Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire: Time of Settlement by a Paying Bank for an Item Received From a Reserve Bank, 72107-72112 [2014-28516]

Download as PDF 72107 Rules and Regulations Federal Register Vol. 79, No. 234 Friday, December 5, 2014 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. scheduled to settle on July 23, 2015, and after will post according to the new posting rule procedures for these transactions, regardless of date of deposit. FOR FURTHER INFORMATION CONTACT: The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. FEDERAL RESERVE SYSTEM 12 CFR Part 210 [Regulation J; Docket No. R–1473] RIN 7100–AE06 Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire: Time of Settlement by a Paying Bank for an Item Received From a Reserve Bank Board of Governors of the Federal Reserve System. ACTION: Final rule. AGENCY: The Board of Governors (Board) is adopting amendments to subpart A of its Regulation J, Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire, to permit the Federal Reserve Banks (Reserve Banks) to require paying banks that receive presentment of checks from the Reserve Banks to make the proceeds of settlement for those checks available to the Reserve Banks as soon as one halfhour after receipt of the checks. The amendments will also permit the Reserve Banks to obtain settlement from paying banks by as early as 8:30 a.m. eastern time for checks that the Reserve Banks present. These amendments to Regulation J are consistent with the revised method for posting debits and credits to banks’ Federal Reserve accounts to measure daylight overdrafts under amendments to the Federal Reserve Policy on Payment System Risk (PSR policy) that the Board is concurrently adopting. The Board is also adopting a technical amendment to the definition of ‘‘Administrative Reserve Bank.’’ DATES: Effective Date: The technical amendment to § 210.2(c) is effective on December 5, 2014. All other amendments are effective on July 23, 2015. Applicability Date: All items wreier-aviles on DSK5TPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 15:04 Dec 04, 2014 Jkt 235001 Susan V. Foley, Senior Associate Director (202/452–3596), Samantha J. Pelosi, Manager (202/530–6292), Scott J. Anchin, Senior Financial Services Analyst (202/452–3638), Division of Reserve Bank Operations and Payment Systems; or Evan Winerman, Senior Attorney (202/872–7578), Legal Division; for users of Telecommunication Devices for the Deaf (TDD) only, contact 202/263–4869. SUPPLEMENTARY INFORMATION: I. Background Subpart A of Regulation J, Collection of Checks and Other Items by Federal Reserve Banks, governs the collection of checks and the handling of returned checks by the Reserve Banks. The purpose of the subpart is to provide rules for collecting and returning items and settling balances. Among other things, the subpart specifies the time and manner in which paying banks must settle for items presented to them by the Reserve Banks. In accordance with Subpart A, the Reserve Banks have issued Operating Circular 3 (OC 3), Collection of Cash Items and Returned Checks, which provides specific terms and conditions under which the Reserve Banks will handle checks.1 The Board’s Regulation CC, Availability of Funds and Collection of Checks, and provisions of the Uniform Commercial Code (UCC), as adopted in a state, also govern the collection, presentment, and return of checks, to the extent those provisions are not inconsistent with Regulation J.2 On December 10, 2013, the Board requested comment on proposed changes to the PSR policy.3 The changes related to the Board’s procedures for posting debit and credit entries to depository institutions’ Federal Reserve accounts for automated clearinghouse (ACH) debit transactions and 1 Operating Circular 3 is available at www.frbservices.org/regulations/operating_ circulars.html. 2 12 CFR part 229; UCC Article 4. 3 78 FR 74130 (Dec. 10, 2013). The Federal Reserve’s current policy on payment system risk is available at www.federalreserve.gov/ paymentsystems/psr_policy.htm. PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 commercial check transactions. At the same time, the Board requested comment on proposed changes to Regulation J that would conform to the proposed changes to the PSR policy.4 Currently, § 210.9(b)(2)(i) of Regulation J provides that the proceeds of a paying bank’s settlement must be made available to its Administrative Reserve Bank by the latest of (1) the next clock hour that is at least one hour after the paying bank receives the check; (2) 9:30 a.m. eastern time; or (3) such later time as provided in the Reserve Banks’ operating circulars.5 Under this section, 9:30 a.m. is the earliest time a paying bank is required to settle for an item, and there has to be at least one hour between the time the item was presented to the paying bank and the time the paying bank settles for the item. The same rules apply to the settlement of returned items under § 210.12(i).6 Section 12.2 of the Reserve Banks’ Operating Circular 3 currently sets 11:00 a.m. as the earliest settlement time (later than 9:30 a.m. set forth in Regulation J). Under section 12.2, the proceeds of a paying bank’s settlement must be available to its Administrative Reserve Bank by the later of 11:00 a.m. or the next clock hour that is at least one hour after the paying bank receives the item, but no later than 3:00 p.m. local time of the paying bank. Consistent with the proposed PSR policy changes, the Board proposed that § 210.9(b)(2)(i) of Regulation J be revised to state that the paying bank shall settle for an item by the latest of (1) the next clock hour or clock half-hour that is at least one half-hour after the paying bank receives the item; (2) 8:30 a.m.; or (3) such later time as provided in the Reserve Banks’ operating circulars. For example, if a Reserve Bank presents an item by 8:00 a.m., the paying bank would be required to settle for the item at 8:30 a.m., unless a later settlement time were provided for in the Reserve 4 78 FR 74041 (Dec.10, 2013). times are eastern time unless otherwise specified. Section 210.9(b)(3)(i) sets forth similar times of day if the paying bank closes voluntarily on a Reserve Bank banking day. Section 210.9(b)(4)(i) sets forth analogous times if the paying bank receives an item on a banking day on which the Reserve Bank is closed, i.e., a business day that is not a banking day for the Reserve Bank. 6 Section 210.12(i) of Regulation J provides that recipients of returned items must settle with Reserve Banks in the same manner and by the same time as items presented for payment. 5 All E:\FR\FM\05DER1.SGM 05DER1 72108 Federal Register / Vol. 79, No. 234 / Friday, December 5, 2014 / Rules and Regulations Banks’ operating circulars. The Board proposed similar changes in §§ 210.9(b)(3)(i) and (b)(4)(i). The Board also proposed to define ‘‘clock half-hour,’’ a new term in § 210.2(p)(2), to mean a time that is on the half-hour (for example, 1:30 or 2:30). Section 210.2(p), which the Board proposed to redesignate as § 210.2(p)(1), currently defines the term ‘‘clock hour’’ as a time that is on the hour (for example, 1:00 or 2:00). II. Summary of Public Comments and Analysis The Board received six comments submitted by depository institution trade organizations on the proposed amendments to Regulation J.7 The Board considered these comments in developing its final rule as discussed below. wreier-aviles on DSK5TPTVN1PROD with RULES A. One Half-Hour Window Between Presentment and Settlement The Board requested comment on whether one half-hour between receipt of items by a paying bank and the paying bank’s settlement is sufficient for a paying bank to perform a limited verification of cash letters and determine whether to settle for or return the cash letter. The Board also requested comment on whether a shorter period between presentment and settlement would be appropriate (for example, fifteen minutes). Two commenters, the American Bankers Association and the Independent Community Bankers of America, supported the Board’s proposal to reduce the settlement window to one half-hour, agreeing that advances in check processing allow for a shorter period between check presentment and settlement. One commenter, the American Bankers Association, did not support shortening the period further to 15 minutes but did not provide a specific reason. The Board believes that the almost allelectronic nature of check processing that currently exists makes one halfhour between presentment and settlement sufficient because of the reduced time required to verify cash letters in an electronic environment. The Board also believes that sufficient tools are available to depository institutions to mitigate any adverse effect that movement to a one half-hour settlement window would have on an institution’s Federal Reserve account balance. Past trends indicate that an institution should be able to predict 7 The comment letters are available at http:// www.federalreserve.gov/apps/foia/ proposedregs.aspx. VerDate Sep<11>2014 15:04 Dec 04, 2014 Jkt 235001 within a reasonable margin of error the approximate dollar value of the checks it expects the Reserve Banks to present and should be able to hold balances sufficient to cover that amount. The Reserve Banks now pay interest on most institutions’ Federal Reserve account balances, reducing institutions’ opportunity cost (that is, loss of interest) associated with holding higher account balances overnight.8 In addition, the PSR policy allows eligible institutions to collateralize their daylight overdrafts to avoid paying a fee. For each twoweek reserve maintenance period, depository institutions also receive a $150 fee waiver, reducing the burden on institutions that might incur small amounts of uncollateralized daylight overdrafts.9 For these reasons, the Board is adopting as proposed the amendments shortening the minimum time period between receipt of checks by a paying bank and the paying bank’s settlement to one half-hour. The Board did not receive any comments on the proposal to define ‘‘clock half-hour’’ as a new term in § 210.2(p)(2) and is adopting the new term as proposed. B. Earliest Settlement Time at 8:30 a.m. The Board requested comment on whether to permit the Reserve Banks to obtain settlement from a paying bank for a check by as early as 8:30 a.m. The Board also requested comment on the feasibility of settlement earlier than 8:30 a.m., given the current almost allelectronic check processing environment, and whether an earlier settlement time would even better align presentment to settlement.10 8 12 CFR 204.10. Board notes that Federal Home Loan Banks (FHLBs) are not eligible to earn interest on balances in Federal Reserve accounts, but can act as passthrough correspondents. Per § 204.10 of Regulation D, in cases of balances maintained by pass-through correspondents that are not interest-eligible institutions, Reserve Banks shall pay interest only on the balances maintained to satisfy a reserve balance requirement of one or more respondents, and the correspondents shall pass back to its respondents interest paid on balances in the correspondent’s account (12 CFR 204.10). The Board notes also that voluntary collateralization of daylight overdrafts and the $150 fee waiver are not available to Edge and agreement corporations, bankers’ banks that have not waived their exemption from reserve requirements, limitedpurpose trust companies, government-sponsored enterprises (including FHLBs), and international organizations. These types of institutions do not have regular access to the discount window and, therefore, are expected not to incur daylight overdrafts in their Federal Reserve accounts. 