Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire, 11431-11443 [2018-04486]

Download as PDF 11431 Proposed Rules Federal Register Vol. 83, No. 51 Thursday, March 15, 2018 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FEDERAL RESERVE SYSTEM 12 CFR Part 210 [Regulation J; Docket No. R–1599] RIN 7100 AE 98 Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers Through Fedwire Board of Governors of the Federal Reserve System. ACTION: Proposed rule and comment request. AGENCY: The Board of Governors of the Federal Reserve System (Board) is publishing for comment proposed amendments to Regulation J. The proposed amendments are intended to clarify and simplify certain provisions of Subpart A of Regulation J, remove obsolete provisions, and align the rights and obligations of sending banks, paying banks, and Federal Reserve Banks (Reserve Banks) with the Board’s recent amendments to Regulation CC, Availability of Funds and Collection of Checks, to reflect the virtually allelectronic check collection and return environment. The proposed rule would also amend subpart B of Regulation J to clarify that terms used in financial messaging standards, such as ISO 20022, do not confer legal status or responsibilities. SUMMARY: Comments must be submitted by May 14, 2018. ADDRESSES: You may submit comments, identified by Docket No. R–1599 and RIN 7100–AE98, by any of the following methods: • Agency Website: http:// www.federalreserve.gov. Follow the instructions for submitting comments at https://www.federalreserve.gov/apps/ foia/proposedregs.aspx • Email: regs.comments@ federalreserve.gov. Include docket and RIN numbers in the subject line of the message. • Fax: (202) 452–3819 or (202) 452– 3102. sradovich on DSK3GMQ082PROD with PROPOSALS DATES: VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 • Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. Instructions: All public comments will be made available on the Board’s website at https:// www.federalreserve.gov/apps/foia/ proposedregs.aspx as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room 3515, 1801 K Street NW (between 18th and 19th Streets NW), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on weekdays. For security reasons, the Board requires that visitors make an appointment to inspect comments. You may do so by calling (202) 452–3684. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments. FOR FURTHER INFORMATION CONTACT: Clinton N. Chen, Senior Attorney (202/ 452–3952), Legal Division; or Ian C.B. Spear, Manager (202–452–3959), Division of Reserve Bank Operations and Payment Systems; for users of Telecommunication Devices for the Deaf (TDD) only, contact 202–263–4869; Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. SUPPLEMENTARY INFORMATION: I. Background Subpart A of Regulation J governs the collection of checks and other items by the Reserve Banks. This subpart includes the warranties and indemnities that are given to the Reserve Banks by parties that send items to the Reserve Banks for collection and return, as well as the warranties and indemnities for which the Reserve Banks are responsible in connection with the items they handle. Subpart A also describes the methods by which the Reserve Banks may recover for losses associated with their collection of items. Subpart A authorizes the Reserve Banks to issue operating circulars governing the details of the collection of checks and other items and provides that such operating circulars have binding effect on all parties interested in an item PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 handled by a Reserve Bank. The Reserve Banks’ Operating Circular No. 3, ‘‘Collection of Cash Items and Returned Checks’’ (OC 3),1 is the operating circular that is most relevant to the Reserve Banks’ check collection activities. Subpart B of Regulation J provides rules to govern funds transfers through the Reserve Banks’ Fedwire Funds Service. This service is also governed by the Reserve Banks’ Operating Circular No. 6, ‘‘Funds Transfers through the Fedwire Funds Service’’ (OC 6).2 II. Overview of Proposed Amendments A. Alignment With Regulation CC Amendments Addressing Electronic Checks In 2004, the Board amended Regulation J to cover electronic check processing options that the Reserve Banks offered after the Check Clearing for the 21st Century Act (Check 21 Act) took effect in October 2004.3 The Board’s amendments to Regulation J at the time included provisions to address the rights and obligations of banks and Reserve Banks relating to electronic items handled by Reserve Banks.4 As a result of the 2004 amendments, Regulation J defines an ‘‘electronic item’’ as an electronic image of, and information describing, an item that a Reserve Bank agrees to handle pursuant to an operating circular.5 Regulation J also sets forth certain warranties provided to the Reserve Banks by the sender of an electronic item and certain 1 See, https://www.frbservices.org/assets/ resources/rules-regulations/072315-operatingcircular-3.pdf. 2 See, https://www.frbservices.org/assets/ resources/rules-regulations/operating-circular-6102917.pdf. 3 The Board’s Regulation CC implements the Expedited Funds Availability Act of 1987 (EFA Act), 12 U.S.C. 4001 et seq.; and the Check Clearing for the 21st Century Act of 2003 (Check 21 Act), 12 U.S.C. 5001 et seq. The Check 21 Act facilitated electronic collection and return of checks by permitting banks to create a paper ‘‘substitute check’’ from an electronic image and electronic information derived from a paper check. The Check 21 Act authorized banks to provide substitute checks to a bank or a customer that had not agreed to electronic exchange. The Board implemented the Check 21 Act primarily in subpart D of Regulation CC. 4 At the time, the Board’s Regulation CC presumed that banks generally handled checks in paper form, and the Uniform Commercial Code did not explicitly address electronic checks other than to say the terms of electronic presentment may be governed by agreement (U.C.C. 4–110). 5 12 CFR 210.2(i). E:\FR\FM\15MRP1.SGM 15MRP1 11432 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules sradovich on DSK3GMQ082PROD with PROPOSALS warranties provided by the Reserve Banks when sending or presenting an electronic item.6 Specifically, Regulation J provides that for electronic items, the sender and the Reserve Banks make warranties (1) as set forth in the Uniform Commercial Code (U.C.C) and Regulation CC as if the electronic item were subject to their terms; and (2) similar to those made for substitute checks under the Check 21 Act (‘‘Check21-like warranties’’).7 Regulation J also currently provides similar provisions related to checks that are returned as electronic items.8 In 2017, the Board published a final rule amending Regulation CC to reflect the virtually all-electronic check collection and return environment.9 Among other things, the amendments created a regulatory framework for the collection and return of electronic items (i.e., electronic images and electronic information derived from a paper item) by defining the terms ‘‘electronic check’’ and ‘‘electronic returned check,’’ creating Check-21-like warranties for electronic checks and electronic returned checks, and applying existing paper-check warranties to electronic checks and electronic returned checks. Accordingly, the Board is proposing amendments to align subpart A of Regulation J with the Board’s 2017 amendments to Regulation CC and incorporate certain provisions by reference, thereby reducing the need for duplication and improving consistency between the regulations. Under the Board’s proposal, the term ‘‘electronic item’’ would be removed from Regulation J and ‘‘check’’ and ‘‘returned check’’ would be defined to include an electronic check and electronic returned check as defined in § 229.2 of Regulation CC. The term ‘‘item’’ would also be defined to include an electronic check as defined in Regulation CC. The Board also proposes to eliminate duplicative provisions by removing the Check-21-like warranties currently provided under Regulation J by the sender and the Reserve Banks. Instead, Regulation J would provide that the sender of an item (including an 6 12 CFR 210.5(a)(3)–(4) sets forth warranties provided by the sender of an electronic item; 12 CFR 210.6(b)(2)–(3) sets forth warranties provided by the Reserve Banks related to electronic items. 7 That is, warranties that a bank will not be asked to pay an item twice and that the electronic image and electronic information are sufficient to create a substitute check. 8 12 CFR 210.12(c)(3)–(4) sets forth warranties provided by the sender of a returned check that is an electronic item; 12 CFR 210.12(e)(1)(ii)–(iii) sets forth warranties provided by the Reserve Banks related to a returned check that is an electronic item. 9 82 FR 27552 (June 15, 2017). VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 electronic check) and the Reserve Banks would (as applicable and unless otherwise provided) make all the warranties and indemnities set forth in and subject to the terms of subparts C and D in Regulation CC. The Board proposes similar amendments to the provisions of Regulation J that currently address returning checks as electronic items. B. Electronically Created Items In the 2017 amendments to Regulation CC, the Board included certain indemnities with respect to electronically-created items (ECIs), which are check-like items created in electronic form that never existed in paper form. ECIs can be difficult to distinguish from electronic images of paper checks. As a practical matter, a bank receiving an ECI often handles it as if it were derived from a paper check. However, because there was no original paper check corresponding to the ECI, the warranties, indemnities, and other provisions of Regulation CC would not apply to those items. As the Board explained in the 2017 Regulation CC amendments, the payee and the depositary bank are best positioned to know whether an item is electronically created and to prevent the item from entering the check-collection system. Therefore, to protect banks that receive ECIs during the check collection process, the Board’s Regulation CC amendments provided indemnities that ultimately shift liability for losses to the depositary bank because either the ECI (1) is not derived from a paper check, (2) was unauthorized, or (3) was transferred or presented for payment more than once.10 The proposed amendments to incorporate Regulation CC’s warranties and indemnities into Regulation J by reference would include these ECI indemnities. Currently, neither Regulation CC nor Regulation J explicitly address the 10 12 CFR 229.34(g) provides that ‘‘each bank that transfers or presents an electronically-created item and receives a settlement or other consideration for it shall indemnify, as set forth in § 229.34(i), each transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank against losses that result from the fact that—(1) The electronic image or electronic information is not derived from a paper check; (2) The person on whose account the electronically-created item is drawn did not authorize the issuance of the item in the amount stated on the item or to the payee stated on the item (for purposes of this paragraph (g)(2), ‘‘account’’ includes an account as defined in section 229.2(a) as well as a credit or other arrangement that allows a person to draw checks that are payable by, through, or at a bank); or (3) A person receives a transfer, presentment, or return of, or otherwise is charged for an electronicallycreated item such that the person is asked to make payment based on an item or check it has already paid.’’ PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 sending of ECIs to the Reserve Banks. However, the definition of item in Regulation J as currently drafted does not encompass ECIs and therefore does not allow for the handling of ECIs by the Reserve Banks. Regulation J defines an item, in part, as ‘‘an instrument or a promise or order to pay money, whether negotiable or not’’ that meets several other requirements.11 The terms ‘‘instrument,’’ ‘‘promise,’’ and ‘‘order’’ are defined under the U.C.C. as requiring a writing.12 Because they never existed in tangible form and therefore do not qualify as writings, ECIs are not ‘‘items’’ as currently defined in Regulation J. To provide greater clarity, the Board proposes to amend the definition of ‘‘item’’ in subpart A of Regulation J to explicitly state that the term does not include an ECI as defined Regulation CC. Furthermore, because Regulation J is intended to provide rules for the collection and return of items by the Reserve Banks, the Board is proposing amendments to Regulation J that would allow the Reserve Banks to require senders to provide warranties and indemnities that only ‘‘items’’ and any ‘‘noncash items’’ the Reserve Banks have agreed to handle will be provided to the Reserve Banks. The Board’s proposed amendments would also permit the Reserve Banks to provide a subsequent collecting bank and a paying bank the warranties and indemnities provided by the sender. As with the amendments to Regulation CC, the Board believes the proposed amendments will help to shift liability to parties better positioned to know whether an item is electronically created and to prevent the item from entering the check-collection system. The Board recognizes that the proposed amendments may affect the creation and acceptance of ECIs. However, the Board’s proposed amendments would not prevent parties that desire to exchange ECIs from doing so by agreement using direct exchange relationships or other methods not involving the Reserve Banks. The Board believes such arrangements are more 11 12 CFR 210.2(i). not otherwise defined in Regulation J or Regulation CC have the meanings set forth in the U.C.C. Under the U.C.C., ‘‘instrument’’ means a ‘‘negotiable instrument’’ which is defined in part as ‘‘unconditional promise or order to pay a fixed amount of money.’’ U.C.C. 3–104. ‘‘Promise’’ is defined as ‘‘a written undertaking to pay money signed by the person undertaking to pay.’’ U.C.C. 3–103. ‘‘Order’’ is defined as ‘‘a written instruction to pay money signed by the person giving the instruction.’’ U.C.C. 3–103. ‘‘Writing’’ and ‘‘written’’ are defined as including ‘‘printing, typewriting, or any other intentional reduction to tangible form.’’ U.C.C. 1–201. 12 Terms E:\FR\FM\15MRP1.SGM 15MRP1 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules appropriate to ensure all parties knowingly accept any corresponding risks arising from the fact that the ECI never existed in paper form and therefore does not carry with it the warranties, indemnities, and other provisions associated with a check. The Board requests comment on possible implications that this clarification and change related to ECIs in Regulation J may have on financial institutions or the industry more broadly. The Board also requests comment on whether, and to what extent, the Board should consider amending Regulation J as part of a future rulemaking to permit the Reserve Banks to accept ECIs. sradovich on DSK3GMQ082PROD with PROPOSALS C. Settlement and Payment Regulation J currently provides that settlement with a Reserve Bank for cash items ‘‘shall be made by debit to an account on the Reserve Bank’s books, cash, or other form of settlement’’ to which the Reserve Bank has agreed.13 With respect to noncash items, Regulation J provides that a Reserve Bank may require settlement by cash, by a debit to an account on a Reserve Bank’s books or ‘‘by any of the following that is in a form acceptable to the collecting Reserve Bank: Bank draft, transfer of funds or bank credit, or any other form of payment authorized by State law.’’ 14 Regulation J also currently provides that a Reserve Bank may require a nonbank payor to settle for items by cash, or by ‘‘any of the following that is in a form acceptable to the Reserve Bank: Cashier’s check, certified check, or other bank draft or obligation.’’ 15 In order to facilitate the efficient collection of items, the Reserve Banks’ current practice is generally to settle for items by debit to an account on the Reserve Bank’s books. The use of cash is rare, typically only done in emergency situations, and could be covered by a provision allowing ‘‘other form of settlement to which the Reserve Bank agrees.’’ The Board therefore proposes to revise certain settlement provisions of Regulation J to remove references to cash and other specified forms of settlement (e.g., cashier’s checks or certified checks) and instead state that the Reserve Banks may settle by a debit to an account on the Reserve Bank’s books, or another form of settlement acceptable to the Reserve Banks. The Board requests comment on possible implications that the proposed changes may have on financial institutions with which the Reserve 13 12 CFR 210.9(b)(5). CFR 210.9(c). 15 12 CFR 210.9(d). 14 12 VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 Banks settle for the presentment of items. D. Legal Status of Terms Used in Financial Messaging Standards Financial messaging standards provide a common format that allows different financial institutions to communicate. Federal Reserve Banks plan to migrate to the ISO 20022 financial messaging standard for the Fedwire Funds Service. ISO 20022 is an international standard that employs terminology that differs in key respects from that used in U.S. funds-transfer law, including Regulation J. The Board proposes an amendment to subpart B of Regulation J that would clarify that terms used in financial messaging standards, such as ISO 20022, do not confer or connote legal status or responsibilities. E. Additional Aspects of the Proposal The Board also proposes several other amendments to Regulation J, which include removal of obsolete material and corrections to include certain provisions that were unintentionally omitted by previous amendatory instructions to Regulation J. F. Effective Date The Board proposes an effective date of July 1, 2018, to align with the effective date of the Board’s amendments to subpart C of Regulation CC. III. Section-by-Section Analysis The paragraph citations in this section are to the paragraphs of the proposed rule unless otherwise stated. The Board requests comment on all aspects of the proposed rule. Subpart A—Collection of Checks and Other Items by Federal Reserve Banks Section 210.2 Definitions 1. Section 210.2(h)—Check Regulation J currently includes the term ‘‘check’’ (a draft as defined in the U.C.C. drawn on a bank and payable on demand). The Board proposes to revise the definition of ‘‘check’’ to mean a ‘‘check’’ and an ‘‘electronic check’’ as those terms are defined in Regulation CC. This amendment will align the terminology in the two regulations. Regulation J also includes the term ‘‘check as defined in 12 CFR 229.2(k)’’ (the Regulation CC definition of ‘‘check’’). This term is used in Regulation J in those provisions that require specific references to the Regulation CC definition of ‘‘check.’’ (See §§ 210.2(m), 210.7(b)(2), and § 210.12(a)(2).) The Board proposes to PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 11433 delete the definition of ‘‘check as defined in 12 CFR 229.2(k)’’ because it is no longer needed in light of the proposed revision of the Regulation J definition of ‘‘check’’ to cross-reference the Regulation CC definition. The Board proposes to revise the three provisions where it is used by deleting the reference to ‘‘check as defined in 12 CFR 229.2(k),’’ as described in more detail in the corresponding section-bysection analysis. 2. Section 210.2(i)—Item Regulation J uses the term ‘‘item’’ to refer to the instruments and electronic images that the Reserve Banks handle. Regulation J uses the term ‘‘electronic item’’ to refer to an electronic image of an item, and information describing that item, that a Reserve Bank agrees to handle as an item pursuant to an operating circular. To align the terminology of Regulation J with Regulation CC, the Board proposes to delete the definition of ‘‘electronic item’’ and revise the definition of ‘‘item’’ in § 210.2(i) to include a check, which, under the proposed amendment discussed above would include both a check and an electronic check as defined in Regulation CC. The Board also proposes to add a clarifying statement that the term ‘‘item’’ does not include an electronically-created item as defined in § 229.2 of Regulation CC (as discussed in detail above). 3. Section 210.2(m)—Returned Check Current § 210.2(m) defines a ‘‘returned check’’ as ‘‘a cash item or a check as defined in 12 CFR 229.2(k) returned by a paying bank.’’ To align the definition of ‘‘returned check’’ with ‘‘check,’’ the Board proposes to delete the reference to ‘‘check as defined in 12 CFR 229.2(k)’’ and instead refer to the definition of ‘‘electronic returned check’’ in Regulation CC. 4. Section 210.2(n)—Sender Current § 210.2(n) defines sender by providing a set of entities that sends an item to a Reserve Bank for forward collection. The Board proposes to add ‘‘member bank, as defined in section 1 of the Federal Reserve Act’’ in § 210.2(n)(2) to include a bank or trust company that is a member of one of the Federal Reserve Banks to ensure inclusion of any member bank that does not fall under the existing definition. The Board proposes to redesignate current §§ 210.2(n)(2)–(6) to §§ 210.2(n)(3)–(7) to accommodate the insertion. E:\FR\FM\15MRP1.SGM 15MRP1 11434 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules 5. Section 210.2(q)—Fedwire Current § 210.2(q) defines ‘‘Fedwire’’ as having the same meaning set forth in § 210.26(e). The Board proposes to amend this definition to refer to both ‘‘Fedwire Funds Service and Fedwire’’ to conform to the proposed amendment to § 210.26(e). Section 210.3 General Provisions Section 210.3(a) provides general provisions concerning the obligations of Reserve Banks and the role of operating circulars. For reasons described above in connection with electronicallycreated items, the Board proposes to add a sentence stating that the operating circulars may require a sender to provide warranties and indemnities that only items and any noncash items the Reserve Banks have agreed to handle will be sent to the Reserve Banks. Additionally, in order to allow the Reserve Banks to pass any such warranties and indemnities forward, the Board proposes to authorize the Reserve Banks to provide to a subsequent collecting bank and to the paying bank any warranties and indemnities provided by the sender pursuant to this paragraph. Section 210.4 Sending Items to Reserve Banks Section 210.4(a) sets forth the rule for determining the Reserve Bank to which an item should be sent. The Board proposes to clarify this paragraph to provide that a sender’s Administrate Reserve Bank may direct a sender (other than a Reserve Bank) to send any item to a specified Reserve Bank, whether or not the item is payable in the Reserve Bank’s district. This amendment reflects current practice in the Reserve Banks’ check service and is not expected or intended to have a substantive affect. The Board is also proposing to capitalize the term ‘‘Administrative Reserve Bank’’ wherever it appears to conform to the defined term in § 210.2(c). sradovich on DSK3GMQ082PROD with PROPOSALS Section 210.5 Sender’s Agreement; Recovery by Reserve Bank 1. Section 210.5(a)—Sender’s Agreement Current § 210.5(a) lists the warranties, authorizations, and agreements made by a sender. The first two paragraphs (current §§ 210.5(a)(1) and (2)) apply to all items and require the sender to authorize the Reserve Banks to handle the item sent and warrant that the sender is entitled to enforce the item, that the item has not been altered, and that the item bears the indorsements applied by all prior parties. The Board VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 is not proposing to revise these paragraphs. Current §§ 210.5(a)(3) and (4) set out warranties for electronic items and electronic items that are not representations of substitute checks, respectively. These warranties are now specified in Regulation CC, and the Board proposes to revise Regulation J accordingly. Proposed § 210.5(a)(3) would require the sender to make all applicable warranties and indemnities set forth in Regulation CC and the U.C.C. The proposal would retain the existing requirement that the sender make all warranties set forth in and subject to the terms of U.C.C. 4–207 for an electronic check as if it were an item subject to the U.C.C. These proposed changes would streamline Regulation J, align § 210.5(a) with the Regulation CC provisions that set out warranties and indemnities for electronic checks, and ensure a seamless chain of warranties for the items handled by the Reserve Banks. The Board also proposes to require a sender to make any warranties or indemnities regarding the sending of items that the Reserve Banks include in an operating circular issued in accordance with § 210.3(a) to ensure that only items and any noncash items the Reserve Banks have agreed to handle will be sent to the Reserve Banks (proposed § 210.5(a)(4)). Finally, the Board proposes to add a reference to ‘‘indemnities’’ to the introductory text of § 210.5(a) to reflect that the sender would provide indemnities pursuant to proposed §§ 210.5(a)(3) and (4). 2. Section 210.5(a)(5)—Sender’s Liability to Reserve Bank Current § 210.5(a)(5) sets out the sender’s liability to Reserve Banks. The Board proposes to make a number of amendments to this subsection that align this paragraph to changes elsewhere in the proposed rule. Current § 210.5(a)(5)(i)(C) states that the sender agrees to indemnify the Reserve Bank for any loss or expense resulting from ‘‘[a]ny warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, or the U.C.C.’’ The Board proposes to amend this provision to provide that the sender will also indemnify a Reserve Bank for any loss or expense sustained resulting from any warranties and indemnities regarding the sending of ‘‘items’’ required by the Reserve Bank in an operating circular issued pursuant to proposed § 210.3(a). Current § 210.5(a)(5)(ii) specifies conditions and limitations to a sender’s liability for warranties and indemnities that a Reserve Bank makes for a substitute check, a paper or electronic PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 representation thereof, or any other electronic item. The Board proposes to delete the term ‘‘electronic item’’ in current § 210.5(a)(5)(ii) and replace it with ‘‘electronic check.’’ Current § 210.5(a)(5)(ii)(A) provides that a sender of an original check is not liable for any amount that the Reserve Bank pays under subpart D of Regulation CC for a subsequently created substitute check or under § 210.6(b)(3) for an electronic item, absent the sender’s agreement to the contrary. The Board proposes to delete the reference to current § 210.6(b)(3), which lists warranties and an indemnity for an electronic item that is not a representation of a substitute check, and replace it with a reference to § 229.34 of this chapter with respect to an electronic check, consistent with other proposed amendments to § 210.6(b) described below. Current § 210.5(a)(5)(ii)(B) provides that nothing in Regulation J alters the liability structure that applies to substitute checks and paper or electronic representations of substitute checks under subpart D of Regulation CC. The Board proposes to add that this subpart also does not alter the liability of a sender of an electronic check under § 229.34, consistent with the other proposed revisions to Regulation J. Current § 210.5(a)(5)(ii)(C) provides that a sender of an electronic item that is not a representations of a substitute check is not liable for any related warranties or indemnities that a Reserve Bank pays that are attributable to the Reserve Bank’s own lack of good faith or failure to exercise ordinary care. The Board proposes to broaden this provision by applying the limitation on liability to all senders for any amount that the Reserve Bank pays that is attributable to the Reserve Bank’s own lack of good faith or failure to exercise ordinary care under Regulation J or Regulation CC. The Board proposes to redesignate this section as § 210.5(a)(5)(iii) and make conforming changes to cross-references. 3. Section 210.5(c) & (d)—Recovery by Reserve Bank and Methods of Recovery Section 210.5(c) sets out the procedures by which a Reserve Bank may recover against a sender if certain actions or proceedings related to the sender’s actions are brought against (or defense is tendered to) a Reserve Bank. A portion of this section was inadvertently dropped from the Code of Federal Regulations. The Board proposes to reinstate the dropped language, which provides that, upon entry of a final judgment or decree, a Reserve Bank may recover from the E:\FR\FM\15MRP1.SGM 15MRP1 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules sender the amount of attorneys’ fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, with interest. In addition, the Board proposes to correct cross-references to this provision in § 210.5(d). 4. Section 210.5(e)—Security Interest Current § 210.5(e) provides that when a sender sends an item to a Reserve Bank, the sender and any prior collecting bank grant to the sender’s Administrative Reserve Bank a security interest in all of their respective assets in the possession of, or held for the account of, any Reserve Bank to secure their respective obligations due or to become due to the Administrative Reserve Bank under this subpart or subpart C of part 229 of this chapter (Regulation CC). The Board proposes to amend this subsection to reference subpart D of Regulation CC in addition to subpart C, as senders may have obligations to Reserve Banks under that subpart as well. Section 210.6 Status, Warranties, and Liability of Reserve Bank 1. Section 210.6(a)(2)—Limitations on Reserve Bank Liability Section 210.6(a)(2) limits a Reserve Bank’s liability with respect to an item to three instances: (1) The Reserve Bank’s own lack of good faith or failure to exercise ordinary care, (2) as provided in this section of Regulation J, and (3) as provided in subparts C and D of Regulation CC. The Board proposes to expand this list to provide that a Reserve Bank may be liable under any warranties and indemnities provided in an operating circular issued in accordance with § 210.3(a) regarding the sending of items. sradovich on DSK3GMQ082PROD with PROPOSALS 2. Section 210.6(b)—Warranties and Liability Section 210.6(b) sets forth the warranties and indemnities made by a Reserve Bank when it presents or sends an item. In alignment with the Board’s proposed amendments to the sender’s warranties in § 210.5(a), the Board proposes to replace current §§ 210.6(b)(2) and (3), which provide warranties and indemnities for electronic items and electronic items that are not representations of substitute checks, respectively. Those warranties are now covered by Regulation CC. The Board also proposes to make a conforming amendment to § 210.6(b)(1)(iii) to eliminate the unnecessary reference to ‘‘paper or electronic form.’’ VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 The Board proposes a new § 210.6(b)(2) to provide that a Reserve Bank would make any warranties or indemnities regarding the sending of items as set forth in an operating circular issued pursuant to proposed § 210.3(a). This language corresponds to the similar proposed provision for sender liability in § 210.5(a)(4). The Board proposes a new § 210.6(b)(3) to provide that the Reserve Bank makes to a subsequent collecting bank and to the paying bank all the warranties and indemnities set forth in subparts C and D for Regulation CC. Proposed § 210.6(b)(3) would retain the existing application of U.C.C. 4–207 warranties to electronic items (now called electronic checks). In § 210.6(b)(4), the Board proposes to retain the existing Reserve Bank indemnity for substitute checks created from electronic checks, which is in current § 210.6(b)(3)(ii). This provision provides an indemnity chain for substitute check indemnity claims under Regulation CC, enabling receiving banks (and, in turn, Reserve Banks) to pass the loss on such claims to the bank whose choice to handle an item electronically necessitated the later creation of a substitute check. 3. Section 210.6(c)—Limitation on Liability The limitations on Reserve Bank liability are set forth in proposed (and current) § 210.6(a)(2). The Board is proposing to delete this subsection as it is redundant and to redesignate current subsection (d) as subsection (c). Section 210.7 Payment Presenting Items for Section 210.7(b) provides the places of presentment for a Reserve Bank or subsequent collecting bank. Current § 210.7(b)(2) states ‘‘In the case of a check as defined in 12 CFR 229.2(k), in accordance with 12 CFR 229.36.’’ In alignment with the Board’s proposed deletion of the defined term ‘‘check as defined in 12 CFR 229.2(k),’’ the Board proposes to delete the use of that term in § 210.7(b)(2), as it is no longer needed, and make other minor edits. As a result, proposed § 210.7(b)(2) would state ‘‘In accordance with § 229.36 of this chapter (Regulation CC).’’ Section 210.9 Settlement and Payment 1. Section 210.9(b)(5), (c), & (d)— Manner of Settlement, Noncash Items, & Nonbank Payor Current § 210.9(b)(5) requires that settlement for cash items with a Reserve Bank be made by debit to an account on the Reserve Bank’s books, cash, or other PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 11435 form of settlement to which the Reserve Bank agrees. As discussed in the overview section, the use of cash as a means of settlement is quite rare and generally used only in emergencies. Accordingly, the Board proposes to amend this provision by removing the reference to cash as a means of settlement. A Reserve Bank could continue to accept cash or other forms of settlement by agreement in special situations. The Board also proposes to make conforming amendments to §§ 210.9(c) and (d), as well as to remove the references to other rarely-used forms of settlement (cashier’s checks, certified checks, or other bank drafts or obligations). The Board is also proposing to correct cross-references and to capitalize the term ‘‘Administrative Reserve Bank’’ wherever it appears to conform to the defined term in § 210.2(c). 2. Section 210.9(e)—Handling of Payment Current § 210.9(e) states that a Reserve Bank may handle a bank draft or other form of payment it receives in payment of a cash item as a cash item and that a Reserve Bank may handle a bank draft or other form of payment it receives in payment of a noncash item as either a cash item or a noncash item. The Board proposes to delete this section as it is now obsolete. 3. Section 210.9(f)—Liability of Reserve Bank Current § 210.9(f) states that a Reserve Bank that acts in good faith and exercises ordinary care shall not be liable for the nonpayment of, or failure to realize upon, any bank draft or other form of payment that it accepts pursuant to § 210.9(b)–(d). The Board proposes to renumber this subsection as § 210.9(e) and to replace the reference to ‘‘bank draft or other form of payment’’ with ‘‘any non-cash form of payment’’ to conform to the proposed changes to the other provisions of this section. Section 210.10 Time Schedule and Availability of Credits for Cash Items and Returned Checks Section 210.10(a) states that each Reserve Bank shall ‘‘include in its operating circulars’’ its time schedules for availability of cash items and returned checks and, correspondingly, when credits can be counted toward reserve balance requirements for purposes of Regulation D (12 CFR part 204). The Reserve Banks’ practice is to publish the time schedules on the Federal Reserve website for financial services. Accordingly, the Board proposes to amend this section to delete E:\FR\FM\15MRP1.SGM 15MRP1 11436 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules the requirement that time schedules be included in the operating circulars and, instead, require only that the time schedules be published. Section 210.11 Availability of Proceeds of Noncash Items; Time Schedule 1. Section 210.11(b)—Time Schedule Section 210.11(b) states that a Reserve Bank may give credit for the proceeds of a noncash item subject to payment in actually and finally collected funds in accordance with a time schedule included in its operating circulars. To conform to amendments made in proposed § 210.10, the Board proposes to delete the reference to operating circulars and require only that the time schedule be published. 2. Section 210.11(c)—Handling of Payment Current § 210.11(c) prohibits a Reserve Bank from providing credit for a bank draft or other form of payment for a noncash item until it receives payment in actually and finally collected funds. The Board proposes to delete this subsection, as actually and finally collected funds are already required by § 210.11(a). Section 210.12 Return of Cash Items and Handling of Returned Checks Section 210.12 sets out the provisions governing the handling of returned checks. It is the counterpart to §§ 210.5 and 210.6, which govern the handling of items for forward collection. sradovich on DSK3GMQ082PROD with PROPOSALS 1. Section 210.12(a)—Return of Items Current § 210.12(a)(2) sets out the procedures by which a paying bank may return checks not handled by Reserve Banks and references ‘‘check as defined in § 229.2(k) of this chapter (Regulation CC).’’ In alignment with the Board’s proposal to delete the defined term ‘‘check as defined in § 229.2(k)’’ in § 210.2(h), the Board proposes to delete the use of this term in this section, as it is no longer needed, and to use the term ‘‘check’’ instead. 2. Section 210.12(c)—Paying Bank’s and Returning Bank’s Agreement Current § 210.12(c) provides the warranties, authorizations, and agreements related to returned checks made by paying banks and returning banks. The Board proposes amendments to this section that are parallel to the proposed amendments for forwardcollection items with respect to the liability of the sender (§ 210.5(a)(3)) and the Reserve Banks (§ 210.6(b)(2)). Specifically, the Board proposes to replace current §§ 210.12(c)(3) and (4), VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 which provide warranties for all returned checks that are electronic items and warranties for returned checks that are electronic items that are not representations of substitute checks, respectively, with a provision that requires the paying bank or returning bank to make all the warranties and indemnities as set forth in Regulation CC, as applicable (proposed § 210.12(c)(3)). Current § 210.12(c)(5) sets out the conditions under which a paying bank or returning bank is liable to a Reserve Bank. The Board proposes to redesignate this paragraph as § 210.12(c)(4) and amend the paragraph to correspond with the proposed amendments to the section on sender’s liability to a Reserve Bank (§ 210.5(a)(4)). These proposed amendments are intended to create consistent liability provisions for senders, paying banks, and returning banks. 3. Section 210.12(d)—Liability Under Other Law Current § 210.12(d) is titled ‘‘Preservation of other warranties and indemnities.’’ The Board proposes to change the title of this section to ‘‘Returning bank’s or paying bank’s liability under other law’’ to mirror the heading for the corresponding section for senders (§ 210.5(b)). 4. Section 210.12(e)—Warranties by and Liability of Reserve Bank Current § 210.12(e) sets forth a Reserve Bank’s liability when it handles a returned check, including warranties and liabilities. The Board proposes to amend this section to correspond to the amendments proposed in § 210.6(b) related to the warranties and liabilities that are made by Reserve Banks when presenting or sending an item. 5. Section 210.12(f) & (g)—Recovery by Reserve Bank & Method of Recovery Section 210.12(f) parallels § 210.5(c) and sets out the procedures by which a Reserve Bank may recover against a paying bank or returning bank if certain actions or proceedings related to the paying bank’s or returning bank’s actions are brought against (or defense is tendered to) a Reserve Bank. A portion of this section was inadvertently dropped from the Code of Federal Regulations. The Board proposes to reinstate the dropped language, which provides that, upon entry of a final judgment or decree, a Reserve Bank may recover from the paying bank or returning bank the amount of attorneys’ fees and other expenses of litigation incurred, as well as any amount the PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 Reserve Bank is required to pay because of the judgment or decree or the tender of defense, with interest. In addition, the Board proposes to correct crossreferences and make organizational changes in § 210.12(g). Subpart B—Funds Transfers Through Fedwire Section 210.25 and Scope Authority, Purpose, Section 210.25 sets out the authority, purpose, and scope for subpart B of Regulation J, which governs Fedwire funds transfers. The Board proposes to add a new § 210.25(e) to clarify that financial messaging standards (e.g., ISO 20022), including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. The proposed amendment would specify that Regulation J, Article 4A of the U.C.C., and the operating circulars of the Reserve Banks govern the rights and obligations of parties to the Fedwire Funds Service and supersede any inconsistency between a financial messaging standard adopted by the Fedwire Funds Service. Additionally, the Board proposes to add in the commentary examples of inconsistent terminology between the ISO 20022 financial messaging standard and U.S. funds transfer law. Section 210.26 Definitions Section 210.2(e) defines the term ‘‘Fedwire’’ to mean the funds-transfer system owned and operated by the Federal Reserve Banks that is used primarily for the transmission and settlement of payment orders governed by Subpart B. The Board is proposing to amend this definition so that it applies to the official title of the service, ‘‘Fedwire Funds Service,’’ as well as the shorthand term ‘‘Fedwire.’’ The Board also proposes to change references to ‘‘Fedwire’’ to ‘‘Fedwire Funds Service’’ in §§ 210.9(b)(4)(i), 210.25(a) and (b)(3), and 210.29(b). Section 210.32 Federal Reserve Bank Liability; Payment of Interest Current § 210.32 sets out provisions that govern Federal Reserve Bank liability and payment of interest. Section 210.32(b) provides that compensation that is paid by Federal Reserve Banks in the form of interest shall be calculated in accordance with section 4A–506 of Article 4A. Under section 4A–506(a), the amount of interest may be determined by agreement between the sender and E:\FR\FM\15MRP1.SGM 15MRP1 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules receiving bank or by funds-transfer system rule. If there is no such agreement, under section 4A–506(b), the amount of interest is based on the federal funds rate. The current commentary to § 210.32(b) states that ‘‘Interest would be calculated in accordance with the procedures specified in section 4A–506(b).’’ The Board proposes to delete this statement and rearrange the commentary to clarify that interest can be calculated in accordance with both section 4A–506(a) and (b). sradovich on DSK3GMQ082PROD with PROPOSALS IV. Competitive Impact Analysis The Board conducts a competitive impact analysis when it considers an operational or legal change, if that change would have a direct and material adverse effect on the ability of other service providers to compete with the Federal Reserve in providing similar services due to legal differences or due to the Federal Reserve’s dominant market position deriving from such legal differences. All operational or legal changes having a substantial effect on payments-system participants will be subject to a competitive-impact analysis, even if competitive effects are not apparent on the face of the proposal. If such legal differences exist, the Board will assess whether the same objectives could be achieved by a modified proposal with lesser competitive impact or, if not, whether the benefits of the proposal (such as contributing to payments-system efficiency or integrity or other Board objectives) outweigh the materially adverse effect on competition.16 The Board does not believe that the amendments to Regulation J will have a direct and material adverse effect on the ability of other service providers to compete effectively with the Reserve Banks in providing similar services due to legal differences. The amendments would align the provisions in Regulation J governing Reserve Bank services to the generally applicable provisions in Regulation CC. The proposed amendment would not affect the competitive position of private` sector presenting banks vis-a-vis the Reserve Banks. V. Paperwork Reduction Act In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a valid Office of Management and Budget (OMB) control 16 Federal Reserve Regulatory Service, 7–145.2. VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 number. The Board reviewed the proposed rule under the authority delegated to the Board by the OMB and determined that it contains no collections of information under the PRA.17 Accordingly, there is no paperwork burden associated with the rule. VI. Regulatory Flexibility Act The Regulatory Flexibility Act (the ‘‘RFA’’) (5 U.S.C. 601 et seq.) requires agencies either to provide an initial regulatory flexibility analysis with a proposed rule or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. In accordance with section 3(a) of the RFA, the Board has reviewed the proposed regulation. In this case, the proposed rule would apply to all depository institutions. This Initial Regulatory Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603 in order for the Board to solicit comment on the effect of the proposal on small entities. The Board will, if necessary, conduct a final regulatory flexibility analysis after consideration of comments received during the public comment period. 