reserve
Bank handling the item that--
(i) The sender is a person entitled to enforce the item or
authorized to obtain payment of the item on behalf of a person entitled
to enforce the item;
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that
previously handled the item for forward collection or return.
(3) Warranties and indemnities as set forth in Regulation CC and
U.C.C. As applicable and unless otherwise provided, the sender of an
item makes to each Reserve Bank that handles the item all the
warranties and indemnities set forth in and subject to the terms of
subparts C and D of part 229 of this chapter (Regulation CC) and
Article 4 of the U.C.C. The sender makes all the warranties set forth
in and subject to the terms of 4-207 of the U.C.C. for an electronic
check as if it were an item subject to the U.C.C.
[[Page 61519]]
(4) Warranties and indemnities as set forth in Reserve Bank
operating circulars. The sender makes any warranties and indemnities
regarding the sending of items as set forth in an operating circular
issued in accordance with Sec. 210.3(a).
(5) Sender's liability to Reserve Bank. (i) Except as provided in
paragraphs (a)(5)(ii) and (iii) of this section, the sender agrees to
indemnify each Reserve Bank for any loss or expense sustained
(including attorneys' fees and expenses of litigation) resulting from--
(A) The sender's lack of authority to make the warranty in
paragraph (a)(1) of this section;
(B) Any action taken by the Reserve Bank within the scope of its
authority in handling the item; or
(C) Any warranty or indemnity made by the Reserve Bank under Sec.
210.6(b), part 229 of this chapter, the U.C.C., or, regarding the
sending of items, an operating circular issued in accordance with Sec.
210.3(a).
(ii) A sender's liability for warranties and indemnities that the
Reserve Bank makes for a substitute check, a paper or electronic
representation thereof, or for an electronic check is subject to the
following conditions and limitations--
(A) A sender of an original check shall not be liable under
paragraph (a)(5)(i) of this section for any amount that the Reserve
Bank pays under subpart D of part 229 of this chapter, or under Sec.
229.34 of this chapter with respect to an electronic check, absent the
sender's agreement to the contrary; and
(B) Nothing in this subpart alters the liability of a sender of a
substitute check or paper or electronic representation of a substitute
check under subpart D of part 229 of this chapter, or a sender of an
electronic check under Sec. 229.34 of this chapter.
(iii) A sender shall not be liable for any amount that the Reserve
Bank pays under this subpart or part 229 of this chapter that is
attributable to the Reserve Bank's own lack of good faith or failure to
exercise ordinary care.
* * * * *
(c) Recovery by Reserve Bank. (1) A Reserve Bank that has handled
an item may recover as provided in paragraph (c)(2) of this section if
an action or proceeding is brought against (or if defense is tendered
to) the Reserve Bank based on--
(i) The alleged failure of the sender to have the authority to make
the warranty and agreement in paragraph (a)(1) of this section;
(ii) Any action by the Reserve Bank within the scope of its
authority in handling the item; or
(iii) Any warranty or indemnity made by the Reserve Bank under
Sec. 210.6(b), part 229 of this chapter, or the U.C.C.
(2) Upon entry of a final judgment or decree in an action or
proceeding described in paragraph (c)(1) of this section, a Reserve
Bank may recover from the sender the amount of attorneys' fees and
other expenses of litigation incurred, as well as any amount the
Reserve Bank is required to pay because of the judgment or decree or
the tender of defense, together with interest thereon.
(d) Methods of recovery. (1) The Reserve Bank may recover the
amount stated in paragraph (c) of this section by charging any account
on its books that is maintained or used by the sender (or by charging a
Reserve Bank sender), if--
(i) The Reserve Bank made seasonable written demand on the sender
to assume defense of the action or proceeding; and
(ii) The sender has not made any other arrangement for payment that
is acceptable to the Reserve Bank.
(2) The Reserve Bank is not responsible for defending the action or
proceeding before using this method of recovery. A Reserve Bank that
has been charged under this paragraph (d) may recover from its sender
in the manner and under the circumstances set forth in this paragraph
(d).
(3) A Reserve Bank's failure to avail itself of the remedy provided
in this paragraph (d) does not prejudice its enforcement in any other
manner of the indemnity agreement referred to in paragraph (a)(5) of
this section.
