Federal Reserve Bank Services, 68049-68069 [05-22224]
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68049
Federal Register / Vol. 70, No. 216 / Wednesday, November 9, 2005 / Notices
A. Federal Reserve Bank of San
Francisco (Tracy Basinger, Director,
Regional and Community Bank Group)
101 Market Street, San Francisco,
California 94105-1579:
1. Ruh Capital, LLC; Eggemeyer
Family Trust; William J. Ruh Trust;
Castle Creek Capital Partners III, L.P.;
Western States Opportunity LLC;
Eggemeyer Capital LLC; and Castle
Creek Capital III, LLC, all of Rancho
Santa Fe, California; to acquire shares of
Atlanta Bancorporation, Inc.,
Alpharetta, Georgia, and indirectly
acquire Gibsonville Community Bank,
Gibsonville, North Carolina, and thereby
engage in operating a state savings bank,
pursuant to section 225.25(b)(4)(ii) of
Regulation Y.
Board of Governors of the Federal Reserve
System, November 4, 2005.
Robert deV. Frierson,
Deputy Secretary of the Board.
[FR Doc.E5–6175 Filed 11–8–05; 8:45 am]
BILLING CODE 6210–01–S
FEDERAL RESERVE SYSTEM
[Docket No. OP–1241]
Federal Reserve Bank Services
Board of Governors of the
Federal Reserve System.
ACTION: Notice.
AGENCY:
SUMMARY: The Board has approved the
2006 fee schedules for Federal Reserve
priced services and electronic access
and a private-sector adjustment factor
(PSAF) for 2006 of $117.7 million.
These actions were taken in accordance
with the requirements of the Monetary
Control Act of 1980, which requires
that, over the long run, fees for Federal
Reserve priced services be established
on the basis of all direct and indirect
costs, including the PSAF. The Board
has also approved maintaining the
current earnings credit rate on clearing
balances.
DATES: The new fee schedules become
effective January 3, 2006, except the
FedLine Select electronic connection
fees, which become effective April 1,
2006.
FOR FURTHER INFORMATION CONTACT: For
questions regarding the fee schedules:
Jack K. Walton II, Associate Director
(202/452–2660); Jeremy R. Mandell,
Financial Services Analyst (202/452–
2842), Division of Reserve Bank
Operations and Payment Systems. For
questions regarding the PSAF and
earnings credits on clearing balances:
Gregory L. Evans, Assistant Director,
(202/452–3945); Brenda L. Richards,
Manager, Financial Accounting (202/
452–2753); or Jonathan Mueller,
Financial Analyst (202/530–6291),
Division of Reserve Bank Operations
and Payment Systems. For users of
Telecommunications Device for the Deaf
(TDD) only, please call 202–263–4869.
Copies of the 2006 fee schedules for the
check service are available from the
Board, the Federal Reserve Banks, or the
Reserve Banks’ financial services Web
site at www.frbservices.org.
SUPPLEMENTARY INFORMATION:
I. Priced Services
A. Discussion
From 1995 through 2004, the Reserve
Banks recovered 97.5 percent of their
total expense (including special project
costs and imputed expenses) and
targeted after-tax profits or return on
equity (ROE) for providing priced
services.1
Table 1 summarizes 2004, 2005
estimated, and 2006 budgeted cost
recovery rates for all priced services.
Cost recovery is estimated to be 103.6
percent in 2005 and budgeted to be
102.5 percent in 2006. The performance
of the check service heavily influences
the aggregate cost recovery rates and
accounts for approximately 80 percent
of the total cost of priced services. The
electronic services (FedACHSM, the
Fedwire funds service and national
settlement service (NSS), and the
Fedwire securities service) account for
approximately 20 percent of total costs.2
The noncash collection service
represents a de minimis amount of total
costs and, by year-end 2005, the Reserve
Banks will exit the service.
TABLE 1.—AGGREGATE PRICED SERVICES PRO FORMA COST AND REVENUE PERFORMANCE a
[$ millions]
1b
Revenue
Year
2004 .....................................................................................
2005 (estimate) ....................................................................
2006 (budget) .......................................................................
2c
Total expense
914.6
958.2
911.1
3
Net income
(Roe) [1–2]
842.6
821.8
817.1
72.0
136.4
94.0
41d
Target ROE
5 Recovery
rate after target ROE [1/
(2+4)]
112.4
102.9
72.0
a Calculations
95.8%
103.6%
102.5%
in this table and subsequent pro forma cost and revenue tables may be affected by rounding.
includes net income on clearing balances (NICB). Clearing balances are assumed to be invested in a broad portfolio of investments,
such as Treasury securities, government agency securities, commercial paper, municipal and corporate bonds, and money market and mutual
funds. To impute income, a constant spread is determined from the historical average return on this portfolio and applied to the rate used to determine the cost of clearing balances. NICB equals the imputed income from these investments less earnings credits granted to holders of clearing balances. The cost of earnings credits is based on the discounted three-month Treasury bill rate.
c The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, FDIC insurance, Board of Governors’ priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pensions under FAS 87 are also included.
d Target ROE is the after-tax ROE included in the PSAF. The 2006 target return on equity is lower than it has been historically because of a
Board-approved change to the method used to calculate the targeted return on equity.
b Revenue
Table 2 presents an overview of the
2004, 2005 budget, 2005 estimate, and
2006 budget cost recovery performance
by priced service.
1 These imputed expenses, such as taxes that
would have been paid, and the return on equity that
would have to be earned had the services been
furnished by a private business firm, are referred to
as the PSAF. The ten-year recovery rate is based
upon the pro forma income statements for Federal
Reserve Banks’ priced services published in the
Board’s Annual Report.
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2 FedACh and Fedwire are registered
servicemarks of the Reserve Banks.
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Federal Register / Vol. 70, No. 216 / Wednesday, November 9, 2005 / Notices
TABLE 2.—PRICED SERVICES COST RECOVERY
[percent]
Priced service
2004
All services .......................................................................................................
Check ...............................................................................................................
FedACH ...........................................................................................................
Fedwire funds and NSS ..................................................................................
Fedwire securities ............................................................................................
Noncash collection ...........................................................................................
2005 Budget
95.8
94.6
103.0
99.4
102.6
120.3
2005 Estimate
2006 Budgeta
103.6
104.0
102.2
101.4
101.3
90.9
102.5
102.3
101.0
105.6
105.9
n.a.
100.1
100.3
100.4
100.1
102.8
76.7
a 2006 budget figures reflect the latest data from Reserve Banks. The Reserve Banks will transmit final budget data to the Board in November
2005, for Board approval in mid-December 2005.
n.a.—not applicable
1. 2005 Estimated Performance
In 2005, the Reserve Banks estimate
that they will recover 103.6 percent of
the costs of providing priced services,
including imputed expenses and
targeted ROE, compared with a
budgeted recovery rate of 100.1 percent,
as shown in table 2. The Reserve Banks
estimate that all services will achieve
full cost recovery with the exception of
the noncash collection service, from
which the Reserve Banks will exit by
year end. The Reserve Banks estimate
that they will fully recover actual and
imputed expenses and earn net income
of $136.4 million compared with the
target of $102.9 million. This greaterthan-expected net income is largely
driven by greater-than-expected (1)
check volumes, (2) cost savings
associated with the Reserve Banks’
check restructuring efforts, and (3) net
income on clearing balances (NICB).
The decline in paper check volume
continues to have a significant effect on
the Reserve Banks priced services.3
Check use nationwide has been
declining, in part because of the
increased use of debit and credit cards,
as well as the growing trend for
merchants, billers, and others to covert
checks into automated clearinghouse
(ACH) transactions. These factors have
led to a general decline in the interbank
clearing of checks, including clearings
through the Reserve Banks. In this
environment, to meet their cost recovery
objectives, the Reserve Banks have
undertaken efforts to reduce the costs
associated with the check service,
including reducing the number of check
processing sites from forty-five in 2003
to twenty-two by the end of 2006.
3 The Federal Reserve’s 2004 retail payments
research indicated that the total number of checks
paid declined at an average annual rate of 4.3
percent from 2000 to 2003. This rate of decline is
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2. 2006 Projected Performance
For 2006, the Reserve Banks project a
priced services cost recovery rate of
102.5 percent. The 2006 fees for priced
services are projected to result in a net
income of $94.0 million, or $22.0
million more than needed to achieve
full cost recovery. The major risks to the
Reserve Banks’ ability to achieve their
budget targets are a greater decline in
the Reserve Banks’ check volume than
the projected 13.8 percent,
unanticipated problems with check
office restructurings that could result in
significant cost overruns, and greaterthan-expected electronic payments
volume loss to competitors. In light of
these risks, the Reserve Banks will
continue to refine their business and
operational strategies to improve
efficiency and reduce excess capacity
and other costs. These strategies will
position the Reserve Banks to achieve
their financial and payment system
objectives and statutory requirements
over the long run.
Web origination returns and notification
of change fee 40 percent.
• With the 2006 fee change, the price
index for the FedACH service will have
decreased 63 percent since 1997.
Fedwire funds and national
settlement
• The Reserve Banks will raise the
surcharge for offline funds transfers by
one-third.
• With the 2006 fee change, the price
index for the Fedwire funds and
national settlement services will have
decreased 57 percent since 1997.
Fedwire securities
• The Reserve Banks will raise the
surcharge for offline securities transfers
51.5 percent and the joint custody fee
14.3 percent.
• With the 2006 fee change, the price
index for the Fedwire securities service
will have decreased 47 percent since
1997.
3. 2006 Pricing
The following summarizes the
changes in the Reserve Banks’ fee
schedules for priced services in 2006:
Check
• The Reserve Banks will raise paper
check fees for forward-collection check
products 5.3 percent, return-check
products 5.4 percent, and payor bank
check products 5.3 percent.
• The Reserve Banks will decrease
Check 21 fees for FedForward products
13.8 percent and to offer incentives to
customers to use FedReceipt products.
• With the 2006 fee change, the price
index for the check service will have
increased 49 percent since 1997.
FedACH
• The Reserve Banks will reduce the
input file fee one-third and the FedLine
Figure 1 compares indexes of fees for
the Reserve Banks’ priced services with
the GDP price deflator. Compared with
the price index for 2005, the price index
for all Reserve Bank priced services is
projected to increase 3.0 percent in
2006. The price index for electronic
payment services, as well as electronic
access to Reserve Banks’ priced services,
is projected to decrease 1.0 percent in
2006. The price index for the paperbased payments services is projected to
increase 5.4 percent in 2006. When
projecting out to 2006, the price index
for all priced services has increased a
total of 12.1 percent since 1997. In
comparison, from 1997 through 2004,
the GDP deflator increased 14.4 percent.
greater than 3.3 percent average annual rate
estimated to have occurred from 1995 to 2000. See
Gerdes, Geoffrey R. and Jack K. Walton II, ‘‘Trends
in the Use of Payment Instruments in the United
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4. 2006 Price Index
BILLING CODE 6210–01–P
States,’’ Federal Reserve Bulletin, Spring 2005, pp.
180–201. (See https://www.federalreserve.gov/pubs/
bulletin/2005/spring05_payment.pdf.)
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Federal Register / Vol. 70, No. 216 / Wednesday, November 9, 2005 / Notices
The Board has approved maintaining
the current rate of 80 percent of the
three-month Treasury bill rate to
calculate earnings credits on clearing
balances.4 The Reserve Banks will
continue to calculate earnings credits
for the marginal reserve requirement
adjusted portion of clearing balances at
the federal funds rate.5
4 Two adjustments are applied to the earnings
credit rate so that the return on clearing balances
at the Federal Reserve is comparable to what the DI
would have earned had it maintained the same
balances at a private-sector correspondent. The
‘‘imputed reserve requirement’’ adjustment is made
because a private-sector correspondent would be
required to hold reserves against the respondent’s
balance with it. As a result, the correspondent
would reduce the balance on which it would base
earnings credits for the respondent because it
would be required to hold a portion, determined by
its marginal reserve ratio, in the form of noninterest-bearing reserves. For example, if a DI held
$1 million in clearing balances with a
correspondent bank and the correspondent had a
marginal reserve ratio of 10 percent, then the
correspondent bank would be required to hold
$100,000 in reserves, and it would typically grant
credits to the respondent based on 90 percent of the
balance, or $900,000. This adjustment imputes a
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Clearing balances were introduced in
1981, as a part of the Board’s
implementation of the Monetary Control
Act, to facilitate access to Federal
Reserve priced services by institutions
that did not have sufficient reserve
balances to support the settlement of
their payment transactions. Beginning
in 2004, the earnings credit calculation
was changed from using the federal
funds rate to using a percentage
discount on a rolling thirteen-week
average of the annualized coupon
marginal reserve ratio of 10 percent to the Reserve
Bank.
