[Federal Register Volume 63, Number 239 (Monday, December 14, 1998)]
[Proposed Rules]
[Pages 68701-68705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33049]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 210 and 229
[Regulations J and CC; Docket No. R-1009]
Collection of Checks and Other Items by Federal Reserve Banks and
Availability of Funds and Collection of Checks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking; termination.
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SUMMARY: In March 1998, the Board issued an advance notice of proposed
rulemaking requesting comment on the benefits and drawbacks associated
with its same-day settlement rule, which became effective in January
1994. The same-day settlement rule, which is part of Regulation CC,
requires paying banks to settle in same-day funds for checks presented
to them by private-sector banks by 8:00 a.m. local time at a location
specified by the paying bank. The Board also requested comment on the
implications of potential rule changes to reduce or eliminate the
remaining legal disparities between Federal Reserve Banks and private-
sector banks in the presentment and settlement of checks. The Board
considered whether such changes would enhance the efficiency of the
interbank check collection market, the check collection process, and
the payments system as a whole. Based on its analysis of the comments
received, the Board concluded that the costs associated with reducing
the remaining legal disparities would outweigh any payments system
efficiency gains. Therefore, the Board has decided not to propose any
specific regulatory changes at this time to reduce these remaining
legal disparities.
FOR FURTHER INFORMATION CONTACT: Louise L. Roseman, Associate Director
(202/452-2789) or Jack K. Walton II, Manager, Check Payments Section
(202/452-2660), Division of Reserve Bank Operations and Payment
Systems; Oliver Ireland, Associate General Counsel (202/452-3625), or
Stephanie Martin, Senior Counsel (202/452-3198), Legal Division. For
the hearing impaired only, contact Diane Jenkins, Telecommunications
Device for the Deaf (TDD) (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Background
In 1987 Congress passed the Expedited Funds Availability Act
(EFAA). That act gave the Board the responsibility to regulate ``any
aspect of the payment system, including the receipt, payment,
collection, or clearing of checks, and any related function of the
payment system with respect to checks'' to carry out provisions of the
act. (12 U.S.C. 4008(c)(1)) The Board issued Regulation CC,
Availability of Funds and Collection of Checks, to carry out its
responsibilities under the EFAA. (12 CFR part 229) In October 1992, the
Board amended Regulation CC by adopting the same-day settlement rule,
effective January 1994. (57 FR 46956, October 14, 1992) The same-day
settlement rule requires a paying bank to settle on the day of
presentment by Fedwire for checks presented by a private-sector
collecting bank, without the imposition of presentment fees, if the
checks are presented at a location designated by the paying bank by
8:00 a.m. local time.1 (12 CFR 229.36(f))
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\1\ The term ``bank'' as used in this notice and in Regulation
CC includes a commercial bank, savings bank, savings and loan
association, credit union, and U.S. agency or branch of a foreign
bank. (12 CFR 229.2(e)) A ``collecting bank'' is a bank handling a
check for collection, except the paying bank. A ``correspondent
bank'' is an intermediary collecting bank that provides check
collection services to other banks. A ``presenting bank'' is the
collecting bank that presents a check to the paying bank. A ``paying
bank'' generally is the bank by, at, or through which a check is
payable.
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The same-day settlement rule was designed to improve payments
system efficiency by 1) enhancing competition between private-sector
banks and Reserve Banks in the provision of check collection services,
2) encouraging agreements between presenting banks and paying banks
that would reduce the cost of the check collection system, 3) reducing
inefficient intermediation in the check collection process, and 4)
encouraging the migration from checks to more efficient payment
mechanisms. At the same time, the rule was designed to address the
concerns of large check drawers and banks that their controlled
disbursement arrangements and paying bank operations would not be
unduly disrupted.
In March 1998, the Board issued an advance notice of proposed
rulemaking requesting comment on the effect that the same-day
settlement rule has had on the interbank check collection market, on
the check collection process, and, more broadly, on the payments
system. (63 FR 12700, March 16, 1998) The notice also requested comment
on the benefits and drawbacks of reducing legal disparities between
Federal Reserve Banks and private-sector collecting banks. These legal
disparities include the rules governing presentment deadlines,
presentment locations, reasonable delivery requirements, the control
and timing of settlement, and the obligation to settle on a non-banking
day.