10 In September 1997, the Board revised § 210.9(b) to explicitly refer to 9:30 a.m. (rather than one hour after the opening of Fedwire) as the earliest time a paying bank could be required to settle for an item. This revision to § 210.9(b) was intended to ensure the earliest settlement time for checks remained 9 The PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 Two commenters, the American Bankers Association and the Independent Community Bankers of America, supported the proposal to allow the Reserve Banks to obtain settlement from a paying bank for a check by as early as 8:30 a.m., noting that the rules that allow the Reserve Banks to pay interest on account balances held by institutions reduces the cost that institutions might incur to hold funds overnight to cover any checks presented early the next morning. One commenter, the American Bankers Association, did not support the proposal to move the settlement time earlier than 8:30 a.m. but did not provide a specific reason. Four commenters, the Credit Union National Association, the Georgia Credit Union League, the Missouri Credit Union Association, and the National Association of Federal Credit Unions, expressed concern that some smaller institutions might be negatively affected by the proposed change and might have to increase their Federal Reserve account balances to settle presented checks by holding higher balances overnight, arranging for additional funding before settlement time, or incurring daylight overdrafts. The Board recognizes that some depository institutions will need to fund their accounts earlier in order to settle for checks by as early as 8:30 a.m. or incur daylight overdrafts. The Board believes, however, that sufficient tools are available to depository institutions to mitigate any adverse effect that a change to 8:30 a.m. may present. As discussed earlier, the Reserve Banks now pay interest on most institutions’ Federal Reserve account balances, eligible institutions can collateralize their daylight overdrafts to avoid paying a fee, and depository institutions receive a $150 fee waiver for each two-week reserve maintenance period. The changes to the posting rules of the PSR policy and to Regulation J better align the policy and regulation with today’s electronic check processing environment, in which over 90 percent of checks are available to be presented by 8:00 a.m. and prompt settlement is possible for the majority of the value of check activity.11 Accordingly, the Board unchanged when the scheduled opening of Fedwire moved from 8:30 a.m. to an earlier hour. 62 FR 48166, 48169 (Sept. 15, 1997). In December 1997, the scheduled opening of Fedwire was moved from 8:30 a.m.to 12:30 a.m., and in May 2004, it moved to 9:00 p.m. on the preceding calendar day. For example, for the Reserve Banks’ banking day of Tuesday, Fedwire opens at 9:00 p.m. on Monday. 11 In addition, the proposed posting rules would give earlier availability for items deposited with the Reserve Banks and for credit adjustments and corrections. E:\FR\FM\05DER1.SGM 05DER1 Federal Register / Vol. 79, No. 234 / Friday, December 5, 2014 / Rules and Regulations is adopting the amendments to Regulation J, § 210.9(b) as proposed. The Reserve Banks plan to amend OC 3 to conform to the changes in Regulation J. wreier-aviles on DSK5TPTVN1PROD with RULES C. Effective date The Board proposed that the changes to the PSR policy and these conforming changes to Regulation J would become effective six months after publication in the Federal Register. The Board requested comment on whether six months provided paying banks with sufficient time to make any necessary operational changes. Five commenters, the American Bankers Association, the Credit Union National Association, the Georgia Credit Union League, the Independent Community Bankers of America, the Missouri Credit Union Association, believed that a six-month lead time would allow enough time to make any necessary operational changes. One commenter, the National Association of Federal Credit Unions, requested that the Board allow a one-year implementation period, stating that the proposed six-month implementation period would not allow institutions enough time to adjust their policies and procedures to reduce the chances of incurring daylight overdraft fees. The Board is adopting an effective date of July 23, 2015. All items scheduled to settle on this date and after will post according to the new posting rule procedures for these transactions, regardless of date of deposit. III. Technical Amendment The Board is also adopting a technical amendment to the definition of ‘‘Administrative Reserve Bank.’’ 12 Section 210.2(c) states that an ‘‘Administrative Reserve Bank’’ is the Reserve Bank in whose District the entity is located, as determined under the procedure described in § 204.3(b)(2) of the chapter (Regulation D). The Board has relocated § 204.3(b)(2) of Regulation D to § 204.3(g).13 Accordingly, the Board is amending the definition of ‘‘Administrative Reserve Bank’’ in § 210.2(c) to cross-reference § 204.3(g) rather than § 204.3(b)(2). The Board did not provide public notice or request comment regarding this technical amendment. Pursuant to section 553(b)(3)(B) of the Administrative Procedure Act,14 the Board finds that public notice and comment is unnecessary because the technical amendment does not effect a substantive change; rather, the technical amendment conforms § 210.2(c) to reorganized Regulation D. For the same reasons, the Board finds that there is good cause for the technical amendment to be effective immediately, rather than thirty days after its publication date.15 IV. Competitive Impact Analysis The Board conducts a competitive impact analysis when it considers a rule or policy change that may have a substantial effect on payment system participants. Specifically, the Board determines whether there would be a direct and material adverse effect on the ability of other service providers to compete with the Federal Reserve due to legal differences or due to the Federal Reserve’s dominant market position deriving from such legal differences.16 If such legal differences exist, the Board will assess whether the same objectives could be achieved by a modified proposal with lesser competitive impact or, if not, whether the benefits of the proposal outweigh the effect on competition. The Board believes that the amendments to Regulation J do 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. Under Regulation J, the Reserve Banks have the legal ability to obtain same-day settlement for checks they present before the paying bank’s cut-off hour (typically 2:00 p.m. local time) through ‘‘auto-charge,’’ that is, a direct debit to the Federal Reserve account of the paying bank or its correspondent settlement agent.17 Under amended Regulation J, the Reserve Banks could present a check at any time before the paying bank’s cut-off hour and debit the account of the paying bank or its correspondent settlement agent on the next clock hour or half-hour that is at least one half-hour after presentment. In contrast, the latest that a privatesector bank may present a paper check for same-day settlement is 8:00 a.m. local time. Section 229.36(f) of Regulation CC requires the paying bank to settle for the check by credit to a Reserve Bank account designated by the presenting bank by the close of Fedwire (currently 6:30 p.m.) or by another agreed-upon method and time.18 Thus, the Reserve Banks may present checks later in the day for same-day settlement than private-sector banks. In addition, the Reserve Banks may obtain settlement earlier in the day than 15 5 12 12 CFR 210.2(c). 13 See 74 FR 25629, 25633–34 (May 29, 2009). 14 5 U.S.C. 553(b)(3)(B). VerDate Sep<11>2014 15:04 Dec 04, 2014 Jkt 235001 U.S.C. 553(d)(3). Reserve Regulatory Service, 7–145.2. 17 12 CFR 210.9(b)(1) and (b)(5). 18 12 CFR 229.36(f)(2). 16 Federal PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 72109 private-sector collecting banks and, in turn, may pass credits for deposited checks earlier in the day without incurring significant intraday float. In March 1998, the Board requested comment on whether these legal differences between the rights of the Reserve Banks and private-sector presenting banks provided the Reserve Banks with a competitive advantage and whether the Board should take action to reduce the differences.19 Commenters generally concluded that the costs of further changes outweighed any advantage of the Reserve Banks. In particular, commenters noted the efficiency of the Reserve Bank’s autocharge process for paying banks, and stated that moving the private-sector presentment deadline to later in the day or eliminating the direct debit of Federal Reserve accounts for check presentments would result in higher costs to paying banks and their business customers in terms of account management, settlement funds transfer fees, and shortened processing windows, and that those costs would outweigh the benefits gained by presenting banks. Based on an analysis of the comments, the Board took no further action. Currently, institutions may determine, as part of the agreement between a presenting bank and a paying bank, the time at which settlement for electronic checks is required to be funded. A presenting bank and a paying bank could agree, for example, to a minimum time between presentment and settlement. For presenting banks and paying banks that opt to use a check clearinghouse rather than directly exchange checks, private-sector clearinghouses have the option to use the Reserve Banks’ National Settlement Service (NSS) to effect settlement of checks or may settle by directing their members to initiate funds transfers over the Reserve Banks’ Fedwire Funds Service.20 Beginning in January 2015, the NSS file submission window will be 7:30 a.m. to 5:30 p.m. Fedwire Funds operating hours begin at 9:00 p.m. the 19 The request for comment and the subsequent notice of the Board’s decision can be found, respectively, at 63 FR 12700 (March 16, 1998) and 63 FR 68701 (December 14, 1998). 