(e) Security interest. When a sender sends an item to a Reserve
Bank, the sender and any prior collecting bank grant to the sender's
Administrative Reserve Bank a security interest in all of their
respective assets in the possession of, or held for the account of, any
Reserve Bank to secure their respective obligations due or to become
due to the Administrative Reserve Bank under this subpart or subpart C
or D of part 229 of this chapter (Regulation CC). The security interest
attaches when a warranty is breached or any other obligation to the
Reserve Bank is incurred. If the Reserve Bank, in its sole discretion,
deems itself insecure and gives notice thereof to the sender or prior
collecting bank, or if the sender or prior collecting bank suspends
payments or is closed, the Reserve Bank may take any action authorized
by law to recover the amount of an obligation, including, but not
limited to, the exercise of rights of set off, the realization on any
available collateral, and any other rights it may have as a creditor
under applicable law.
0
7. In Sec. 210.6:
0
a. Remove the word ``and'' at the end of paragraph (a)(2)(ii).
0
b. Revise paragraph (a)(2)(iii).
0
c. Add paragraph (a)(2)(iv).
0
d. Revise paragraphs (b) and (c).
0
e. Remove paragraph (d).
The revisions and addition read as follows:
Sec. 210.6 Status, warranties, and liability of Reserve Bank.
(a) * * *
(2) * * *
(iii) As provided in an operating circular issued in accordance
with Sec. 210.3(a) regarding the sending of items; and
(iv) As provided in subparts C and D of part 229 of this chapter
(Regulation CC).
* * * * *
(b) Warranties and liability. The following provisions apply when a
Reserve Bank presents or sends an item.
(1) Warranties for all items. The Reserve Bank warrants to a
subsequent collecting bank and to the paying bank and any other payor
that--
(i) The Reserve Bank is a person entitled to enforce the item (or
is authorized to obtain payment of the item on behalf of a person that
is either entitled to enforce the item or authorized to obtain payment
on behalf of a person entitled to enforce the item);
(ii) The item has not been altered; and
(iii) The item bears all indorsements applied by parties that
previously handled the item for forward collection or return.
(2) Warranties and indemnities as set forth in Reserve Bank
operating circulars. The Reserve Bank makes any warranties and
indemnities regarding the sending of items as set forth in an operating
circular issued in accordance with Sec. 210.3(a).
(3) Warranties and indemnities as set forth in Regulation CC and
U.C.C. As applicable and unless otherwise provided, the Reserve Bank
makes all the warranties and indemnities set forth in and subject to
the terms of subparts C and D of part 229 of this chapter (Regulation
CC) and Article 4 of the U.C.C. The Reserve Bank makes all the
warranties set forth in and subject to the terms of 4-207 of the U.C.C.
for an electronic check as if it were an item subject to the U.C.C.
(4) Indemnity for substitute check created from an electronic
check. (i) Except as provided in paragraph (b)(4)(ii) of this section,
the Reserve Bank shall indemnify the bank to which it transfers or
presents an electronic check (the recipient bank) for the amount of any
losses that the recipient bank incurs under subpart D of part 229
[[Page 61520]]
of this chapter (Regulation CC) for an indemnity that the recipient
bank was required to make under subpart D of part 229 of this chapter
in connection with a substitute check later created from the electronic
check.
(ii) The Reserve Bank shall not be liable under paragraph (b)(4)(i)
of this section for any amount that the recipient bank pays under
subpart D of part 229 of this chapter that is attributable to the lack
of good faith or failure to exercise ordinary care of the recipient
bank or a person that handled the item, in any form, after the
recipient bank.
(c) Time for commencing action against Reserve Bank. (1) A claim
against a Reserve Bank for lack of good faith or failure to exercise
ordinary care shall be barred unless the action on the claim is
commenced within two years after the claim accrues. Such a claim
accrues on the date when a Reserve Bank's alleged failure to exercise
ordinary care or to act in good faith first results in damages to the
claimant.
(2) A claim that arises under paragraph (b)(3) of this section
shall be barred unless the action on the claim is commenced within one
year after the claim accrues. Such a claim accrues as of the date on
which the claimant first learns, or by which the claimant reasonably
should have learned, of the facts and circumstances giving rise to the
claim.