The Board undertook this evaluation to consider whether reducing
these disparities would enhance the efficiency of the interbank check
collection market, the check collection process, and the payments
system as a whole either directly, by expediting the collection and
return of checks, or indirectly, by fostering competition. Improved
competition among collecting banks that would likely result from a
reduction in legal disparities and the efficiency gains derived from
this competition were weighed against any increased costs to paying
banks and their check-writing customers that could result from the
changes. Consistent with its policy, the Board's evaluation of
potential regulatory changes included an analysis of the competitive
impact any changes might have on the ability of other service providers
to compete with the Reserve Banks.2 The following is a
summary of the comments received and the Board's analysis of those
comments.
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\2\ The Board has established procedures for assessing the
competitive impact of rule changes that may have a substantial
impact on payments system participants. Under these procedures, the
Board will assess whether a change would have a direct and material
adverse effect on the ability of other service providers to compete
effectively with the Federal Reserve in providing similar services
due to differing legal powers or constraints, or due to a dominant
market position of the Federal Reserve deriving from such
differences. If no reasonable modifications would mitigate the
adverse competitive effects, the Board will determine whether the
anticipated benefits are significant enough to proceed with the
change despite the adverse effects. These procedures are described
in the Board's policy statement ``The Federal Reserve in the
Payments System,'' as revised in March 1990. (55 FR 11648, March 29,
1990; FRRS 7-145.2)
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II. Summary of Comments
The Board received a total of eighty-one comment letters in
response to the March 1998 advance notice of proposed rulemaking. The
following table shows the number of comments received by category of
commenter:
[[Page 68702]]
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Number of
Category of commenter responses
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Depository institutions, bank holding companies, and
associations representing depository institutions......... 45
Corporations and associations representing corporations.... 15
Clearinghouses............................................. 7
Check processors........................................... 6
Federal Reserve Banks...................................... 4
Money order companies...................................... 2
Other organizations........................................ 2
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Total.................................................. 81
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Sixty-one commenters recommended not changing the rule governing
the same-day settlement presentment deadline or reducing other legal
disparities. Eight commenters recommended limited expansion of the
same-day settlement rule. Six commenters suggested rescinding the
existing rule, and six did not offer a specific opinion. Thirteen
commenters stated that if the Board were to make any regulatory
changes, particularly those that would require operational or
programming changes, the changes should not take effect prior to mid-
2000. Several commenters raised other regulatory issues as well as
issues related to specific Reserve Bank services or policies that were
not germane to the Board's March 1998 advance notice of proposed
rulemaking.
Based on its analysis of the comments received, the Board has
decided not to propose specific amendments to the same-day settlement
rule or Regulation J at this time. The following sections summarize the
comments received regarding current market practices, the presentment
deadline, the timing and control of settlement, and other legal
disparities and review the Board's conclusions based on its analysis of
the comments.
A. Current Practices
The March 1998 notice asked commenters to provide information on
what effect, if any, the same-day settlement rule has had on their
operations since it was implemented in January 1994. In addition, the
Board requested information on current practices that it could use to
assess the need to modify the same-day settlement rule further. In
total, sixty-eight commenters provided information on the current
practices of businesses and banks, including changes made since the
implementation of the same-day settlement rule.
Banks
Twenty-three out of twenty-five comments on the effect of the same-
day settlement rule on check collection costs and availability stated
that the rule had resulted in lower costs for collecting banks. Ten of
those commenters also stated that they had experienced an improvement
in funds availability due to the implementation of the same-day
settlement rule. Several large collecting banks reported that their
check collection costs were reduced not only by the elimination of
presentment fees, but by using lower-priced check clearing services
offered by correspondent banks.