20 NSS is a multilateral settlement service owned and operated by the Reserve Banks. The service is offered to depository institutions that settle for participants in clearinghouses, financial exchanges, and other clearing and settlement groups. Settlement agents, acting on behalf of depository institutions in a settlement arrangement, electronically submit settlement files to the Reserve Banks. Files are processed upon receipt, and entries are automatically posted to the depository institutions’ Reserve Bank accounts. The NSS file submission window is currently 8:30 a.m. to 5:00 p.m. E:\FR\FM\05DER1.SGM 05DER1 72110 Federal Register / Vol. 79, No. 234 / Friday, December 5, 2014 / Rules and Regulations wreier-aviles on DSK5TPTVN1PROD with RULES previous calendar day and end at 6:30 p.m. Under the final amendments to Regulation J and the recently adopted changes to the PSR policy posting rules, the bulk of the Reserve Banks’ postings of credits to senders and debits to paying banks for commercial check transactions will shift to earlier in the day. The value of checks a bank sends to the Reserve Banks could be higher or lower than the value it receives from the Reserve Banks. As a result, the earlier posting of commercial check transactions may be viewed as more or less attractive, depending on whether the value of an institution’s check credits is higher or lower than the value of its check debits. Further, privatesector institutions can achieve improvements in earlier settlement similar to those provided by the rule and the PSR policy changes through private agreements among participants, as well as the use of NSS. More recently, the Board requested comment on the continued utility of the Regulation CC same-day settlement rule for paper checks and whether the rule should be applied to electronic check presentments by private-sector banks. The Board also noted that if, in the future, it proposes to eliminate the same-day settlement rule, it could also propose to retain the proscription against paying banks’ assessment of presentment fees in order to maintain the current balance of bargaining power, as well as reduce the competitive disparities in presentment abilities between the Reserve Banks and privatesector banks.21 The Board is in the process of analyzing these comments and will discuss these issues, as appropriate, at a later date in the context of the final amendments to Regulation CC. In the meantime, the Board does not believe that the changes to Regulation J reducing the minimum time between presentment and settlement to 30 from 60 minutes, and moving the earliest settlement time to 8:30 a.m. from 9:30 a.m., changes the Reserve Banks’ competitive position versus privatesector presenting banks in a material way. V. Final Regulatory Flexibility Analysis The Board has reviewed the final regulation in accordance with section 3(a) of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.). The rule would apply to all depository institutions that receive presentment or return of checks from the Reserve Banks. Based on current information, the Board believes that the final rule 21 79 FR 6674 (Feb. 14, 2014). VerDate Sep<11>2014 15:04 Dec 04, 2014 Jkt 235001 would not have a significant economic impact on a substantial number of small entities (5 U.S.C. 605(b)). Nonetheless, a Final Regulatory Flexibility Analysis has been prepared in accordance with 5 U.S.C. 604, after consideration of comments received during the public comment period. Statement of the Need for, and Objectives of the Final Rule These final amendments to Regulation J are necessary to conform the required settlement times for checks presented by the Reserve Banks to the method for posting debits and credits to institutions’ Federal Reserve accounts to measure daylight overdrafts under recent revisions to the PSR policy. The Board believes that the Regulation J revisions and the PSR policy posting rules better align the settlement for checks with actual deposit and presentment times, reflecting the industry’s almost complete shift from paper to electronic check processing. Public Comments The Board requested information and comment on any costs that would arise from the application of the proposed rule. Four institutions expressed concern that some smaller institutions might be negatively affected by the proposed change and might have to increase their Federal Reserve account balances to settle presented checks by holding higher balances overnight, arranging for additional funding before settlement time, or incurring daylight overdrafts. As discussed earlier, the Board believes that sufficient tools are available to depository institutions to mitigate any adverse effect. For example, the Reserve Banks now pay interest on most institutions’ Federal Reserve account balances, eligible institutions can collateralize their daylight overdrafts to avoid paying a fee, and depository institutions receive a $150 fee waiver for each two-week reserve maintenance period.22 As further discussed earlier, under the PSR policy posting rules, the bulk of the Reserve Banks’ postings of debits to paying institutions for commercial check transactions will shift to earlier in the day, allowing the Reserve Banks to provide credits to depositing institutions earlier, thus mitigating 22 A small number of institutions could be ineligible to receive intraday credit and would incur overdrafts. To avoid violating the PSR policy and incurring fees, these institutions would need to increase funding either overnight or early in the morning. Some of these institutions could be eligible to receive interest on Federal Reserve account balances. PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 adverse effects on depository institutions. Small Entities Affected by the Rule The final rule affects all institutions that receive checks or returned checks handled by the Reserve Banks. The Board believes that virtually all depository institutions receive checks or returned checks handled by the Reserve Banks on at least an occasional basis. Pursuant to regulations issued by the Small Business Administration (SBA) (13 CFR 121.201), a ‘‘small banking organization’’ includes a depository institution with $550 million or less in total assets. Based on data reported as of June 30, 2014, the Board believes that there are approximately 11,750 small depository institutions. Projected Reporting, Recordkeeping, and Other Compliance Requirements The final rule would permit the Reserve Banks to require a paying bank to settle for an item by as early as 8:30 a.m., instead of 9:30 a.m., and as soon as one half-hour, instead of one hour, after it receives the item from the Reserve Banks. Paying banks may choose to fund their accounts to accommodate the earlier settlement time by holding sufficient balances overnight or arranging for funding before the settlement time. Otherwise, paying banks would incur daylight overdrafts in their Federal Reserve account. The rule contains no other reporting, recordkeeping, or compliance requirements. Steps Taken To Minimize Impact of, and Significant Alternatives to, the Final Rule As noted earlier, four commenters, the Credit Union National Association, the Georgia Credit Union League, the Missouri Credit Union Association, and the National Association of Federal Credit Unions, suggested that some smaller institutions might be negatively affected by the proposed change and might have to increase their Federal Reserve account balances to settle presented checks by holding higher balances overnight or arranging for additional funding before settlement time. Otherwise, paying banks would incur daylight overdrafts. As discussed earlier, the Board believes that sufficient tools are available to depository institutions to mitigate any adverse effect on an institution’s Federal Reserve account balance (including interest on Federal Reserve account balances, collateralization of daylight overdrafts to avoid paying a fee, and a $150 fee waiver for each two-week reserve maintenance period). As further E:\FR\FM\05DER1.SGM 05DER1 Federal Register / Vol. 79, No. 234 / Friday, December 5, 2014 / Rules and Regulations discussed earlier, under the PSR policy posting rules, the bulk of the Reserve Banks’ postings of debits to paying institutions for commercial check transactions will shift to earlier in the day, allowing the Reserve Banks to provide credits to depositing institutions earlier, thus mitigating adverse effects on depository institutions. Alternatively, the Board could have adopted a rule that permits the Reserve Banks to require a paying bank to settle for an item at a time earlier than 8:30 a.m. or leave the earliest possible settlement time at 9:30 a.m. The Board believes the proposed time of 8:30 a.m. better achieves the Board’s goal of aligning presentment to settlement, and better aligns with today’s electronic check processing environment, than the existing 9:30 a.m. settlement time under Regulation J. In addition, the Board believe that the proposed settlement time of 8:30 a.m. will impose minimal costs on paying banks. The Board sought comment on (1) whether permitting the Reserve Banks to obtain settlement from a paying bank for a check by as early as 8:30 a.m. was appropriate and (2) the feasibility of settlement prior to 8:30 a.m. and whether an earlier posting time would even better align presentment to settlement. (See discussion earlier in section II.B.) In addition, in lieu of proposing to permit the Reserve Banks to require a paying bank to settle as soon as one half-hour after it receives the item from the Reserve Banks, the Board could have proposed a shorter or longer period. The Board believes the final time period of one half-hour promotes the Board’s objective of minimizing the window between presentment and settlement to reflect technological and operational developments while continuing to provide paying banks with sufficient time to perform a limited verification of cash letters. The Board requested comment on whether one half-hour between presentment and settlement is appropriate or if a shorter window would be sufficient. (See discussion earlier in section II.A.) wreier-aviles on DSK5TPTVN1PROD with RULES VI. Paperwork Reduction Act Analysis In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320, appendix A.1), the Board reviewed the final rule under the authority delegated to the Board by the Office of Management and Budget (OMB). No collections of information pursuant to the PRA are contained in the final rule. VerDate Sep<11>2014 15:04 Dec 04, 2014 Jkt 235001 List of Subjects in 12 CFR Part 210 Banks, Banking, Federal Reserve System. Authority and Issuance For the reasons set forth in the preamble, the Board amends Regulation J, 12 CFR part 210, as follows: PART 210—COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J) 1. The authority citation for part 210 is revised to read as follows: ■ Authority: 12 U.S.C. 248(i), (j), and 248–1, 342, 360, 464, 4001–4010, and 5001–5018. 