The ‘‘marginal reserve requirement’’ adjustment
accounts for the fact that the respondent can deduct
balances maintained at a correspondent, but not the
Federal Reserve, from its reservable liabilities. This
reduction has value to the respondent when it frees
up balances that can be invested in interest-bearing
instruments, such as federal funds. For example, a
respondent placing $1 million with a correspondent
rather than the Federal Reserve would free up
$30,000 if its marginal reserve ratio were 3 percent.
The formula used by the Reserve Banks to
calculate earnings credits can be expressed as
e = [b * (1¥FRR) * r] + [b * (MRR) * f]
Where e is total earnings credits, b is the average
clearing balance maintained, FRR is the assumed
Reserve Bank marginal reserve ratio (10 percent), r
is the earnings credit rate, MRR is the marginal
reserve ratio of the DI holding the balance (either
0 percent, 3 percent, or 10 percent), and f is the
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equivalent yield of three-month
Treasury bills in the secondary market
to better align Federal Reserve policy
with market practice. Earnings credits
can be used only to offset charges for
priced services, are calculated monthly,
and expire if not used within one year.6
C. Check Service
Table 3 below shows the 2004, 2005
estimate, and 2006 budgeted cost
recovery performance for the check
service.
average federal funds rate. A DI that meets its
reserve requirement entirely with vault cash is
assigned a marginal reserve requirement of zero.
5 This calculation adjusts earnings credits as
though account holders could adjust their reserve
requirement for a ‘‘due from deduction’’ for clearing
balances held with a Reserve Bank.
6 A band is established around the contracted
clearing balance to determine the maximum balance
on which credits are earned as well as any
deficiency charges. The clearing balance allowance
is 2 percent of the contracted amount, or $25,00,
whichever is greater. Earnings credits are based on
the period-average balance maintained up to a
maximum of the contracted amount plus the
clearinig balance allowance. Deficiency charges
apply when the average balance fals below the
contracted amount less the allowance, although
credits are still earned on the average maintained
balance.
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B. Earnings Credits on Clearing
Balances
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Federal Register / Vol. 70, No. 216 / Wednesday, November 9, 2005 / Notices
TABLE 3.—CHECK PRO FORMA COST AND REVENUE PERFORMANCE
[$ millions]
1
Revenue
Year
2004 .....................................................................................
2005 (estimate) ....................................................................
2006 (budget) .......................................................................
1. 2005 Estimate
For 2005, the Reserve Banks estimate
that the check service will recover 104.0
percent of total expenses and targeted
ROE, compared with the budgeted
recovery rate of 100.3 percent. The
Reserve Banks expect to recover all
actual and imputed expenses of
providing check services and earn net
income of $112.5 million (see table 3).
The higher-than-budgeted cost
recovery is the result of higher-thanexpected revenue of $53.7 million that
2
Total expense
760.2
786.4
732.9
3
Net income
(ROE) [1–2]
709.6
673.9
659.6
was partially offset by higher-thanexpected expenses of $24.0 million. The
higher revenue is due to greater-thanbudgeted check volumes, customer use
of a higher priced product mix, greaterthan-expected NICB, and explicit float
revenue. The higher costs were largely
due to the cost of processing greaterthan-expected paper check volume and
higher personnel costs related to Check
21 substitute check printing.
The greater-than-expected paper
check volume can be attributed to the
50.2
112.5
73.4
4
Target Roe
93.6
82.0
57.0
5
Recovery rate
after target
ROE [1/(2+4)]
94.6%
104.0
102.3
slower-than-expected adoption of Check
21 products and lower-than-anticipated
volume losses resulting from check
office restructurings. For full-year 2005,
the Reserve Banks estimate that paper
forward-collection check volume will
decline 12.0 percent, compared with a
budgeted decline of 14.6 percent. The
Reserve Banks expect that paper return
check volume will decline 24.4 percent
for the full year, compared with a
budgeted decline of 27.0 percent.
TABLE 4.—PAPER CHECK PRODUCT VOLUME CHANGES
[percent]
Budgeted
2005 change
Total forward-collection a
Forward-processed ...............................................................................................................
Fine-sort a ..............................................................................................................................
Returns ........................................................................................................................................
(14.7)
(10.1)
(27.0)
Actual change
through
August 2005
(11.2)
(21.6)
(19.5)
Estimated
2005 change
(10.9)
(31.9)
(24.4)
a These rates exclude electronic fine-sort volume. Including the electronic fine-sort product, fine-sort volume was budgeted to decline 42.6 percent in 2005 and is now estimated to decline 33.7 percent.
While electronic check presentment
volumes are expected to decline for fullyear 2005 (see table 5), the share of
electronic checks that the Reserve Banks
present is expected to increase. Through
August 2005, the Reserve Banks
presented approximately 26.2 percent of
their checks electronically, which
represents an increase from 24.6 percent
in 2004. In addition to electronic check
presentment, through August 2005, the
Reserve Banks captured images for
about 12.3 percent of all checks they
collected.
TABLE 5.—ELECTRONIC CHECK PRODUCT SHARE
[percent]
2005 actual
through August
2004
Truncation a ..................................................................................................................................
Non-truncation (Electronic Check Presentment) a .......................................................................
Electronic check information ........................................................................................................
Images .........................................................................................................................................
5.8
18.8
6.3
11.0
6.7
19.5
6.0
12.3
2005 estimated
6.2
19.3
6.1
12.1
a ECP consists of truncated and non-truncated checks. Non-truncated checks include checks presented through the MICR presentment and
MICR presentment plus products.
2. 2006 Pricing
In 2006, the Reserve Banks project
that the check service will recover 102.3
of total expenses and targeted ROE.
The Reserve Banks plan to maintain
full cost recovery by continuing to
streamline check processing and
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administrative activities across the
System as well as by increasing Check
21 volume. A number of cost reduction
initiatives have been identified and are
currently in various stages of
implementation. These initiatives
include eliminating six more check
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processing sites by the end of 2006 and
working to reduce various check
support functions such as check
adjustments and check automation
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services in response to the declining
volume.7
Total expenses are projected to
decline by $14.3 million, a decline of
2.1 percent when compared with the
2005 estimate. This decline is primarily
attributable to lower local operating
costs due to efficiency improvements at
restructuring sites and declines in
projected 2006 volumes. These lower
costs are partially offset by higher
temporary costs associated with further
check restructuring and additional costs
to support Check 21 products.
Revenue is projected to be $732.9
million, a decline of 6.8 percent
compared to the 2005 estimate. This
decline is driven by a $75.9 million, or
10.7 percent, decline in fee revenue that
is offset by a $22.3 million increase in
NICB. In 2006, the Reserve Banks
project that paper check volume for
forward products will decrease 13.9
percent, volume for return products will
decrease 23.9 percent, and volume for
payor bank products will decrease 20.4
percent. These expected volume
declines will be partially offset by a
projected increase in Check 21 volume.
Check 21 products have been offered
for about one year, and the Reserve
Banks anticipate significant growth in
2006 (see table 6).8 The Reserve Banks
project that FedForward volume will
more than double, FedReturn volume
will more than triple, and FedReceipt
volume will increase almost twelvefold.
The Reserve Banks have projected an
increase in the 2006 Check 21 volume
that will result in a doubling of Check
21 product revenue, to about $44
million. Board and Reserve Bank staff
believe that the key to realizing Check
21 cost efficiencies for the System is the
widespread acceptance of FedReceipt by
paying banks.
TABLE 6.—CHECK 21 VOLUME
2006 Budgeted volume
[millions of
items]
FedForward ..............................................................................................................................................................
FedReturn ................................................................................................................................................................
FedReceipt ...............................................................................................................................................................
In 2006, the Reserve Banks will
continue to encourage the adoption of
electronic check collection and
presentment alternatives through
modest price increases to paper check
products and price reductions for some
electronic products. The price increases
for paper products generally are
expected to be distributed across most
product categories, with generally
higher price increases for nonstrategic
product lines. The Reserve Banks will
also narrow the price ranges for similar
products across the System. In addition,
the Reserve Banks will offer depository
institutions (DIs) greater incentives to
deposit checks electronically and to
accept image presentments. Longer
term, as the use of Check 21-related
products increases, the pricing of paper
products may be strategically raised to
encourage further adoption of electronic
check collection and presentment
alternatives.
For 2006, the Reserve Banks are
targeting an overall price increase for
paper check services of 5.3 percent (see
table 7). This increase consists of a 5.3
percent increase in forward check-
collection fees, which is composed of a
4.9 percent increase in forward cash
letter fees and a 5.4 percent increase in
per-item fees. Fees for return services
will increase by 5.4 percent, which is
composed of a 5.9 percent increase in
return cash letter fees and a 5.3 percent
increase in per-item fees. The average
volume-weighted fees for payor bank
services will increase 5.3 percent.
7 In February 2003, the Reserve Banks announced
an initiative to reduce the number of check
processing locations from forty-five to thirty-two. In
August 2004 and May 2005, the Reserve Banks
announced two further rounds of restructurings. By
the end of these announced restructurings in 2006,
the Reserve Banks will have twenty-two check
processing locations.
8 The Reserve Banks’ Check 21 product suite
includes FedForward, FedReturn, and FedReceipt.
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TABLE 7.—2006 FEE CHANGES
[percent]
Product
Fee change
Paper Check .........................
Forward-collection .........
Cash Letter .............
Item ........................
Returns ..........................
Cash Letter .............
Item ........................
Payor bank services .............
Truncation ......................
Non-truncation (electronic check presentment) ..........................
Electronic check information ........................
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5.3
5.3
4.9
5.4
5.4
5.9
5.3
5.3
1.8
431.8
15.2
57.5
Growth from
2005 estimate
[percent]
138.5
206.7
1,084.3
TABLE 7.—2006 FEE CHANGES—
Continued
[percent]
Product
Images ...........................
Check 21
FedForward ...................
FedReturn ......................
FedReceipt ....................
Fee change
(1.0)
(13.8)
0.0
($.002) a
a FedReceipt
customers will receive a
$0.002 discount per check presented. The discount can be used to offset other check service fees incurred by FedReceipt customers.
The primary risk to meeting the
budgeted 2006 cost recovery is higherthan-expected paper check volume
declines. Other risks include
unanticipated problems with check
office restructurings or other major
initiatives that may result in significant
cost overruns.
D. FedACH Service
Table 8 below shows the 2004, 2005
estimate, and 2006 budgeted cost
recovery performance for the
13.8 commercial FedACH service.
14.5
FedForward is the electronic alternative to forward
check collection; FedReturn is the electronic
alternative to return items; and FedReceipt is
electronic receipt of Check 21 items.
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TABLE 8.—FEDACH PRO FORMA COST AND REVENUE PERFORMANCE
[$ millions]
1
Revenue
Year
2004 .....................................................................................
2005 (estimate) ....................................................................
2006 (budget) .......................................................................
1. 2005 Estimate
For 2005, the Reserve Banks estimate
that the FedACH service will recover
102.2 percent of total expenses and
targeted ROE, compared with the
budgeted recovery rate of 100.4 percent.
Total revenue is estimated to be $2.6
million greater than the amount
budgeted, and total expenses exceed
budget by about $1.3 million. Through
August, FedACH commercial
origination volume is 14.5 percent
higher than the same period last year.
For full-year 2005, the Reserve Banks
estimate that FedACH originations will
grow 12.7 percent, compared with the
budgeted growth of 7.7 percent.