Smaller banks commented that the same-day settlement rule benefited
only large collecting banks by shifting funds transfer, staff, and
adjustment costs for same-day settlement presentments to small paying
banks. Community banks stated that they have benefited, in some cases,
from receiving same-day settlement presentments earlier in the day than
they receive Reserve Bank presentments. Receiving presentments earlier
in the day provides the paying bank with more time to process the
presentments, which lowers their processing costs. Most of these banks,
however, also cited the cost of funds transfers for settlement as
particularly burdensome.
Old Kent Financial Corporation noted that the Grand Rapids,
Michigan, Clearing House disbanded as a result of the same-day
settlement rule because members were able to present items directly
without incurring the administrative and organizational expenses of
maintaining a clearinghouse organization. Conversely, the five
clearinghouses that provided information on their membership and
clearing volume since 1993 stated that they had expanded their
membership and clearing networks in response to the same-day settlement
rule by providing transportation or settlement services.
Businesses
Of the thirty-eight commenters that commented on current business
practices, none stated that the same-day settlement rule had influenced
businesses' decisions to use controlled disbursement services. The
Treasury Management Association (TMA) noted that 80 percent of
businesses with annual sales over $100 million use controlled
disbursement services. TMA as well as several businesses and banks
noted that the primary benefit of controlled disbursement services was
not the ability to generate float, but the ability to make investment
and borrowing decisions early in the day based on knowledge of the
value of that day's check presentments. Several large banks that
provide cash management services as well as most businesses stated that
they rely primarily or solely on the disbursement totals provided by
their banks to determine their daily account balances because
businesses tend to view internal forecasting as not sufficiently
reliable. Three large cash management service providers and TMA
reported that since the implementation of the same-day settlement rule,
up to 55 percent of the value of their first presentment notification
had shifted to their second presentment notification.3 As a
result, businesses that previously forecasted total daily presentments
based on first presentment notifications have become more dependent on
second presentment notifications to more accurately project daily
presentments. Several banks and businesses indicated that maintaining
an early morning presentment deadline also allows banks enough time to
provide positive pay services, which help reduce losses from fraudulent
check activity.4
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\3\ Cash management banks typically provide corporations with a
preliminary initial notification of the day's clearing totals by
around 8:00 a.m. local time, which includes early direct
presentments, on-us items, and the first Reserve Bank presentments.
The second notification is typically made between 9:30 and 11:00
a.m. eastern time and includes the second Reserve Bank presentment
from the high dollar group sort program and most same-day settlement
presentments.
\4\ Companies using positive pay services generally provide the
paying bank with an electronic file containing information on all
checks disbursed. The paying bank compares data on the file with
data captured from the presented checks to identify exceptions that
are examined for potential fraudulent check activity.
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None of the cash management service providers or businesses
reported any plans to shift from checks to electronic payments as their
primary method for disbursements, but a few noted that some businesses
would consider expanding their use of electronic payments as services
become more widely accepted and affordable. Technological investment
and other startup costs were mentioned most often as the primary
barriers to expanded use of electronic forms of payment.
B. Presentment Deadline Disparity
Under Regulation J, Reserve Banks can obtain same-day settlement
for checks presented to a paying bank before its cut-off hour,
generally 2:00 p.m. or later. (12 CFR 210.9(b)(1)) The same-day
settlement rule for private-sector banks, however, requires that they
make their presentments by 8:00 a.m. to ensure that they receive same-
day settlement by Fedwire without
[[Page 68703]]
being assessed presentment fees. The Board requested comment on the
effect of the difference in presentment deadlines for Reserve Banks and
private-sector collecting banks. The Board also requested comment on an
extension of the presentment deadline if the presenting bank transmits
the information contained in the magnetic ink character recognition
(MICR) line of each check by some earlier time. Further, the Board
requested comment on the Reserve Banks' noon presentment policy and the
effect of allowing interest payments on demand deposit accounts.
Presentment Deadline
Most commenters did not believe that the six-hour difference in
presentment deadlines was a significant impediment to the ability of
private-sector collecting banks to compete with the Reserve Banks.