2. In § 210.2, revise paragraphs (c) and (p) to read as follows: ■ § 210.2 Definitions. * * * * * (c) Administrative Reserve Bank with respect to an entity means the Reserve Bank in whose District the entity is located, as determined under the procedure described in § 204.3(g) of this chapter (Regulation D), even if the entity is not otherwise subject to that section. * * * * * (p) Clock hour and clock half-hour. (1) Clock hour means a time that is on the hour, such as 1:00, 2:00, etc. (2) Clock half-hour means a time that is on the half-hour, such as 1:30, 2:30, etc. * * * * * ■ 3. In § 210.9, revise paragraphs (b)(2), (3), and (4) to read as follows: § 210.9 Settlement and payment. * * * * * (b) * * * (2) Time of settlement. (i) On the day a paying bank receives a cash item from a Reserve Bank, it shall settle for the item so that the proceeds of the settlement are available to its administrative Reserve Bank, or return the item, by the latest of— (A) The next clock hour or clock halfhour that is at least one half-hour after the paying bank receives the item; (B) 8:30 a.m. eastern time; or (C) Such later time as provided in the Reserve Banks’ operating circulars. (ii) If the paying bank fails to settle for or return a cash item in accordance with paragraph (b)(2)(i) of this section, it shall be subject to any applicable overdraft charges. Settlement under paragraph (b)(2)(i) of this section satisfies the settlement requirements of paragraph (b)(1) of this section. (3) Paying bank closes voluntarily. (i) If a paying bank closes voluntarily so PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 72111 that it does not receive a cash item on a day that is a banking day for a Reserve Bank, and the Reserve Bank makes a cash item available to the paying bank on that day, the paying bank shall either— (A) On that day, settle for the item so that the proceeds of the settlement are available to its administrative Reserve Bank, or return the item, by the latest of the next clock hour or clock half-hour that is at least one half-hour after it ordinarily would have received the item, 8:30 a.m. eastern time, or such later time as provided in the Reserve Banks’ operating circulars; or (B) On the next day that is a banking day for both the paying bank and the Reserve Bank, settle for the item so that the proceeds of the settlement are available to its administrative Reserve Bank by 8:30 a.m. eastern time on that day or such later time as provided in the Reserve Banks’ operating circulars; and compensate the Reserve Bank for the value of the float associated with the item in accordance with procedures provided in the Reserve Bank’s operating circular. (ii) If a paying bank closes voluntarily so that it does not receive a cash item on a day that is a banking day for a Reserve Bank, and the Reserve Bank makes a cash item available to the paying bank on that day, the paying bank is not considered to have received the item until its next banking day, but it shall be subject to any applicable overdraft charges if it fails to settle for or return the item in accordance with paragraph (b)(3)(i) of this section. The settlement requirements of paragraphs (b)(1) and (2) of this section do not apply to a paying bank that settles in accordance with paragraph (b)(3)(i) of this section. (4) Reserve Bank closed. (i) If a paying bank receives a cash item from a Reserve Bank on a banking day that is not a banking day for the Reserve Bank, the paying bank shall— (A) Settle for the item so that the proceeds of the settlement are available to its administrative Reserve Bank by the close of Fedwire on the Reserve Bank’s next banking day, or return the item by midnight of the day it receives the item (if the paying bank fails to settle for or return a cash item in accordance with this paragraph (b)(4)(i)(A), it shall become accountable for the amount of the item as of the close of its banking day on the day it receives the item); and (B) Settle for the item so that the proceeds of the settlement are available to its administrative Reserve Bank by 8:30 a.m. eastern time on the Reserve Bank’s next banking day or such later E:\FR\FM\05DER1.SGM 05DER1 72112 Federal Register / Vol. 79, No. 234 / Friday, December 5, 2014 / Rules and Regulations time as provided in the Reserve Bank’s operating circular, or return the item by midnight of the day it receives the item. If the paying bank fails to settle for or return a cash item in accordance with this paragraph (b)(4)(i)(B), it shall be subject to any applicable overdraft charges. Settlement under this paragraph (b)(4)(i)(B) satisfies the settlement requirements of paragraph (b)(4)(i)(A) of this section. (ii) [Reserved] * * * * * By order of the Board of Governors of the Federal Reserve System, December 1, 2014. Robert deV. Frierson, Secretary of the Board. [FR Doc. 2014–28516 Filed 12–4–14; 8:45 am] BILLING CODE 6210–01–P FEDERAL RESERVE SYSTEM 12 CFR Part 210 [Docket No. OP–1472] Federal Reserve Policy on Payment System Risk; Procedures for Measuring Daylight Overdrafts Board of Governors of the Federal Reserve System. ACTION: Policy statement. AGENCY: The Board of Governors of the Federal Reserve System (Board) has adopted revisions to part II of the Federal Reserve Policy on Payment System Risk (PSR policy) related to the procedures for measuring balances intraday in institutions’ accounts at the Federal Reserve Banks (Reserve Banks). The changes relate to the Board’s procedures for posting debit and credit entries to institutions’ Federal Reserve accounts for automated clearinghouse (ACH) debit transactions and commercial check transactions. Elsewhere in the Federal Register under Docket No. R–1473, the Board has adopted related changes to the Board’s Regulation J that affect when paying banks settle for check transactions presented to them by the Reserve Banks. Additionally, in this document, the Board has adopted a set of principles for establishing future posting procedures for the Reserve Banks’ same-day ACH service. The Board has also adopted a change in language of the PSR policy intended to clarify the Reserve Banks’ administration of the policy for U.S. branches and agencies of foreign banking organizations. Finally, the Board has adopted two technical revisions to the posting procedures to reflect deposit deadlines already in effect for Treasury checks, postal money wreier-aviles on DSK5TPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 15:04 Dec 04, 2014 Jkt 235001 orders, local Federal Reserve Bank checks, and savings bond redemptions in separately sorted deposits. DATES: Effective Dates: The policy changes related to the set of principles for establishing future posting procedures for the Reserve Banks’ sameday ACH service, the Reserve Banks’ administration of the policy for U.S. branches and agencies of foreign banking organizations, and the technical revisions to the posting procedures for Treasury checks, postal money orders, local Federal Reserve Bank checks, and savings bond redemptions will take effect on December 5, 2014. The policy changes to the Board’s procedures for posting debit and credit entries to institutions’ Federal Reserve accounts for ACH debit and commercial check transactions will take effect on July 23, 2015. All items scheduled to settle on this date and after will post according to the new posting rule procedures for these transactions, regardless of date of deposit. FOR FURTHER INFORMATION CONTACT: Susan V. Foley, Senior Associate Director (202/452–3596), Jeffrey D. Walker, Assistant Director (202/721– 4559), or Michelle D. Olivier, Senior Financial Services Analyst (202/452– 2404), Division of Reserve Bank Operations and Payment Systems, Board of Governors of the Federal Reserve System; for users of Telecommunications Device for the Deaf (TDD) only, contact 202/263–4869. SUPPLEMENTARY INFORMATION: I. Background On December 10, 2013, the Board requested comment on several changes to part II of the PSR policy intended to enhance the efficiency of the payment system.1 Technology and processing improvements have enabled payment systems and depository institutions to achieve significant efficiencies since the Board first established the procedures, referred to as posting rules, to measure depository institutions’ intraday Federal Reserve account balances. The proposed changes to these posting rules are intended to align them with current operations and processing times and to strategically position the rules for future advancements in the speed of clearing and settlement. Commercial and Government ACH Debit Transactions The Board proposed moving the posting times for commercial and government ACH debit transactions 1 78 FR 74130 (Dec. 10, 2013). The Board’s PSR policy is available at www.federalreserve.gov/ paymentsystems/psr_policy.htm. PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 processed overnight to 8:30 a.m. from 11:00 a.m. eastern time (ET) to coincide with the posting time for ACH credit transactions processed overnight.2 Under the proposal, other types of ACH transactions, including same-day ACH and certain ACH return items, would not be affected and would continue to post at 5:00 p.m. The Board outlined four potential benefits to shifting earlier the posting for ACH debit transactions. First, posting ACH debit transactions according to the proposed posting rules would simplify account management by allowing institutions to fund the net of all ACH activity at a single posting time, rather than funding debit and credit transactions separately. Second, the change would increase liquidity early in the day both for institutions that originate ACH debit transactions over the FedACH network and for those institutions that originate ACH debit transactions over the Electronic Payments Network (EPN), the other ACH operator, but have transactions delivered to receiving institutions over the FedACH network (interoperator transactions).3 Third, moving the posting time for ACH debit transactions to 8:30 a.m. would align the Reserve Banks’ FedACH settlement times with those of EPN. The Board believes that this change would remove any potential competitive disparities between the two ACH operators and their participants arising from the different settlement times for ACH debit transactions. Fourth, the earlier posting of ACH debit transactions would increase the efficiency of the ACH network by aligning better the settlement of ACH debit transactions with their processing. Additionally, posting ACH debit transfers at 8:30 a.m. would better conform to the Board’s principles for measuring daylight overdrafts, specifically the principle that encourages posting times to be as close as possible to the delivery of payments to the receiving institution.4 2 All times are eastern time unless otherwise specified. In 2008, the Board requested comment on moving the posting time of ACH debit transactions from 11:00 a.m. to 8:30 a.m. to coincide with the posting of ACH credit transactions but decided not to pursue the change because of economic conditions at the time and the additional costs and liquidity pressures that could be placed on some institutions. The request for comment and the subsequent notice of the Board’s decision not to pursue the proposed changes can be found, respectively, at 73 FR 12443 (Mar. 7, 2008) and 73 FR 79127 (Dec. 24, 2008). 3 Liquidity refers to balances in Federal Reserve accounts to make payments. An increase in liquidity involves higher account balances, which could result in fewer daylight overdrafts. 4 The Board’s four principles for measuring daylight overdrafts are as follows: (1) The E:\FR\FM\05DER1.SGM 05DER1