2. 2006 Pricing
The Reserve Banks will reduce the
input file fee one-third, from $3.75 to
$2.50. This change is consistent with
2
Total expense
75.1
84.7
86.7
3
Net income
(ROE)[1-2]
64.0
72.8
78.3
the Reserve Banks’ long-term strategy to
decrease file fees. In addition, the
Reserve Banks will reduce the FedLine
Web notification of change fee 40
percent, from $0.50 to $0.30, to better
align the fee with that of similar
products.
The Reserve Banks project that the
FedACH service will recover 101.0
percent of total expenses and targeted
ROE in 2006. Total revenue is budgeted
to increase $2.1 million from the 2005
estimate, despite $1.6 million less in fee
revenue. The decrease in fee revenue is
offset by NICB revenue, which is $3.2
million larger than the 2005 estimate.
Based on industry projections, the
Reserve Banks estimate national ACH
commercial origination volume will
grow approximately 18 percent in 2006.
This growth is largely attributable to
volume increases associated with
electronic check conversion
11.1
11.8
8.4
4
Target roe
5
Recovery rate
after target roe
[1/(2+4)]
8.9
10.0
7.6
103.0%
102.2
101.0
applications, including checks
converted at lockboxes, and internet
initiated payments. The Reserve Banks,
however, have projected FedACH
commercial origination volume growth
of 7.6 percent in 2006 to reflect
continued volume shifts to the privatesector ACH operator.
Total expenses and targeted ROE are
budgeted to increase $3.1 million over
the 2005 estimate. The Reserve Banks
have budgeted increased costs for
product development and service
initiatives, such as FedACH risk
management services.
E. Fedwire Funds and National
Settlement Services
Table 9 below shows the 2004, 2005
estimate, and 2006 budgeted cost
recovery performance for the Fedwire
funds and national settlement services.
TABLE 9.—FEDWIRE FUNDS AND NATIONAL SETTLEMENT SERVICES PRO FORMA COST AND REVENUE PERFORMANCE
[$ millions]
1
Revenue
Year
2004 ..............................................................................
2005 (estimate) .............................................................
2006 (budget) ...............................................................
1. 2005 Estimate
For 2005, the Reserve Banks estimate
that the Fedwire funds and national
settlement services will recover 101.4
percent of total expenses and targeted
ROE, compared with a 2005 budgeted
recovery rate of 100.1 percent. Fedwire
funds achieved full cost recovery
despite lower-than-budgeted fee
revenue. Although the Reserve Banks
have experienced higher-than-expected
growth for online funds volume for
2005, most of the growth has been in the
lowest-priced tier. Through August,
online funds volume is 5.7 percent
higher than it was for the same period
last year. For full-year 2005, the Reserve
Banks estimate that online funds
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2
Total expense
57.1
64.9
69.3
50.6
56.1
60.0
volume will grow 5.3 percent, compared
with a budgeted growth of 2.8 percent.
Also offsetting the lower-than-budgeted
fee revenue is higher electronic
connection revenue and NICB, as well
as lower operating costs. With respect to
the national settlement service, the
Reserve Banks estimate that the volume
of settlement entries processed during
2005 will be 1.4 percent higher than the
2005 budget projection.
2. 2006 Pricing
The Reserve Banks will raise the
surcharge for offline transfers one-third,
from $15 to $20. The surcharge increase
more closely aligns the fee with the
costs of providing offline access to the
Fedwire funds service.
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3
Net income
(ROE) [1-2]
4
TABOET ROE
5
Recovery rate
after Target
ROE [1/(2+4)]
6.8
7.9
5.6
99.4%
101.4
105.6
6.5
8.8
9.3
In 2006, the Reserve Banks project
that Fedwire funds and national
settlement services will recover 105.6
percent of total expense and targeted
ROE. The Reserve Banks project 2006
total revenue to increase by $4.4 million
over the 2005 estimate primarily
because of the projected higher funds
transfer volume and higher NICB and
electronic connection revenue. Total
expenses for 2006 are expected to
increase $3.9 million from the 2005
estimate primarily because of security
and technology investments, including
the cost to migrate from legacy systems
to Internet protocol-based systems, and
further enhance resiliency. Online funds
transfer volume for 2006 is expected to
increase 3.0 percent compared with the
2005 estimate. National settlement
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service volume for 2006 is expected to
remain flat compared with the 2005
estimate.
F. Fedwire Securities Service
Table 10 below shows the 2004, 2005
estimate, and 2006 budgeted cost
recovery performance for the Fedwire
securities service.9
TABLE 10.—FEDWIRE SECURITIES SERVICE PRO FORMA COST AND REVENUE PERFORMANCE
[$ millions]
1
Revenue
Year
2004 .....................................................................................
2005 (estimate) ....................................................................
2006 (budget) .......................................................................
1. 2005 Estimate
For 2005, the Reserve Banks estimate
that the Fedwire securities service will
recover 101.3 percent of total expenses
and targeted ROE, compared with a
2005 budgeted recovery rate of 102.8
percent. The lower-than-budgeted
recovery is primarily attributable to $0.6
million in lower-than-expected fee
revenue associated with lower-thanexpected transaction volume. Through
August, online securities volume was
flat compared to the same period last
year. For full-year 2005, the Reserve
Banks estimate that online securities
volume will grow 1.1 percent, compared
with a budgeted growth of 2.0 percent.
2
Total expense
20.4
21.0
22.1
3
Net income
(ROE)[1-2]
17.0
17.9
19.1
The shortfall in fee revenue was offset
by higher-than-expected NICB revenue.
2. 2006 Pricing
The Reserve Banks will raise the
offline transfer origination and receipt
surcharge from $33 to $50, and the joint
custody origination surcharge from $35
to $40. The Reserve Banks will retain all
other fees at their current levels. The
surcharge increase more closely aligns
the fees with the costs of processing
these transactions.
The Reserve Banks project that the
Fedwire securities service will recover
105.9 percent of total expense and
targeted ROE in 2006. Total revenue is
projected to increase $1.1 million from
the 2005 estimate primarily because of
4
Target ROE
3.4
3.1
3.0
5
Recovery rate
after target
ROE [1/
(2+4)]%
2.9
2.9
1.8
102.6
101.3
105.9
higher NICB. Online securities volume
in 2006 is budgeted to be flat against the
2005 estimate. Offline securities volume
is projected to fall 9.0 percent against
the 2005 estimate. Total expenses are
expected to increase $1.2 million from
the 2005 estimate. In 2006, the Reserve
Banks plan to continue to invest in
security and technology projects to
enhance resiliency, migrate from legacy
systems to Internet protocol-based
systems, and implement changes in
payment system risk policy.
G. Noncash Collection Service
Table 11 below shows the 2004 and
2005 estimated cost recovery
performance for the noncash collection
service.
TABLE 11.—NONCASH COLLECTION PRO FORMA COST AND REVENUE PERFORMANCE
[$ millions]
1
Revenue
Year
2004 .....................................................................................
2005 (estimate) ....................................................................
1. 2005 Estimate
For 2005, the Reserve Banks estimate
that the noncash collection service will
recover 90.9 percent of total expenses
and targeted ROE, compared with the
budgeted recovery rate of 76.7 percent.
This greater-than-expected recovery is
due to lower-than-expected costs of
withdrawal. The Reserve Banks estimate
that, in 2005, noncash collection
volume will be 16.1 percent lower than
9 The Reserve Banks provide transfer services for
securities issued by the U.S. Treasury, federal
government agencies, government-sponsored
enterprises, and certain international institutions.
The priced component of this service, reflected in
this memorandum, consists of revenues, expenses,
and volumes associated with the transfer of all nonTreasury securities. For Treasury securities, the
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2
Total expense
1.9
1.2
3
Net income
(ROE) [1–2]
1.4
1.1
expected. Effective September 30, 2005,
the Reserve Banks stopped accepting
deposits of definitive municipal
securities from DIs. The Reserve Banks
plan to complete withdrawal from the
service effective December 30, 2005.
4
Target ROE
0.5
0.1
0.2
0.2
5
Recovery rate
after target
ROE [1/
(2+4)]%
120.3
90.9
H. Electronic Access
The Reserve Banks will no longer
offer the noncash collection service in
2006.
The Reserve Banks allocate the costs
and revenues associated with electronic
access methods to the Reserve Banks’
priced services.10 There are four types of
electronic access methods through
which DIs can access the Reserve Banks’
priced services: FedLine, FedMail,
FedPhone, and computer interface
(mainframe to mainframe).11 There are
three ways DIs currently use FedLine to
U.S. Treasury assesses fees for the securities
transfer component of the service. The Reserve
Banks assess a fee for the funds settlement
component of a Treasury securities transfer; this
component is not treated as a priced service.
10 Certain electronic access fees are recorded as
recoveries that offset the cost of providing these
services. These fees are for ancillary services, such
as training and vendor pass-through charges.
Therefore, these fees are not listed in the electronic
access 2006 fee schedule below.
11 Fedline, FedMail, and FedPhone are registered
servicemarks of the Reserve Banks. These
connections may also be used to access non-priced
services provided by the Reserve Banks.
2. 2006 Pricing
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access the Reserve Banks’ services:
FedLine Web, FedLine Advantage, or
FedLine DOS. Information services are
available through FedLine Web, while
transaction services are available
through FedLine Advantage or FedLine
DOS. For 2006, the Reserve Banks will
change to the FedLine DOS connection
fees as well as ancillary changes to
frame relay spare parts and training fees.
The Reserve Banks will discontinue
access to their services via FedLine DOS
effective September 30, 2006. The
Reserve Banks are migrating their
customers to a tiered, web-based access
structure. This migration is scheduled to
be completed by September 30. At that
time, FedLine customers will only be
able to access Reserve Banks services
via FedLine Web or FedLine Advantage.
In the interim, those customers that
have not yet migrated to web-based
access can continue to use FedLine
DOS. For those customers, the Reserve
Banks bundle a FedLine DOS
connection and a FedLine Web
connection into a single FedLine Select
package. In this arrangement, customers
use their FedLine DOS connection to
access transaction services and FedLine
Web to access information services. The
Reserve Banks will increase the fee for
FedLine Select from $200 to $400 per
month, beginning April 1, 2006, to
encourage customers to move to
FedLine Advantage before the
September 30, 2006, sunset date.
The Reserve Banks will also increase
the frame relay spare parts set fee and
in-person and over-the-phone training
fees. The fee increase for the frame relay
spare parts set, from $155 to $175, is
intended to ensure fee consistency with
the complete 56 kbps frame relay
product.12 The fee increase for over-thephone and in-person training, from $100
to $150 per session and $800 to $1,000
per session respectively, is intended to
encourage the use of online training
options that are offered at no cost.
II. Private-Sector Adjustment Factor
A. Background
Each year, as required by the
Monetary Control Act of 1980, the
Reserve Banks set fees for priced
services provided to depository
institutions. These fees are set to
recover, over the long run, all direct and
indirect costs and imputed costs,
including financing costs, taxes, and
certain other expenses, as well as return
12 The fee for the computer interface frame relay
56 kbps product is $1,000 per month. The fee for
the full circuit backup single equipment set is $825
per month which, when combined with the $175
per month spare parts set fee, is consistent with the
complete frame relay product.
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on equity (profit) that would have been
earned if a private business firm
provided the services. The imputed
costs and imputed profit are collectively
referred to as the PSAF. In a comparable
fashion, investment income is imputed
and netted with related direct costs
associated with clearing balances to
estimate NICB.
B. Private Sector Adjustment Factor
The method for calculating the
financing and equity costs in the PSAF
requires determining the appropriate
levels of debt and equity to impute and
then applying the applicable financing
rates. In this process, a pro forma priced
services balance sheet using estimated
Reserve Bank assets and liabilities
associated with priced services is
developed and the remaining elements
that would exist if the Reserve Banks’
priced services were provided by a
private business firm are imputed.
The amount of the Reserve Banks’
assets that will be used to provide
priced services during the coming year
is determined using Reserve Bank
information on actual assets and
projected disposals and acquisitions.
The priced portion of assets is
determined based on the allocation of
the related depreciation expense. The
priced portion of actual Reserve Bank
liabilities consists of balances held by
Reserve Banks for clearing priced
services transactions (clearing balances),
and other liabilities such as accounts
payable and accrued expenses.