Several banks and processors noted that Reserve Banks typically make
their check presentments to paying banks much earlier than the 2:00
p.m. cut-off hour. In addition, most large correspondent banks
indicated that they are able to compete effectively with Reserve Banks
by offering lower prices and, in some cases, better availability of
funds.
Ten banks, two check processors, and one Federal Reserve Bank noted
that a later same-day settlement presentment deadline would require
paying banks to process incoming presentments during the time they
currently use to process internal documents and outgoing checks. For
example, commenters noted that shifting same-day settlement check
volumes into a shorter processing window would cause paying banks to
incur significant additional costs, including the cost of acquiring
additional sorter capacity and increased staffing expense. Commenters
also indicated that the shorter processing windows would likely result
in higher check-fraud losses because paying banks would have less time
to inspect presented checks properly and make return decisions
regarding those checks. In addition, banks and processors that provide
cash management services stated that later presentments would reduce
their revenue from cash management services because daily clearing
totals would be reported later in the day to businesses and, therefore,
businesses would be less willing to pay for those services. All of the
comments received from businesses stated that a later presentment
deadline would severely diminish their ability to manage account
balances efficiently because presentment totals would be reported to
them later in the day.
Seventy-five percent of all commenters favored not changing the
8:00 a.m. same-day settlement presentment deadline primarily because
the additional costs incurred by paying banks and businesses would
outweigh benefits gained by collecting banks. Six commenters
recommended that the same-day settlement rule be rescinded to allow
paying banks to discourage private-sector presentments, regardless of
the presentment deadline. Seven commenters favored expanding the same-
day settlement rules by moving the deadline for private-sector
presentments later in the day, with the recommended new deadline
ranging from 9:00 a.m. to 2:00 p.m. First Union Bank and Firstar Bank
conditioned their recommendation on preserving an 8:00 deadline for
controlled disbursement checks, while First Tennessee Bank recommended
the deadline only be extended if the presenting bank provided a MICR
information transmission by 8:00 a.m. Several banks both for and
against extending the same-day settlement presentment deadline
suggested that a later deadline would improve funds availability by
increasing the amount of processing time available to private-sector
collecting banks, particularly for West Coast banks collecting checks
drawn on East Coast banks. Those opposed to extending the deadline,
however, believed that the availability improvements would not likely
be of sufficient magnitude to justify additional transportation
expenses for collecting banks or the increased operational costs to
paying banks.
Six banks and one check processor with operations in the Midwest or
West noted that moving the presentment deadline as little as thirty
minutes later would result in a further shift of controlled
disbursement accounts to banks in the eastern time zone. Being located
in the eastern time zone gives controlled disbursement service
providers an advantage in reporting disbursement totals to customers
earlier in the day because it offers them time to make investment and
funding decisions prior to the close of the European and U.S. financial
markets. First Interstate Bank (Montana) and Bank of America proposed
establishing a presentment deadline based on eastern time, rather than
local time, to allow banks in the western part of the country to
compete more effectively with banks in the eastern time zone in
providing cash management services. In addition, four commenters
recommended creating a special class of controlled disbursement routing
numbers with an 8:00 a.m. presentment deadline and extending the
presentment deadline for all other types of checks.
Because some collecting banks have been slow to take advantage of
the same-day settlement rule, several commenters noted that they would
prefer to leave the current same-day settlement rule unchanged.
Maintaining the rule would allow the private sector to continue
promoting other initiatives, such as the expansion of direct
presentments through existing clearinghouses. A few commenters
recommended moving the Reserve Banks' presentment deadline earlier, to
match the private-sector same-day settlement presentment deadline, but
several others noted that this would most likely force Reserve Banks to
move deposit deadlines earlier, slowing the check collection process.
Later Presentment Deadline Conditioned on Earlier Transmission of MICR
Information
Forty-seven commenters commented on conditioning the extension of
the same-day settlement presentment deadline for paper checks on the
transmission of check MICR information earlier in the day. Twenty-nine
of those commenters opposed conditioning the extension of the
presentment deadline on an earlier MICR transmission. Twelve commenters
stated that the presentment deadline under the same-day settlement rule
could be extended by the earlier provision of MICR information only if
the rule contained detailed standards regarding the MICR transmission.