Agencies

[Federal Register Volume 79, Number 234 (Friday, December 5, 2014)]
[Rules and Regulations]
[Pages 72107-72112]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-28516]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 
Prices of new books are listed in the first FEDERAL REGISTER issue of each 
week.

========================================================================


Federal Register / Vol. 79, No. 234 / Friday, December 5, 2014 / 
Rules and Regulations

[[Page 72107]]



FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-1473]
RIN 7100-AE06


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire: Time of Settlement by a Paying Bank 
for an Item Received From a Reserve Bank

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board of Governors (Board) is adopting amendments to 
subpart A of its Regulation J, Collection of Checks and Other Items by 
Federal Reserve Banks and Funds Transfers through Fedwire, to permit 
the Federal Reserve Banks (Reserve Banks) to require paying banks that 
receive presentment of checks from the Reserve Banks to make the 
proceeds of settlement for those checks available to the Reserve Banks 
as soon as one half-hour after receipt of the checks. The amendments 
will also permit the Reserve Banks to obtain settlement from paying 
banks by as early as 8:30 a.m. eastern time for checks that the Reserve 
Banks present. These amendments to Regulation J are consistent with the 
revised method for posting debits and credits to banks' Federal Reserve 
accounts to measure daylight overdrafts under amendments to the Federal 
Reserve Policy on Payment System Risk (PSR policy) that the Board is 
concurrently adopting. The Board is also adopting a technical amendment 
to the definition of ``Administrative Reserve Bank.''

DATES: Effective Date: The technical amendment to Sec.  210.2(c) is 
effective on December 5, 2014. All other amendments are effective on 
July 23, 2015. Applicability Date: All items scheduled to settle on 
July 23, 2015, and after will post according to the new posting rule 
procedures for these transactions, regardless of date of deposit.

FOR FURTHER INFORMATION CONTACT: Susan V. Foley, Senior Associate 
Director (202/452-3596), Samantha J. Pelosi, Manager (202/530-6292), 
Scott J. Anchin, Senior Financial Services Analyst (202/452-3638), 
Division of Reserve Bank Operations and Payment Systems; or Evan 
Winerman, Senior Attorney (202/872-7578), Legal Division; for users of 
Telecommunication Devices for the Deaf (TDD) only, contact 202/263-
4869.

SUPPLEMENTARY INFORMATION: 

I. Background

    Subpart A of Regulation J, Collection of Checks and Other Items by 
Federal Reserve Banks, governs the collection of checks and the 
handling of returned checks by the Reserve Banks. The purpose of the 
subpart is to provide rules for collecting and returning items and 
settling balances. Among other things, the subpart specifies the time 
and manner in which paying banks must settle for items presented to 
them by the Reserve Banks.
    In accordance with Subpart A, the Reserve Banks have issued 
Operating Circular 3 (OC 3), Collection of Cash Items and Returned 
Checks, which provides specific terms and conditions under which the 
Reserve Banks will handle checks.\1\ The Board's Regulation CC, 
Availability of Funds and Collection of Checks, and provisions of the 
Uniform Commercial Code (UCC), as adopted in a state, also govern the 
collection, presentment, and return of checks, to the extent those 
provisions are not inconsistent with Regulation J.\2\
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    \1\ Operating Circular 3 is available at www.frbservices.org/regulations/operating_circulars.html.
    \2\ 12 CFR part 229; UCC Article 4.
---------------------------------------------------------------------------

    On December 10, 2013, the Board requested comment on proposed 
changes to the PSR policy.\3\ The changes related to the Board's 
procedures for posting debit and credit entries to depository 
institutions' Federal Reserve accounts for automated clearinghouse 
(ACH) debit transactions and commercial check transactions. At the same 
time, the Board requested comment on proposed changes to Regulation J 
that would conform to the proposed changes to the PSR policy.\4\
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    \3\ 78 FR 74130 (Dec. 10, 2013). The Federal Reserve's current 
policy on payment system risk is available at 
www.federalreserve.gov/paymentsystems/psr_policy.htm.
    \4\ 78 FR 74041 (Dec.10, 2013).
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    Currently, Sec.  210.9(b)(2)(i) of Regulation J provides that the 
proceeds of a paying bank's settlement must be made available to its 
Administrative Reserve Bank by the latest of (1) the next clock hour 
that is at least one hour after the paying bank receives the check; (2) 
9:30 a.m. eastern time; or (3) such later time as provided in the 
Reserve Banks' operating circulars.\5\ Under this section, 9:30 a.m. is 
the earliest time a paying bank is required to settle for an item, and 
there has to be at least one hour between the time the item was 
presented to the paying bank and the time the paying bank settles for 
the item. The same rules apply to the settlement of returned items 
under Sec.  210.12(i).\6\
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    \5\ All times are eastern time unless otherwise specified. 
Section 210.9(b)(3)(i) sets forth similar times of day if the paying 
bank closes voluntarily on a Reserve Bank banking day. Section 
210.9(b)(4)(i) sets forth analogous times if the paying bank 
receives an item on a banking day on which the Reserve Bank is 
closed, i.e., a business day that is not a banking day for the 
Reserve Bank.
    \6\ Section 210.12(i) of Regulation J provides that recipients 
of returned items must settle with Reserve Banks in the same manner 
and by the same time as items presented for payment.
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    Section 12.2 of the Reserve Banks' Operating Circular 3 currently 
sets 11:00 a.m. as the earliest settlement time (later than 9:30 a.m. 
set forth in Regulation J). Under section 12.2, the proceeds of a 
paying bank's settlement must be available to its Administrative 
Reserve Bank by the later of 11:00 a.m. or the next clock hour that is 
at least one hour after the paying bank receives the item, but no later 
than 3:00 p.m. local time of the paying bank.
    Consistent with the proposed PSR policy changes, the Board proposed 
that Sec.  210.9(b)(2)(i) of Regulation J be revised to state that the 
paying bank shall settle for an item by the latest of (1) the next 
clock hour or clock half-hour that is at least one half-hour after the 
paying bank receives the item; (2) 8:30 a.m.; or (3) such later time as 
provided in the Reserve Banks' operating circulars. For example, if a 
Reserve Bank presents an item by 8:00 a.m., the paying bank would be 
required to settle for the item at 8:30 a.m., unless a later settlement 
time were provided for in the Reserve

[[Page 72108]]

Banks' operating circulars. The Board proposed similar changes in 
Sec. Sec.  210.9(b)(3)(i) and (b)(4)(i).
    The Board also proposed to define ``clock half-hour,'' a new term 
in Sec.  210.2(p)(2), to mean a time that is on the half-hour (for 
example, 1:30 or 2:30). Section 210.2(p), which the Board proposed to 
redesignate as Sec.  210.2(p)(1), currently defines the term ``clock 
hour'' as a time that is on the hour (for example, 1:00 or 2:00).