Long-term debt is imputed only when
core clearing balances and long-term
liabilities are not sufficient to fund longterm assets or if the interest rate risk
sensitivity analysis, which measures the
interest rate effect of the difference
between interest rate sensitive assets
and liabilities, indicates that a 200 basis
point change in interest rates would
change cost recovery more than two
percentage points.13 Short-term debt is
imputed only when short-term
liabilities and clearing balances not
used to finance long-term assets are
insufficient to fund short-term assets.
Equity is imputed to meet the FDIC
definition of a well-capitalized
depository institution for insurance
premium purposes.14
13 A portion of clearing balances is used as a
funding source for priced services assets. Long-term
assets are partially funded from core clearing
balances, currently $4 billion. Core clearing
balances are considered the portion of the balances
that has remained stable over time without regard
to the magnitude of actual clearing balances.
14 The FDIC requirements for a well-capitalized
depository institution are 1) a ratio of total capital
to risk-weighted assets of 10 percent or greater; and
2) a ratio of Tier 1 capital to risk-weighted assets
of 6 percent or greater; and 3) a leverage ratio of
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1. Financing rates
Equity financing rates are based on
the target ROE result of the capital asset
pricing model (CAPM).15 In the CAPM,
the required rate of return on a firm’s
equity is equal to the return on a riskfree asset plus a risk premium. To
implement CAPM, the risk-free rate is
based on the three-month Treasury bill,
the beta is assumed to be equal to 1.0,
which approximates the risk of the
market as a whole, and the monthly
returns in excess of the risk-free rate
over the most recent 40 years are used
as the market risk premium. The
resulting ROE influences the dollar level
of the PSAF because this is the return
a shareholder would expect in order to
invest in a private business firm.
For simplicity, given that federal
corporate income tax rates are
graduated, state income tax rates vary,
and various credits and deductions can
apply, a specific income tax expense is
not calculated for Reserve Bank priced
services. Instead, the Board targets a
pretax ROE that would provide
sufficient income to fulfill its income
tax obligations.16 To the extent that the
actual performance results are greater or
less than the targeted ROE, income taxes
are adjusted using an imputed income
tax rate. The imputed income tax rate is
the median of the rates paid by the top
fifty bank holding companies (BHCs)
based on deposit balance over the past
five years adjusted to the extent that
they invested in tax-free municipal
bonds. Because the Reserve Banks
provide similar services through their
correspondent banking activities,
including payment and settlement
services, and equity is imputed to meet
the FDIC requirements of a wellcapitalized depository institution, using
a tax rate based on the top fifty BHCs
by deposit balance continues to be an
applicable and reasonable approach.
2. Other Costs
The PSAF also includes the estimated
priced services-related expenses of the
Board of Governors and imputed sales
taxes based on Reserve Bank estimated
expenditures. An assessment for FDIC
insurance, when required, is imputed
Tier 1 capital to total assets of 5 percent or greater.
The Federal Reserve priced-services balance sheet
total capital has no components of Tier 1 or total
capital other than equity; therefore, requirements 1
and 2 are essentially the same measurement.
15 In October, the Board approved changes to the
methodology used to derive the pretax ROE from
using the average of the results of three analytical
models, the comparable accounting earnings model
(CAE), the discounted cash-flow model (DCF), and
the CAPM, to using only the CAPM (70 FR 60341,
October 17, 2005).
16 Other taxes are included in price-services
actual or imputed costs.
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based on current FDIC rates and
projected clearing balances held with
the Federal Reserve.
C. Net Income on Clearing Balances
The NICB calculation is made each
year along with the PSAF calculation
and is based on the assumption that
Reserve Banks invest clearing balances
net of imputed reserve requirements and
balances used to finance priced-services
assets. Based on these net clearing
balance levels, Reserve Banks impute a
constant spread, determined by the
return on a portfolio of investments,
over the three-month Treasury bill
rate.17 18 The calculation also involves
determining the priced services cost of
earnings credits (amounts available to
offset service fees) on contracted
clearing balances held, net of expired
earnings credits, based on a discounted
Treasury bill rate. Rates and clearing
balance levels used in the NICB estimate
are based on the most recent rates and
clearing balance levels.19 Because
clearing balances are held for clearing
priced services transactions or offsetting
priced services fees, they are directly
related to priced services. The net
earnings or expense attributed to the
investments and the cost associated
with holding clearing balances,
therefore, are considered net income for
priced services activities.
the estimated level of clearing balances
held, are offset by an increase in items
in process of collection due to higher
estimated float receivables. As a result
of consolidation and restructuring of
several System priced services
functions, furniture and equipment and
bank premises assets are expected to
decrease $59.5 million in 2006.
As shown in table 13, the assets
financed through the PSAF have
decreased. Short-term assets funded
with short-term payables and clearing
balances total $28.4 million. This
represents a $10.5 million decrease from
the short-term assets funded in 2005
due to an increase in expected shortterm payables. Long-term assets funded
with long-term liabilities, equity, and
core clearing balances are projected to
total $291.1 million. This represents a
decrease of $70.6 million from the longterm assets funded in 2005 because
long-term assets have decreased.
2. Debt and Equity Costs and Taxes
The estimated 2006 Federal Reserve
assets, reflected in table 12, have
increased $0.3 million. The decline in
imputed investments in marketable
securities of $546.0 million and in
imputed reserve requirements of $69.7
million, which are imputed based on
As previously mentioned, core
clearing balances are available as a
funding source for priced service assets.
Table 13 shows that $319.5 million in
clearing balances is used to fund priced
services assets in 2006. The interest rate
sensitivity analysis in table 14 indicates
that a 200 basis point decrease in
interest rates affects the ratio of ratesensitive assets to rate-sensitive
liabilities and produces a decrease in
cost recovery of 1.2 percentage points,
while an increase of 200 basis points in
interest rates increases cost recovery by
1.1 percentage points. The established
threshold for a change in cost recovery
is two percentage points; therefore,
interest rate risk associated with using
these balances is within acceptable
levels and no long-term debt is imputed.
Table 15 shows the imputed PSAF
elements, the pretax ROE, and other
required PSAF costs for 2005 and 2006.
The decrease in ROE lowers the
estimated cost of equity in 2006. Sales
taxes decreased from $8.2 million in
2005 to $7.7 million in 2006. The
effective income tax rate used in 2006
increased to 29.8 percent from 29.6
percent in 2005. The priced service
portion of the Board’s expenses
17 The investment portfolio is composed of
investments comparable to a BHC’s investment
holdings, such as short-term Treasury securities,
government agency securities, commercial paper,
long-term corporate bonds, and money market
funds. See table 16 for the investments imputed in
2006.
18 NICB is projected to be $102.8 million for 2006
using a constant spread of 35 basis points over the
three-month Treasury bill, and applying this rate to
D. Discussion
The decrease in the 2006 PSAF is
primarily due to the decrease in ROE,
which results in a decrease in the cost
of equity. Although clearing balances on
which investments are imputed
decreased, a similar offsetting increase
in items in process of collection results
in a small increase in total assets.
Because equity is imputed at 5 percent
of total assets, this small change in
assets causes equity to remain
unchanged from 2005.
1. Asset Base
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68057
increased $0.9 million from $6.6 million
in 2005 to $7.5 million in 2006.
3. Capital Adequacy and FDIC
Assessment
As shown in table 12, the amount of
equity imputed for the 2006 PSAF is
$808.0 million, unchanged from the
imputed equity in 2005. As noted above
and shown in table 16, equity is based
on 5 percent of total assets and is greater
than 10 percent of risk-weighted assets,
as required by the FDIC definition of a
well-capitalized depository institution
for insurance premium purposes. In
2006, the capital to total assets ratio and
the capital to risk-weighted asset ratio
both meet or exceed regulatory
guidelines. As a result, no FDIC
assessment is imputed for 2006.
III. Analysis of Competitive Effect
All operational and legal changes
considered by the Board that have a
substantial effect on payments system
participants are subject to the
competitive impact analysis described
in the March 1990 policy, ‘‘The Federal
Reserve in the Payments System.’’ 20
Under this policy, the Board assesses
whether the proposed 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
because of differing legal powers or
constraints or because of a dominant
market position deriving from such legal
differences. If the change creates such
an effect, the Board must further
evaluate the change to assess whether
its benefits—such as contributions to
payment system efficiency, payment
system integrity, or other Board
objectives—can be retained while
minimizing the adverse effect on
competition.
The Board believes that the 2006 fees,
fee structures, or changes in service will
not have a direct and material adverse
effect on the ability of other service
providers to compete effectively with
the Reserve Banks in providing similar
services. The changes will permit the
Reserve Banks to earn an ROE that is
comparable to the returns of the overall
market.
BILLING CODE 6210–01–P
the clearing balance levels used in the 2006 pricing
process. The 2005 NICB estimate is $73.8 million.
19 July 2005 rates and balances were used to
estimate the 2006 NICB.
20 Federal Reserve Regulatory Service (FRRS) 9–
1558.
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68068
Federal Register / Vol. 70, No. 216 / Wednesday, November 9, 2005 / Notices
By order of the Board of Governors of the
Federal Reserve System, November 2, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 05–22224 Filed 11–8–05; 8:45 am]
BILLING CODE 6210–01–C
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
National Toxicology Program (NTP);
Liaison and Scientific Review Office;
Meeting of the Scientific Advisory
Committee on Alternative
Toxicological Methods (SACATM)
National Institute of
Environmental Health Sciences
(NIEHS), National Institutes of Health
(NIH), HHS.
ACTION: Meeting announcement and
request for comment.
AGENCY:
SUMMARY: Pursuant to section 10(a) of
the Federal Advisory Committee Act, as
amended (5 U.S.C. Appendix 2), notice
is hereby given of a meeting of the
SACATM on December 12, 2005. The
meeting is scheduled from 8:30 a.m. to
adjournment (~5 p.m.) and is open to
the public with attendance limited only
by the space available. SACATM
advises the Interagency Coordinating
Committee on the Validation of
Alternative Methods (ICCVAM), the
NTP Interagency Center for the
Evaluation of Alternative Toxicological
Methods (NICEATM), and the Director
of the NIEHS regarding statutorily
mandated duties of ICCVAM and
activities of NICEATM. SACATM
provides advice on priorities and
activities related to the development,
validation, scientific review, regulatory
acceptance, implementation, and
national and international
harmonization of new, revised, and
alternative toxicological test methods.
Additional information about SACATM,
including the charter, roster, and
records of past meetings can be found at
https://ntp.niehs.nih.gov/ see ‘‘Advisory
Board & Committees.’’
DATES: The SACATM meeting will be
held on December 12, 2005. All
individuals who plan to attend are
encouraged to register online at the NTP
Web site by December 5, 2005, at http:/
/ntp.niehs.nih.gov/ select ‘‘Advisory
Boards & Committees.’’ In order to
facilitate planning for this meeting,
persons wishing to make an oral
presentation are asked to notify the
Executive Secretary for SACTAM via
online registration, phone, or e-mail by
December 5, 2005, (see ADDRESSES
below). Written comments should also
be received by December 5, 2005, to
VerDate jul<14>2003
16:18 Nov 08, 2005
Jkt 208001
enable review by SACATM and NTP
staff prior to the meeting.
ADDESSES: The SACATM meeting will
be held at the Hilton Alexandria Old
Town, 1767 King Street, Alexandria, VA
22314. Public comments and other
correspondence should be directed to
Dr. Kristina Thayer, Executive Secretary
for SACATM (NTP Liaison and
Scientific Review Office, NIEHS, P.O.
Box 12233, MD A3–01, Research
Triangle Park, NC 27709; telephone:
919–541–5021, fax: 919–541–0295; or email: thayer@niehs.nih.gov). Persons
needing special assistance, such as sign
language interpretation or other
reasonable accommodation in order to
attend, should contact 919–541–2475
voice, 919–541–4644 TTY (text
telephone), through the Federal TTY
Relay System at 800–877–8339, or by email to niehsoeeo@niehs.nih.gov.
Requests should be made at least 7 days
in advance of the event.
SUPPLEMENTARY INFORMATION:
Preliminary Agenda and Availability of
Meeting Materials
A preliminary agenda is provided
below. Additional background material
will be posted on the NTP Web site as
available at https://ntp.niehs.nih.gov/ see
‘‘Advisory Board & Committees’’ or
available upon request (see ADDRESSES
above). Following the meeting,
summary minutes will be prepared and
available at this Web site and upon
request.