Six commenters favored using MICR files to extend the presentment
deadline as long as the private sector is allowed to set MICR
transmission standards. The primary concern of those opposed to
conditioning the extension of the presentment deadline on the earlier
transmission of MICR information was the accuracy of the data contained
in the MICR files. Three banks stated that they currently receive MICR
files from presenting banks and noted that they occasionally find
discrepancies between data contained in the electronic files and the
associated checks. Other concerns included the investment required to
send, receive, and process MICR files; potential communication network
capacity issues at peak transmission times; and the need for additional
warranties.
The commenters that currently receive MICR file transmissions under
bilateral agreements stated that their existing agreements adequately
cover relevant MICR file transmission issues and that regulation of
these issues would likely be too general to address
[[Page 68704]]
operational issues effectively. Several paying banks noted that if they
wanted to maintain their current cash management reporting deadlines,
they would be required to process MICR files from presenting banks that
take advantage of the later deadline, even if paying banks determined
that the investment required to process MICR information could not be
recouped by efficiency gains. Several commenters suggested that it
would be better to let market forces determine the acceptance of MICR
files than to incorporate the use of MICR files in the same-day
settlement rule as a condition for a later presentment deadline.
Noon Presentment Policy
Of the twenty-three comments received on the Reserve Banks' current
noon presentment policy for city-zone endpoints, seventeen commenters
stated that the policy does not need to be changed.5 They
said that the current policy adequately balances the Reserve Banks'
ability to expedite the collection of city-zone checks with the desire
of paying banks to receive their presentments earlier in the day. Four
commenters suggested that the Reserve Banks make presentments earlier
in the day and two suggested that the Reserve Banks could make their
presentments later in the day.
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\5\ The Board adopted a policy in 1982 under which the Reserve
Banks generally must present checks to paying banks located in
Federal Reserve city availability zones by noon local time. (48 FR
79, January 3 1983) This noon presentment policy, which provided for
later presentments to city banks than was previously the case, was
part of a broader program to expedite the collection of checks by
establishing significantly later deposit deadlines and associated
later presentment times for checks drawn on city banks.
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Interest on Demand Deposits
Most banks that provide cash management services stated that
controlled disbursement accounts would still be needed even if banks
were permitted to pay interest on corporate demand deposits. Several
banks indicated that they already compensate businesses through
earnings credits and that they would not be able to pay rates high
enough to keep larger businesses from seeking higher returns through
alternative investments, although paying interest might help smaller
businesses. TMA and Bank of America stated, however, that if banks paid
market rates of interest on corporate demand deposits, the demand for
controlled disbursement services would be significantly reduced, thus
mitigating concerns about a later same-day settlement presentment
deadline.
C. Timing and Control of Settlement
Under Regulation J, Reserve Banks have the right to settle for
check presentments by debiting the Federal Reserve account of the
paying bank or its correspondent settlement agent, a process often
referred to as autocharge. (12 CFR 210.9(b)) The debit is posted during
the day based on the time of presentment, as provided in the Reserve
Banks' operating circulars. Under the same-day settlement rule in
Regulation CC, however, the paying bank maintains control of the
settlement through the initiation of a Fedwire funds transfer that does
not have to be made until the close of Fedwire (6:30 p.m. eastern
time). (12 CFR 229.36(f)(2)) Most commenters acknowledge that the
regulations governing the timing and control of settlement favor
Reserve Banks over private-sector collecting banks. None of the
commenters, however, suggested an alternative that eliminated the
disparity while maintaining a balance between the needs of both the
paying and collecting banks to control some portion of the settlement
process.
None of the commenters recommended changing the control of
settlement. The primary concern with eliminating the Reserve Banks'
ability to autocharge accounts was that paying banks would incur
additional costs to transfer funds daily to the Reserve Banks. In
addition, none of the paying banks indicated problems with the Reserve
Banks' autocharge process. Moreover, most banks opposed giving private-
sector presenting banks the ability to debit their Federal Reserve
accounts directly. Smaller paying banks, in particular, stated that
their ability to adjust the amount of their funds transfers for
settlement was often their most effective method of resolving
discrepancies in the presentment totals, even though funds transfers
were also cited as a significant cost to paying banks under the same-
day settlement rule.