II. Summary of Public Comments and Analysis

    The Board received six comments submitted by depository institution 
trade organizations on the proposed amendments to Regulation J.\7\ The 
Board considered these comments in developing its final rule as 
discussed below.
---------------------------------------------------------------------------

    \7\ The comment letters are available at http://www.federalreserve.gov/apps/foia/proposedregs.aspx.
---------------------------------------------------------------------------

A. One Half-Hour Window Between Presentment and Settlement

    The Board requested comment on whether one half-hour between 
receipt of items by a paying bank and the paying bank's settlement is 
sufficient for a paying bank to perform a limited verification of cash 
letters and determine whether to settle for or return the cash letter. 
The Board also requested comment on whether a shorter period between 
presentment and settlement would be appropriate (for example, fifteen 
minutes).
    Two commenters, the American Bankers Association and the 
Independent Community Bankers of America, supported the Board's 
proposal to reduce the settlement window to one half-hour, agreeing 
that advances in check processing allow for a shorter period between 
check presentment and settlement. One commenter, the American Bankers 
Association, did not support shortening the period further to 15 
minutes but did not provide a specific reason.
    The Board believes that the almost all-electronic nature of check 
processing that currently exists makes one half-hour between 
presentment and settlement sufficient because of the reduced time 
required to verify cash letters in an electronic environment.
    The Board also believes that sufficient tools are available to 
depository institutions to mitigate any adverse effect that movement to 
a one half-hour settlement window would have on an institution's 
Federal Reserve account balance. Past trends indicate that an 
institution should be able to predict within a reasonable margin of 
error the approximate dollar value of the checks it expects the Reserve 
Banks to present and should be able to hold balances sufficient to 
cover that amount. The Reserve Banks now pay interest on most 
institutions' Federal Reserve account balances, reducing institutions' 
opportunity cost (that is, loss of interest) associated with holding 
higher account balances overnight.\8\ In addition, the PSR policy 
allows eligible institutions to collateralize their daylight overdrafts 
to avoid paying a fee. For each two-week reserve maintenance period, 
depository institutions also receive a $150 fee waiver, reducing the 
burden on institutions that might incur small amounts of 
uncollateralized daylight overdrafts.\9\
---------------------------------------------------------------------------

    \8\ 12 CFR 204.10.
    \9\ The Board notes that Federal Home Loan Banks (FHLBs) are not 
eligible to earn interest on balances in Federal Reserve accounts, 
but can act as pass-through correspondents. Per Sec.  204.10 of 
Regulation D, in cases of balances maintained by pass-through 
correspondents that are not interest-eligible institutions, Reserve 
Banks shall pay interest only on the balances maintained to satisfy 
a reserve balance requirement of one or more respondents, and the 
correspondents shall pass back to its respondents interest paid on 
balances in the correspondent's account (12 CFR 204.10). The Board 
notes also that voluntary collateralization of daylight overdrafts 
and the $150 fee waiver are not available to Edge and agreement 
corporations, bankers' banks that have not waived their exemption 
from reserve requirements, limited-purpose trust companies, 
government-sponsored enterprises (including FHLBs), and 
international organizations. These types of institutions do not have 
regular access to the discount window and, therefore, are expected 
not to incur daylight overdrafts in their Federal Reserve accounts.
---------------------------------------------------------------------------

    For these reasons, the Board is adopting as proposed the amendments 
shortening the minimum time period between receipt of checks by a 
paying bank and the paying bank's settlement to one half-hour. The 
Board did not receive any comments on the proposal to define ``clock 
half-hour'' as a new term in Sec.  210.2(p)(2) and is adopting the new 
term as proposed.

B. Earliest Settlement Time at 8:30 a.m.

    The Board requested comment on whether to permit the Reserve Banks 
to obtain settlement from a paying bank for a check by as early as 8:30 
a.m. The Board also requested comment on the feasibility of settlement 
earlier than 8:30 a.m., given the current almost all-electronic check 
processing environment, and whether an earlier settlement time would 
even better align presentment to settlement.\10\
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    \10\ In September 1997, the Board revised Sec.  210.9(b) to 
explicitly refer to 9:30 a.m. (rather than one hour after the 
opening of Fedwire) as the earliest time a paying bank could be 
required to settle for an item. This revision to Sec.  210.9(b) was 
intended to ensure the earliest settlement time for checks remained 
unchanged when the scheduled opening of Fedwire moved from 8:30 a.m. 
to an earlier hour. 62 FR 48166, 48169 (Sept. 15, 1997). In December 
1997, the scheduled opening of Fedwire was moved from 8:30 a.m.to 
12:30 a.m., and in May 2004, it moved to 9:00 p.m. on the preceding 
calendar day. For example, for the Reserve Banks' banking day of 
Tuesday, Fedwire opens at 9:00 p.m. on Monday.
---------------------------------------------------------------------------

    Two commenters, the American Bankers Association and the 
Independent Community Bankers of America, supported the proposal to 
allow the Reserve Banks to obtain settlement from a paying bank for a 
check by as early as 8:30 a.m., noting that the rules that allow the 
Reserve Banks to pay interest on account balances held by institutions 
reduces the cost that institutions might incur to hold funds overnight 
to cover any checks presented early the next morning. One commenter, 
the American Bankers Association, did not support the proposal to move 
the settlement time earlier than 8:30 a.m. but did not provide a 
specific reason. Four commenters, the Credit Union National 
Association, the Georgia Credit Union League, the Missouri Credit Union 
Association, and the National Association of Federal Credit Unions, 
expressed concern that some smaller institutions might be negatively 
affected by the proposed change and might have to increase their 
Federal Reserve account balances to settle presented checks by holding 
higher balances overnight, arranging for additional funding before 
settlement time, or incurring daylight overdrafts.
    The Board recognizes that some depository institutions will need to 
fund their accounts earlier in order to settle for checks by as early 
as 8:30 a.m. or incur daylight overdrafts. The Board believes, however, 
that sufficient tools are available to depository institutions to 
mitigate any adverse effect that a change to 8:30 a.m. may present. As 
discussed earlier, the Reserve Banks now pay interest on most 
institutions' Federal Reserve account balances, eligible institutions 
can collateralize their daylight overdrafts to avoid paying a fee, and 
depository institutions receive a $150 fee waiver for each two-week 
reserve maintenance period. The changes to the posting rules of the PSR 
policy and to Regulation J better align the policy and regulation with 
today's electronic check processing environment, in which over 90 
percent of checks are available to be presented by 8:00 a.m. and prompt 
settlement is possible for the majority of the value of check 
activity.\11\ Accordingly, the Board

[[Page 72109]]

is adopting the amendments to Regulation J, Sec.  210.9(b) as proposed. 
The Reserve Banks plan to amend OC 3 to conform to the changes in 
Regulation J.
---------------------------------------------------------------------------

    \11\ In addition, the proposed posting rules would give earlier 
availability for items deposited with the Reserve Banks and for 
credit adjustments and corrections.
---------------------------------------------------------------------------

C. Effective date

    The Board proposed that the changes to the PSR policy and these 
conforming changes to Regulation J would become effective six months 
after publication in the Federal Register. The Board requested comment 
on whether six months provided paying banks with sufficient time to 
make any necessary operational changes.
    Five commenters, the American Bankers Association, the Credit Union 
National Association, the Georgia Credit Union League, the Independent 
Community Bankers of America, the Missouri Credit Union Association, 
believed that a six-month lead time would allow enough time to make any 
necessary operational changes. One commenter, the National Association 
of Federal Credit Unions, requested that the Board allow a one-year 
implementation period, stating that the proposed six-month 
implementation period would not allow institutions enough time to 
adjust their policies and procedures to reduce the chances of incurring 
daylight overdraft fees. The Board is adopting an effective date of 
July 23, 2015. All items scheduled to settle on this date and after 
will post according to the new posting rule procedures for these 
transactions, regardless of date of deposit.