Preliminary Agenda, Scientific
Advisory Committee on Alternative
Toxicological Methods, December 12,
2005, Hilton Alexandria Old Town,
1767 King Street, Alexandria, VA 22314.
8:30 a.m.
• Call to Order, Introductions, and
Recognition of Retiring Members.
• NICEATM and ICCVAM Update.
• Overview of the May 2005 Ocular
Toxicity Scientific Symposia.
Æ Mechanisms of Chemically-Induced
Ocular Injury and Recovery.
Æ Reducing Pain and Distress in
Ocular Safety Testing.
• Performance Characteristics of the
In Vivo Ocular Irritancy Test.
Æ Public Comment.
• ICCVAM Evaluation of In Vitro
Methods to Identify Ocular Sever
Irritants and Corrosives: Report from the
Expert Panel (Presentation).
Æ Bovine Corneal Opacity and
Permeability (BCOP) Assay.
Æ Isolated Chicken Eye (ICE) Assay.
Æ Isolated Rabbit Eye (IRE) Assay.
Æ Hen’s Egg Test—Chorion Allantoic
Membrane (HET–CAM) Assay.
Æ Reference Chemicals.
12 p.m.
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
68069
LUNCH BREAK.
1 p.m.
• ICCVAM Evaluation of In Vitro
Methods to Identify Ocular Severe
Irritants and Corrosives: Report from the
Expert Panel Continued.
Æ Public Comment.
• ICCVAM Nominations.
Æ Public Comment.
• ICCVAM–NICEATM–ECVAM
Workshop on Validation Principles and
Approaches for Toxicogenomic-based
Method.
Æ Public Comment.
• ECVAM Update.
• SACATM General Discussion.
~5 p.m.
ADJOURN.
Request for Comments
Public input at this meeting is invited
and time is set aside for the presentation
of public comments. Each organization
is allowed one time slot per public
comment period. At least 7 minutes will
be allotted to each speaker, and if time
permits, may be extended to 10 minutes.
Registration for oral comments will also
be available on-site, although time
allowed for presentation by on-site
registrants may be less than that for preregistered speakers and will be
determined by the number of persons
who register at the meeting.
Persons registering to make oral
comments are asked, if possible, to send
a copy of their statement to the
Executive Secretary for SACATM (see
ADDRESSES above) by December 5, 2005,
to enable review by SACATM and
NIEHS/NTP staff prior to the meeting.
Written statements can supplement and
may expand the oral presentation. If
registering on-site and reading from
written text, please bring 40 copies of
the statement for distribution and to
supplement the record. Written
comments received in response to this
notice will be posted on the NTP Web
site. Persons submitting written
comments should include their name,
affiliation, mailing address, phone, fax,
e-mail, and sponsoring organization (if
any) with the document.
Background Information on SACATM
The SACATM was established
January 9, 2002, to fulfill section 3(d) of
Public Law 106–545, the ICCVAM
Authorization Act of 2000 [42 U.S.C.
285l–3(d)] and is composed of scientists
from the public and private sectors
(Federal Register: March 13, 2002: Vol.
67, No. 49, page 11358). The SACATM
provides advice to the Director of the
NIEHS, ICCVAM, and NICEATM
regarding statutorily mandated duties of
ICCVAM and activities of NICEATM.
Additional information about SACATM,
E:\FR\FM\09NON1.SGM
pfrm13
PsN: 09NON1
]]>Agencies
[Federal Register Volume 70, Number 216 (Wednesday, November 9, 2005)]
[Notices]
[Pages 68049-68069]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-22224]
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
[Docket No. OP-1241]
Federal Reserve Bank Services
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Board has approved the 2006 fee schedules for Federal
Reserve priced services and electronic access and a private-sector
adjustment factor (PSAF) for 2006 of $117.7 million. These actions were
taken in accordance with the requirements of the Monetary Control Act
of 1980, which requires that, over the long run, fees for Federal
Reserve priced services be established on the basis of all direct and
indirect costs, including the PSAF. The Board has also approved
maintaining the current earnings credit rate on clearing balances.
DATES: The new fee schedules become effective January 3, 2006, except
the FedLine Select electronic connection fees, which become effective
April 1, 2006.
FOR FURTHER INFORMATION CONTACT: For questions regarding the fee
schedules: Jack K. Walton II, Associate Director (202/452-2660); Jeremy
R. Mandell, Financial Services Analyst (202/452-2842), Division of
Reserve Bank Operations and Payment Systems. For questions regarding
the PSAF and earnings credits on clearing balances: Gregory L. Evans,
Assistant Director, (202/452-3945); Brenda L. Richards, Manager,
Financial Accounting (202/452-2753); or Jonathan Mueller, Financial
Analyst (202/530-6291), Division of Reserve Bank Operations and Payment
Systems. For users of Telecommunications Device for the Deaf (TDD)
only, please call 202-263-4869. Copies of the 2006 fee schedules for
the check service are available from the Board, the Federal Reserve
Banks, or the Reserve Banks' financial services Web site at
www.frbservices.org.
SUPPLEMENTARY INFORMATION:
I. Priced Services
A. Discussion
From 1995 through 2004, the Reserve Banks recovered 97.5 percent of
their total expense (including special project costs and imputed
expenses) and targeted after-tax profits or return on equity (ROE) for
providing priced services.\1\
---------------------------------------------------------------------------
\1\ These imputed expenses, such as taxes that would have been
paid, and the return on equity that would have to be earned had the
services been furnished by a private business firm, are referred to
as the PSAF. The ten-year recovery rate is based upon the pro forma
income statements for Federal Reserve Banks' priced services
published in the Board's Annual Report.
---------------------------------------------------------------------------
Table 1 summarizes 2004, 2005 estimated, and 2006 budgeted cost
recovery rates for all priced services. Cost recovery is estimated to
be 103.6 percent in 2005 and budgeted to be 102.5 percent in 2006. The
performance of the check service heavily influences the aggregate cost
recovery rates and accounts for approximately 80 percent of the total
cost of priced services. The electronic services (FedACHSM,
the Fedwire[supreg] funds service and national settlement service
(NSS), and the Fedwire[supreg] securities service) account for
approximately 20 percent of total costs.\2\ The noncash collection
service represents a de minimis amount of total costs and, by year-end
2005, the Reserve Banks will exit the service.
---------------------------------------------------------------------------
\2\ FedACh and Fedwire are registered servicemarks of the
Reserve Banks.
Table 1.--Aggregate Priced Services Pro Forma Cost and Revenue Performance a
[$ millions]
----------------------------------------------------------------------------------------------------------------
5 Recovery
2c Total 3 Net income 41d Target rate after
Year 1b Revenue expense (Roe) [1-2] ROE target ROE [1/
(2+4)]
----------------------------------------------------------------------------------------------------------------
2004............................ 914.6 842.6 72.0 112.4 95.8%
2005 (estimate)................. 958.2 821.8 136.4 102.9 103.6%
2006 (budget)................... 911.1 817.1 94.0 72.0 102.5%
----------------------------------------------------------------------------------------------------------------
a Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding.
b Revenue includes net income on clearing balances (NICB). Clearing balances are assumed to be invested in a
broad portfolio of investments, such as Treasury securities, government agency securities, commercial paper,
municipal and corporate bonds, and money market and mutual funds. To impute income, a constant spread is
determined from the historical average return on this portfolio and applied to the rate used to determine the
cost of clearing balances. NICB equals the imputed income from these investments less earnings credits granted
to holders of clearing balances. The cost of earnings credits is based on the discounted three-month Treasury
bill rate.
c The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses
include taxes, FDIC insurance, Board of Governors' priced services expenses, the cost of float, and interest
on imputed debt, if any. Credits or debits related to the accounting for pensions under FAS 87 are also
included.
d Target ROE is the after-tax ROE included in the PSAF. The 2006 target return on equity is lower than it has
been historically because of a Board-approved change to the method used to calculate the targeted return on
equity.
Table 2 presents an overview of the 2004, 2005 budget, 2005
estimate, and 2006 budget cost recovery performance by priced service.
[[Page 68050]]
Table 2.--Priced Services Cost Recovery
[percent]
----------------------------------------------------------------------------------------------------------------
Priced service 2004 2005 Budget 2005 Estimate 2006 Budgeta
----------------------------------------------------------------------------------------------------------------
All services.................................... 95.8 100.1 103.6 102.5
Check........................................... 94.6 100.3 104.0 102.3
FedACH.......................................... 103.0 100.4 102.2 101.0
Fedwire funds and NSS........................... 99.4 100.1 101.4 105.6
Fedwire securities.............................. 102.6 102.8 101.3 105.9
Noncash collection.............................. 120.3 76.7 90.9 n.a.
----------------------------------------------------------------------------------------------------------------
a 2006 budget figures reflect the latest data from Reserve Banks. The Reserve Banks will transmit final budget
data to the Board in November 2005, for Board approval in mid-December 2005.
n.a.--not applicable
1. 2005 Estimated Performance
In 2005, the Reserve Banks estimate that they will recover 103.6
percent of the costs of providing priced services, including imputed
expenses and targeted ROE, compared with a budgeted recovery rate of
100.1 percent, as shown in table 2. The Reserve Banks estimate that all
services will achieve full cost recovery with the exception of the
noncash collection service, from which the Reserve Banks will exit by
year end. The Reserve Banks estimate that they will fully recover
actual and imputed expenses and earn net income of $136.4 million
compared with the target of $102.9 million. This greater-than-expected
net income is largely driven by greater-than-expected (1) check
volumes, (2) cost savings associated with the Reserve Banks' check
restructuring efforts, and (3) net income on clearing balances (NICB).
The decline in paper check volume continues to have a significant
effect on the Reserve Banks priced services.\3\ Check use nationwide
has been declining, in part because of the increased use of debit and
credit cards, as well as the growing trend for merchants, billers, and
others to covert checks into automated clearinghouse (ACH)
transactions. These factors have led to a general decline in the
interbank clearing of checks, including clearings through the Reserve
Banks. In this environment, to meet their cost recovery objectives, the
Reserve Banks have undertaken efforts to reduce the costs associated
with the check service, including reducing the number of check
processing sites from forty-five in 2003 to twenty-two by the end of
2006.
---------------------------------------------------------------------------
\3\ The Federal Reserve's 2004 retail payments research
indicated that the total number of checks paid declined at an
average annual rate of 4.3 percent from 2000 to 2003. This rate of
decline is greater than 3.3 percent average annual rate estimated to
have occurred from 1995 to 2000. See Gerdes, Geoffrey R. and Jack K.
Walton II, ``Trends in the Use of Payment Instruments in the United
States,'' Federal Reserve Bulletin, Spring 2005, pp. 180-201. (See
https://www.federalreserve.gov/pubs/bulletin/2005/spring05_
payment.pdf.)
---------------------------------------------------------------------------
2. 2006 Projected Performance
For 2006, the Reserve Banks project a priced services cost recovery
rate of 102.5 percent. The 2006 fees for priced services are projected
to result in a net income of $94.0 million, or $22.0 million more than
needed to achieve full cost recovery. The major risks to the Reserve
Banks' ability to achieve their budget targets are a greater decline in
the Reserve Banks' check volume than the projected 13.8 percent,
unanticipated problems with check office restructurings that could
result in significant cost overruns, and greater-than-expected
electronic payments volume loss to competitors. In light of these
risks, the Reserve Banks will continue to refine their business and
operational strategies to improve efficiency and reduce excess capacity
and other costs. These strategies will position the Reserve Banks to
achieve their financial and payment system objectives and statutory
requirements over the long run.
3. 2006 Pricing
The following summarizes the changes in the Reserve Banks' fee
schedules for priced services in 2006:
Check
The Reserve Banks will raise paper check fees for forward-
collection check products 5.3 percent, return-check products 5.4
percent, and payor bank check products 5.3 percent.
The Reserve Banks will decrease Check 21 fees for
FedForward products 13.8 percent and to offer incentives to customers
to use FedReceipt products.
With the 2006 fee change, the price index for the check
service will have increased 49 percent since 1997.
FedACH
The Reserve Banks will reduce the input file fee one-third
and the FedLine Web origination returns and notification of change fee
40 percent.