1. Statement of the Need for, Objectives of, and Legal Basis for, the Proposed Rule The Board is proposing the foregoing amendments to Regulation J pursuant to its authority under the Federal Reserve Act, the EFA Act; the Check 21 Act, and other laws. The proposal clarifies and simplifies certain provisions of Subpart A of Regulation J, removes obsolete provisions, and aligns the rights and obligations of sending banks, paying banks, and Reserve Banks with the Board’s recent amendments to Regulation CC to reflect the virtually allelectronic check collection and return environment. The proposed rule would also amend subpart B of Regulation J to clarify the legal status of terms in financial messaging standards. 2. Small Entities Affected by the Proposed Rule The proposed rule would apply to all depository institutions regardless of their size.18 Pursuant to regulations issued by the Small Business Administration (13 CFR 121.201), a ‘‘small banking organization’’ includes a depository institution with $550 million or less in total assets. Based on call report data as of June 2017, there are approximately 9,918 of depository 17 See 44 U.S.C. 3502(3). proposed rule would not impose costs on any small entities other than depository institutions. 18 The PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 11437 institutions that have total domestic assets of $550 million or less and thus are considered small entities for purposes of the RFA. 3. Projected Reporting, Recordkeeping, and Other Compliance Requirements The Board’s proposed rule generally does not have any projected reporting, recordkeeping or other compliance requirements, as the proposed amendments to Regulation J align the rights and obligations of sending banks, paying banks, and Federal Reserve Banks (Reserve Banks) with the Board’s recent amendments to Regulation CC. The proposed warranties and indemnities are similar to the warranties and indemnities that apply to paper and electronic checks under existing Regulation J and other law. The proposed amendments do not require any bank to change the form in which it submits checks, nor do they require any bank to submit reports, maintain records, or provide notices or disclosures. With respect to ECIs, the Board recognizes that the proposed amendments that would allow the Reserve Banks to require senders to provide certain warranties and indemnities may affect the creation and acceptance of ECIs by small entities. However, the Board’s proposed amendments would not prevent small entities that desire to exchange ECIs from doing so by agreement using direct exchange relationships or other methods not involving the Reserve Banks. The Board believes the proposed amendments will help to shift liability to parties better positioned to know whether an item is electronically created and that can either prevent the item from entering the check-collection system or assume the risk of sending it forward. Furthermore, the Board does not expect the Board’s proposed amendments to remove references to cash and other specified forms of settlement to burden small entities, as the use of cash as settlement is rare and typically only done in emergency situations. The Board’s proposed amendment would allow use of cash as settlement in emergency situations by continuing to permit other forms of settlement to which the Reserve Banks agree. 4. Identification of Duplicative, Overlapping, or Conflicting Federal Rules The Board notes that subparts C and D of Regulation CC overlap with the proposed rule with respect to checks collected or returned through the E:\FR\FM\15MRP1.SGM 15MRP1 11438 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules Reserve Banks. The Board’s intent in proposing the amendments is, in part, to align Regulation J with Regulation CC and incorporate certain provisions by reference, thereby reducing the need for duplication and improving consistency between the regulations. The provisions of Regulation J would supersede any inconsistent provisions of Regulation CC, but only to the extent of the inconsistency.19 The Board knows of no other duplicative, overlapping, to conflicting Federal rules related to this proposal. 5. Significant Alternatives to the Proposed Rule The Board welcomes comment on the impact of the proposed rule on small entities and any approaches, other than the proposed amendments, that would reduce the burden on all entities. List of Subjects in 12 CFR Part 210 Banks, Banking, Federal Reserve System. Authority and Issuance For the reasons set forth in the preamble, the Board proposes to amend 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)—[AMENDED] 1. The authority citation for part 210 is revised to read as follows: ■ Authority: 12 U.S.C. 248 (i), (j), and (o); 12 U.S.C. 342; 12 U.S.C. 360; 12 U.S.C. 464; 12 U.S.C. 4001–4010; 12 U.S.C. 5001–5018. PART 210—[AMENDED] 2. In part 210, revise all references to ‘‘article 4A’’ to read ‘‘Article 4A’’. ■ Subpart A—Collection of Checks and Other Items by Federal Reserve Banks 3. In § 210.2, revise paragraphs (h), (i), (m), (n), (q), and (s)(1) to read as follows: ■ § 210.2 Definitions. sradovich on DSK3GMQ082PROD with PROPOSALS * * * * * (h) Check means a check or an electronic check, as those terms are defined in § 229.2 of this chapter (Regulation CC). (i) Item. (1) Item means— (i) An instrument or a promise or order to pay money, whether negotiable or not, that is— 19 See 12 CFR 210.3(f). VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 (A) Payable in a Federal Reserve District 1 (District); (B) Sent by a sender to a Reserve Bank for handling under this subpart; and (C) Collectible in funds acceptable to the Reserve Bank of the District in which the instrument is payable; or (ii) A check. (2) Unless otherwise indicated, item includes both a cash and a noncash item, and includes a returned check sent by a paying or returning bank. Item does not include a check that cannot be collected at par, or a payment order as defined in § 210.26(i) and handled under subpart B of this part. The term also does not include an electronicallycreated item as defined in § 229.2 of this chapter (Regulation CC). * * * * * (m) Returned check means a cash item returned by a paying bank, including an electronic returned check as defined in § 229.2 of this chapter (Regulation CC) and a notice of nonpayment in lieu of a returned check, whether or not a Reserve Bank handled the check for collection. (n) Sender means any of the following entities that sends an item to a Reserve Bank for forward collection— (1) A depository institution, as defined in section 19(b) of the Federal Reserve Act (12 U.S.C. 461(b)); (2) A member bank, as defined in section 1 of the Federal Reserve Act (12 U.S.C. 221); (3) A clearing institution, defined as— (i) An institution that is not a depository institution but that maintains with a Reserve Bank the balance referred to in the first paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or (ii) A corporation that maintains an account with a Reserve Bank in conformity with § 211.4 of this chapter (Regulation K); (4) Another Reserve Bank; (5) An international organization for which a Reserve Bank is empowered to act as depositary or fiscal agent and maintains an account; (6) A foreign correspondent, defined as any of the following entities for which a Reserve Bank maintains an account: A foreign bank or banker, a foreign state as defined in section 25(b) of the Federal Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency referred to in section 14(e) of that act (12 U.S.C. 358); or (7) A branch or agency of a foreign bank maintaining reserves under section 1 For purposes of this subpart, the Virgin Islands and Puerto Rico are deemed to be in the Second District, and Guam, American Samoa, and the Northern Mariana Islands in the Twelfth District. PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 3105). * * * * * (q) Fedwire Funds Service and Fedwire have the same meaning as that set forth in § 210.26(e). * * * * * (s) * * * (1) The terms not defined herein have the meanings set forth in § 229.2 of this chapter applicable to subpart C or subpart D of part 229 of this chapter (Regulation CC), as appropriate; and * * * * * ■ 4. In § 210.3, revise paragraph (a) to read as follows: § 210.3 General provisions. (a) General. Each Reserve Bank shall receive and handle items in accordance with this subpart, and shall issue operating circulars governing the details of its handling of items and other matters deemed appropriate by the Reserve Bank. The circulars may, among other things, classify cash items and noncash items, require separate sorts and letters, provide different closing times for the receipt of different classes or types of items, provide for instructions by an Administrative Reserve Bank to other Reserve Banks, set forth terms of services, and establish procedures for adjustments on a Reserve Bank’s books, including amounts, waiver of expenses, and payment of compensation. As deemed appropriate by the Reserve Bank, the circulars may also require the sender to provide warranties and indemnities that only items and any noncash items the Reserve Banks have agreed to handle will be sent to the Reserve Banks. The Reserve Banks may provide to a subsequent collecting bank and to the paying bank any warranties and indemnities provided by the sender pursuant to this paragraph. * * * * * ■ 5. In § 210.4, revise paragraphs (a), (b)(1)(ii), (b)(1)(iii), and (b)(3) to read as follows: § 210.4 Sending items to Reserve Banks. (a) Sending of items. A sender’s Administrative Reserve Bank may direct a sender other than a Reserve Bank to send any item to a specified Reserve Bank, whether or not the item is payable in the Reserve Bank’s district. (b) * * * (1) * * * (ii) The initial sender’s Administrative Reserve Bank (which is deemed to have accepted deposit of the item from the initial sender); (iii) The Reserve Bank that receives the item from the initial sender (if E:\FR\FM\15MRP1.SGM 15MRP1 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules different from the initial sender’s Administrative Reserve Bank); and * * * * * (3) The identity and order of the parties under paragraph (b)(1) of this section determine the relationships and the rights and liabilities of the parties under this subpart, part 229 of this chapter (Regulation CC), section 13(1) and section 16(13) of the Federal Reserve Act, and the Uniform Commercial Code. An initial sender’s Administrative Reserve Bank that is deemed to accept an item for deposit or handle an item is also deemed to be a sender with respect to that item. The Reserve Banks that are deemed to handle an item are deemed to be agents or subagents of the owner of the item, as provided in § 210.6(a). * * * * * ■ 6. In § 210.5, revise paragraphs (a), (c), (d), and (e) to read as follows: sradovich on DSK3GMQ082PROD with PROPOSALS § 210.5 Sender’s agreement; recovery by Reserve Bank. (a) Sender’s agreement. The warranties, indemnities, authorizations, and agreements made pursuant to this paragraph may not be disclaimed and are made whether or not the item bears an indorsement of the sender. By sending an item to a Reserve Bank, the sender does all of the following. (1) Authorization to handle item. The sender authorizes the sender’s Administrative Reserve Bank and any other Reserve Bank or collecting bank to which the item is sent to handle the item (and authorizes any Reserve Bank that handles settlement for the item to make accounting entries), subject to this subpart and to the Reserve Banks’ operating circulars, and warrants its authority to give this authorization. (2) Warranties for all items. The sender warrants to each Reserve Bank handling the item that— (i) The sender is a person entitled to enforce the item or authorized to obtain payment of the item on behalf of a person entitled to enforce the item; (ii) The item has not been altered; and (iii) The item bears all indorsements applied by parties that previously handled the item for forward collection or return. (3) Warranties and indemnities as set forth in Regulation CC and U.C.C. As applicable and unless otherwise provided, the sender of an item makes to each Reserve Bank that handles the item all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC) and Article 4 of the U.C.C. The sender makes all the warranties set forth in and subject to the terms of 4–207 of the U.C.C. for an VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 electronic check as if it were an item subject to the U.C.C. (4) Warranties and indemnities as set forth in Reserve Bank Operating Circulars. The sender makes any warranties and indemnities regarding the sending of items as set forth in an operating circular issued in accordance with § 210.3(a). (5) Sender’s liability to Reserve Bank. (i) Except as provided in paragraph (a)(5)(ii) and (iii) of this section, the sender agrees to indemnify each Reserve Bank for any loss or expense sustained (including attorneys’ fees and expenses of litigation) resulting from— (A) The sender’s lack of authority to make the warranty in paragraph (a)(1) of this section; (B) Any action taken by the Reserve Bank within the scope of its authority in handling the item; or (C) Any warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, the U.C.C., or, regarding the sending of items, an operating circular issued in accordance with § 210.3(a). (ii) A sender’s liability for warranties and indemnities that the Reserve Bank makes for a substitute check, a paper or electronic representation thereof, or for an electronic check is subject to the following conditions and limitations— (A) A sender of an original check shall not be liable under paragraph (a)(5)(i) of this section for any amount that the Reserve Bank pays under subpart D of part 229 of this chapter, or under § 229.34 of this chapter with respect to an electronic check, absent the sender’s agreement to the contrary; and (B) Nothing in this subpart alters the liability of a sender of a substitute check or paper or electronic representation of a substitute check under subpart D of part 229 of this chapter, or a sender of an electronic check under § 229.34 of this chapter. (iii) A sender shall not be liable for any amount that the Reserve Bank pays under this subpart or part 229 of this chapter that is attributable to the Reserve Bank’s own lack of good faith or failure to exercise ordinary care. * * * * * (c) Recovery by Reserve Bank. (1) A Reserve Bank that has handled an item may recover as provided in paragraph (c)(2) if an action or proceeding is brought against (or if defense is tendered to) the Reserve Bank based on— (i) The alleged failure of the sender to have the authority to make the warranty and agreement in paragraph (a)(1) of this section; PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 11439 (ii) Any action by the Reserve Bank within the scope of its authority in handling the item; or (iii) Any warranty or indemnity made by the Reserve Bank under § 210.6(b), part 229 of this chapter, or the U.C.C. (2) Upon entry of a final judgment or decree in an action or proceeding described in paragraph (c)(1), a Reserve Bank may recover from the sender the amount of attorneys’ fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, together with interest thereon. (d) Methods of recovery. (1) The Reserve Bank may recover the amount stated in paragraph (c) of this section by charging any account on its books that is maintained or used by the sender (or by charging a Reserve Bank sender), if— (i) The Reserve Bank made seasonable written demand on the sender to assume defense of the action or proceeding; and (ii) The sender has not made any other arrangement for payment that is acceptable to the Reserve Bank. (2) The Reserve Bank is not responsible for defending the action or proceeding before using this method of recovery. A Reserve Bank that has been charged under this paragraph (d) may recover from its sender in the manner and under the circumstances set forth in this paragraph (d). (3) A Reserve Bank’s failure to avail itself of the remedy provided in this paragraph (d) does not prejudice its enforcement in any other manner of the indemnity agreement referred to in paragraph (a)(5) of this section. (e) Security interest. When a sender sends an item to a Reserve Bank, the sender and any prior collecting bank grant to the sender’s Administrative Reserve Bank a security interest in all of their respective assets in the possession of, or held for the account of, any Reserve Bank to secure their respective obligations due or to become due to the Administrative Reserve Bank under this subpart or subpart C or D of part 229 of this chapter (Regulation CC). The security interest attaches when a warranty is breached or any other obligation to the Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, deems itself insecure and gives notice thereof to the sender or prior collecting bank, or if the sender or prior collecting bank suspends payments or is closed, the Reserve Bank may take any action authorized by law to recover the amount of an obligation, including, but not limited to, the exercise of rights of set off, the realization on any available collateral, E:\FR\FM\15MRP1.SGM 15MRP1 11440 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules and any other rights it may have as a creditor under applicable law. ■ 7. Amend § 210.6 by: ■ a. Revising paragraphs (a)(2)(iii), (b), and (c); ■ b. Adding paragraph (a)(2)(iv); and ■ c. Removing paragraph (d). The revisions and additions read as follows: sradovich on DSK3GMQ082PROD with PROPOSALS § 210.6 Status, warranties, and liability of Reserve Bank. (a) * * * (2) * * * (iii) As provided in an operating circular issued in accordance with § 210.3(a) regarding the sending of items; and (iv) As provided in subparts C and D of part 229 of this chapter (Regulation CC). * * * * * (b) Warranties and liability. The following provisions apply when a Reserve Bank presents or sends an item. (1) Warranties for all items. The Reserve Bank warrants to a subsequent collecting bank and to the paying bank and any other payor that— (i) The Reserve Bank is a person entitled to enforce the item (or is authorized to obtain payment of the item on behalf of a person that is either entitled to enforce the item or authorized to obtain payment on behalf of a person entitled to enforce the item); (ii) The item has not been altered; and (iii) The item bears all indorsements applied by parties that previously handled the item for forward collection or return. (2) Warranties and indemnities as set forth in Reserve Bank Operating Circulars. The Reserve makes any warranties and indemnities regarding the sending of items as set forth in an operating circular issued in accordance with § 210.3(a). (3) Warranties and indemnities as set forth in Regulation CC and U.C.C. As applicable and unless otherwise provided, the Reserve Bank makes to a subsequent collecting bank and to the paying bank all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC) and Article 4 of the U.C.C. The Reserve Bank makes all the warranties set forth in and subject to the terms of 4–207 of the U.C.C. for an electronic check as if it were an item subject to the U.C.C. (4) Indemnity for substitute check created from an electronic check. (i) Except as provided in paragraph (b)(4)(ii) of this section, the Reserve Bank shall indemnify the bank to which it transfers or presents an electronic check (the recipient bank) for the VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 amount of any losses that the recipient bank incurs under subpart D of part 229 of this chapter (Regulation CC) for an indemnity that the recipient bank was required to make under subpart D of part 229 of this chapter in connection with a substitute check later created from the electronic check. (ii) The Reserve Bank shall not be liable under paragraph (b)(4)(i) of this section for any amount that the recipient bank pays under subpart D of part 229 of this chapter that is attributable to the lack of good faith or failure to exercise ordinary care of the recipient bank or a person that handled the item, in any form, after the recipient bank. (c) Time for commencing action against Reserve Bank. (1) A claim against a Reserve Bank for lack of good faith or failure to exercise ordinary care shall be barred unless the action on the claim is commenced within two years after the claim accrues. Such a claim accrues on the date when a Reserve Bank’s alleged failure to exercise ordinary care or to act in good faith first results in damages to the claimant. (2) A claim that arises under paragraph (b)(3) of this section shall be barred unless the action on the claim is commenced within one year after the claim accrues. Such a claim accrues as of the date on which the claimant first learns, or by which the claimant reasonably should have learned, of the facts and circumstances giving rise to the claim. (3) This paragraph (d) does not alter the time limit for claims under § 229.38(g) of this chapter (which include claims for breach of warranty under § 229.34 of this chapter) or subpart D of part 229 of this chapter. ■ 8. In § 210.7, revise paragraphs (a)(1) and (b)(2) to read as follows: § 210.7 Presenting items for payment. (a) * * * (1) A Reserve Bank or a subsequent collecting bank may present an item for payment or send the item for presentment and payment; and * * * * * (b) * * * (2) In accordance with § 229.36 of this chapter (Regulation CC); * * * * * ■ 9. Amend § 210.9 by: ■ a. Revising paragraphs (b)(2)(i), (b)(3)(i)(A), (b)(3)(i)(B), (b)(4) through (b)(6), paragraphs (c) through (e); and ■ b. Removing paragraph (f). The revisions read as follows: § 210.9 * PO 00000 * Settlement and payment. * Frm 00010 * Fmt 4702 * Sfmt 4702 (b) * * * (2) * * * (i) On the day a paying bank receives a cash item from a Reserve Bank, it shall settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank, or return the item, by the latest of— (A) The next clock hour or clock 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. * * * * * (3) * * * (i) * * * (A) On that day, settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank, or return the item, by the latest of the next clock hour or clock half-hour that is at least one half-hour after it ordinarily would have received the item, 8:30 a.m. eastern time, or such later time as provided in the Reserve Banks’ operating circulars; or (B) On the next day that is a banking day for both the paying bank and the Reserve Bank, settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by 