III. Technical Amendment

    The Board is also adopting a technical amendment to the definition 
of ``Administrative Reserve Bank.'' \12\ Section 210.2(c) states that 
an ``Administrative Reserve Bank'' is the Reserve Bank in whose 
District the entity is located, as determined under the procedure 
described in Sec.  204.3(b)(2) of the chapter (Regulation D). The Board 
has relocated Sec.  204.3(b)(2) of Regulation D to Sec.  204.3(g).\13\ 
Accordingly, the Board is amending the definition of ``Administrative 
Reserve Bank'' in Sec.  210.2(c) to cross-reference Sec.  204.3(g) 
rather than Sec.  204.3(b)(2).
---------------------------------------------------------------------------

    \12\ 12 CFR 210.2(c).
    \13\ See 74 FR 25629, 25633-34 (May 29, 2009).
---------------------------------------------------------------------------

    The Board did not provide public notice or request comment 
regarding this technical amendment. Pursuant to section 553(b)(3)(B) of 
the Administrative Procedure Act,\14\ the Board finds that public 
notice and comment is unnecessary because the technical amendment does 
not effect a substantive change; rather, the technical amendment 
conforms Sec.  210.2(c) to reorganized Regulation D. For the same 
reasons, the Board finds that there is good cause for the technical 
amendment to be effective immediately, rather than thirty days after 
its publication date.\15\
---------------------------------------------------------------------------

    \14\ 5 U.S.C. 553(b)(3)(B).
    \15\ 5 U.S.C. 553(d)(3).
---------------------------------------------------------------------------

IV. Competitive Impact Analysis

    The Board conducts a competitive impact analysis when it considers 
a rule or policy change that may have a substantial effect on payment 
system participants. Specifically, the Board determines whether there 
would be a direct and material adverse effect on the ability of other 
service providers to compete with the Federal Reserve due to legal 
differences or due to the Federal Reserve's dominant market position 
deriving from such legal differences.\16\ If such legal differences 
exist, the Board will assess whether the same objectives could be 
achieved by a modified proposal with lesser competitive impact or, if 
not, whether the benefits of the proposal outweigh the effect on 
competition.
---------------------------------------------------------------------------

    \16\ Federal Reserve Regulatory Service, 7-145.2.
---------------------------------------------------------------------------

    The Board believes that the amendments to Regulation J do 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.
    Under Regulation J, the Reserve Banks have the legal ability to 
obtain same-day settlement for checks they present before the paying 
bank's cut-off hour (typically 2:00 p.m. local time) through ``auto-
charge,'' that is, a direct debit to the Federal Reserve account of the 
paying bank or its correspondent settlement agent.\17\ Under amended 
Regulation J, the Reserve Banks could present a check at any time 
before the paying bank's cut-off hour and debit the account of the 
paying bank or its correspondent settlement agent on the next clock 
hour or half-hour that is at least one half-hour after presentment.
---------------------------------------------------------------------------

    \17\ 12 CFR 210.9(b)(1) and (b)(5).
---------------------------------------------------------------------------

    In contrast, the latest that a private-sector bank may present a 
paper check for same-day settlement is 8:00 a.m. local time. Section 
229.36(f) of Regulation CC requires the paying bank to settle for the 
check by credit to a Reserve Bank account designated by the presenting 
bank by the close of Fedwire (currently 6:30 p.m.) or by another 
agreed-upon method and time.\18\ Thus, the Reserve Banks may present 
checks later in the day for same-day settlement than private-sector 
banks. In addition, the Reserve Banks may obtain settlement earlier in 
the day than private-sector collecting banks and, in turn, may pass 
credits for deposited checks earlier in the day without incurring 
significant intraday float.
---------------------------------------------------------------------------

    \18\ 12 CFR 229.36(f)(2).
---------------------------------------------------------------------------

    In March 1998, the Board requested comment on whether these legal 
differences between the rights of the Reserve Banks and private-sector 
presenting banks provided the Reserve Banks with a competitive 
advantage and whether the Board should take action to reduce the 
differences.\19\ Commenters generally concluded that the costs of 
further changes outweighed any advantage of the Reserve Banks. In 
particular, commenters noted the efficiency of the Reserve Bank's auto-
charge process for paying banks, and stated that moving the private-
sector presentment deadline to later in the day or eliminating the 
direct debit of Federal Reserve accounts for check presentments would 
result in higher costs to paying banks and their business customers in 
terms of account management, settlement funds transfer fees, and 
shortened processing windows, and that those costs would outweigh the 
benefits gained by presenting banks. Based on an analysis of the 
comments, the Board took no further action.
---------------------------------------------------------------------------

    \19\ The request for comment and the subsequent notice of the 
Board's decision can be found, respectively, at 63 FR 12700 (March 
16, 1998) and 63 FR 68701 (December 14, 1998).
---------------------------------------------------------------------------

    Currently, institutions may determine, as part of the agreement 
between a presenting bank and a paying bank, the time at which 
settlement for electronic checks is required to be funded. A presenting 
bank and a paying bank could agree, for example, to a minimum time 
between presentment and settlement. For presenting banks and paying 
banks that opt to use a check clearinghouse rather than directly 
exchange checks, private-sector clearinghouses have the option to use 
the Reserve Banks' National Settlement Service (NSS) to effect 
settlement of checks or may settle by directing their members to 
initiate funds transfers over the Reserve Banks' Fedwire Funds 
Service.\20\ Beginning in January 2015, the NSS file submission window 
will be 7:30 a.m. to 5:30 p.m. Fedwire Funds operating hours begin at 
9:00 p.m. the

[[Page 72110]]

previous calendar day and end at 6:30 p.m.
---------------------------------------------------------------------------

    \20\ NSS is a multilateral settlement service owned and operated 
by the Reserve Banks. The service is offered to depository 
institutions that settle for participants in clearinghouses, 
financial exchanges, and other clearing and settlement groups. 
Settlement agents, acting on behalf of depository institutions in a 
settlement arrangement, electronically submit settlement files to 
the Reserve Banks. Files are processed upon receipt, and entries are 
automatically posted to the depository institutions' Reserve Bank 
accounts. The NSS file submission window is currently 8:30 a.m. to 
5:00 p.m.
---------------------------------------------------------------------------

    Under the final amendments to Regulation J and the recently adopted 
changes to the PSR policy posting rules, the bulk of the Reserve Banks' 
postings of credits to senders and debits to paying banks for 
commercial check transactions will shift to earlier in the day. The 
value of checks a bank sends to the Reserve Banks could be higher or 
lower than the value it receives from the Reserve Banks. As a result, 
the earlier posting of commercial check transactions may be viewed as 
more or less attractive, depending on whether the value of an 
institution's check credits is higher or lower than the value of its 
check debits. Further, private-sector institutions can achieve 
improvements in earlier settlement similar to those provided by the 
rule and the PSR policy changes through private agreements among 
participants, as well as the use of NSS.
    More recently, the Board requested comment on the continued utility 
of the Regulation CC same-day settlement rule for paper checks and 
whether the rule should be applied to electronic check presentments by 
private-sector banks. The Board also noted that if, in the future, it 
proposes to eliminate the same-day settlement rule, it could also 
propose to retain the proscription against paying banks' assessment of 
presentment fees in order to maintain the current balance of bargaining 
power, as well as reduce the competitive disparities in presentment 
abilities between the Reserve Banks and private-sector banks.\21\ The 
Board is in the process of analyzing these comments and will discuss 
these issues, as appropriate, at a later date in the context of the 
final amendments to Regulation CC. In the meantime, the Board does not 
believe that the changes to Regulation J reducing the minimum time 
between presentment and settlement to 30 from 60 minutes, and moving 
the earliest settlement time to 8:30 a.m. from 9:30 a.m., changes the 
Reserve Banks' competitive position versus private-sector presenting 
banks in a material way.
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    \21\ 79 FR 6674 (Feb. 14, 2014).
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V. Final Regulatory Flexibility Analysis

    The Board has reviewed the final regulation in accordance with 
section 3(a) of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et 
seq.). The rule would apply to all depository institutions that receive 
presentment or return of checks from the Reserve Banks. Based on 
current information, the Board believes that the final rule would not 
have a significant economic impact on a substantial number of small 
entities (5 U.S.C. 605(b)). Nonetheless, a Final Regulatory Flexibility 
Analysis has been prepared in accordance with 5 U.S.C. 604, after 
consideration of comments received during the public comment period.
Statement of the Need for, and Objectives of the Final Rule
    These final amendments to Regulation J are necessary to conform the 
required settlement times for checks presented by the Reserve Banks to 
the method for posting debits and credits to institutions' Federal 
Reserve accounts to measure daylight overdrafts under recent revisions 
to the PSR policy. The Board believes that the Regulation J revisions 
and the PSR policy posting rules better align the settlement for checks 
with actual deposit and presentment times, reflecting the industry's 
almost complete shift from paper to electronic check processing.
Public Comments
    The Board requested information and comment on any costs that would 
arise from the application of the proposed rule. Four institutions 
expressed concern that some smaller institutions might be negatively 
affected by the proposed change and might have to increase their 
Federal Reserve account balances to settle presented checks by holding 
higher balances overnight, arranging for additional funding before 
settlement time, or incurring daylight overdrafts. As discussed 
earlier, the Board believes that sufficient tools are available to 
depository institutions to mitigate any adverse effect. For example, 
the Reserve Banks now pay interest on most institutions' Federal 
Reserve account balances, eligible institutions can collateralize their 
daylight overdrafts to avoid paying a fee, and depository institutions 
receive a $150 fee waiver for each two-week reserve maintenance 
period.\22\ As further discussed earlier, under the PSR policy posting 
rules, the bulk of the Reserve Banks' postings of debits to paying 
institutions for commercial check transactions will shift to earlier in 
the day, allowing the Reserve Banks to provide credits to depositing 
institutions earlier, thus mitigating adverse effects on depository 
institutions.
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    \22\ A small number of institutions could be ineligible to 
receive intraday credit and would incur overdrafts. To avoid 
violating the PSR policy and incurring fees, these institutions 
would need to increase funding either overnight or early in the 
morning. Some of these institutions could be eligible to receive 
interest on Federal Reserve account balances.
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Small Entities Affected by the Rule
    The final rule affects all institutions that receive checks or 
returned checks handled by the Reserve Banks. The Board believes that 
virtually all depository institutions receive checks or returned checks 
handled by the Reserve Banks on at least an occasional basis. Pursuant 
to regulations issued by the Small Business Administration (SBA) (13 
CFR 121.201), a ``small banking organization'' includes a depository 
institution with $550 million or less in total assets. Based on data 
reported as of June 30, 2014, the Board believes that there are 
approximately 11,750 small depository institutions.
Projected Reporting, Recordkeeping, and Other Compliance Requirements
    The final rule would permit the Reserve Banks to require a paying 
bank to settle for an item by as early as 8:30 a.m., instead of 9:30 
a.m., and as soon as one half-hour, instead of one hour, after it 
receives the item from the Reserve Banks. Paying banks may choose to 
fund their accounts to accommodate the earlier settlement time by 
holding sufficient balances overnight or arranging for funding before 
the settlement time. Otherwise, paying banks would incur daylight 
overdrafts in their Federal Reserve account. The rule contains no other 
reporting, recordkeeping, or compliance requirements.
Steps Taken To Minimize Impact of, and Significant Alternatives to, the 
Final Rule
    As noted earlier, four commenters, the Credit Union National 
Association, the Georgia Credit Union League, the Missouri Credit Union 
Association, and the National Association of Federal Credit Unions, 
suggested that some smaller institutions might be negatively affected 
by the proposed change and might have to increase their Federal Reserve 
account balances to settle presented checks by holding higher balances 
overnight or arranging for additional funding before settlement time. 
Otherwise, paying banks would incur daylight overdrafts. As discussed 
earlier, the Board believes that sufficient tools are available to 
depository institutions to mitigate any adverse effect on an 
institution's Federal Reserve account balance (including interest on 
Federal Reserve account balances, collateralization of daylight 
overdrafts to avoid paying a fee, and a $150 fee waiver for each two-
week reserve maintenance period). As further