With the 2006 fee change, the price index for the FedACH
service will have decreased 63 percent since 1997.
Fedwire funds and national settlement
The Reserve Banks will raise the surcharge for offline
funds transfers by one-third.
With the 2006 fee change, the price index for the Fedwire
funds and national settlement services will have decreased 57 percent
since 1997.
Fedwire securities
The Reserve Banks will raise the surcharge for offline
securities transfers 51.5 percent and the joint custody fee 14.3
percent.
With the 2006 fee change, the price index for the Fedwire
securities service will have decreased 47 percent since 1997.
4. 2006 Price Index
Figure 1 compares indexes of fees for the Reserve Banks' priced
services with the GDP price deflator. Compared with the price index for
2005, the price index for all Reserve Bank priced services is projected
to increase 3.0 percent in 2006. The price index for electronic payment
services, as well as electronic access to Reserve Banks' priced
services, is projected to decrease 1.0 percent in 2006. The price index
for the paper-based payments services is projected to increase 5.4
percent in 2006. When projecting out to 2006, the price index for all
priced services has increased a total of 12.1 percent since 1997. In
comparison, from 1997 through 2004, the GDP deflator increased 14.4
percent.
BILLING CODE 6210-01-P
[[Page 68051]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.053
B. Earnings Credits on Clearing Balances
The Board has approved maintaining the current rate of 80 percent
of the three-month Treasury bill rate to calculate earnings credits on
clearing balances.\4\ The Reserve Banks will continue to calculate
earnings credits for the marginal reserve requirement adjusted portion
of clearing balances at the federal funds rate.\5\
---------------------------------------------------------------------------
\4\ Two adjustments are applied to the earnings credit rate so
that the return on clearing balances at the Federal Reserve is
comparable to what the DI would have earned had it maintained the
same balances at a private-sector correspondent. The ``imputed
reserve requirement'' adjustment is made because a private-sector
correspondent would be required to hold reserves against the
respondent's balance with it. As a result, the correspondent would
reduce the balance on which it would base earnings credits for the
respondent because it would be required to hold a portion,
determined by its marginal reserve ratio, in the form of non-
interest-bearing reserves. For example, if a DI held $1 million in
clearing balances with a correspondent bank and the correspondent
had a marginal reserve ratio of 10 percent, then the correspondent
bank would be required to hold $100,000 in reserves, and it would
typically grant credits to the respondent based on 90 percent of the
balance, or $900,000. This adjustment imputes a marginal reserve
ratio of 10 percent to the Reserve Bank.
The ``marginal reserve requirement'' adjustment accounts for the
fact that the respondent can deduct balances maintained at a
correspondent, but not the Federal Reserve, from its reservable
liabilities. This reduction has value to the respondent when it
frees up balances that can be invested in interest-bearing
instruments, such as federal funds. For example, a respondent
placing $1 million with a correspondent rather than the Federal
Reserve would free up $30,000 if its marginal reserve ratio were 3
percent.
The formula used by the Reserve Banks to calculate earnings
credits can be expressed as
e = [ b * (1-FRR) * r] + [ b * (MRR) * f]
Where e is total earnings credits, b is the average clearing
balance maintained, FRR is the assumed Reserve Bank marginal reserve
ratio (10 percent), r is the earnings credit rate, MRR is the
marginal reserve ratio of the DI holding the balance (either 0
percent, 3 percent, or 10 percent), and f is the average federal
funds rate. A DI that meets its reserve requirement entirely with
vault cash is assigned a marginal reserve requirement of zero.
\5\ This calculation adjusts earnings credits as though account
holders could adjust their reserve requirement for a ``due from
deduction'' for clearing balances held with a Reserve Bank.
---------------------------------------------------------------------------
Clearing balances were introduced in 1981, as a part of the Board's
implementation of the Monetary Control Act, to facilitate access to
Federal Reserve priced services by institutions that did not have
sufficient reserve balances to support the settlement of their payment
transactions. Beginning in 2004, the earnings credit calculation was
changed from using the federal funds rate to using a percentage
discount on a rolling thirteen-week average of the annualized coupon
equivalent yield of three-month Treasury bills in the secondary market
to better align Federal Reserve policy with market practice. Earnings
credits can be used only to offset charges for priced services, are
calculated monthly, and expire if not used within one year.\6\
---------------------------------------------------------------------------
\6\ A band is established around the contracted clearing balance
to determine the maximum balance on which credits are earned as well
as any deficiency charges. The clearing balance allowance is 2
percent of the contracted amount, or $25,00, whichever is greater.
Earnings credits are based on the period-average balance maintained
up to a maximum of the contracted amount plus the clearinig balance
allowance. Deficiency charges apply when the average balance fals
below the contracted amount less the allowance, although credits are
still earned on the average maintained balance.
---------------------------------------------------------------------------
C. Check Service
Table 3 below shows the 2004, 2005 estimate, and 2006 budgeted cost
recovery performance for the check service.
[[Page 68052]]
Table 3.--Check Pro Forma Cost and Revenue Performance
[$ millions]
----------------------------------------------------------------------------------------------------------------
5 Recovery
2 Total 3 Net income rate after
Year 1 Revenue expense (ROE) [1-2] 4 Target Roe target ROE [1/
(2+4)]
----------------------------------------------------------------------------------------------------------------
2004............................ 760.2 709.6 50.2 93.6 94.6%
2005 (estimate)................. 786.4 673.9 112.5 82.0 104.0
2006 (budget)................... 732.9 659.6 73.4 57.0 102.3
----------------------------------------------------------------------------------------------------------------
1. 2005 Estimate
For 2005, the Reserve Banks estimate that the check service will
recover 104.0 percent of total expenses and targeted ROE, compared with
the budgeted recovery rate of 100.3 percent. The Reserve Banks expect
to recover all actual and imputed expenses of providing check services
and earn net income of $112.5 million (see table 3).
The higher-than-budgeted cost recovery is the result of higher-
than-expected revenue of $53.7 million that was partially offset by
higher-than-expected expenses of $24.0 million. The higher revenue is
due to greater-than-budgeted check volumes, customer use of a higher
priced product mix, greater-than-expected NICB, and explicit float
revenue. The higher costs were largely due to the cost of processing
greater-than-expected paper check volume and higher personnel costs
related to Check 21 substitute check printing.
The greater-than-expected paper check volume can be attributed to
the slower-than-expected adoption of Check 21 products and lower-than-
anticipated volume losses resulting from check office restructurings.
For full-year 2005, the Reserve Banks estimate that paper forward-
collection check volume will decline 12.0 percent, compared with a
budgeted decline of 14.6 percent. The Reserve Banks expect that paper
return check volume will decline 24.4 percent for the full year,
compared with a budgeted decline of 27.0 percent.
Table 4.--Paper Check Product Volume Changes
[percent]
----------------------------------------------------------------------------------------------------------------
Actual change
Budgeted 2005 through Estimated 2005
change August 2005 change
----------------------------------------------------------------------------------------------------------------
Total forward-collection a
Forward-processed........................................... (14.7) (11.2) (10.9)
Fine-sort a................................................. (10.1) (21.6) (31.9)
Returns......................................................... (27.0) (19.5) (24.4)
----------------------------------------------------------------------------------------------------------------
a These rates exclude electronic fine-sort volume. Including the electronic fine-sort product, fine-sort volume
was budgeted to decline 42.6 percent in 2005 and is now estimated to decline 33.7 percent.
While electronic check presentment volumes are expected to decline
for full-year 2005 (see table 5), the share of electronic checks that
the Reserve Banks present is expected to increase. Through August 2005,
the Reserve Banks presented approximately 26.2 percent of their checks
electronically, which represents an increase from 24.6 percent in 2004.
In addition to electronic check presentment, through August 2005, the
Reserve Banks captured images for about 12.3 percent of all checks they
collected.
Table 5.--Electronic Check Product Share
[percent]
----------------------------------------------------------------------------------------------------------------
2005 actual
2004 through August 2005 estimated
----------------------------------------------------------------------------------------------------------------
Truncation a.................................................... 5.8 6.7 6.2
Non-truncation (Electronic Check Presentment) a................. 18.8 19.5 19.3
Electronic check information.................................... 6.3 6.0 6.1
Images.......................................................... 11.0 12.3 12.1
----------------------------------------------------------------------------------------------------------------
a ECP consists of truncated and non-truncated checks. Non-truncated checks include checks presented through the
MICR presentment and MICR presentment plus products.
2. 2006 Pricing
In 2006, the Reserve Banks project that the check service will
recover 102.3 of total expenses and targeted ROE.
The Reserve Banks plan to maintain full cost recovery by continuing
to streamline check processing and administrative activities across the
System as well as by increasing Check 21 volume. A number of cost
reduction initiatives have been identified and are currently in various
stages of implementation. These initiatives include eliminating six
more check processing sites by the end of 2006 and working to reduce
various check support functions such as check adjustments and check
automation
[[Page 68053]]
services in response to the declining volume.\7\
---------------------------------------------------------------------------
\7\ In February 2003, the Reserve Banks announced an initiative
to reduce the number of check processing locations from forty-five
to thirty-two. In August 2004 and May 2005, the Reserve Banks
announced two further rounds of restructurings. By the end of these
announced restructurings in 2006, the Reserve Banks will have
twenty-two check processing locations.
---------------------------------------------------------------------------
Total expenses are projected to decline by $14.3 million, a decline
of 2.1 percent when compared with the 2005 estimate. This decline is
primarily attributable to lower local operating costs due to efficiency
improvements at restructuring sites and declines in projected 2006
volumes. These lower costs are partially offset by higher temporary
costs associated with further check restructuring and additional costs
to support Check 21 products.
Revenue is projected to be $732.9 million, a decline of 6.8 percent
compared to the 2005 estimate. This decline is driven by a $75.9
million, or 10.7 percent, decline in fee revenue that is offset by a
$22.3 million increase in NICB. In 2006, the Reserve Banks project that
paper check volume for forward products will decrease 13.9 percent,
volume for return products will decrease 23.9 percent, and volume for
payor bank products will decrease 20.4 percent. These expected volume
declines will be partially offset by a projected increase in Check 21
volume.
Check 21 products have been offered for about one year, and the
Reserve Banks anticipate significant growth in 2006 (see table 6).\8\
The Reserve Banks project that FedForward volume will more than double,
FedReturn volume will more than triple, and FedReceipt volume will
increase almost twelvefold. The Reserve Banks have projected an
increase in the 2006 Check 21 volume that will result in a doubling of
Check 21 product revenue, to about $44 million. Board and Reserve Bank
staff believe that the key to realizing Check 21 cost efficiencies for
the System is the widespread acceptance of FedReceipt by paying banks.
---------------------------------------------------------------------------
\8\ The Reserve Banks' Check 21 product suite includes
FedForward, FedReturn, and FedReceipt. FedForward is the electronic
alternative to forward check collection; FedReturn is the electronic
alternative to return items; and FedReceipt is electronic receipt of
Check 21 items.
Table 6.--Check 21 Volume
------------------------------------------------------------------------
2006 Budgeted
volume Growth from
[millions of 2005 estimate
items] [percent]
------------------------------------------------------------------------
FedForward.............................. 431.8 138.5
FedReturn............................... 15.2 206.7
FedReceipt.............................. 57.5 1,084.3
------------------------------------------------------------------------
In 2006, the Reserve Banks will continue to encourage the adoption
of electronic check collection and presentment alternatives through
modest price increases to paper check products and price reductions for
some electronic products. The price increases for paper products
generally are expected to be distributed across most product
categories, with generally higher price increases for nonstrategic
product lines. The Reserve Banks will also narrow the price ranges for
similar products across the System. In addition, the Reserve Banks will
offer depository institutions (DIs) greater incentives to deposit
checks electronically and to accept image presentments. Longer term, as
the use of Check 21-related products increases, the pricing of paper
products may be strategically raised to encourage further adoption of
electronic check collection and presentment alternatives.