8:30 a.m. eastern time on that day or such later time as provided in the Reserve Banks’ operating circulars; and compensate the Reserve Bank for the value of the float associated with the item in accordance with procedures provided in the Reserve Bank’s operating circular. * * * * * (4) Reserve Bank closed. If a paying bank receives a cash item from a Reserve Bank on a banking day that is not a banking day for the Reserve Bank, the paying bank shall— (i) Settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by the close of 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), it shall become accountable for the amount of the item as of the close of its banking day on the day it receives the item); and (ii) Settle for the item so that the proceeds of the settlement are available to its Administrative Reserve Bank by 8:30 a.m. eastern time on the Reserve Bank’s next banking day or such later time as provided in the Reserve Bank’s operating circular, or return the item by midnight of the day it receives the item. If the paying bank fails to settle for or E:\FR\FM\15MRP1.SGM 15MRP1 sradovich on DSK3GMQ082PROD with PROPOSALS Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules return a cash item in accordance with this paragraph (b)(4)(ii), it shall be subject to any applicable overdraft charges. Settlement under this paragraph (b)(4)(ii) satisfies the settlement requirements of paragraph (b)(4)(i) of this section. (5) Manner of settlement. Settlement with a Reserve Bank under paragraphs (b)(1) through (4) of this section shall be made by debit to an account on the Reserve Bank’s books or other form of settlement to which the Reserve Bank agrees, except that the Reserve Bank may, in its discretion, obtain settlement by charging the paying bank’s account. A paying bank may not set off against the amount of a settlement under this section the amount of a claim with respect to another cash item, cash letter, or other claim under § 229.34 of this chapter (Regulation CC) or other law. (6) Notice in lieu of return. If a cash item is unavailable for return, the paying bank may send a notice in lieu of return as provided in § 229.31(f) of this chapter (Regulation CC). (c) Noncash items. A Reserve Bank may require the paying or collecting bank to which it has presented or sent a noncash item to pay for the item by a debit to an account maintained or used by the paying or collecting bank on the Reserve Bank’s books or by any other form of settlement acceptable to the Reserve Bank. (d) Nonbank payor. A Reserve Bank may require a nonbank payor to which it has presented an item to pay for it by debit to an account on the Reserve Bank’s books or other form of settlement acceptable to the Reserve Bank. (e) Liability of Reserve Bank. Except as set forth in 12 CFR 229.35(b), a Reserve Bank shall not be liable for the failure of a collecting bank, paying bank, or nonbank payor to pay for an item, or for any loss resulting from the Reserve Bank’s acceptance of any form of payment other than cash authorized in paragraphs (b), (c), and (d) of this section. A Reserve Bank that acts in good faith and exercises ordinary care shall not be liable for the nonpayment of, or failure to realize upon, any noncash form of payment that it accepts under paragraphs (b), (c), and (d) of this section. ■ 10. In § 210.10, revise paragraph (a) to read as follows: § 210.10 Time schedule and availability of credits for cash items and returned checks. (a) Each Reserve Bank shall publish a time schedule indicating when the amount of any cash item or returned check received by it is counted toward the balance maintained to satisfy a reserve balance requirement for VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 purposes of part 204 of this chapter (Regulation D) and becomes available for use by the sender or paying or returning bank. The Reserve Bank that holds the settlement account shall give either immediate or deferred credit to a sender, a paying bank, or a returning bank (other than a foreign correspondent) in accordance with the time schedule of the receiving Reserve Bank. A Reserve Bank ordinarily gives credit to a foreign correspondent only when the Reserve Bank receives payment of the item in actually and finally collected funds, but, in its discretion, a Reserve Bank may give immediate or deferred credit in accordance with its time schedule. * * * * * ■ 11. Amend § 210.11 by: ■ a. Revising paragraph (b) and; ■ b. Removing paragraph (c). The revision reads as follows: § 210.11 Availability of proceeds of noncash items; time schedule. * * * * * (b) Time schedule. A Reserve Bank may give credit for the proceeds of a noncash item subject to payment in actually and finally collected funds in accordance with a published time schedule. The time schedule shall indicate when the proceeds of the noncash item will be counted toward the balance maintained to satisfy a reserve balance requirement for purposes of part 204 of this chapter (Regulation D) and become available for use by the sender. A Reserve Bank may, however, refuse at any time to permit the use of credit given by it for a noncash item for which the Reserve Bank has not yet received payment in actually and finally collected funds. ■ 12. In § 210.12, revise paragraphs (a) and (c) through (g) to read as follows: § 210.12 Return of cash items and handling of returned checks. (a) Return of items— (1) Return of cash items handled by Reserve Banks. A paying bank that receives a cash item from a Reserve Bank, other than for immediate payment over the counter, and that settles for the item as provided in § 210.9(b), may, before it has finally paid the item, return the item to any Reserve Bank (unless its Administrative Reserve Bank directs it to return the item to a specific Reserve Bank) in accordance with subpart C of part 229 of this chapter (Regulation CC), the Uniform Commercial Code, and the Reserve Banks’ operating circulars. A paying bank that receives a cash item from a Reserve Bank also may return the item prior to settlement, in accordance with § 210.9(b) of this subpart and the PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 11441 Reserve Banks’ operating circulars. The rules or practices of a clearinghouse through which the item was presented, or a special collection agreement under which the item was presented, may not extend these return times, but may provide for a shorter return time. (2) Return of checks not handled by Reserve Banks. A paying bank that receives a check, other than from a Reserve Bank, and that determines not to pay the check, may send the returned check to any Reserve Bank (unless its Administrative Reserve Bank directs it to send the returned check to a specific Reserve Bank) in accordance with subpart C of part 229 of this chapter (Regulation CC), the Uniform Commercial Code, and the Reserve Banks’ operating circulars. A returning bank may send a returned check to any Reserve Bank (unless its Administrative Reserve Bank directs it to send the returned check to a specific Reserve Bank) in accordance with subpart C of part 229 of this chapter (Regulation CC), the Uniform Commercial Code, and the Reserve Banks’ operating circulars. * * * * * (c) Paying bank’s and returning bank’s agreement. The warranties, indemnities, authorizations, and agreements made pursuant to this paragraph may not be disclaimed and are made whether or not the returned check bears an indorsement of the paying bank or returning bank. By sending a returned check to a Reserve Bank, the paying bank or returning bank does all of the following. (1) Authorization to handled returned check. The paying bank or returning bank authorizes the paying bank’s or returning bank’s Administrative Reserve Bank, and any other Reserve Bank or returning bank to which the returned check is sent, to handle the returned check (and authorizes any Reserve Bank that handles settlement for the returned check to make accounting entries) subject to this subpart and to the Reserve Banks’ operating circulars. (2) Warranties for all returned checks. The paying bank or returning bank warrants to each Reserve Bank handling a returned check that the returned check bears all indorsements applied by parties that previously handled the returned check for forward collection or return. (3) Warranties and indemnities as set forth in Regulation CC. As applicable and unless otherwise provided, a paying bank or returning bank makes to each Reserve Bank that handles the returned check all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC). E:\FR\FM\15MRP1.SGM 15MRP1 sradovich on DSK3GMQ082PROD with PROPOSALS 11442 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules (4) Paying bank or returning bank’s liability to Reserve Bank. (i) Except as provided in paragraph (c)(4)(ii) and (iii) of this section, a paying bank or returning bank agrees to indemnify each Reserve Bank for any loss or expense (including attorneys’ fees and expenses of litigation) resulting from— (A) The paying or returning bank’s lack of authority to give the authorization in paragraph (c)(1) of this section; (B) Any action taken by a Reserve Bank within the scope of its authority in handling the returned check; or (C) Any warranty or indemnity made by the Reserve Bank under paragraph (e) of this section or part 229 of this chapter. (ii) A paying bank’s or returning bank’s liability for warranties and indemnities that a Reserve Bank makes for a returned check that is a substitute check, a paper or electronic representation thereof, or an electronic returned check is subject to the following conditions and limitations— (A) A paying bank or returning bank that sent an original returned check shall not be liable for any amount that a Reserve Bank pays under subpart D of part 229 of this chapter, or under § 229.34 of this chapter with respect to an electronic returned check, absent the paying bank’s or returning bank’s agreement to the contrary; (B) Nothing in this subpart alters the liability under subpart D of part 229 of this chapter of a paying bank or returning bank that sent a substitute check or a paper or electronic representation of a substitute check or under § 229.34 of this chapter of a paying bank or returning bank that sent an electronic returned check; and (iii) A paying bank or returning bank shall not be liable for any amount that the Reserve Bank pays under this subpart or part 229 of this chapter that is attributable to the Reserve Bank’s own lack of good faith or failure to exercise ordinary care. (d) Paying bank or returning bank’s liability under other law. Nothing in paragraph (c) of this section limits any warranty or indemnity by a returning bank or paying bank (or a person that handled an item prior to that bank) arising under state law or regulation (such as the U.C.C.), other federal law or regulation (such as part 229 of this chapter), or an agreement with a Reserve Bank. (e) Warranties by and liability of Reserve Bank. (1) The following provisions apply when a Reserve Bank handles a returned check under this subpart. VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 (i) Warranties for all items. The Reserve Bank warrants to the bank to which it sends the returned check that the returned check bears all indorsements applied by parties that previously handled the returned check for forward collection or return. (ii) Warranties and indemnities as set forth in Regulation CC. As applicable and unless otherwise provided, the Reserve Bank makes to the bank to which it sends the returned check all the warranties and indemnities set forth in and subject to the terms of subparts C and D of part 229 of this chapter (Regulation CC). (2) Indemnity for substitute check created from electronic returned check. (i) Except as provided in paragraph (e)(2)(ii) of this section, the Reserve Bank shall indemnify the bank to which it transfers or presents and electronic returned check (the recipient bank) for the amount of any losses that the recipient bank incurs under subpart D of part 229 of this chapter (Regulation CC) for an indemnity that the recipient bank was required to make under subpart D of part 229 of this chapter in connection with a substitute check later created from the electronic returned check. (ii) The Reserve Bank shall not be liable under paragraph (e)(2)(i) of this section for any amount that the recipient bank pays under subpart D of part 229 of this chapter that is attributable to the lack of good faith or failure to exercise ordinary care of the recipient bank or a person that handled the item, in any form, after the recipient bank. (3) A Reserve Bank shall not have or assume any other liability to any person except— (i) For the Reserve Bank’s own lack of good faith or failure to exercise ordinary care; (ii) As provided in this paragraph (e); and (iii) As provided in subparts C and D of part 229 of this chapter (Regulation CC). (f) Recovery by Reserve Bank. (1) A Reserve Bank that has handled a returned check may recover as provided in paragraph (f)(2) if an action or proceeding is brought against (or if defense is tendered to) the Reserve Bank based on— (i) The alleged failure of the paying bank or returning bank to have the authority to give the authorization in paragraph (c)(1) of this section; (ii) Any action by the Reserve Bank within the scope of its authority in handling the returned check; or (iii) Any warranty or indemnity made by the Reserve Bank under paragraph (e) PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 of this section or part 229 of this chapter, (2) Upon entry of a final judgment or decree in an action or proceeding described in paragraph (f)(1), a Reserve Bank may recover from the paying bank or returning bank the amount of attorneys’ fees and other expenses of litigation incurred, as well as any amount the Reserve Bank is required to pay because of the judgment or decree or the tender of defense, together with interest thereon. (g) Methods of recovery. (1) The Reserve Bank may recover the amount stated in paragraph (f) of this section by charging any account on its books that is maintained or used by the paying bank or returning bank (or by charging another returning Reserve Bank), if— (i) The Reserve Bank made seasonable written demand on the paying bank or returning bank to assume defense of the action or proceeding; and (ii) The paying bank or returning bank has not made any other arrangement for payment that is acceptable to the Reserve Bank. (2) The Reserve Bank is not responsible for defending the action or proceeding before using this method of recovery. A Reserve Bank that has been charged under this paragraph (g) may recover from the paying or returning bank in the manner and under the circumstances set forth in this paragraph (g). (3) A Reserve Bank’s failure to avail itself of the remedy provided in this paragraph (g) does not prejudice its enforcement in any other manner of the indemnity agreement referred to in paragraph (c)(4) of this section. * * * * * ■ 13. Amend § 210.25 by: ■ a. Revising the introductory text of paragraph (b)(2); and ■ b. Adding paragraph (e). The revisions and additions read as follows: Subpart B—Funds Transfers Through Fedwire § 210.25 Authority, purpose, and scope. * * * * * (b) * * * (2) Except as otherwise provided in paragraphs (b)(3) and (b)(4) of this section, including Article 4A as incorporated herein, and operating circulars of the Reserve Banks issued in accordance with paragraph (c) of this section, this subpart governs the rights and obligations of: * * * * * (e) Financial Messaging Standards. Financial messaging standards (e.g., ISO E:\FR\FM\15MRP1.SGM 15MRP1 11443 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Proposed Rules 20022), including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. This subpart, including Article 4A as incorporated herein, and the operating circulars of the Reserve Banks issued in accordance with paragraph (c) of this section govern the rights and obligations of parties to funds transfers sent through the Fedwire Funds Service as provided in paragraph (b) of this section. To the extent there is any inconsistency between a financial messaging standard adopted by the Fedwire Funds Service and this subpart, this subpart shall prevail. ■ 14. In § 210.26, revise paragraph (e) to read as follows: § 210.26 Definitions. * * * * * (e) Fedwire Funds Service and Fedwire means the funds-transfer system owned and operated by the Federal Reserve Banks that is used primarily for the transmission and settlement of payment orders governed by this subpart. Fedwire does not include the system for making automated clearing house transfers. * * * * * §§ 210.9, 210.25, and 210.29 Appendix A to Subpart B of Part 210— Commentary sradovich on DSK3GMQ082PROD with PROPOSALS * * * * Section 210.25—Authority, Purpose, and Scope * * * * * (e) Financial messaging standards. This paragraph makes clear that financial messaging standards, including the financial messaging components, elements, technical documentation, tags, and terminology used to implement those standards, do not confer or connote legal status or responsibilities. VerDate Sep<11>2014 16:41 Mar 14, 2018 Jkt 244001 * * * * * Section 210.32—Federal Reserve Bank Liability; Payment of Interest * [Amended] 15. In addition to the amendments set forth above, in 12 CFR part 210, remove the words ‘‘Fedwire’’ and add, in their place, the words ‘‘the Fedwire Funds Service’’ in the following places: (a) Section 210.9(b)(4)(i)(A); (b) Sections 210.25(a), (b)(3); and (c) Section 210.29(b). Appendix A to subpart B of part 210 [Amended] ■ 16. In Appendix A to subpart B of part 210: (a) Under ‘‘Section 210.25— Authority, Purpose, and Scope’’, add paragraph (e). (b) Under ‘‘Section 210.32—Federal Reserve Bank Liability; Payment of Interest’’, revise paragraph (b). The additions and revisions read as follows: ■ * Instead, subpart B of Regulation J and Federal Reserve Bank operating circulars govern the rights and obligations of parties to funds transfers sent through the Fedwire Funds Service as provided in section 210.25(b). Thus, to the extent there is any inconsistency between a financial messaging standard adopted by the Fedwire Funds Service and subpart B of Regulation J, subpart B of Regulation J, including Article 4A as adopted in its appendix, will prevail. In the ISO 20022 financial messaging standard, for example, the term agent is used to refer to a variety of bank parties to a funds transfer (e.g., debtor agent, creditor agent, intermediary agent). Notwithstanding use of that term in the standard and in message tags, such banks are not the agents of any party to a funds transfer and owe no duty to any other party to such a funds transfer except as provided in subpart B of Regulation J (including Article 4A) or by express agreement. The ISO 20022 financial messaging standard also permits information to be carried in a funds-transfer message regarding persons that are not parties to that funds transfer (e.g., ultimate debtor, ultimate creditor, initiating party) for regulatory, compliance, remittance, or other purposes. An ‘‘ultimate debtor’’ is not an ‘‘originator’’ as defined in Article 4A. The relationship between the ultimate debtor and the originator (what the ISO 20022 standard calls the ‘‘debtor’’) is determined by law other than Article 4A. * * * * (b) Payment of interest. (1) Under article 4A, a Federal Reserve Bank may be required to pay compensation in the form of interest to another party in connection with its handling of a funds transfer. For example, payment of compensation in the form of interest is required in certain situations pursuant to sections 4A–204 (relating to refund of payment and duty of customer to report with respect to unauthorized payment order), 4A–209 (relating to acceptance of payment order), 4A–210 (relating to rejection of payment order), 4A–304 (relating to duty of sender to report erroneously executed payment order), 4A–305 (relating to liability for late or improper execution or failure to execute a payment order), 4A–402 (relating to obligation of sender to pay receiving bank), and 4A–404 (relating to obligation of beneficiary’s bank to pay and give notice to beneficiary). (2) Section 210.32(b) requires Federal Reserve Banks to provide compensation through an explicit interest payment. Under section 4A–506(a), the amount of such interest may be determined by agreement between the sender and receiving bank or by funds-transfer system rule. If there is no such agreement, under section 4A–506(b), the amount of interest is based on the federal funds rate. Similarly, compensation in the form of explicit interest will be paid to government senders, receiving banks, or beneficiaries described in § 210.25(d) if they are entitled to interest under this subpart. A Federal Reserve Bank may also, in its discretion, pay PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 explicit interest directly to a remote party to a Fedwire funds transfer that is entitled to interest, rather than providing compensation to its direct sender or receiving bank. * * * * * By order of the Board of Governors of the Federal Reserve System, February 28, 2018. Ann E. Misback, Secretary of the Board. [FR Doc. 2018–04486 Filed 3–14–18; 8:45 am] BILLING CODE 6210–01–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration 14 CFR Part 71 [Docket No. FAA–2018–007; Airspace Docket No. 17–AWP–18] Proposed Amendment of Class E Airspace; Mesquite, NV Federal Aviation Administration (FAA), DOT. ACTION: Notice of proposed rulemaking (NPRM). AGENCY: This action proposes to modify Class E airspace extending upward from 700 feet above the surface at Mesquite Airport, Mesquite, NV, by enlarging the area southwest of the airport and updating the airport’s geographic coordinates to match the FAA’s aeronautical database. These changes are necessary to accommodate new area navigation (RNAV) procedures at this airport. DATES: Comments must be received on or before April 30, 2018. ADDRESSES: Send comments on this proposal to the U.S. Department of Transportation, Docket Operations, 1200 New Jersey Avenue SE, West Building Ground Floor, Room W12–140, Washington, DC 20590; telephone: 1– 800–647–5527, or (202) 366–9826. You must identify FAA Docket No. FAA– 2018–007; Airspace Docket No. 17– AWP–18, at the beginning of your comments. You may also submit comments through the internet at http:// www.regulations.gov. FAA Order 7400.11B, Airspace Designations and Reporting Points, and subsequent amendments can be viewed online at http://www.faa.gov/air_traffic/ publications/. For further information, you can contact the Airspace Policy Group, Federal Aviation Administration, 800 Independence Avenue SW, Washington, DC 20591; telephone: (202) 267–8783. The Order is also available for inspection at the National Archives and Records Administration (NARA). For SUMMARY: E:\FR\FM\15MRP1.SGM 15MRP1