(3) This paragraph (c) does not alter the time limit for claims
under Sec. 229.38(g) of this chapter (which include claims for breach
of warranty under Sec. 229.34 of this chapter) or subpart D of part
229 of this chapter.
0
8. In Sec. 210.7, revise paragraphs (a)(1) and (b)(2) to read as
follows:
Sec. 210.7 Presenting items for payment.
(a) * * *
(1) A Reserve Bank or a subsequent collecting bank may present an
item for payment or send the item for presentment and payment; and
* * * * *
(b) * * *
(2) In accordance with Sec. 229.36 of this chapter (Regulation
CC);
* * * * *
0
9. In Sec. 210.9, revise paragraphs (b)(2)(i), (b)(3)(i)(A) and (B),
(b)(4) through (6), and (c) through (e) and remove paragraph (f) to
read as follows:
Sec. 210.9 Settlement and payment.
* * * * *
(b) * * *
(2) * * *
(i) On the day a paying bank receives a cash item from a Reserve
Bank, it shall settle for the item so that the proceeds of the
settlement are available to its Administrative Reserve Bank, or return
the item, by the latest of--
(A) The next clock hour or clock half-hour that is at least one
half-hour after the paying bank receives the item;
(B) 8:30 a.m. eastern time; or
(C) Such later time as provided in the Reserve Banks' operating
circulars.
* * * * *
(3) * * *
(i) * * *
(A) On that day, settle for the item so that the proceeds of the
settlement are available to its Administrative Reserve Bank, or return
the item, by the latest of the next clock hour or clock half-hour that
is at least one half-hour after it ordinarily would have received the
item, 8:30 a.m. eastern time, or such later time as provided in the
Reserve Banks' operating circulars; or
(B) On the next day that is a banking day for both the paying bank
and the Reserve Bank, settle for the item so that the proceeds of the
settlement are available to its Administrative Reserve Bank by 8:30
a.m. eastern time on that day or such later time as provided in the
Reserve Banks' operating circulars; and compensate the Reserve Bank for
the value of the float associated with the item in accordance with
procedures provided in the Reserve Bank's operating circular.
* * * * *
(4) Reserve Bank closed. If a paying bank receives a cash item from
a Reserve Bank on a banking day that is not a banking day for the
Reserve Bank, the paying bank shall--
(i) Settle for the item so that the proceeds of the settlement are
available to its Administrative Reserve Bank by the close of the
Fedwire Funds Service on the Reserve Bank's next banking day, or return
the item by midnight of the day it receives the item (if the paying
bank fails to settle for or return a cash item in accordance with this
paragraph (b)(4)(i), it shall become accountable for the amount of the
item as of the close of its banking day on the day it receives the
item); and
(ii) Settle for the item so that the proceeds of the settlement are
available to its Administrative Reserve Bank by 8:30 a.m. eastern time
on the Reserve Bank's next banking day or such later time as provided
in the Reserve Bank's operating circular, or return the item by
midnight of the day it receives the item. If the paying bank fails to
settle for or return a cash item in accordance with this paragraph
(b)(4)(ii), it shall be subject to any applicable overdraft charges.
Settlement under this paragraph (b)(4)(ii) satisfies the settlement
requirements of paragraph (b)(4)(i) of this section.
(5) Manner of settlement. Settlement with a Reserve Bank under
paragraphs (b)(1) through (4) of this section shall be made by debit to
an account on the Reserve Bank's books or other form of settlement to
which the Reserve Bank agrees, except that the Reserve Bank may, in its
discretion, obtain settlement by charging the paying bank's account. A
paying bank may not set off against the amount of a settlement under
this section the amount of a claim with respect to another cash item,
cash letter, or other claim under Sec. 229.34 of this chapter
(Regulation CC) or other law.
(6) Notice in lieu of return. If a cash item is unavailable for
return, the paying bank may send a notice in lieu of return as provided
in Sec. 229.31(f) of this chapter (Regulation CC).
(c) Noncash items. A Reserve Bank may require the paying or
collecting bank to which it has presented or sent a noncash item to pay
for the item by a debit to an account maintained or used by the paying
or collecting bank on the Reserve Bank's books or by any other form of
settlement acceptable to the Reserve Bank.