While seven commenters suggested moving the settlement deadline
under the same-day settlement rule for private-sector banks to earlier
in the day, most commenters stated that the current timing of Reserve
Bank settlements was appropriate. Several banks expressed concern that
if Reserve Banks obtained settlement for their presentments later in
the day, Reserve Banks would post credits to depositors' accounts
later, thus increasing the likelihood of daylight overdrafts. Another
concern cited by several collecting banks was that under the current
same-day settlement rule, most funds transfers settling for same-day
settlement presentments are received late in the day, making it
difficult for collecting banks to manage account balances and reserve
requirements. A few paying banks, however, noted that the later
settlement deadline for private-sector banks provided paying banks time
to process and reconcile presentments before settling. To help resolve
issues regarding the timing and control of settlement, the regional
check clearinghouses noted that they have incorporated same-day
settlement presentments into their clearinghouse settlements.
D. Other Legal Disparities
In its March 1998 notice, the Board also requested comment on other
legal disparities that exist between Reserve Banks and private-sector
collecting banks. Specifically, the Board wanted to know if the
difference in presentment location, reasonable delivery requirements,
and the obligation to settle on a non-banking day hindered competition
and innovation in the payments system. The Board also asked for comment
on any other legal differences between Reserve Banks and private-sector
collecting banks that limit the ability of private-sector banks and
Reserve Banks to compete in the interbank check collection market.
Under the same-day settlement rule, paying banks have the right to
designate the presentment location, with certain restrictions, and to
impose reasonable delivery requirements for presentments received from
private-sector presenting banks. (12 CFR 229.36(f)(1)) Regulation J,
however, allows Reserve Banks to present checks at certain locations
that may not be the same as the location designated by the paying bank
under the same-day settlement rule. (12 CFR 210.7(b)) In addition,
Regulation J does not give paying banks the right to impose delivery
requirements on Reserve Banks. In practice, however, the Reserve Banks
generally present checks at a location designated by the paying bank
and generally comply with the paying bank's delivery requirements.
Most of the thirty-one commenters on the issues of presentment
location and reasonable delivery requirements noted that Reserve Banks
already generally comply with private-sector practices. Fourteen
commenters noted that the current disparity in presentment location and
delivery requirements does not result in any material competitive
advantage. Further, they noted that if the Board were to make changes
in this area, the Board should modify Regulation J to allow paying
banks to designate the presentment location and
[[Page 68705]]
reasonable delivery requirements for presentments by Reserve Banks.
None of the commenters suggested eliminating the reasonable delivery
requirements for private-sector presentments. Only four commenters
noted that the current rules provide a material competitive advantage
for the Reserve Banks and suggested that collecting banks be given the
same legal rights for presentment location as Reserve Banks.
The settlement obligation of a paying bank that closes voluntarily
on a business day differs based on whether the presenting bank is a
Reserve Bank or a private-sector bank. Under Regulation J, the paying
bank's obligation to settle with a Reserve Bank is triggered if the
Reserve Bank ``makes a cash item available to the paying bank on that
day.'' (12 CFR 210.9(b)(3)) Under the same-day settlement rule, the
paying bank's obligation to settle with a private-sector collecting
bank is triggered only if the paying bank ``receives presentment of a
check'' on a business day on which it is open. (12 CFR 229.36(f)(3)).
Of the seventeen commenters that commented on this issue, none of the
commenters believed that the difference between the rules for private-
sector banks and Federal Reserve Banks had a material competitive
effect.