Agencies

[Federal Register Volume 83, Number 51 (Thursday, March 15, 2018)]
[Proposed Rules]
[Pages 11431-11443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04486]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / 
Proposed Rules

[[Page 11431]]



FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-1599]
RIN 7100 AE 98


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule and comment request.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is publishing for comment proposed amendments to Regulation J. The 
proposed amendments are intended to clarify and simplify certain 
provisions of Subpart A of Regulation J, remove obsolete provisions, 
and align the rights and obligations of sending banks, paying banks, 
and Federal Reserve Banks (Reserve Banks) with the Board's recent 
amendments to Regulation CC, Availability of Funds and Collection of 
Checks, to reflect the virtually all-electronic check collection and 
return environment. The proposed rule would also amend subpart B of 
Regulation J to clarify that terms used in financial messaging 
standards, such as ISO 20022, do not confer legal status or 
responsibilities.

DATES: Comments must be submitted by May 14, 2018.

ADDRESSES: You may submit comments, identified by Docket No. R-1599 and 
RIN 7100-AE98, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://www.federalreserve.gov/apps/foia/proposedregs.aspx
     Email: [email protected]. Include docket 
and RIN numbers in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    Instructions: All public comments will be made available on the 
Board's website at https://www.federalreserve.gov/apps/foia/proposedregs.aspx as submitted, unless modified for technical reasons. 
Accordingly, your comments will not be edited to remove any identifying 
or contact information. Public comments may also be viewed 
electronically or in paper form in Room 3515, 1801 K Street NW (between 
18th and 19th Streets NW), Washington, DC 20006 between 9:00 a.m. and 
5:00 p.m. on weekdays. For security reasons, the Board requires that 
visitors make an appointment to inspect comments. You may do so by 
calling (202) 452-3684. Upon arrival, visitors will be required to 
present valid government-issued photo identification and to submit to 
security screening in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT: Clinton N. Chen, Senior Attorney (202/
452-3952), Legal Division; or Ian C.B. Spear, Manager (202-452-3959), 
Division of Reserve Bank Operations and Payment Systems; for users of 
Telecommunication Devices for the Deaf (TDD) only, contact 202-263-
4869; Board of Governors of the Federal Reserve System, 20th and C 
Streets NW, Washington, DC 20551.

SUPPLEMENTARY INFORMATION: 

I. Background

    Subpart A of Regulation J governs the collection of checks and 
other items by the Reserve Banks. This subpart includes the warranties 
and indemnities that are given to the Reserve Banks by parties that 
send items to the Reserve Banks for collection and return, as well as 
the warranties and indemnities for which the Reserve Banks are 
responsible in connection with the items they handle. Subpart A also 
describes the methods by which the Reserve Banks may recover for losses 
associated with their collection of items. Subpart A authorizes the 
Reserve Banks to issue operating circulars governing the details of the 
collection of checks and other items and provides that such operating 
circulars have binding effect on all parties interested in an item 
handled by a Reserve Bank. The Reserve Banks' Operating Circular No. 3, 
``Collection of Cash Items and Returned Checks'' (OC 3),\1\ is the 
operating circular that is most relevant to the Reserve Banks' check 
collection activities. Subpart B of Regulation J provides rules to 
govern funds transfers through the Reserve Banks' Fedwire Funds 
Service. This service is also governed by the Reserve Banks' Operating 
Circular No. 6, ``Funds Transfers through the Fedwire Funds Service'' 
(OC 6).\2\
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    \1\ See, https://www.frbservices.org/assets/resources/rules-regulations/072315-operating-circular-3.pdf.
    \2\ See, https://www.frbservices.org/assets/resources/rules-regulations/operating-circular-6-102917.pdf.
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II. Overview of Proposed Amendments

A. Alignment With Regulation CC Amendments Addressing Electronic Checks

    In 2004, the Board amended Regulation J to cover electronic check 
processing options that the Reserve Banks offered after the Check 
Clearing for the 21st Century Act (Check 21 Act) took effect in October 
2004.\3\ The Board's amendments to Regulation J at the time included 
provisions to address the rights and obligations of banks and Reserve 
Banks relating to electronic items handled by Reserve Banks.\4\
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    \3\ The Board's Regulation CC implements the Expedited Funds 
Availability Act of 1987 (EFA Act), 12 U.S.C. 4001 et seq.; and the 
Check Clearing for the 21st Century Act of 2003 (Check 21 Act), 12 
U.S.C. 5001 et seq. The Check 21 Act facilitated electronic 
collection and return of checks by permitting banks to create a 
paper ``substitute check'' from an electronic image and electronic 
information derived from a paper check. The Check 21 Act authorized 
banks to provide substitute checks to a bank or a customer that had 
not agreed to electronic exchange. The Board implemented the Check 
21 Act primarily in subpart D of Regulation CC.
    \4\ At the time, the Board's Regulation CC presumed that banks 
generally handled checks in paper form, and the Uniform Commercial 
Code did not explicitly address electronic checks other than to say 
the terms of electronic presentment may be governed by agreement 
(U.C.C. 4-110).
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    As a result of the 2004 amendments, Regulation J defines an 
``electronic item'' as an electronic image of, and information 
describing, an item that a Reserve Bank agrees to handle pursuant to an 
operating circular.\5\ Regulation J also sets forth certain warranties 
provided to the Reserve Banks by the sender of an electronic item and 
certain

[[Page 11432]]

warranties provided by the Reserve Banks when sending or presenting an 
electronic item.\6\ Specifically, Regulation J provides that for 
electronic items, the sender and the Reserve Banks make warranties (1) 
as set forth in the Uniform Commercial Code (U.C.C) and Regulation CC 
as if the electronic item were subject to their terms; and (2) similar 
to those made for substitute checks under the Check 21 Act (``Check-21-
like warranties'').\7\ Regulation J also currently provides similar 
provisions related to checks that are returned as electronic items.\8\
---------------------------------------------------------------------------

    \5\ 12 CFR 210.2(i).
    \6\ 12 CFR 210.5(a)(3)-(4) sets forth warranties provided by the 
sender of an electronic item; 12 CFR 210.6(b)(2)-(3) sets forth 
warranties provided by the Reserve Banks related to electronic 
items.
    \7\ That is, warranties that a bank will not be asked to pay an 
item twice and that the electronic image and electronic information 
are sufficient to create a substitute check.
    \8\ 12 CFR 210.12(c)(3)-(4) sets forth warranties provided by 
the sender of a returned check that is an electronic item; 12 CFR 
210.12(e)(1)(ii)-(iii) sets forth warranties provided by the Reserve 
Banks related to a returned check that is an electronic item.
---------------------------------------------------------------------------

    In 2017, the Board published a final rule amending Regulation CC to 
reflect the virtually all-electronic check collection and return 
environment.\9\ Among other things, the amendments created a regulatory 
framework for the collection and return of electronic items (i.e., 
electronic images and electronic information derived from a paper item) 
by defining the terms ``electronic check'' and ``electronic returned 
check,'' creating Check-21-like warranties for electronic checks and 
electronic returned checks, and applying existing paper-check 
warranties to electronic checks and electronic returned checks.
---------------------------------------------------------------------------

    \9\ 82 FR 27552 (June 15, 2017).
---------------------------------------------------------------------------

    Accordingly, the Board is proposing amendments to align subpart A 
of Regulation J with the Board's 2017 amendments to Regulation CC and 
incorporate certain provisions by reference, thereby reducing the need 
for duplication and improving consistency between the regulations. 
Under the Board's proposal, the term ``electronic item'' would be 
removed from Regulation J and ``check'' and ``returned check'' would be 
defined to include an electronic check and electronic returned check as 
defined in Sec.  229.2 of Regulation CC. The term ``item'' would also 
be defined to include an electronic check as defined in Regulation CC. 
The Board also proposes to eliminate duplicative provisions by removing 
the Check-21-like warranties currently provided under Regulation J by 
the sender and the Reserve Banks. Instead, Regulation J would provide 
that the sender of an item (including an electronic check) and the 
Reserve Banks would (as applicable and unless otherwise provided) make 
all the warranties and indemnities set forth in and subject to the 
terms of subparts C and D in Regulation CC. The Board proposes similar 
amendments to the provisions of Regulation J that currently address 
returning checks as electronic items.

B. Electronically Created Items

    In the 2017 amendments to Regulation CC, the Board included certain 
indemnities with respect to electronically-created items (ECIs), which 
are check-like items created in electronic form that never existed in 
paper form. ECIs can be difficult to distinguish from electronic images 
of paper checks. As a practical matter, a bank receiving an ECI often 
handles it as if it were derived from a paper check. However, because 
there was no original paper check corresponding to the ECI, the 
warranties, indemnities, and other provisions of Regulation CC would 
not apply to those items. As the Board explained in the 2017 Regulation 
CC amendments, the payee and the depositary bank are best positioned to 
know whether an item is electronically created and to prevent the item 
from entering the check-collection system. Therefore, to protect banks 
that receive ECIs during the check collection process, the Board's 
Regulation CC amendments provided indemnities that ultimately shift 
liability for losses to the depositary bank because either the ECI (1) 
is not derived from a paper check, (2) was unauthorized, or (3) was 
transferred or presented for payment more than once.\10\ The proposed 
amendments to incorporate Regulation CC's warranties and indemnities 
into Regulation J by reference would include these ECI indemnities.
---------------------------------------------------------------------------

    \10\ 12 CFR 229.34(g) provides that ``each bank that transfers 
or presents an electronically-created item and receives a settlement 
or other consideration for it shall indemnify, as set forth in Sec.  
229.34(i), each transferee bank, any subsequent collecting bank, the 
paying bank, and any subsequent returning bank against losses that 
result from the fact that--(1) The electronic image or electronic 
information is not derived from a paper check; (2) The person on 
whose account the electronically-created item is drawn did not 
authorize the issuance of the item in the amount stated on the item 
or to the payee stated on the item (for purposes of this paragraph 
(g)(2), ``account'' includes an account as defined in section 
229.2(a) as well as a credit or other arrangement that allows a 
person to draw checks that are payable by, through, or at a bank); 
or (3) A person receives a transfer, presentment, or return of, or 
otherwise is charged for an electronically-created item such that 
the person is asked to make payment based on an item or check it has 
already paid.''
---------------------------------------------------------------------------

    Currently, neither Regulation CC nor Regulation J explicitly 
address the sending of ECIs to the Reserve Banks. However, the 
definition of item in Regulation J as currently drafted does not 
encompass ECIs and therefore does not allow for the handling of ECIs by 
the Reserve Banks. Regulation J defines an item, in part, as ``an 
instrument or a promise or order to pay money, whether negotiable or 
not'' that meets several other requirements.\11\ The terms 
``instrument,'' ``promise,'' and ``order'' are defined under the U.C.C. 
as requiring a writing.\12\ Because they never existed in tangible form 
and therefore do not qualify as writings, ECIs are not ``items'' as 
currently defined in Regulation J. To provide greater clarity, the 
Board proposes to amend the definition of ``item'' in subpart A of 
Regulation J to explicitly state that the term does not include an ECI 
as defined Regulation CC.
---------------------------------------------------------------------------

    \11\ 12 CFR 210.2(i).
    \12\ Terms not otherwise defined in Regulation J or Regulation 
CC have the meanings set forth in the U.C.C. Under the U.C.C., 
``instrument'' means a ``negotiable instrument'' which is defined in 
part as ``unconditional promise or order to pay a fixed amount of 
money.'' U.C.C. 3-104. ``Promise'' is defined as ``a written 
undertaking to pay money signed by the person undertaking to pay.'' 
U.C.C. 3-103. ``Order'' is defined as ``a written instruction to pay 
money signed by the person giving the instruction.'' U.C.C. 3-103. 
``Writing'' and ``written'' are defined as including ``printing, 
typewriting, or any other intentional reduction to tangible form.'' 
U.C.C. 1-201.
---------------------------------------------------------------------------

    Furthermore, because Regulation J is intended to provide rules for 
the collection and return of items by the Reserve Banks, the Board is 
proposing amendments to Regulation J that would allow the Reserve Banks 
to require senders to provide warranties and indemnities that only 
``items'' and any ``noncash items'' the Reserve Banks have agreed to 
handle will be provided to the Reserve Banks. The Board's proposed 
amendments would also permit the Reserve Banks to provide a subsequent 
collecting bank and a paying bank the warranties and indemnities 
provided by the sender. As with the amendments to Regulation CC, the 
Board believes the proposed amendments will help to shift liability to 
parties better positioned to know whether an item is electronically 
created and to prevent the item from entering the check-collection 
system.
    The Board recognizes that the proposed amendments may affect the 
creation and acceptance of ECIs. However, the Board's proposed 
amendments would not prevent parties that desire to exchange ECIs from 
doing so by agreement using direct exchange relationships or other 
methods not involving the Reserve Banks. The Board believes such 
arrangements are more

[[Page 11433]]

appropriate to ensure all parties knowingly accept any corresponding 
risks arising from the fact that the ECI never existed in paper form 
and therefore does not carry with it the warranties, indemnities, and 
other provisions associated with a check. The Board requests comment on 
possible implications that this clarification and change related to 
ECIs in Regulation J may have on financial institutions or the industry 
more broadly. The Board also requests comment on whether, and to what 
extent, the Board should consider amending Regulation J as part of a 
future rulemaking to permit the Reserve Banks to accept ECIs.

C. Settlement and Payment

    Regulation J currently provides that settlement with a Reserve Bank 
for cash items ``shall be made by debit to an account on the Reserve 
Bank's books, cash, or other form of settlement'' to which the Reserve 
Bank has agreed.\13\ With respect to noncash items, Regulation J 
provides that a Reserve Bank may require settlement by cash, by a debit 
to an account on a Reserve Bank's books or ``by any of the following 
that is in a form acceptable to the collecting Reserve Bank: Bank 
draft, transfer of funds or bank credit, or any other form of payment 
authorized by State law.'' \14\ Regulation J also currently provides 
that a Reserve Bank may require a nonbank payor to settle for items by 
cash, or by ``any of the following that is in a form acceptable to the 
Reserve Bank: Cashier's check, certified check, or other bank draft or 
obligation.'' \15\ In order to facilitate the efficient collection of 
items, the Reserve Banks' current practice is generally to settle for 
items by debit to an account on the Reserve Bank's books. The use of 
cash is rare, typically only done in emergency situations, and could be 
covered by a provision allowing ``other form of settlement to which the 
Reserve Bank agrees.'' The Board therefore proposes to revise certain 
settlement provisions of Regulation J to remove references to cash and 
other specified forms of settlement (e.g., cashier's checks or 
certified checks) and instead state that the Reserve Banks may settle 
by a debit to an account on the Reserve Bank's books, or another form 
of settlement acceptable to the Reserve Banks. The Board requests 
comment on possible implications that the proposed changes may have on 
financial institutions with which the Reserve Banks settle for the 
presentment of items.
---------------------------------------------------------------------------

    \13\ 12 CFR 210.9(b)(5).
    \14\ 12 CFR 210.9(c).
    \15\ 12 CFR 210.9(d).
---------------------------------------------------------------------------

D. Legal Status of Terms Used in Financial Messaging Standards

    Financial messaging standards provide a common format that allows 
different financial institutions to communicate. Federal Reserve Banks 
plan to migrate to the ISO 20022 financial messaging standard for the 
Fedwire Funds Service. ISO 20022 is an international standard that 
employs terminology that differs in key respects from that used in U.S. 
funds-transfer law, including Regulation J. The Board proposes an 
amendment to subpart B of Regulation J that would clarify that terms 
used in financial messaging standards, such as ISO 20022, do not confer 
or connote legal status or responsibilities.

E. Additional Aspects of the Proposal

    The Board also proposes several other amendments to Regulation J, 
which include removal of obsolete material and corrections to include 
certain provisions that were unintentionally omitted by previous 
amendatory instructions to Regulation J.

F. Effective Date

    The Board proposes an effective date of July 1, 2018, to align with 
the effective date of the Board's amendments to subpart C of Regulation 
CC.

III. Section-by-Section Analysis

    The paragraph citations in this section are to the paragraphs of 
the proposed rule unless otherwise stated. The Board requests comment 
on all aspects of the proposed rule.