For 2006, the Reserve Banks are targeting an overall price increase
for paper check services of 5.3 percent (see table 7). This increase
consists of a 5.3 percent increase in forward check-collection fees,
which is composed of a 4.9 percent increase in forward cash letter fees
and a 5.4 percent increase in per-item fees. Fees for return services
will increase by 5.4 percent, which is composed of a 5.9 percent
increase in return cash letter fees and a 5.3 percent increase in per-
item fees. The average volume-weighted fees for payor bank services
will increase 5.3 percent.
Table 7.--2006 Fee Changes
[percent]
------------------------------------------------------------------------
Product Fee change
------------------------------------------------------------------------
Paper Check............................................. 5.3
Forward-collection.................................. 5.3
Cash Letter..................................... 4.9
Item............................................ 5.4
Returns............................................. 5.4
Cash Letter..................................... 5.9
Item............................................ 5.3
Payor bank services..................................... 5.3
Truncation.......................................... 1.8
Non-truncation (electronic check presentment)....... 14.5
Electronic check information........................ 13.8
Images.............................................. (1.0)
Check 21
FedForward.......................................... (13.8)
FedReturn........................................... 0.0
FedReceipt.......................................... ($.002) a
------------------------------------------------------------------------
a FedReceipt customers will receive a $0.002 discount per check
presented. The discount can be used to offset other check service fees
incurred by FedReceipt customers.
The primary risk to meeting the budgeted 2006 cost recovery is
higher-than-expected paper check volume declines. Other risks include
unanticipated problems with check office restructurings or other major
initiatives that may result in significant cost overruns.
D. FedACH Service
Table 8 below shows the 2004, 2005 estimate, and 2006 budgeted cost
recovery performance for the commercial FedACH service.
[[Page 68054]]
Table 8.--FedACH Pro Forma Cost and Revenue Performance
[$ millions]
----------------------------------------------------------------------------------------------------------------
5 Recovery
2 Total 3 Net income rate after
Year 1 Revenue expense (ROE)[1-2] 4 Target roe target roe [1/
(2+4)]
----------------------------------------------------------------------------------------------------------------
2004............................ 75.1 64.0 11.1 8.9 103.0%
2005 (estimate)................. 84.7 72.8 11.8 10.0 102.2
2006 (budget)................... 86.7 78.3 8.4 7.6 101.0
----------------------------------------------------------------------------------------------------------------
1. 2005 Estimate
For 2005, the Reserve Banks estimate that the FedACH service will
recover 102.2 percent of total expenses and targeted ROE, compared with
the budgeted recovery rate of 100.4 percent. Total revenue is estimated
to be $2.6 million greater than the amount budgeted, and total expenses
exceed budget by about $1.3 million. Through August, FedACH commercial
origination volume is 14.5 percent higher than the same period last
year. For full-year 2005, the Reserve Banks estimate that FedACH
originations will grow 12.7 percent, compared with the budgeted growth
of 7.7 percent.
2. 2006 Pricing
The Reserve Banks will reduce the input file fee one-third, from
$3.75 to $2.50. This change is consistent with the Reserve Banks' long-
term strategy to decrease file fees. In addition, the Reserve Banks
will reduce the FedLine Web notification of change fee 40 percent, from
$0.50 to $0.30, to better align the fee with that of similar products.
The Reserve Banks project that the FedACH service will recover
101.0 percent of total expenses and targeted ROE in 2006. Total revenue
is budgeted to increase $2.1 million from the 2005 estimate, despite
$1.6 million less in fee revenue. The decrease in fee revenue is offset
by NICB revenue, which is $3.2 million larger than the 2005 estimate.
Based on industry projections, the Reserve Banks estimate national ACH
commercial origination volume will grow approximately 18 percent in
2006. This growth is largely attributable to volume increases
associated with electronic check conversion applications, including
checks converted at lockboxes, and internet initiated payments. The
Reserve Banks, however, have projected FedACH commercial origination
volume growth of 7.6 percent in 2006 to reflect continued volume shifts
to the private-sector ACH operator.
Total expenses and targeted ROE are budgeted to increase $3.1
million over the 2005 estimate. The Reserve Banks have budgeted
increased costs for product development and service initiatives, such
as FedACH risk management services.
E. Fedwire Funds and National Settlement Services
Table 9 below shows the 2004, 2005 estimate, and 2006 budgeted cost
recovery performance for the Fedwire funds and national settlement
services.
Table 9.--Fedwire Funds and National Settlement Services Pro Forma Cost and Revenue Performance
[$ millions]
----------------------------------------------------------------------------------------------------------------
5 Recovery
2 Total 3 Net income rate after
Year 1 Revenue expense (ROE) [1-2] 4 TABOET ROE Target ROE [1/
(2+4)]
----------------------------------------------------------------------------------------------------------------
2004........................ 57.1 50.6 6.5 6.8 99.4%
2005 (estimate)............. 64.9 56.1 8.8 7.9 101.4
2006 (budget)............... 69.3 60.0 9.3 5.6 105.6
----------------------------------------------------------------------------------------------------------------
1. 2005 Estimate
For 2005, the Reserve Banks estimate that the Fedwire funds and
national settlement services will recover 101.4 percent of total
expenses and targeted ROE, compared with a 2005 budgeted recovery rate
of 100.1 percent. Fedwire funds achieved full cost recovery despite
lower-than-budgeted fee revenue. Although the Reserve Banks have
experienced higher-than-expected growth for online funds volume for
2005, most of the growth has been in the lowest-priced tier. Through
August, online funds volume is 5.7 percent higher than it was for the
same period last year. For full-year 2005, the Reserve Banks estimate
that online funds volume will grow 5.3 percent, compared with a
budgeted growth of 2.8 percent. Also offsetting the lower-than-budgeted
fee revenue is higher electronic connection revenue and NICB, as well
as lower operating costs. With respect to the national settlement
service, the Reserve Banks estimate that the volume of settlement
entries processed during 2005 will be 1.4 percent higher than the 2005
budget projection.
2. 2006 Pricing
The Reserve Banks will raise the surcharge for offline transfers
one-third, from $15 to $20. The surcharge increase more closely aligns
the fee with the costs of providing offline access to the Fedwire funds
service.
In 2006, the Reserve Banks project that Fedwire funds and national
settlement services will recover 105.6 percent of total expense and
targeted ROE. The Reserve Banks project 2006 total revenue to increase
by $4.4 million over the 2005 estimate primarily because of the
projected higher funds transfer volume and higher NICB and electronic
connection revenue. Total expenses for 2006 are expected to increase
$3.9 million from the 2005 estimate primarily because of security and
technology investments, including the cost to migrate from legacy
systems to Internet protocol-based systems, and further enhance
resiliency. Online funds transfer volume for 2006 is expected to
increase 3.0 percent compared with the 2005 estimate. National
settlement
[[Page 68055]]
service volume for 2006 is expected to remain flat compared with the
2005 estimate.
F. Fedwire Securities Service
Table 10 below shows the 2004, 2005 estimate, and 2006 budgeted
cost recovery performance for the Fedwire securities service.\9\
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\9\ The Reserve Banks provide transfer services for securities
issued by the U.S. Treasury, federal government agencies,
government-sponsored enterprises, and certain international
institutions. The priced component of this service, reflected in
this memorandum, consists of revenues, expenses, and volumes
associated with the transfer of all non-Treasury securities. For
Treasury securities, the U.S. Treasury assesses fees for the
securities transfer component of the service. The Reserve Banks
assess a fee for the funds settlement component of a Treasury
securities transfer; this component is not treated as a priced
service.
Table 10.--Fedwire Securities Service Pro Forma Cost and Revenue Performance
[$ millions]
----------------------------------------------------------------------------------------------------------------
5 Recovery
2 Total 3 Net income rate after
Year 1 Revenue expense (ROE)[1-2] 4 Target ROE target ROE [1/
(2+4)]%
----------------------------------------------------------------------------------------------------------------
2004............................ 20.4 17.0 3.4 2.9 102.6
2005 (estimate)................. 21.0 17.9 3.1 2.9 101.3
2006 (budget)................... 22.1 19.1 3.0 1.8 105.9
----------------------------------------------------------------------------------------------------------------
1. 2005 Estimate
For 2005, the Reserve Banks estimate that the Fedwire securities
service will recover 101.3 percent of total expenses and targeted ROE,
compared with a 2005 budgeted recovery rate of 102.8 percent. The
lower-than-budgeted recovery is primarily attributable to $0.6 million
in lower-than-expected fee revenue associated with lower-than-expected
transaction volume. Through August, online securities volume was flat
compared to the same period last year. For full-year 2005, the Reserve
Banks estimate that online securities volume will grow 1.1 percent,
compared with a budgeted growth of 2.0 percent. The shortfall in fee
revenue was offset by higher-than-expected NICB revenue.
2. 2006 Pricing
The Reserve Banks will raise the offline transfer origination and
receipt surcharge from $33 to $50, and the joint custody origination
surcharge from $35 to $40. The Reserve Banks will retain all other fees
at their current levels. The surcharge increase more closely aligns the
fees with the costs of processing these transactions.
The Reserve Banks project that the Fedwire securities service will
recover 105.9 percent of total expense and targeted ROE in 2006. Total
revenue is projected to increase $1.1 million from the 2005 estimate
primarily because of higher NICB. Online securities volume in 2006 is
budgeted to be flat against the 2005 estimate. Offline securities
volume is projected to fall 9.0 percent against the 2005 estimate.
Total expenses are expected to increase $1.2 million from the 2005
estimate. In 2006, the Reserve Banks plan to continue to invest in
security and technology projects to enhance resiliency, migrate from
legacy systems to Internet protocol-based systems, and implement
changes in payment system risk policy.
G. Noncash Collection Service
Table 11 below shows the 2004 and 2005 estimated cost recovery
performance for the noncash collection service.
Table 11.--Noncash Collection Pro Forma Cost and Revenue Performance
[$ millions]
----------------------------------------------------------------------------------------------------------------
5 Recovery
2 Total 3 Net income rate after
Year 1 Revenue expense (ROE) [1-2] 4 Target ROE target ROE [1/
(2+4)]%
----------------------------------------------------------------------------------------------------------------
2004............................ 1.9 1.4 0.5 0.2 120.3
2005 (estimate)................. 1.2 1.1 0.1 0.2 90.9
----------------------------------------------------------------------------------------------------------------
1. 2005 Estimate
For 2005, the Reserve Banks estimate that the noncash collection
service will recover 90.9 percent of total expenses and targeted ROE,
compared with the budgeted recovery rate of 76.7 percent. This greater-
than-expected recovery is due to lower-than-expected costs of
withdrawal. The Reserve Banks estimate that, in 2005, noncash
collection volume will be 16.1 percent lower than expected. Effective
September 30, 2005, the Reserve Banks stopped accepting deposits of
definitive municipal securities from DIs. The Reserve Banks plan to
complete withdrawal from the service effective December 30, 2005.
2. 2006 Pricing
The Reserve Banks will no longer offer the noncash collection
service in 2006.
H. Electronic Access
The Reserve Banks allocate the costs and revenues associated with
electronic access methods to the Reserve Banks' priced services.\10\
There are four types of electronic access methods through which DIs can
access the Reserve Banks' priced services: FedLine[reg], FedMail[reg],
FedPhone[reg], and computer interface (mainframe to mainframe).\11\
There are three ways DIs currently use FedLine to
[[Page 68056]]
access the Reserve Banks' services: FedLine Web, FedLine Advantage, or
FedLine DOS. Information services are available through FedLine Web,
while transaction services are available through FedLine Advantage or
FedLine DOS. For 2006, the Reserve Banks will change to the FedLine DOS
connection fees as well as ancillary changes to frame relay spare parts
and training fees.
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\10\ Certain electronic access fees are recorded as recoveries
that offset the cost of providing these services. These fees are for
ancillary services, such as training and vendor pass-through
charges. Therefore, these fees are not listed in the electronic
access 2006 fee schedule below.
\11\ Fedline, FedMail, and FedPhone are registered servicemarks
of the Reserve Banks. These connections may also be used to access
non-priced services provided by the Reserve Banks.