[[Page 72111]]

discussed earlier, under the PSR policy posting rules, the bulk of the 
Reserve Banks' postings of debits to paying institutions for commercial 
check transactions will shift to earlier in the day, allowing the 
Reserve Banks to provide credits to depositing institutions earlier, 
thus mitigating adverse effects on depository institutions.
    Alternatively, the Board could have adopted a rule that permits the 
Reserve Banks to require a paying bank to settle for an item at a time 
earlier than 8:30 a.m. or leave the earliest possible settlement time 
at 9:30 a.m. The Board believes the proposed time of 8:30 a.m. better 
achieves the Board's goal of aligning presentment to settlement, and 
better aligns with today's electronic check processing environment, 
than the existing 9:30 a.m. settlement time under Regulation J. In 
addition, the Board believe that the proposed settlement time of 8:30 
a.m. will impose minimal costs on paying banks. The Board sought 
comment on (1) whether permitting the Reserve Banks to obtain 
settlement from a paying bank for a check by as early as 8:30 a.m. was 
appropriate and (2) the feasibility of settlement prior to 8:30 a.m. 
and whether an earlier posting time would even better align presentment 
to settlement. (See discussion earlier in section II.B.)
    In addition, in lieu of proposing to permit the Reserve Banks to 
require a paying bank to settle as soon as one half-hour after it 
receives the item from the Reserve Banks, the Board could have proposed 
a shorter or longer period. The Board believes the final time period of 
one half-hour promotes the Board's objective of minimizing the window 
between presentment and settlement to reflect technological and 
operational developments while continuing to provide paying banks with 
sufficient time to perform a limited verification of cash letters. The 
Board requested comment on whether one half-hour between presentment 
and settlement is appropriate or if a shorter window would be 
sufficient. (See discussion earlier in section II.A.)

VI. Paperwork Reduction Act Analysis

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320, appendix A.1), the Board reviewed the 
final rule under the authority delegated to the Board by the Office of 
Management and Budget (OMB). No collections of information pursuant to 
the PRA are contained in the final rule.

List of Subjects in 12 CFR Part 210

    Banks, Banking, Federal Reserve System.

Authority and Issuance

    For the reasons set forth in the preamble, the Board amends 
Regulation J, 12 CFR part 210, as follows:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

0
1. The authority citation for part 210 is revised to read as follows:

    Authority: 12 U.S.C. 248(i), (j), and 248-1, 342, 360, 464, 
4001-4010, and 5001-5018.


0
2. In Sec.  210.2, revise paragraphs (c) and (p) to read as follows:


Sec.  210.2  Definitions.

* * * * *
    (c) Administrative Reserve Bank with respect to an entity means the 
Reserve Bank in whose District the entity is located, as determined 
under the procedure described in Sec.  204.3(g) of this chapter 
(Regulation D), even if the entity is not otherwise subject to that 
section.
* * * * *
    (p) Clock hour and clock half-hour. (1) Clock hour means a time 
that is on the hour, such as 1:00, 2:00, etc.
    (2) Clock half-hour means a time that is on the half-hour, such as 
1:30, 2:30, etc.
* * * * *

0
3. In Sec.  210.9, revise paragraphs (b)(2), (3), and (4) to read as 
follows:


Sec.  210.9  Settlement and payment.

* * * * *
    (b) * * *
    (2) Time of settlement. (i) On the day a paying bank receives a 
cash item from a Reserve Bank, it shall settle for the item so that the 
proceeds of the settlement are available to its administrative Reserve 
Bank, or return the item, by the latest of--
    (A) The next clock hour or clock half-hour that is at least one 
half-hour after the paying bank receives the item;
    (B) 8:30 a.m. eastern time; or
    (C) Such later time as provided in the Reserve Banks' operating 
circulars.
    (ii) If the paying bank fails to settle for or return a cash item 
in accordance with paragraph (b)(2)(i) of this section, it shall be 
subject to any applicable overdraft charges. Settlement under paragraph 
(b)(2)(i) of this section satisfies the settlement requirements of 
paragraph (b)(1) of this section.
    (3) Paying bank closes voluntarily. (i) If a paying bank closes 
voluntarily so that it does not receive a cash item on a day that is a 
banking day for a Reserve Bank, and the Reserve Bank makes a cash item 
available to the paying bank on that day, the paying bank shall 
either--
    (A) On that day, settle for the item so that the proceeds of the 
settlement are available to its administrative Reserve Bank, or return 
the item, by the latest of the next clock hour or clock half-hour that 
is at least one half-hour after it ordinarily would have received the 
item, 8:30 a.m. eastern time, or such later time as provided in the 
Reserve Banks' operating circulars; or
    (B) On the next day that is a banking day for both the paying bank 
and the Reserve Bank, settle for the item so that the proceeds of the 
settlement are available to its administrative Reserve Bank by 8:30 
a.m. eastern time on that day or such later time as provided in the 
Reserve Banks' operating circulars; and compensate the Reserve Bank for 
the value of the float associated with the item in accordance with 
procedures provided in the Reserve Bank's operating circular.
    (ii) If a paying bank closes voluntarily so that it does not 
receive a cash item on a day that is a banking day for a Reserve Bank, 
and the Reserve Bank makes a cash item available to the paying bank on 
that day, the paying bank is not considered to have received the item 
until its next banking day, but it shall be subject to any applicable 
overdraft charges if it fails to settle for or return the item in 
accordance with paragraph (b)(3)(i) of this section. The settlement 
requirements of paragraphs (b)(1) and (2) of this section do not apply 
to a paying bank that settles in accordance with paragraph (b)(3)(i) of 
this section.
    (4) Reserve Bank closed. (i) If a paying bank receives a cash item 
from a Reserve Bank on a banking day that is not a banking day for the 
Reserve Bank, the paying bank shall--
    (A) Settle for the item so that the proceeds of the settlement are 
available to its administrative Reserve Bank by the close of Fedwire on 
the Reserve Bank's next banking day, or return the item by midnight of 
the day it receives the item (if the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(4)(i)(A), it 
shall become accountable for the amount of the item as of the close of 
its banking day on the day it receives the item); and
    (B) Settle for the item so that the proceeds of the settlement are 
available to its administrative Reserve Bank by 8:30 a.m. eastern time 
on the Reserve Bank's next banking day or such later

[[Page 72112]]

time as provided in the Reserve Bank's operating circular, or return 
the item by midnight of the day it receives the item. If the paying 
bank fails to settle for or return a cash item in accordance with this 
paragraph (b)(4)(i)(B), it shall be subject to any applicable overdraft 
charges. Settlement under this paragraph (b)(4)(i)(B) satisfies the 
settlement requirements of paragraph (b)(4)(i)(A) of this section.
    (ii) [Reserved]
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, December 1, 2014.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2014-28516 Filed 12-4-14; 8:45 am]
BILLING CODE 6210-01-P