Subpart A--Collection of Checks and Other Items by Federal Reserve 
Banks

Section 210.2 Definitions

1. Section 210.2(h)--Check
    Regulation J currently includes the term ``check'' (a draft as 
defined in the U.C.C. drawn on a bank and payable on demand). The Board 
proposes to revise the definition of ``check'' to mean a ``check'' and 
an ``electronic check'' as those terms are defined in Regulation CC. 
This amendment will align the terminology in the two regulations.
    Regulation J also includes the term ``check as defined in 12 CFR 
229.2(k)'' (the Regulation CC definition of ``check''). This term is 
used in Regulation J in those provisions that require specific 
references to the Regulation CC definition of ``check.'' (See 
Sec. Sec.  210.2(m), 210.7(b)(2), and Sec.  210.12(a)(2).) The Board 
proposes to delete the definition of ``check as defined in 12 CFR 
229.2(k)'' because it is no longer needed in light of the proposed 
revision of the Regulation J definition of ``check'' to cross-reference 
the Regulation CC definition. The Board proposes to revise the three 
provisions where it is used by deleting the reference to ``check as 
defined in 12 CFR 229.2(k),'' as described in more detail in the 
corresponding section-by-section analysis.
2. Section 210.2(i)--Item
    Regulation J uses the term ``item'' to refer to the instruments and 
electronic images that the Reserve Banks handle. Regulation J uses the 
term ``electronic item'' to refer to an electronic image of an item, 
and information describing that item, that a Reserve Bank agrees to 
handle as an item pursuant to an operating circular. To align the 
terminology of Regulation J with Regulation CC, the Board proposes to 
delete the definition of ``electronic item'' and revise the definition 
of ``item'' in Sec.  210.2(i) to include a check, which, under the 
proposed amendment discussed above would include both a check and an 
electronic check as defined in Regulation CC. The Board also proposes 
to add a clarifying statement that the term ``item'' does not include 
an electronically-created item as defined in Sec.  229.2 of Regulation 
CC (as discussed in detail above).
3. Section 210.2(m)--Returned Check
    Current Sec.  210.2(m) defines a ``returned check'' as ``a cash 
item or a check as defined in 12 CFR 229.2(k) returned by a paying 
bank.'' To align the definition of ``returned check'' with ``check,'' 
the Board proposes to delete the reference to ``check as defined in 12 
CFR 229.2(k)'' and instead refer to the definition of ``electronic 
returned check'' in Regulation CC.
4. Section 210.2(n)--Sender
    Current Sec.  210.2(n) defines sender by providing a set of 
entities that sends an item to a Reserve Bank for forward collection. 
The Board proposes to add ``member bank, as defined in section 1 of the 
Federal Reserve Act'' in Sec.  210.2(n)(2) to include a bank or trust 
company that is a member of one of the Federal Reserve Banks to ensure 
inclusion of any member bank that does not fall under the existing 
definition. The Board proposes to redesignate current Sec. Sec.  
210.2(n)(2)-(6) to Sec. Sec.  210.2(n)(3)-(7) to accommodate the 
insertion.

[[Page 11434]]

5. Section 210.2(q)--Fedwire
    Current Sec.  210.2(q) defines ``Fedwire'' as having the same 
meaning set forth in Sec.  210.26(e). The Board proposes to amend this 
definition to refer to both ``Fedwire Funds Service and Fedwire'' to 
conform to the proposed amendment to Sec.  210.26(e).

Section 210.3 General Provisions

    Section 210.3(a) provides general provisions concerning the 
obligations of Reserve Banks and the role of operating circulars. For 
reasons described above in connection with electronically-created 
items, the Board proposes to add a sentence stating that the operating 
circulars may require a sender to provide warranties and indemnities 
that only items and any noncash items the Reserve Banks have agreed to 
handle will be sent to the Reserve Banks. Additionally, in order to 
allow the Reserve Banks to pass any such warranties and indemnities 
forward, the Board proposes to authorize the Reserve Banks to provide 
to a subsequent collecting bank and to the paying bank any warranties 
and indemnities provided by the sender pursuant to this paragraph.

Section 210.4 Sending Items to Reserve Banks

    Section 210.4(a) sets forth the rule for determining the Reserve 
Bank to which an item should be sent. The Board proposes to clarify 
this paragraph to provide that a sender's Administrate Reserve Bank may 
direct a sender (other than a Reserve Bank) to send any item to a 
specified Reserve Bank, whether or not the item is payable in the 
Reserve Bank's district. This amendment reflects current practice in 
the Reserve Banks' check service and is not expected or intended to 
have a substantive affect. The Board is also proposing to capitalize 
the term ``Administrative Reserve Bank'' wherever it appears to conform 
to the defined term in Sec.  210.2(c).

Section 210.5 Sender's Agreement; Recovery by Reserve Bank

1. Section 210.5(a)--Sender's Agreement
    Current Sec.  210.5(a) lists the warranties, authorizations, and 
agreements made by a sender. The first two paragraphs (current 
Sec. Sec.  210.5(a)(1) and (2)) apply to all items and require the 
sender to authorize the Reserve Banks to handle the item sent and 
warrant that the sender is entitled to enforce the item, that the item 
has not been altered, and that the item bears the indorsements applied 
by all prior parties. The Board is not proposing to revise these 
paragraphs. Current Sec. Sec.  210.5(a)(3) and (4) set out warranties 
for electronic items and electronic items that are not representations 
of substitute checks, respectively. These warranties are now specified 
in Regulation CC, and the Board proposes to revise Regulation J 
accordingly. Proposed Sec.  210.5(a)(3) would require the sender to 
make all applicable warranties and indemnities set forth in Regulation 
CC and the U.C.C. The proposal would retain the existing requirement 
that the sender make all warranties set forth in and subject to the 
terms of U.C.C. 4-207 for an electronic check as if it were an item 
subject to the U.C.C. These proposed changes would streamline 
Regulation J, align Sec.  210.5(a) with the Regulation CC provisions 
that set out warranties and indemnities for electronic checks, and 
ensure a seamless chain of warranties for the items handled by the 
Reserve Banks.
    The Board also proposes to require a sender to make any warranties 
or indemnities regarding the sending of items that the Reserve Banks 
include in an operating circular issued in accordance with Sec.  
210.3(a) to ensure that only items and any noncash items the Reserve 
Banks have agreed to handle will be sent to the Reserve Banks (proposed 
Sec.  210.5(a)(4)). Finally, the Board proposes to add a reference to 
``indemnities'' to the introductory text of Sec.  210.5(a) to reflect 
that the sender would provide indemnities pursuant to proposed 
Sec. Sec.  210.5(a)(3) and (4).
2. Section 210.5(a)(5)--Sender's Liability to Reserve Bank
    Current Sec.  210.5(a)(5) sets out the sender's liability to 
Reserve Banks. The Board proposes to make a number of amendments to 
this subsection that align this paragraph to changes elsewhere in the 
proposed rule.
    Current Sec.  210.5(a)(5)(i)(C) states that the sender agrees to 
indemnify the Reserve Bank for any loss or expense resulting from 
``[a]ny warranty or indemnity made by the Reserve Bank under Sec.  
210.6(b), part 229 of this chapter, or the U.C.C.'' The Board proposes 
to amend this provision to provide that the sender will also indemnify 
a Reserve Bank for any loss or expense sustained resulting from any 
warranties and indemnities regarding the sending of ``items'' required 
by the Reserve Bank in an operating circular issued pursuant to 
proposed Sec.  210.3(a).
    Current Sec.  210.5(a)(5)(ii) specifies conditions and limitations 
to a sender's liability for warranties and indemnities that a Reserve 
Bank makes for a substitute check, a paper or electronic representation 
thereof, or any other electronic item. The Board proposes to delete the 
term ``electronic item'' in current Sec.  210.5(a)(5)(ii) and replace 
it with ``electronic check.''
    Current Sec.  210.5(a)(5)(ii)(A) provides that a sender of an 
original check is not liable for any amount that the Reserve Bank pays 
under subpart D of Regulation CC for a subsequently created substitute 
check or under Sec.  210.6(b)(3) for an electronic item, absent the 
sender's agreement to the contrary. The Board proposes to delete the 
reference to current Sec.  210.6(b)(3), which lists warranties and an 
indemnity for an electronic item that is not a representation of a 
substitute check, and replace it with a reference to Sec.  229.34 of 
this chapter with respect to an electronic check, consistent with other 
proposed amendments to Sec.  210.6(b) described below.
    Current Sec.  210.5(a)(5)(ii)(B) provides that nothing in 
Regulation J alters the liability structure that applies to substitute 
checks and paper or electronic representations of substitute checks 
under subpart D of Regulation CC. The Board proposes to add that this 
subpart also does not alter the liability of a sender of an electronic 
check under Sec.  229.34, consistent with the other proposed revisions 
to Regulation J.
    Current Sec.  210.5(a)(5)(ii)(C) provides that a sender of an 
electronic item that is not a representations of a substitute check is 
not liable for any related warranties or indemnities that a Reserve 
Bank pays that are attributable to the Reserve Bank's own lack of good 
faith or failure to exercise ordinary care. The Board proposes to 
broaden this provision by applying the limitation on liability to all 
senders for any amount that the Reserve Bank pays that is attributable 
to the Reserve Bank's own lack of good faith or failure to exercise 
ordinary care under Regulation J or Regulation CC. The Board proposes 
to redesignate this section as Sec.  210.5(a)(5)(iii) and make 
conforming changes to cross-references.
3. Section 210.5(c) & (d)--Recovery by Reserve Bank and Methods of 
Recovery
    Section 210.5(c) sets out the procedures by which a Reserve Bank 
may recover against a sender if certain actions or proceedings related 
to the sender's actions are brought against (or defense is tendered to) 
a Reserve Bank. A portion of this section was inadvertently dropped 
from the Code of Federal Regulations. The Board proposes to reinstate 
the dropped language, which provides that, upon entry of a final 
judgment or decree, a Reserve Bank may recover from the

[[Page 11435]]

sender the amount of attorneys' fees and other expenses of litigation 
incurred, as well as any amount the Reserve Bank is required to pay 
because of the judgment or decree or the tender of defense, with 
interest. In addition, the Board proposes to correct cross-references 
to this provision in Sec.  210.5(d).
4. Section 210.5(e)--Security Interest
    Current Sec.  210.5(e) provides that when a sender sends an item to 
a Reserve Bank, the sender and any prior collecting bank grant to the 
sender's Administrative Reserve Bank a security interest in all of 
their respective assets in the possession of, or held for the account 
of, any Reserve Bank to secure their respective obligations due or to 
become due to the Administrative Reserve Bank under this subpart or 
subpart C of part 229 of this chapter (Regulation CC). The Board 
proposes to amend this subsection to reference subpart D of Regulation 
CC in addition to subpart C, as senders may have obligations to Reserve 
Banks under that subpart as well.

Section 210.6 Status, Warranties, and Liability of Reserve Bank

1. Section 210.6(a)(2)--Limitations on Reserve Bank Liability
    Section 210.6(a)(2) limits a Reserve Bank's liability with respect 
to an item to three instances: (1) The Reserve Bank's own lack of good 
faith or failure to exercise ordinary care, (2) as provided in this 
section of Regulation J, and (3) as provided in subparts C and D of 
Regulation CC. The Board proposes to expand this list to provide that a 
Reserve Bank may be liable under any warranties and indemnities 
provided in an operating circular issued in accordance with Sec.  
210.3(a) regarding the sending of items.
2. Section 210.6(b)--Warranties and Liability
    Section 210.6(b) sets forth the warranties and indemnities made by 
a Reserve Bank when it presents or sends an item. In alignment with the 
Board's proposed amendments to the sender's warranties in Sec.  
210.5(a), the Board proposes to replace current Sec. Sec.  210.6(b)(2) 
and (3), which provide warranties and indemnities for electronic items 
and electronic items that are not representations of substitute checks, 
respectively. Those warranties are now covered by Regulation CC. The 
Board also proposes to make a conforming amendment to Sec.  
210.6(b)(1)(iii) to eliminate the unnecessary reference to ``paper or 
electronic form.''
    The Board proposes a new Sec.  210.6(b)(2) to provide that a 
Reserve Bank would make any warranties or indemnities regarding the 
sending of items as set forth in an operating circular issued pursuant 
to proposed Sec.  210.3(a). This language corresponds to the similar 
proposed provision for sender liability in Sec.  210.5(a)(4).
    The Board proposes a new Sec.  210.6(b)(3) to provide that the 
Reserve Bank makes to a subsequent collecting bank and to the paying 
bank all the warranties and indemnities set forth in subparts C and D 
for Regulation CC. Proposed Sec.  210.6(b)(3) would retain the existing 
application of U.C.C. 4-207 warranties to electronic items (now called 
electronic checks).
    In Sec.  210.6(b)(4), the Board proposes to retain the existing 
Reserve Bank indemnity for substitute checks created from electronic 
checks, which is in current Sec.  210.6(b)(3)(ii). This provision 
provides an indemnity chain for substitute check indemnity claims under 
Regulation CC, enabling receiving banks (and, in turn, Reserve Banks) 
to pass the loss on such claims to the bank whose choice to handle an 
item electronically necessitated the later creation of a substitute 
check.
3. Section 210.6(c)--Limitation on Liability
    The limitations on Reserve Bank liability are set forth in proposed 
(and current) Sec.  210.6(a)(2). The Board is proposing to delete this 
subsection as it is redundant and to redesignate current subsection (d) 
as subsection (c).

Section 210.7 Presenting Items for Payment

    Section 210.7(b) provides the places of presentment for a Reserve 
Bank or subsequent collecting bank. Current Sec.  210.7(b)(2) states 
``In the case of a check as defined in 12 CFR 229.2(k), in accordance 
with 12 CFR 229.36.'' In alignment with the Board's proposed deletion 
of the defined term ``check as defined in 12 CFR 229.2(k),'' the Board 
proposes to delete the use of that term in Sec.  210.7(b)(2), as it is 
no longer needed, and make other minor edits. As a result, proposed 
Sec.  210.7(b)(2) would state ``In accordance with Sec.  229.36 of this 
chapter (Regulation CC).''

Section 210.9 Settlement and Payment

1. Section 210.9(b)(5), (c), & (d)--Manner of Settlement, Noncash 
Items, & Nonbank Payor
    Current Sec.  210.9(b)(5) requires that settlement for cash items 
with a Reserve Bank be made by debit to an account on the Reserve 
Bank's books, cash, or other form of settlement to which the Reserve 
Bank agrees. As discussed in the overview section, the use of cash as a 
means of settlement is quite rare and generally used only in 
emergencies. Accordingly, the Board proposes to amend this provision by 
removing the reference to cash as a means of settlement. A Reserve Bank 
could continue to accept cash or other forms of settlement by agreement 
in special situations. The Board also proposes to make conforming 
amendments to Sec. Sec.  210.9(c) and (d), as well as to remove the 
references to other rarely-used forms of settlement (cashier's checks, 
certified checks, or other bank drafts or obligations). The Board is 
also proposing to correct cross-references and to capitalize the term 
``Administrative Reserve Bank'' wherever it appears to conform to the 
defined term in Sec.  210.2(c).
2. Section 210.9(e)--Handling of Payment
    Current Sec.  210.9(e) states that a Reserve Bank may handle a bank 
draft or other form of payment it receives in payment of a cash item as 
a cash item and that a Reserve Bank may handle a bank draft or other 
form of payment it receives in payment of a noncash item as either a 
cash item or a noncash item. The Board proposes to delete this section 
as it is now obsolete.
3. Section 210.9(f)--Liability of Reserve Bank
    Current Sec.  210.9(f) states that a Reserve Bank that acts in good 
faith and exercises ordinary care shall not be liable for the 
nonpayment of, or failure to realize upon, any bank draft or other form 
of payment that it accepts pursuant to Sec.  210.9(b)-(d). The Board 
proposes to renumber this subsection as Sec.  210.9(e) and to replace 
the reference to ``bank draft or other form of payment'' with ``any 
non-cash form of payment'' to conform to the proposed changes to the 
other provisions of this section.

Section 210.10 Time Schedule and Availability of Credits for Cash Items 
and Returned Checks

    Section 210.10(a) states that each Reserve Bank shall ``include in 
its operating circulars'' its time schedules for availability of cash 
items and returned checks and, correspondingly, when credits can be 
counted toward reserve balance requirements for purposes of Regulation 
D (12 CFR part 204). The Reserve Banks' practice is to publish the time 
schedules on the Federal Reserve website for financial services. 
Accordingly, the Board proposes to amend this section to delete

[[Page 11436]]

the requirement that time schedules be included in the operating 
circulars and, instead, require only that the time schedules be 
published.

Section 210.11 Availability of Proceeds of Noncash Items; Time Schedule

1. Section 210.11(b)--Time Schedule
    Section 210.11(b) states that a Reserve Bank may give credit for 
the proceeds of a noncash item subject to payment in actually and 
finally collected funds in accordance with a time schedule included in 
its operating circulars. To conform to amendments made in proposed 
Sec.  210.10, the Board proposes to delete the reference to operating 
circulars and require only that the time schedule be published.
2. Section 210.11(c)--Handling of Payment
    Current Sec.  210.11(c) prohibits a Reserve Bank from providing 
credit for a bank draft or other form of payment for a noncash item 
until it receives payment in actually and finally collected funds. The 
Board proposes to delete this subsection, as actually and finally 
collected funds are already required by Sec.  210.11(a).

Section 210.12 Return of Cash Items and Handling of Returned Checks

    Section 210.12 sets out the provisions governing the handling of 
returned checks. It is the counterpart to Sec. Sec.  210.5 and 210.6, 
which govern the handling of items for forward collection.
1. Section 210.12(a)--Return of Items
    Current Sec.  210.12(a)(2) sets out the procedures by which a 
paying bank may return checks not handled by Reserve Banks and 
references ``check as defined in Sec.  229.2(k) of this chapter 
(Regulation CC).'' In alignment with the Board's proposal to delete the 
defined term ``check as defined in Sec.  229.2(k)'' in Sec.  210.2(h), 
the Board proposes to delete the use of this term in this section, as 
it is no longer needed, and to use the term ``check'' instead.
2. Section 210.12(c)--Paying Bank's and Returning Bank's Agreement
    Current Sec.  210.12(c) provides the warranties, authorizations, 
and agreements related to returned checks made by paying banks and 
returning banks. The Board proposes amendments to this section that are 
parallel to the proposed amendments for forward-collection items with 
respect to the liability of the sender (Sec.  210.5(a)(3)) and the 
Reserve Banks (Sec.  210.6(b)(2)). Specifically, the Board proposes to 
replace current Sec. Sec.  210.12(c)(3) and (4), which provide 
warranties for all returned checks that are electronic items and 
warranties for returned checks that are electronic items that are not 
representations of substitute checks, respectively, with a provision 
that requires the paying bank or returning bank to make all the 
warranties and indemnities as set forth in Regulation CC, as applicable 
(proposed Sec.  210.12(c)(3)).
    Current Sec.  210.12(c)(5) sets out the conditions under which a 
paying bank or returning bank is liable to a Reserve Bank. The Board 
proposes to redesignate this paragraph as Sec.  210.12(c)(4) and amend 
the paragraph to correspond with the proposed amendments to the section 
on sender's liability to a Reserve Bank (Sec.  210.5(a)(4)). These 
proposed amendments are intended to create consistent liability 
provisions for senders, paying banks, and returning banks.
3. Section 210.12(d)--Liability Under Other Law
    Current Sec.  210.12(d) is titled ``Preservation of other 
warranties and indemnities.'' The Board proposes to change the title of 
this section to ``Returning bank's or paying bank's liability under 
other law'' to mirror the heading for the corresponding section for 
senders (Sec.  210.5(b)).
4. Section 210.12(e)--Warranties by and Liability of Reserve Bank
    Current Sec.  210.12(e) sets forth a Reserve Bank's liability when 
it handles a returned check, including warranties and liabilities. The 
Board proposes to amend this section to correspond to the amendments 
proposed in Sec.  210.6(b) related to the warranties and liabilities 
that are made by Reserve Banks when presenting or sending an item.
5. Section 210.12(f) & (g)--Recovery by Reserve Bank & Method of 
Recovery
    Section 210.12(f) parallels Sec.  210.5(c) and sets out the 
procedures by which a Reserve Bank may recover against a paying bank or 
returning bank if certain actions or proceedings related to the paying 
bank's or returning bank's actions are brought against (or defense is 
tendered to) a Reserve Bank. A portion of this section was 
inadvertently dropped from the Code of Federal Regulations. The Board 
proposes to reinstate the dropped language, which provides that, upon 
entry of a final judgment or decree, a Reserve Bank may recover from 
the paying bank or returning bank the amount of attorneys' fees and 
other expenses of litigation incurred, as well as any amount the 
Reserve Bank is required to pay because of the judgment or decree or 
the tender of defense, with interest. In addition, the Board proposes 
to correct cross-references and make organizational changes in Sec.  
210.12(g).