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The Reserve Banks will discontinue access to their services via
FedLine DOS effective September 30, 2006. The Reserve Banks are
migrating their customers to a tiered, web-based access structure. This
migration is scheduled to be completed by September 30. At that time,
FedLine customers will only be able to access Reserve Banks services
via FedLine Web or FedLine Advantage. In the interim, those customers
that have not yet migrated to web-based access can continue to use
FedLine DOS. For those customers, the Reserve Banks bundle a FedLine
DOS connection and a FedLine Web connection into a single FedLine
Select package. In this arrangement, customers use their FedLine DOS
connection to access transaction services and FedLine Web to access
information services. The Reserve Banks will increase the fee for
FedLine Select from $200 to $400 per month, beginning April 1, 2006, to
encourage customers to move to FedLine Advantage before the September
30, 2006, sunset date.
The Reserve Banks will also increase the frame relay spare parts
set fee and in-person and over-the-phone training fees. The fee
increase for the frame relay spare parts set, from $155 to $175, is
intended to ensure fee consistency with the complete 56 kbps frame
relay product.\12\ The fee increase for over-the-phone and in-person
training, from $100 to $150 per session and $800 to $1,000 per session
respectively, is intended to encourage the use of online training
options that are offered at no cost.
---------------------------------------------------------------------------
\12\ The fee for the computer interface frame relay 56 kbps
product is $1,000 per month. The fee for the full circuit backup
single equipment set is $825 per month which, when combined with the
$175 per month spare parts set fee, is consistent with the complete
frame relay product.
---------------------------------------------------------------------------
II. Private-Sector Adjustment Factor
A. Background
Each year, as required by the Monetary Control Act of 1980, the
Reserve Banks set fees for priced services provided to depository
institutions. These fees are set to recover, over the long run, all
direct and indirect costs and imputed costs, including financing costs,
taxes, and certain other expenses, as well as return on equity (profit)
that would have been earned if a private business firm provided the
services. The imputed costs and imputed profit are collectively
referred to as the PSAF. In a comparable fashion, investment income is
imputed and netted with related direct costs associated with clearing
balances to estimate NICB.
B. Private Sector Adjustment Factor
The method for calculating the financing and equity costs in the
PSAF requires determining the appropriate levels of debt and equity to
impute and then applying the applicable financing rates. In this
process, a pro forma priced services balance sheet using estimated
Reserve Bank assets and liabilities associated with priced services is
developed and the remaining elements that would exist if the Reserve
Banks' priced services were provided by a private business firm are
imputed.
The amount of the Reserve Banks' assets that will be used to
provide priced services during the coming year is determined using
Reserve Bank information on actual assets and projected disposals and
acquisitions. The priced portion of assets is determined based on the
allocation of the related depreciation expense. The priced portion of
actual Reserve Bank liabilities consists of balances held by Reserve
Banks for clearing priced services transactions (clearing balances),
and other liabilities such as accounts payable and accrued expenses.
Long-term debt is imputed only when core clearing balances and
long-term liabilities are not sufficient to fund long-term assets or if
the interest rate risk sensitivity analysis, which measures the
interest rate effect of the difference between interest rate sensitive
assets and liabilities, indicates that a 200 basis point change in
interest rates would change cost recovery more than two percentage
points.\13\ Short-term debt is imputed only when short-term liabilities
and clearing balances not used to finance long-term assets are
insufficient to fund short-term assets. Equity is imputed to meet the
FDIC definition of a well-capitalized depository institution for
insurance premium purposes.\14\
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\13\ A portion of clearing balances is used as a funding source
for priced services assets. Long-term assets are partially funded
from core clearing balances, currently $4 billion. Core clearing
balances are considered the portion of the balances that has
remained stable over time without regard to the magnitude of actual
clearing balances.
\14\ The FDIC requirements for a well-capitalized depository
institution are 1) a ratio of total capital to risk-weighted assets
of 10 percent or greater; and 2) a ratio of Tier 1 capital to risk-
weighted assets of 6 percent or greater; and 3) a leverage ratio of
Tier 1 capital to total assets of 5 percent or greater. The Federal
Reserve priced-services balance sheet total capital has no
components of Tier 1 or total capital other than equity; therefore,
requirements 1 and 2 are essentially the same measurement.
---------------------------------------------------------------------------
1. Financing rates
Equity financing rates are based on the target ROE result of the
capital asset pricing model (CAPM).\15\ In the CAPM, the required rate
of return on a firm's equity is equal to the return on a risk-free
asset plus a risk premium. To implement CAPM, the risk-free rate is
based on the three-month Treasury bill, the beta is assumed to be equal
to 1.0, which approximates the risk of the market as a whole, and the
monthly returns in excess of the risk-free rate over the most recent 40
years are used as the market risk premium. The resulting ROE influences
the dollar level of the PSAF because this is the return a shareholder
would expect in order to invest in a private business firm.
---------------------------------------------------------------------------
\15\ In October, the Board approved changes to the methodology
used to derive the pretax ROE from using the average of the results
of three analytical models, the comparable accounting earnings model
(CAE), the discounted cash-flow model (DCF), and the CAPM, to using
only the CAPM (70 FR 60341, October 17, 2005).
---------------------------------------------------------------------------
For simplicity, given that federal corporate income tax rates are
graduated, state income tax rates vary, and various credits and
deductions can apply, a specific income tax expense is not calculated
for Reserve Bank priced services. Instead, the Board targets a pretax
ROE that would provide sufficient income to fulfill its income tax
obligations.\16\ To the extent that the actual performance results are
greater or less than the targeted ROE, income taxes are adjusted using
an imputed income tax rate. The imputed income tax rate is the median
of the rates paid by the top fifty bank holding companies (BHCs) based
on deposit balance over the past five years adjusted to the extent that
they invested in tax-free municipal bonds. Because the Reserve Banks
provide similar services through their correspondent banking
activities, including payment and settlement services, and equity is
imputed to meet the FDIC requirements of a well-capitalized depository
institution, using a tax rate based on the top fifty BHCs by deposit
balance continues to be an applicable and reasonable approach.
---------------------------------------------------------------------------
\16\ Other taxes are included in price-services actual or
imputed costs.
---------------------------------------------------------------------------
2. Other Costs
The PSAF also includes the estimated priced services-related
expenses of the Board of Governors and imputed sales taxes based on
Reserve Bank estimated expenditures. An assessment for FDIC insurance,
when required, is imputed
[[Page 68057]]
based on current FDIC rates and projected clearing balances held with
the Federal Reserve.
C. Net Income on Clearing Balances
The NICB calculation is made each year along with the PSAF
calculation and is based on the assumption that Reserve Banks invest
clearing balances net of imputed reserve requirements and balances used
to finance priced-services assets. Based on these net clearing balance
levels, Reserve Banks impute a constant spread, determined by the
return on a portfolio of investments, over the three-month Treasury
bill rate.\17\ \18\ The calculation also involves determining the
priced services cost of earnings credits (amounts available to offset
service fees) on contracted clearing balances held, net of expired
earnings credits, based on a discounted Treasury bill rate. Rates and
clearing balance levels used in the NICB estimate are based on the most
recent rates and clearing balance levels.\19\ Because clearing balances
are held for clearing priced services transactions or offsetting priced
services fees, they are directly related to priced services. The net
earnings or expense attributed to the investments and the cost
associated with holding clearing balances, therefore, are considered
net income for priced services activities.
---------------------------------------------------------------------------
\17\ The investment portfolio is composed of investments
comparable to a BHC's investment holdings, such as short-term
Treasury securities, government agency securities, commercial paper,
long-term corporate bonds, and money market funds. See table 16 for
the investments imputed in 2006.
\18\ NICB is projected to be $102.8 million for 2006 using a
constant spread of 35 basis points over the three-month Treasury
bill, and applying this rate to the clearing balance levels used in
the 2006 pricing process. The 2005 NICB estimate is $73.8 million.
\19\ July 2005 rates and balances were used to estimate the 2006
NICB.
---------------------------------------------------------------------------
D. Discussion
The decrease in the 2006 PSAF is primarily due to the decrease in
ROE, which results in a decrease in the cost of equity. Although
clearing balances on which investments are imputed decreased, a similar
offsetting increase in items in process of collection results in a
small increase in total assets. Because equity is imputed at 5 percent
of total assets, this small change in assets causes equity to remain
unchanged from 2005.
1. Asset Base
The estimated 2006 Federal Reserve assets, reflected in table 12,
have increased $0.3 million. The decline in imputed investments in
marketable securities of $546.0 million and in imputed reserve
requirements of $69.7 million, which are imputed based on the estimated
level of clearing balances held, are offset by an increase in items in
process of collection due to higher estimated float receivables. As a
result of consolidation and restructuring of several System priced
services functions, furniture and equipment and bank premises assets
are expected to decrease $59.5 million in 2006.
As shown in table 13, the assets financed through the PSAF have
decreased. Short-term assets funded with short-term payables and
clearing balances total $28.4 million. This represents a $10.5 million
decrease from the short-term assets funded in 2005 due to an increase
in expected short-term payables. Long-term assets funded with long-term
liabilities, equity, and core clearing balances are projected to total
$291.1 million. This represents a decrease of $70.6 million from the
long-term assets funded in 2005 because long-term assets have
decreased.
2. Debt and Equity Costs and Taxes
As previously mentioned, core clearing balances are available as a
funding source for priced service assets. Table 13 shows that $319.5
million in clearing balances is used to fund priced services assets in
2006. The interest rate sensitivity analysis in table 14 indicates that
a 200 basis point decrease in interest rates affects the ratio of rate-
sensitive assets to rate-sensitive liabilities and produces a decrease
in cost recovery of 1.2 percentage points, while an increase of 200
basis points in interest rates increases cost recovery by 1.1
percentage points. The established threshold for a change in cost
recovery is two percentage points; therefore, interest rate risk
associated with using these balances is within acceptable levels and no
long-term debt is imputed.
Table 15 shows the imputed PSAF elements, the pretax ROE, and other
required PSAF costs for 2005 and 2006. The decrease in ROE lowers the
estimated cost of equity in 2006. Sales taxes decreased from $8.2
million in 2005 to $7.7 million in 2006. The effective income tax rate
used in 2006 increased to 29.8 percent from 29.6 percent in 2005. The
priced service portion of the Board's expenses increased $0.9 million
from $6.6 million in 2005 to $7.5 million in 2006.
3. Capital Adequacy and FDIC Assessment
As shown in table 12, the amount of equity imputed for the 2006
PSAF is $808.0 million, unchanged from the imputed equity in 2005. As
noted above and shown in table 16, equity is based on 5 percent of
total assets and is greater than 10 percent of risk-weighted assets, as
required by the FDIC definition of a well-capitalized depository
institution for insurance premium purposes. In 2006, the capital to
total assets ratio and the capital to risk-weighted asset ratio both
meet or exceed regulatory guidelines. As a result, no FDIC assessment
is imputed for 2006.
III. Analysis of Competitive Effect
All operational and legal changes considered by the Board that have
a substantial effect on payments system participants are subject to the
competitive impact analysis described in the March 1990 policy, ``The
Federal Reserve in the Payments System.'' \20\ Under this policy, the
Board assesses whether the proposed 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 because of differing legal powers or constraints or because of
a dominant market position deriving from such legal differences. If the
change creates such an effect, the Board must further evaluate the
change to assess whether its benefits--such as contributions to payment
system efficiency, payment system integrity, or other Board
objectives--can be retained while minimizing the adverse effect on
competition.
---------------------------------------------------------------------------
\20\ Federal Reserve Regulatory Service (FRRS) 9-1558.
---------------------------------------------------------------------------
The Board believes that the 2006 fees, fee structures, or changes
in service will not have a direct and material adverse effect on the
ability of other service providers to compete effectively with the
Reserve Banks in providing similar services. The changes will permit
the Reserve Banks to earn an ROE that is comparable to the returns of
the overall market.
BILLING CODE 6210-01-P
[[Page 68058]]
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[[Page 68059]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.013
[[Page 68060]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.014
[[Page 68061]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.015
[[Page 68062]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.016
[[Page 68063]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.017
[[Page 68064]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.018
[[Page 68065]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.019
[[Page 68066]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.020
[[Page 68067]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.021
[[Page 68068]]
[GRAPHIC] [TIFF OMITTED] TN09NO05.022
[[Page 68069]]
By order of the Board of Governors of the Federal Reserve
System, November 2, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 05-22224 Filed 11-8-05; 8:45 am]
BILLING CODE 6210-01-C