(d) Nonbank payor. A Reserve Bank may require a nonbank payor to
which it has presented an item to pay for it by debit to an account on
the Reserve Bank's books or other form of settlement acceptable to the
Reserve Bank.
(e) Liability of Reserve Bank. Except as set forth in Sec.
229.35(b) of this chapter (Regulation CC), a Reserve Bank shall not be
liable for the failure of a collecting bank, paying bank, or nonbank
payor to pay for an item, or for any loss resulting from the Reserve
Bank's acceptance of any form of payment other than cash authorized in
paragraphs (b), (c), and (d) of this section. A Reserve Bank that acts
in good faith and exercises ordinary care shall not be liable for the
nonpayment of, or failure to realize upon, any non-cash form of payment
that it accepts under paragraphs (b), (c), and (d) of this section.
0
10. In Sec. 210.10, revise paragraph (a) to read as follows:
Sec. 210.10 Time schedule and availability of credits for cash items
and returned checks.
(a) Each Reserve Bank shall publish a time schedule indicating when
the amount of any cash item or returned check received by it is counted
toward the balance maintained to satisfy a reserve balance requirement
for purposes of part 204 of this chapter (Regulation D) and becomes
available for use by the sender or paying or
[[Page 61521]]
returning bank. The Reserve Bank that holds the settlement account
shall give either immediate or deferred credit to a sender, a paying
bank, or a returning bank (other than a foreign correspondent) in
accordance with the time schedule of the receiving Reserve Bank. A
Reserve Bank ordinarily gives credit to a foreign correspondent only
when the Reserve Bank receives payment of the item in actually and
finally collected funds, but, in its discretion, a Reserve Bank may
give immediate or deferred credit in accordance with its time schedule.
* * * * *
0
11. In Sec. 210.11, revise paragraph (b) and remove paragraph (c) to
read as follows:
Sec. 210.11 Availability of proceeds of noncash items; time
schedule.
* * * * *
(b) Time schedule. A Reserve Bank may give credit for the proceeds
of a noncash item subject to payment in actually and finally collected
funds in accordance with a published time schedule. The time schedule
shall indicate when the proceeds of the noncash item will be counted
toward the balance maintained to satisfy a reserve balance requirement
for purposes of part 204 of this chapter (Regulation D) and become
available for use by the sender. A Reserve Bank may, however, refuse at
any time to permit the use of credit given by it for a noncash item for
which the Reserve Bank has not yet received payment in actually and
finally collected funds.
0
12. In Sec. 210.12, revise paragraphs (a) and (c) through (g) to read
as follows:
Sec. 210.12 Return of cash items and handling of returned checks.
(a) Return of items--(1) Return of cash items handled by Reserve
Banks. A paying bank that receives a cash item from a Reserve Bank,
other than for immediate payment over the counter, and that settles for
the item as provided in Sec. 210.9(b), may, before it has finally paid
the item, return the item to any Reserve Bank (unless its
Administrative Reserve Bank directs it to return the item to a specific
Reserve Bank) in accordance with subpart C of part 229 of this chapter
(Regulation CC), the Uniform Commercial Code, and the Reserve Banks'
operating circulars. A paying bank that receives a cash item from a
Reserve Bank also may return the item prior to settlement, in
accordance with Sec. 210.9(b) and the Reserve Banks' operating
circulars. The rules or practices of a clearinghouse through which the
item was presented, or a special collection agreement under which the
item was presented, may not extend these return times, but may provide
for a shorter return time.
(2) Return of checks not handled by Reserve Banks. A paying bank
that receives a check, other than from a Reserve Bank, and that
determines not to pay the check, may send the returned check to any
Reserve Bank (unless its Administrative Reserve Bank directs it to send
the returned check to a specific Reserve Bank) in accordance with
subpart C of part 229 of this chapter (Regulation CC), the Uniform
Commercial Code, and the Reserve Banks' operating circulars. A
returning bank may send a returned check to any Reserve Bank (unless
its Administrative Reserve Bank directs it to send the returned check
to a specific Reserve Bank) in accordance with subpart C of part 229 of
this chapter (Regulation CC), the Uniform Commercial Code, and the
Reserve Banks' operating circulars.