Nine commenters raised as another legal disparity the way paying
banks and private-sector presenting banks resolve discrepancies in the
settlement amount for presentments. The Reserve Banks' Operating
Circular 3, Collection of Cash Items and Returned Checks (paragraphs
12, 18, and 19), sets forth the terms under which Reserve Banks handle
corrections, adjustments, and warranty claims. Although paying banks
and private-sector presenting banks can establish bilateral or
multilateral agreements addressing adjustment standards, the same-day
settlement rule does not provide standards for private-sector banks
lacking such agreements. Several commenters noted that the lack of
detailed adjustment standards had occasionally made it difficult to
resolve differences between collecting and paying banks in a timely
manner. While a few commenters asked the Board to incorporate detailed
standards in Regulation CC, several others recommended that industry
groups continue to set these standards.
E. Analysis and Conclusions
The Board recognizes that certain legal disparities between Reserve
Banks and private-sector collecting banks may affect the competitive
position of participants in the check collection system. In evaluating
potential reductions in the legal disparities between Reserve Banks and
private-sector collecting banks, the Board recognizes that even
removing the disparities discussed in its advance notice of proposed
rulemaking would not result in a completely level playing field in the
interbank check collection market. For example, the Reserve Banks enjoy
an unsurpassable credit rating that makes them an attractive service
provider in times of financial stress.6
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\6\ Reserve Banks also labor, however, under constraints not
imposed on their private-sector competitors, such as central bank
concerns regarding the adequacy of payment services in the markets
and cost recovery by major service category, as well as a level of
public scrutiny of price and service level determinations not shared
by the private sector.
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Based on the comments received, the Board believes that regulatory
changes to reduce legal disparities between Reserve Banks and private-
sector collecting banks would yield only marginal benefits in terms of
directly expediting the collection and return of checks. While the
removal of these disparities may foster competition between Reserve
Banks and private-sector collecting banks in the check collection
market, neither the direct nor indirect benefits appear to be
sufficient to offset the significant additional costs that such
regulatory changes would impose on paying banks and their customers.
Specifically, the Board has concluded that moving the presentment
deadline later in the day for private-sector banks would impose
significant costs on paying bank operations and those businesses that
use controlled disbursement services. In addition, moving the Reserve
Banks' presentment deadline earlier in the day would delay the
collection of some checks, which would be inconsistent with one purpose
of EFAA: to expedite the check collection and return system.
Further, the Board believes that eliminating the disparities
between the Reserve Banks and private-sector banks as to the control
and timing of settlement would also likely increase costs and reduce
the efficiency in the check system. The Board notes that private-sector
initiatives, such as the expansion of clearinghouse settlement
services, have been able to mitigate the settlement disparities to some
extent.
With respect to the control of settlement, the Board believes that
the autocharge system used by the Reserve Banks provides an efficient
settlement mechanism that has not created problems for paying banks and
therefore should be retained. The Board recognizes that while banks
generally are not concerned with the ability of Reserve Banks to charge
paying banks' Federal Reserve accounts, banks are very concerned about
the risks associated with extending this capability to private-sector
banks.
With respect to the timing of settlement, providing for a later
settlement of Reserve Bank presentments would similarly delay the
ability of Reserve Banks to post credits for check deposits, thereby
making intraday account management more difficult for many banks and
potentially increasing their daylight overdraft charges. In addition,
providing for an earlier settlement deadline for presentments by
private-sector banks could materially increase the costs and risks to
paying banks by reducing the time that they have to process and
reconcile presentments before settling.
The Board has also concluded that the legal disparities in control
of presentment location, delivery requirements, and settlement on a
non-banking day do not materially affect the efficiency of or
competition in the check collection system.
The implementation of the same-day settlement rule in 1994 has
significantly reduced the legal disparities between private-sector
collecting banks and Reserve Banks, thereby improving the competitive
position of private-sector collecting banks. While some legal
disparities related to the presentment and settlement of checks still
exist, they are not as significant as those that existed prior to 1994.
The Board believes that the costs associated with reducing the
remaining legal disparities would outweigh any payments system
efficiency gains. Therefore, based on its analysis of the comments
received, the Board believes that changes to further reduce the legal
disparities should not be made at this time.
By order of the Board of Governors of the Federal Reserve
System, December 8, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-33049 Filed 12-11-98; 8:45 am]
BILLING CODE 6210-01-P