Subpart B--Funds Transfers Through Fedwire

Section 210.25 Authority, Purpose, and Scope

    Section 210.25 sets out the authority, purpose, and scope for 
subpart B of Regulation J, which governs Fedwire funds transfers. The 
Board proposes to add a new Sec.  210.25(e) to clarify that financial 
messaging standards (e.g., ISO 20022), including the financial 
messaging components, elements, technical documentation, tags, and 
terminology used to implement those standards, do not confer or connote 
legal status or responsibilities. The proposed amendment would specify 
that Regulation J, Article 4A of the U.C.C., and the operating 
circulars of the Reserve Banks govern the rights and obligations of 
parties to the Fedwire Funds Service and supersede any inconsistency 
between a financial messaging standard adopted by the Fedwire Funds 
Service. Additionally, the Board proposes to add in the commentary 
examples of inconsistent terminology between the ISO 20022 financial 
messaging standard and U.S. funds transfer law.

Section 210.26 Definitions

    Section 210.2(e) defines the term ``Fedwire'' to mean the funds-
transfer system owned and operated by the Federal Reserve Banks that is 
used primarily for the transmission and settlement of payment orders 
governed by Subpart B. The Board is proposing to amend this definition 
so that it applies to the official title of the service, ``Fedwire 
Funds Service,'' as well as the shorthand term ``Fedwire.'' The Board 
also proposes to change references to ``Fedwire'' to ``Fedwire Funds 
Service'' in Sec. Sec.  210.9(b)(4)(i), 210.25(a) and (b)(3), and 
210.29(b).

Section 210.32 Federal Reserve Bank Liability; Payment of Interest

    Current Sec.  210.32 sets out provisions that govern Federal 
Reserve Bank liability and payment of interest. Section 210.32(b) 
provides that compensation that is paid by Federal Reserve Banks in the 
form of interest shall be calculated in accordance with section 4A-506 
of Article 4A. Under section 4A-506(a), the amount of interest may be 
determined by agreement between the sender and

[[Page 11437]]

receiving bank or by funds-transfer system rule. If there is no such 
agreement, under section 4A-506(b), the amount of interest is based on 
the federal funds rate. The current commentary to Sec.  210.32(b) 
states that ``Interest would be calculated in accordance with the 
procedures specified in section 4A-506(b).'' The Board proposes to 
delete this statement and rearrange the commentary to clarify that 
interest can be calculated in accordance with both section 4A-506(a) 
and (b).

IV. Competitive Impact Analysis

    The Board conducts a competitive impact analysis when it considers 
an operational or legal change, if that change would have a direct and 
material adverse effect on the ability of other service providers to 
compete with the Federal Reserve in providing similar services due to 
legal differences or due to the Federal Reserve's dominant market 
position deriving from such legal differences. All operational or legal 
changes having a substantial effect on payments-system participants 
will be subject to a competitive-impact analysis, even if competitive 
effects are not apparent on the face of the proposal. If such legal 
differences exist, the Board will assess whether the same objectives 
could be achieved by a modified proposal with lesser competitive impact 
or, if not, whether the benefits of the proposal (such as contributing 
to payments-system efficiency or integrity or other Board objectives) 
outweigh the materially adverse effect on competition.\16\
---------------------------------------------------------------------------

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

    The Board does not believe that the amendments to Regulation J will 
have a direct and material adverse effect on the ability of other 
service providers to compete effectively with the Reserve Banks in 
providing similar services due to legal differences. The amendments 
would align the provisions in Regulation J governing Reserve Bank 
services to the generally applicable provisions in Regulation CC. The 
proposed amendment would not affect the competitive position of 
private-sector presenting banks vis-[agrave]-vis the Reserve Banks.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board may not conduct 
or sponsor, and a respondent is not required to respond to, an 
information collection unless it displays a valid Office of Management 
and Budget (OMB) control number. The Board reviewed the proposed rule 
under the authority delegated to the Board by the OMB and determined 
that it contains no collections of information under the PRA.\17\ 
Accordingly, there is no paperwork burden associated with the rule.
---------------------------------------------------------------------------

    \17\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act

    The Regulatory Flexibility Act (the ``RFA'') (5 U.S.C. 601 et seq.) 
requires agencies either to provide an initial regulatory flexibility 
analysis with a proposed rule or to certify that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. In accordance with section 3(a) of the RFA, the Board has 
reviewed the proposed regulation. In this case, the proposed rule would 
apply to all depository institutions. This Initial Regulatory 
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603 
in order for the Board to solicit comment on the effect of the proposal 
on small entities. The Board will, if necessary, conduct a final 
regulatory flexibility analysis after consideration of comments 
received during the public comment period.

1. Statement of the Need for, Objectives of, and Legal Basis for, the 
Proposed Rule

    The Board is proposing the foregoing amendments to Regulation J 
pursuant to its authority under the Federal Reserve Act, the EFA Act; 
the Check 21 Act, and other laws. The proposal clarifies and simplifies 
certain provisions of Subpart A of Regulation J, removes obsolete 
provisions, and aligns the rights and obligations of sending banks, 
paying banks, and Reserve Banks with the Board's recent amendments to 
Regulation CC to reflect the virtually all-electronic check collection 
and return environment. The proposed rule would also amend subpart B of 
Regulation J to clarify the legal status of terms in financial 
messaging standards.

2. Small Entities Affected by the Proposed Rule

    The proposed rule would apply to all depository institutions 
regardless of their size.\18\ Pursuant to regulations issued by the 
Small Business Administration (13 CFR 121.201), a ``small banking 
organization'' includes a depository institution with $550 million or 
less in total assets. Based on call report data as of June 2017, there 
are approximately 9,918 of depository institutions that have total 
domestic assets of $550 million or less and thus are considered small 
entities for purposes of the RFA.
---------------------------------------------------------------------------

    \18\ The proposed rule would not impose costs on any small 
entities other than depository institutions.
---------------------------------------------------------------------------

3. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The Board's proposed rule generally does not have any projected 
reporting, recordkeeping or other compliance requirements, as the 
proposed amendments to Regulation J align the rights and obligations of 
sending banks, paying banks, and Federal Reserve Banks (Reserve Banks) 
with the Board's recent amendments to Regulation CC. The proposed 
warranties and indemnities are similar to the warranties and 
indemnities that apply to paper and electronic checks under existing 
Regulation J and other law. The proposed amendments do not require any 
bank to change the form in which it submits checks, nor do they require 
any bank to submit reports, maintain records, or provide notices or 
disclosures.
    With respect to ECIs, the Board recognizes that the proposed 
amendments that would allow the Reserve Banks to require senders to 
provide certain warranties and indemnities may affect the creation and 
acceptance of ECIs by small entities. However, the Board's proposed 
amendments would not prevent small entities that desire to exchange 
ECIs from doing so by agreement using direct exchange relationships or 
other methods not involving the Reserve Banks. The Board believes the 
proposed amendments will help to shift liability to parties better 
positioned to know whether an item is electronically created and that 
can either prevent the item from entering the check-collection system 
or assume the risk of sending it forward.
    Furthermore, the Board does not expect the Board's proposed 
amendments to remove references to cash and other specified forms of 
settlement to burden small entities, as the use of cash as settlement 
is rare and typically only done in emergency situations. The Board's 
proposed amendment would allow use of cash as settlement in emergency 
situations by continuing to permit other forms of settlement to which 
the Reserve Banks agree.

4. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules

    The Board notes that subparts C and D of Regulation CC overlap with 
the proposed rule with respect to checks collected or returned through 
the

[[Page 11438]]

Reserve Banks. The Board's intent in proposing the amendments is, in 
part, to align Regulation J with Regulation CC and incorporate certain 
provisions by reference, thereby reducing the need for duplication and 
improving consistency between the regulations. The provisions of 
Regulation J would supersede any inconsistent provisions of Regulation 
CC, but only to the extent of the inconsistency.\19\ The Board knows of 
no other duplicative, overlapping, to conflicting Federal rules related 
to this proposal.
---------------------------------------------------------------------------

    \19\ See 12 CFR 210.3(f).
---------------------------------------------------------------------------

5. Significant Alternatives to the Proposed Rule

    The Board welcomes comment on the impact of the proposed rule on 
small entities and any approaches, other than the proposed amendments, 
that would reduce the burden on all entities.

List of Subjects in 12 CFR Part 210

    Banks, Banking, Federal Reserve System.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 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)--[AMENDED]

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


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

PART 210--[AMENDED]

0
2. In part 210, revise all references to ``article 4A'' to read 
``Article 4A''.

Subpart A--Collection of Checks and Other Items by Federal Reserve 
Banks

0
3. In Sec.  210.2, revise paragraphs (h), (i), (m), (n), (q), and 
(s)(1) to read as follows:


Sec.  210.2   Definitions.

* * * * *
    (h) Check means a check or an electronic check, as those terms are 
defined in Sec.  229.2 of this chapter (Regulation CC).
    (i) Item.
    (1) Item means--
    (i) An instrument or a promise or order to pay money, whether 
negotiable or not, that is--
    (A) Payable in a Federal Reserve District \1\ (District);
---------------------------------------------------------------------------

    \1\ For purposes of this subpart, the Virgin Islands and Puerto 
Rico are deemed to be in the Second District, and Guam, American 
Samoa, and the Northern Mariana Islands in the Twelfth District.
---------------------------------------------------------------------------

    (B) Sent by a sender to a Reserve Bank for handling under this 
subpart; and
    (C) Collectible in funds acceptable to the Reserve Bank of the 
District in which the instrument is payable; or
    (ii) A check.
    (2) Unless otherwise indicated, item includes both a cash and a 
noncash item, and includes a returned check sent by a paying or 
returning bank. Item does not include a check that cannot be collected 
at par, or a payment order as defined in Sec.  210.26(i) and handled 
under subpart B of this part. The term also does not include an 
electronically-created item as defined in Sec.  229.2 of this chapter 
(Regulation CC).
* * * * *
    (m) Returned check means a cash item returned by a paying bank, 
including an electronic returned check as defined in Sec.  229.2 of 
this chapter (Regulation CC) and a notice of nonpayment in lieu of a 
returned check, whether or not a Reserve Bank handled the check for 
collection.
    (n) Sender means any of the following entities that sends an item 
to a Reserve Bank for forward collection--
    (1) A depository institution, as defined in section 19(b) of the 
Federal Reserve Act (12 U.S.C. 461(b));
    (2) A member bank, as defined in section 1 of the Federal Reserve 
Act (12 U.S.C. 221);
    (3) A clearing institution, defined as--
    (i) An institution that is not a depository institution but that 
maintains with a Reserve Bank the balance referred to in the first 
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
    (ii) A corporation that maintains an account with a Reserve Bank in 
conformity with Sec.  211.4 of this chapter (Regulation K);
    (4) Another Reserve Bank;
    (5) An international organization for which a Reserve Bank is 
empowered to act as depositary or fiscal agent and maintains an 
account;
    (6) A foreign correspondent, defined as any of the following 
entities for which a Reserve Bank maintains an account: A foreign bank 
or banker, a foreign state as defined in section 25(b) of the Federal 
Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency 
referred to in section 14(e) of that act (12 U.S.C. 358); or
    (7) A branch or agency of a foreign bank maintaining reserves under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 
3105).
* * * * *
    (q) Fedwire Funds Service and Fedwire have the same meaning as that 
set forth in Sec.  210.26(e).
* * * * *
    (s) * * *
    (1) The terms not defined herein have the meanings set forth in 
Sec.  229.2 of this chapter applicable to subpart C or subpart D of 
part 229 of this chapter (Regulation CC), as appropriate; and
* * * * *
0
4. In Sec.  210.3, revise paragraph (a) to read as follows:


Sec.  210.3   General provisions.

    (a) General. Each Reserve Bank shall receive and handle items in 
accordance with this subpart, and shall issue operating circulars 
governing the details of its handling of items and other matters deemed 
appropriate by the Reserve Bank. The circulars may, among other things, 
classify cash items and noncash items, require separate sorts and 
letters, provide different closing times for the receipt of different 
classes or types of items, provide for instructions by an 
Administrative Reserve Bank to other Reserve Banks, set forth terms of 
services, and establish procedures for adjustments on a Reserve Bank's 
books, including amounts, waiver of expenses, and payment of 
compensation. As deemed appropriate by the Reserve Bank, the circulars 
may also require the sender to provide warranties and indemnities that 
only items and any noncash items the Reserve Banks have agreed to 
handle will be sent to the Reserve Banks. The Reserve Banks may provide 
to a subsequent collecting bank and to the paying bank any warranties 
and indemnities provided by the sender pursuant to this paragraph.
* * * * *
0
5. In Sec.  210.4, revise paragraphs (a), (b)(1)(ii), (b)(1)(iii), and 
(b)(3) to read as follows:


Sec.  210.4   Sending items to Reserve Banks.

    (a) Sending of items. A sender's Administrative Reserve Bank may 
direct a sender other than a Reserve Bank to send any item to a 
specified Reserve Bank, whether or not the item is payable in the 
Reserve Bank's district.
    (b) * * *
    (1) * * *
    (ii) The initial sender's Administrative Reserve Bank (which is 
deemed to have accepted deposit of the item from the initial sender);
    (iii) The Reserve Bank that receives the item from the initial 
sender (if

[[Page 11439]]

different from the initial sender's Administrative Reserve Bank); and
* * * * *
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), section 13(1) and section 16(13) of the Federal Reserve Act, and 
the Uniform Commercial Code. An initial sender's Administrative Reserve 
Bank that is deemed to accept an item for deposit or handle an item is 
also deemed to be a sender with respect to that item. The Reserve Banks 
that are deemed to handle an item are deemed to be agents or subagents 
of the owner of the item, as provided in Sec.  210.6(a).
* * * * *
0
6. In Sec.  210.5, revise paragraphs (a), (c), (d), and (e) to read as 
follows:


Sec.  210.5   Sender's agreement; recovery by Reserve Bank.

    (a) Sender's agreement. The warranties, indemnities, 
authorizations, and agreements made pursuant to this paragraph may not 
be disclaimed and are made whether or not the item bears an indorsement 
of the sender. By sending an item to a Reserve Bank, the sender does 
all of the following.
    (1) Authorization to handle item. The sender authorizes the 
sender's Administrative Reserve Bank and any other Reserve Bank or 
collecting bank to which the item is sent to handle the item (and 
authorizes any Reserve Bank that handles settlement for the item to 
make accounting entries), subject to this subpart and to the Reserve 
Banks' operating circulars, and warrants its authority to give this 
authorization.
    (2) Warranties for all items. The sender warrants to each Reserve 
Bank handling the item that--
    (i) The sender is a person entitled to enforce the item or 
authorized to obtain payment of the item on behalf of a person entitled 
to enforce the item;
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item for forward collection or return.
    (3) Warranties and indemnities as set forth in Regulation CC and 
U.C.C. As applicable and unless otherwise provided, the sender of an 
item makes to each Reserve Bank that handles the item all the 
warranties and indemnities set forth in and subject to the terms of 
subparts C and D of part 229 of this chapter (Regulation CC) and 
Article 4 of the U.C.C. The sender makes all the warranties set forth 
in and subject to the terms of 4-207 of the U.C.C. for an electronic 
check as if it were an item subject to the U.C.C.
    (4) Warranties and indemnities as set forth in Reserve Bank 
Operating Circulars. The sender makes any warranties and indemnities 
regarding the sending of items as set forth in an operating circular 
issued in accordance with Sec.  210.3(a).
    (5) Sender's liability to Reserve Bank.
    (i) Except as provided in paragraph (a)(5)(ii) and (iii) of this 
section, the sender agrees to indemnify each Reserve Bank for any loss 
or expense sustained (including attorneys' fees and expenses of 
litigation) resulting from--
    (A) The sender's lack of authority to make the warranty in 
paragraph (a)(1) of this section;
    (B) Any action taken by the Reserve Bank within the scope of its 
authority in handling the item; or
    (C) Any warranty or indemnity made by the Reserve Bank under Sec.  
210.6(b), part 229 of this chapter, the U.C.C., or, regarding the 
sending of items, an operating circular issued in accordance with Sec.  
210.3(a).
    (ii) A sender's liability for warranties and indemnities that the 
Reserve Bank makes for a substitute check, a paper or electronic 
representation thereof, or for an electronic check is subject to the 
following conditions and limitations--
    (A) A sender of an original check shall not be liable under 
paragraph (a)(5)(i) of this section for any amount that the Reserve 
Bank pays under subpart D of part 229 of this chapter, or under Sec.  
229.34 of this chapter with respect to an electronic check, absent the 
sender's agreement to the contrary; and
    (B) Nothing in this subpart alters the liability of a sender of a 
substitute check or paper or electronic representation of a substitute 
check under subpart D of part 229 of this chapter, or a sender of an 
electronic check under Sec.  229.34 of this chapter.
    (iii) A sender shall not be liable for any amount that the Reserve 
Bank pays under this subpart or part 229 of this chapter that is 
attributable to the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care.
* * * * *
    (c) Recovery by Reserve Bank.
    (1) A Reserve Bank that has handled an item may recover as provided 
in paragraph (c)(2) if an action or proceeding is brought against (or 
if defense is tendered to) the Reserve Bank based on--
    (i) The alleged failure of the sender to have the authority to make 
the warranty and agreement in paragraph (a)(1) of this section;
    (ii) Any action by the Reserve Bank within the scope of its 
authority in handling the item; or
    (iii) Any warranty or indemnity made by the Reserve Bank under 
Sec.  210.6(b), part 229 of this chapter, or the U.C.C.
    (2) Upon entry of a final judgment or decree in an action or 
proceeding described in paragraph (c)(1), a Reserve Bank may recover 
from the sender the amount of attorneys' fees and other expenses of 
litigation incurred, as well as any amount the Reserve Bank is required 
to pay because of the judgment or decree or the tender of defense, 
together with interest thereon.
    (d) Methods of recovery.
    (1) The Reserve Bank may recover the amount stated in paragraph (c) 
of this section by charging any account on its books that is maintained 
or used by the sender (or by charging a Reserve Bank sender), if--
    (i) The Reserve Bank made seasonable written demand on the sender 
to assume defense of the action or proceeding; and
    (ii) The sender has not made any other arrangement for payment that 
is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that 
has been charged under this paragraph (d) may recover from its sender 
in the manner and under the circumstances set forth in this paragraph 
(d).
    (3) A Reserve Bank's failure to avail itself of the remedy provided 
in this paragraph (d) does not prejudice its enforcement in any other 
manner of the indemnity agreement referred to in paragraph (a)(5) of 
this section.
    (e) Security interest. When a sender sends an item to a Reserve 
Bank, the sender and any prior collecting bank grant to the sender's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
or D of part 229 of this chapter (Regulation CC). The security interest 
attaches when a warranty is breached or any other obligation to the 
Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the sender or prior 
collecting bank, or if the sender or prior collecting bank suspends 
payments or is closed, the Reserve Bank may take any action authorized 
by law to recover the amount of an obligation, including, but not 
limited to, the exercise of rights of set off, the realization on any 
available collateral,

[[Page 11440]]

and any other rights it may have as a creditor under applicable law.
0
7. Amend Sec.  210.6 by:
0
a. Revising paragraphs (a)(2)(iii), (b), and (c);
0
b. Adding paragraph (a)(2)(iv); and
0
c. Removing paragraph (d).
    The revisions and additions read as follows:


Sec.  210.6  Status, warranties, and liability of Reserve Bank.