* * * * *
(c) Paying bank's and returning bank's agreement. The warranties,
indemnities, authorizations, and agreements made pursuant to this
paragraph (c) may not be disclaimed and are made whether or not the
returned check bears an indorsement of the paying bank or returning
bank. By sending a returned check to a Reserve Bank, the paying bank or
returning bank does all of the following.
(1) Authorization to handle returned check. The paying bank or
returning bank authorizes the paying bank's or returning bank's
Administrative Reserve Bank, and any other Reserve Bank or returning
bank to which the returned check is sent, to handle the returned check
(and authorizes any Reserve Bank that handles settlement for the
returned check to make accounting entries) subject to this subpart and
to the Reserve Banks' operating circulars.
(2) Warranties for all returned checks. The paying bank or
returning bank warrants to each Reserve Bank handling a returned check
that the returned check bears all indorsements applied by parties that
previously handled the returned check for forward collection or return.
(3) Warranties and indemnities as set forth in Regulation CC. As
applicable and unless otherwise provided, a paying bank or returning
bank makes to each Reserve Bank that handles the returned check all the
warranties and indemnities set forth in and subject to the terms of
subparts C and D of part 229 of this chapter (Regulation CC).
(4) Paying bank or returning bank's liability to Reserve Bank. (i)
Except as provided in paragraph (c)(4)(ii) and (iii) of this section, a
paying bank or returning bank agrees to indemnify each Reserve Bank for
any loss or expense (including attorneys' fees and expenses of
litigation) resulting from--
(A) The paying or returning bank's lack of authority to give the
authorization in paragraph (c)(1) of this section;
(B) Any action taken by a Reserve Bank within the scope of its
authority in handling the returned check; or
(C) Any warranty or indemnity made by the Reserve Bank under
paragraph (e) of this section or part 229 of this chapter.
(ii) A paying bank's or returning bank's liability for warranties
and indemnities that a Reserve Bank makes for a returned check that is
a substitute check, a paper or electronic representation thereof, or an
electronic returned check is subject to the following conditions and
limitations--
(A) A paying bank or returning bank that sent an original returned
check shall not be liable for any amount that a Reserve Bank pays under
subpart D of part 229 of this chapter, or under Sec. 229.34 of this
chapter with respect to an electronic returned check, absent the paying
bank's or returning bank's agreement to the contrary; and
(B) Nothing in this subpart alters the liability under subpart D of
part 229 of this chapter of a paying bank or returning bank that sent a
substitute check or a paper or electronic representation of a
substitute check or under Sec. 229.34 of this chapter of a paying bank
or returning bank that sent an electronic returned check; and
(iii) A paying bank or returning bank shall not be liable for any
amount that the Reserve Bank pays under this subpart or part 229 of
this chapter that is attributable to the Reserve Bank's own lack of
good faith or failure to exercise ordinary care.
(d) Paying bank or returning bank's liability under other law.
Nothing in paragraph (c) of this section limits any warranty or
indemnity by a returning bank or paying bank (or a person that handled
an item prior to that bank) arising under state law or regulation (such
as the U.C.C.), other federal law or regulation (such as part 229 of
this chapter), or an agreement with a Reserve Bank.
(e) Warranties by and liability of Reserve Bank--(1) Warranties and
indemnities. The following provisions apply when a Reserve Bank handles
a returned check under this subpart.
(i) Warranties for all items. The Reserve Bank warrants to the bank
to which it sends the returned check that the returned check bears all
[[Page 61522]]
indorsements applied by parties that previously handled the returned
check for forward collection or return.
(ii) Warranties and indemnities as set forth in Regulation CC. As
applicable and unless otherwise provided, the Reserve Bank makes all
the warranties and indemnities set forth in and subject to the terms of
subparts C and D of part 229 of this chapter (Regulation CC).
(2) Indemnity for substitute check created from electronic returned
check. (i) Except as provided in paragraph (e)(2)(ii) of this section,
the Reserve Bank shall indemnify the bank to which it transfers or
presents an electronic returned check (the recipient bank) for the
amount of any losses that the recipient bank incurs under subpart D of
part 229 of this chapter (Regulation CC) for an indemnity that the
recipient bank was required to make under subpart D of part 229 of this
chapter in connection with a substitute check later created from the
electronic returned check.
(ii) The Reserve Bank shall not be liable under paragraph (e)(2)(i)
of this section for any amount that the recipient bank pays under
subpart D of part 229 of this chapter that is attributable to the lack
of good faith or failure to exercise ordinary care of the recipient
bank or a person that handled the item, in any form, after the
recipient bank.
(3) Liability of Reserve Bank. A Reserve Bank shall not have or
assume any other liability to any person except--
(i) For the Reserve Bank's own lack of good faith or failure to
exercise ordinary care;
(ii) As provided in this paragraph (e); and
(iii) As provided in subparts C and D of part 229 of this chapter
(Regulation CC).
(f) Recovery by Reserve Bank. (1) A Reserve Bank that has handled a
returned check may recover as provided in paragraph (f)(2) of this
section if an action or proceeding is brought against (or if defense is
tendered to) the Reserve Bank based on--
(i) The alleged failure of the paying bank or returning bank to
have the authority to give the authorization in paragraph (c)(1) of
this section;
(ii) Any action by the Reserve Bank within the scope of its
authority in handling the returned check; or
(iii) Any warranty or indemnity made by the Reserve Bank under
paragraph (e) of this section or part 229 of this chapter; and
(2) Upon entry of a final judgment or decree in an action or
proceeding described in paragraph (f)(1) of this section, a Reserve
Bank may recover from the paying bank or returning bank the amount of
attorneys' fees and other expenses of litigation incurred, as well as
any amount the Reserve Bank is required to pay because of the judgment
or decree or the tender of defense, together with interest thereon.
(g) Methods of recovery. (1) The Reserve Bank may recover the
amount stated in paragraph (f) of this section by charging any account
on its books that is maintained or used by the paying bank or returning
bank (or by charging another returning Reserve Bank), if--
(i) The Reserve Bank made seasonable written demand on the paying
bank or returning bank to assume defense of the action or proceeding;
and
(ii) The paying bank or returning bank has not made any other
arrangement for payment that is acceptable to the Reserve Bank.
(2) The Reserve Bank is not responsible for defending the action or
proceeding before using this method of recovery. A Reserve Bank that
has been charged under this paragraph (g) may recover from the paying
or returning bank in the manner and under the circumstances set forth
in this paragraph (g).
(3) A Reserve Bank's failure to avail itself of the remedy provided
in this paragraph (g) does not prejudice its enforcement in any other
manner of the indemnity agreement referred to in paragraph (c)(4) of
this section.
* * * * *
Subpart B--Funds Transfers Through Fedwire
0
13. In Sec. 210.25:
0
a. In paragraphs (a) and (b)(3), remove the word ``Fedwire'' and add in
its place the words ``the Fedwire Funds Service''.
0
b. Revise the introductory text of paragraph (b)(2).
0
c. Add paragraph (e).
The revision and addition read as follows:
Sec. 210.25 Authority, purpose, and scope.
* * * * *
(b) * * *
(2) Except as otherwise provided in paragraphs (b)(3) and (4) of
this section, including Article 4A as set forth in appendix B to this
subpart, and operating circulars of the Reserve Banks issued in
accordance with paragraph (c) of this section, this subpart governs the
rights and obligations of:
* * * * *
(e) Financial messaging standards. Financial messaging standards
(e.g., ISO 20022), including the financial messaging components,
elements, technical documentation, tags, and terminology used to
implement those standards, do not confer or connote legal status or
responsibilities. This subpart, including Article 4A as set forth in
appendix B to this subpart, and the operating circulars of the Reserve
Banks issued in accordance with paragraph (c) of this section govern
the rights and obligations of parties to funds transfers sent through
the Fedwire Funds Service as provided in paragraph (b) of this section.
To the extent there is any inconsistency between a financial messaging
standard adopted by the Fedwire Funds Service and this subpart, this
subpart shall prevail.
0
14. In Sec. 210.26, revise paragraph (e) to read as follows:
Sec. 210.26 Definitions.
* * * * *
(e) Fedwire Funds Service and Fedwire means the funds-transfer
system owned and operated by the Federal Reserve Banks that is used
primarily for the transmission and settlement of payment orders
governed by this subpart. Fedwire does not include the system for
making automated clearing house transfers.
* * * * *
Sec. 210.29 [Amended]
0
15. In Sec. 210.29(b), remove the word ``Fedwire'' and add in its
place the words ``the Fedwire Funds Service''.
0
16. In appendix A to subpart B:
0
a. Under ``Section 210.25--Authority, Purpose, and Scope'', add
paragraph (e).
0
b. Under ``Section 210.32--Federal Reserve Bank Liability; Payment of
Interest'', revise paragraph (b).
The addition and revision read as follows:
Appendix A to Subpart B of Part 210--Commentary
* * * * *
Section 210.25--Authority, Purpose, and Scope
* * * * *
(e) Financial messaging standards. This paragraph makes clear
that financial messaging standards, including the financial
messaging components, elements, technical documentation, tags, and
terminology used to implement those standards, do not confer or
connote legal status or responsibilities. Instead, subpart B of this
part and Federal Reserve Bank operating circulars govern the rights
and obligations of parties to funds transfers sent through the
Fedwire Funds Service as provided in Sec. 210.25(b). Thus, to the
extent there is any inconsistency between a financial messaging
standard adopted by the Fedwire Funds Service and subpart B of this
part, subpart B of this part, including Article 4A as adopted in
appendix B to subpart B of this part, will prevail. In the ISO 20022
financial messaging standard, for
[[Page 61523]]
example, the term agent is used to refer to a variety of bank
parties to a funds transfer (e.g., debtor agent, creditor agent,
intermediary agent). Notwithstanding use of that term in the
standard and in message tags, such banks are not the agents of any
party to a funds transfer and owe no duty to any other party to such
a funds transfer except as provided in subpart B of this part
(including Article 4A) or by express agreement. The ISO 20022
financial messaging standard also permits information to be carried
in a funds-transfer message regarding persons that are not parties
to that funds transfer (e.g., ultimate debtor, ultimate creditor,
initiating party) for regulatory, compliance, remittance, or other
purposes. An ``ultimate debtor'' is not an ``originator'' as defined
in Article 4A. The relationship between the ultimate debtor and the
originator (what the ISO 20022 standard calls the ``debtor'') is
determined by law other than Article 4A.
* * * * *
Section 210.32--Federal Reserve Bank Liability; Payment of Interest
* * * * *
(b) Payment of interest. (1) Under article 4A, a Federal Reserve
Bank may be required to pay compensation in the form of interest to
another party in connection with its handling of a funds transfer.
For example, payment of compensation in the form of interest is
required in certain situations pursuant to sections 4A-204 (relating
to refund of payment and duty of customer to report with respect to
unauthorized payment order), 4A-209 (relating to acceptance of
payment order), 4A-210 (relating to rejection of payment order), 4A-
304 (relating to duty of sender to report erroneously executed
payment order), 4A-305 (relating to liability for late or improper
execution or failure to execute a payment order), 4A-402 (relating
to obligation of sender to pay receiving bank), and 4A-404 (relating
to obligation of beneficiary's bank to pay and give notice to
beneficiary).
(2) Section 210.32(b) requires Federal Reserve Banks to provide
compensation through an explicit interest payment. Under section 4A-
506(a), the amount of such interest may be determined by agreement
between the sender and receiving bank or by funds-transfer system
rule. If there is no such agreement, under section 4A-506(b), the
amount of interest is based on the federal funds rate. Similarly,
compensation in the form of explicit interest will be paid to
government senders, receiving banks, or beneficiaries described in
Sec. 210.25(d) if they are entitled to interest under this subpart.
A Federal Reserve Bank may also, in its discretion, pay explicit
interest directly to a remote party to a Fedwire funds transfer that
is entitled to interest, rather than providing compensation to its
direct sender or receiving bank.
(3) If a bank that received an explicit interest payment is not
the party entitled to interest compensation under article 4A, the
bank must pass the benefit of the explicit interest payment made to
it to the party that is entitled to compensation in the form of
interest from a Federal Reserve Bank. The benefit may be passed on
either in the form of a direct payment of interest or in the form of
a compensating balance, if the party entitled to interest agrees to
accept the other form of compensation, and the value of the
compensating balance is at least equivalent to the value of the
explicit interest that otherwise would have been provided.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, November 14, 2018.
Ann Misback,
Secretary of the Board.
[FR Doc. 2018-25267 Filed 11-29-18; 8:45 am]
BILLING CODE 6210-01-P