    (a) * * *
    (2) * * *
    (iii) As provided in an operating circular issued in accordance 
with Sec.  210.3(a) regarding the sending of items; and
    (iv) As provided in subparts C and D of part 229 of this chapter 
(Regulation CC).
* * * * *
    (b) Warranties and liability. The following provisions apply when a 
Reserve Bank presents or sends an item.
    (1) Warranties for all items. The Reserve Bank warrants to a 
subsequent collecting bank and to the paying bank and any other payor 
that--
    (i) The Reserve Bank is a person entitled to enforce the item (or 
is authorized to obtain payment of the item on behalf of a person that 
is either entitled to enforce the item or authorized to obtain payment 
on behalf of a person entitled to enforce the item);
    (ii) The item has not been altered; and
    (iii) The item bears all indorsements applied by parties that 
previously handled the item for forward collection or return.
    (2) Warranties and indemnities as set forth in Reserve Bank 
Operating Circulars. The Reserve makes any warranties and indemnities 
regarding the sending of items as set forth in an operating circular 
issued in accordance with Sec.  210.3(a).
    (3) Warranties and indemnities as set forth in Regulation CC and 
U.C.C. As applicable and unless otherwise provided, the Reserve Bank 
makes to a subsequent collecting bank and to the paying bank all the 
warranties and indemnities set forth in and subject to the terms of 
subparts C and D of part 229 of this chapter (Regulation CC) and 
Article 4 of the U.C.C. The Reserve Bank makes all the warranties set 
forth in and subject to the terms of 4-207 of the U.C.C. for an 
electronic check as if it were an item subject to the U.C.C.
    (4) Indemnity for substitute check created from an electronic 
check.
    (i) Except as provided in paragraph (b)(4)(ii) of this section, the 
Reserve Bank shall indemnify the bank to which it transfers or presents 
an electronic check (the recipient bank) for the amount of any losses 
that the recipient bank incurs under subpart D of part 229 of this 
chapter (Regulation CC) for an indemnity that the recipient bank was 
required to make under subpart D of part 229 of this chapter in 
connection with a substitute check later created from the electronic 
check.
    (ii) The Reserve Bank shall not be liable under paragraph (b)(4)(i) 
of this section for any amount that the recipient bank pays under 
subpart D of part 229 of this chapter that is attributable to the lack 
of good faith or failure to exercise ordinary care of the recipient 
bank or a person that handled the item, in any form, after the 
recipient bank.
    (c) Time for commencing action against Reserve Bank.
    (1) A claim against a Reserve Bank for lack of good faith or 
failure to exercise ordinary care shall be barred unless the action on 
the claim is commenced within two years after the claim accrues. Such a 
claim accrues on the date when a Reserve Bank's alleged failure to 
exercise ordinary care or to act in good faith first results in damages 
to the claimant.
    (2) A claim that arises under paragraph (b)(3) of this section 
shall be barred unless the action on the claim is commenced within one 
year after the claim accrues. Such a claim accrues as of the date on 
which the claimant first learns, or by which the claimant reasonably 
should have learned, of the facts and circumstances giving rise to the 
claim.
    (3) This paragraph (d) does not alter the time limit for claims 
under Sec.  229.38(g) of this chapter (which include claims for breach 
of warranty under Sec.  229.34 of this chapter) or subpart D of part 
229 of this chapter.

0
8. In Sec.  210.7, revise paragraphs (a)(1) and (b)(2) to read as 
follows:


Sec.  210.7   Presenting items for payment.

    (a) * * *
    (1) A Reserve Bank or a subsequent collecting bank may present an 
item for payment or send the item for presentment and payment; and
* * * * *
    (b) * * *
    (2) In accordance with Sec.  229.36 of this chapter (Regulation 
CC);
* * * * *
0
9. Amend Sec.  210.9 by:
0
a. Revising paragraphs (b)(2)(i), (b)(3)(i)(A), (b)(3)(i)(B), (b)(4) 
through (b)(6), paragraphs (c) through (e); and
0
b. Removing paragraph (f).
    The revisions read as follows:


Sec.  210.9   Settlement and payment.

* * * * *
    (b) * * *
    (2) * * *
    (i) On the day a paying bank receives a cash item from a Reserve 
Bank, it shall settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank, or return 
the item, by the latest of--
    (A) The next clock hour or clock half-hour that is at least one 
half-hour after the paying bank receives the item;
    (B) 8:30 a.m. eastern time; or
    (C) Such later time as provided in the Reserve Banks' operating 
circulars.
* * * * *
    (3) * * *
    (i) * * *
    (A) On that day, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank, or return 
the item, by the latest of the next clock hour or clock half-hour that 
is at least one half-hour after it ordinarily would have received the 
item, 8:30 a.m. eastern time, or such later time as provided in the 
Reserve Banks' operating circulars; or
    (B) On the next day that is a banking day for both the paying bank 
and the Reserve Bank, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank by 8:30 
a.m. eastern time on that day or such later time as provided in the 
Reserve Banks' operating circulars; and compensate the Reserve Bank for 
the value of the float associated with the item in accordance with 
procedures provided in the Reserve Bank's operating circular.
* * * * *
    (4) Reserve Bank closed. If a paying bank receives a cash item from 
a Reserve Bank on a banking day that is not a banking day for the 
Reserve Bank, the paying bank shall--
    (i) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by the close of 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), it 
shall become accountable for the amount of the item as of the close of 
its banking day on the day it receives the item); and
    (ii) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by 8:30 a.m. eastern time 
on the Reserve Bank's next banking day or such later time as provided 
in the Reserve Bank's operating circular, or return the item by 
midnight of the day it receives the item. If the paying bank fails to 
settle for or

[[Page 11441]]

return a cash item in accordance with this paragraph (b)(4)(ii), it 
shall be subject to any applicable overdraft charges. Settlement under 
this paragraph (b)(4)(ii) satisfies the settlement requirements of 
paragraph (b)(4)(i) of this section.
    (5) Manner of settlement. Settlement with a Reserve Bank under 
paragraphs (b)(1) through (4) of this section shall be made by debit to 
an account on the Reserve Bank's books or other form of settlement to 
which the Reserve Bank agrees, except that the Reserve Bank may, in its 
discretion, obtain settlement by charging the paying bank's account. A 
paying bank may not set off against the amount of a settlement under 
this section the amount of a claim with respect to another cash item, 
cash letter, or other claim under Sec.  229.34 of this chapter 
(Regulation CC) or other law.
    (6) Notice in lieu of return. If a cash item is unavailable for 
return, the paying bank may send a notice in lieu of return as provided 
in Sec.  229.31(f) of this chapter (Regulation CC).
    (c) Noncash items. A Reserve Bank may require the paying or 
collecting bank to which it has presented or sent a noncash item to pay 
for the item by a debit to an account maintained or used by the paying 
or collecting bank on the Reserve Bank's books or by any other form of 
settlement acceptable to the Reserve Bank.
    (d) Nonbank payor. A Reserve Bank may require a nonbank payor to 
which it has presented an item to pay for it by debit to an account on 
the Reserve Bank's books or other form of settlement acceptable to the 
Reserve Bank.
    (e) Liability of Reserve Bank. Except as set forth in 12 CFR 
229.35(b), a Reserve Bank shall not be liable for the failure of a 
collecting bank, paying bank, or nonbank payor to pay for an item, or 
for any loss resulting from the Reserve Bank's acceptance of any form 
of payment other than cash authorized in paragraphs (b), (c), and (d) 
of this section. A Reserve Bank that acts in good faith and exercises 
ordinary care shall not be liable for the nonpayment of, or failure to 
realize upon, any non-cash form of payment that it accepts under 
paragraphs (b), (c), and (d) of this section.
0
10. In Sec.  210.10, revise paragraph (a) to read as follows:


Sec.  210.10   Time schedule and availability of credits for cash items 
and returned checks.

    (a) Each Reserve Bank shall publish a time schedule indicating when 
the amount of any cash item or returned check received by it is counted 
toward the balance maintained to satisfy a reserve balance requirement 
for purposes of part 204 of this chapter (Regulation D) and becomes 
available for use by the sender or paying or returning bank. The 
Reserve Bank that holds the settlement account shall give either 
immediate or deferred credit to a sender, a paying bank, or a returning 
bank (other than a foreign correspondent) in accordance with the time 
schedule of the receiving Reserve Bank. A Reserve Bank ordinarily gives 
credit to a foreign correspondent only when the Reserve Bank receives 
payment of the item in actually and finally collected funds, but, in 
its discretion, a Reserve Bank may give immediate or deferred credit in 
accordance with its time schedule.
* * * * *
0
11. Amend Sec.  210.11 by:
0
a. Revising paragraph (b) and;
0
b. Removing paragraph (c).
    The revision reads as follows:


Sec.  210.11   Availability of proceeds of noncash items; time 
schedule.

* * * * *
    (b) Time schedule. A Reserve Bank may give credit for the proceeds 
of a noncash item subject to payment in actually and finally collected 
funds in accordance with a published time schedule. The time schedule 
shall indicate when the proceeds of the noncash item will be counted 
toward the balance maintained to satisfy a reserve balance requirement 
for purposes of part 204 of this chapter (Regulation D) and become 
available for use by the sender. A Reserve Bank may, however, refuse at 
any time to permit the use of credit given by it for a noncash item for 
which the Reserve Bank has not yet received payment in actually and 
finally collected funds.
0
12. In Sec.  210.12, revise paragraphs (a) and (c) through (g) to read 
as follows:


Sec.  210.12   Return of cash items and handling of returned checks.

    (a) Return of items--
    (1) Return of cash items handled by Reserve Banks. A paying bank 
that receives a cash item from a Reserve Bank, other than for immediate 
payment over the counter, and that settles for the item as provided in 
Sec.  210.9(b), may, before it has finally paid the item, return the 
item to any Reserve Bank (unless its Administrative Reserve Bank 
directs it to return the item to a specific Reserve Bank) in accordance 
with subpart C of part 229 of this chapter (Regulation CC), the Uniform 
Commercial Code, and the Reserve Banks' operating circulars. A paying 
bank that receives a cash item from a Reserve Bank also may return the 
item prior to settlement, in accordance with Sec.  210.9(b) of this 
subpart and the Reserve Banks' operating circulars. The rules or 
practices of a clearinghouse through which the item was presented, or a 
special collection agreement under which the item was presented, may 
not extend these return times, but may provide for a shorter return 
time.
    (2) Return of checks not handled by Reserve Banks. A paying bank 
that receives a check, other than from a Reserve Bank, and that 
determines not to pay the check, may send the returned check to any 
Reserve Bank (unless its Administrative Reserve Bank directs it to send 
the returned check to a specific Reserve Bank) in accordance with 
subpart C of part 229 of this chapter (Regulation CC), the Uniform 
Commercial Code, and the Reserve Banks' operating circulars. A 
returning bank may send a returned check to any Reserve Bank (unless 
its Administrative Reserve Bank directs it to send the returned check 
to a specific Reserve Bank) in accordance with subpart C of part 229 of 
this chapter (Regulation CC), the Uniform Commercial Code, and the 
Reserve Banks' operating circulars.
* * * * *
    (c) Paying bank's and returning bank's agreement. The warranties, 
indemnities, authorizations, and agreements made pursuant to this 
paragraph may not be disclaimed and are made whether or not the 
returned check bears an indorsement of the paying bank or returning 
bank. By sending a returned check to a Reserve Bank, the paying bank or 
returning bank does all of the following.
    (1) Authorization to handled returned check. The paying bank or 
returning bank authorizes the paying bank's or returning bank's 
Administrative Reserve Bank, and any other Reserve Bank or returning 
bank to which the returned check is sent, to handle the returned check 
(and authorizes any Reserve Bank that handles settlement for the 
returned check to make accounting entries) subject to this subpart and 
to the Reserve Banks' operating circulars.
    (2) Warranties for all returned checks. The paying bank or 
returning bank warrants to each Reserve Bank handling a returned check 
that the returned check bears all indorsements applied by parties that 
previously handled the returned check for forward collection or return.
    (3) Warranties and indemnities as set forth in Regulation CC. As 
applicable and unless otherwise provided, a paying bank or returning 
bank makes to each Reserve Bank that handles the returned check all the 
warranties and indemnities set forth in and subject to the terms of 
subparts C and D of part 229 of this chapter (Regulation CC).

[[Page 11442]]

    (4) Paying bank or returning bank's liability to Reserve Bank.
    (i) Except as provided in paragraph (c)(4)(ii) and (iii) of this 
section, a paying bank or returning bank agrees to indemnify each 
Reserve Bank for any loss or expense (including attorneys' fees and 
expenses of litigation) resulting from--
    (A) The paying or returning bank's lack of authority to give the 
authorization in paragraph (c)(1) of this section;
    (B) Any action taken by a Reserve Bank within the scope of its 
authority in handling the returned check; or
    (C) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter.
    (ii) A paying bank's or returning bank's liability for warranties 
and indemnities that a Reserve Bank makes for a returned check that is 
a substitute check, a paper or electronic representation thereof, or an 
electronic returned check is subject to the following conditions and 
limitations--
    (A) A paying bank or returning bank that sent an original returned 
check shall not be liable for any amount that a Reserve Bank pays under 
subpart D of part 229 of this chapter, or under Sec.  229.34 of this 
chapter with respect to an electronic returned check, absent the paying 
bank's or returning bank's agreement to the contrary;
    (B) Nothing in this subpart alters the liability under subpart D of 
part 229 of this chapter of a paying bank or returning bank that sent a 
substitute check or a paper or electronic representation of a 
substitute check or under Sec.  229.34 of this chapter of a paying bank 
or returning bank that sent an electronic returned check; and
    (iii) A paying bank or returning bank shall not be liable for any 
amount that the Reserve Bank pays under this subpart or part 229 of 
this chapter that is attributable to the Reserve Bank's own lack of 
good faith or failure to exercise ordinary care.
    (d) Paying bank or returning bank's liability under other law. 
Nothing in paragraph (c) of this section limits any warranty or 
indemnity by a returning bank or paying bank (or a person that handled 
an item prior to that bank) arising under state law or regulation (such 
as the U.C.C.), other federal law or regulation (such as part 229 of 
this chapter), or an agreement with a Reserve Bank.
    (e) Warranties by and liability of Reserve Bank.
    (1) The following provisions apply when a Reserve Bank handles a 
returned check under this subpart.
    (i) Warranties for all items. The Reserve Bank warrants to the bank 
to which it sends the returned check that the returned check bears all 
indorsements applied by parties that previously handled the returned 
check for forward collection or return.
    (ii) Warranties and indemnities as set forth in Regulation CC. As 
applicable and unless otherwise provided, the Reserve Bank makes to the 
bank to which it sends the returned check all the warranties and 
indemnities set forth in and subject to the terms of subparts C and D 
of part 229 of this chapter (Regulation CC).
    (2) Indemnity for substitute check created from electronic returned 
check.
    (i) Except as provided in paragraph (e)(2)(ii) of this section, the 
Reserve Bank shall indemnify the bank to which it transfers or presents 
and electronic returned check (the recipient bank) for the amount of 
any losses that the recipient bank incurs under subpart D of part 229 
of this chapter (Regulation CC) for an indemnity that the recipient 
bank was required to make under subpart D of part 229 of this chapter 
in connection with a substitute check later created from the electronic 
returned check.
    (ii) The Reserve Bank shall not be liable under paragraph (e)(2)(i) 
of this section for any amount that the recipient bank pays under 
subpart D of part 229 of this chapter that is attributable to the lack 
of good faith or failure to exercise ordinary care of the recipient 
bank or a person that handled the item, in any form, after the 
recipient bank.
    (3) A Reserve Bank shall not have or assume any other liability to 
any person except--
    (i) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care;
    (ii) As provided in this paragraph (e); and
    (iii) As provided in subparts C and D of part 229 of this chapter 
(Regulation CC).
    (f) Recovery by Reserve Bank.
    (1) A Reserve Bank that has handled a returned check may recover as 
provided in paragraph (f)(2) if an action or proceeding is brought 
against (or if defense is tendered to) the Reserve Bank based on--
    (i) The alleged failure of the paying bank or returning bank to 
have the authority to give the authorization in paragraph (c)(1) of 
this section;
    (ii) Any action by the Reserve Bank within the scope of its 
authority in handling the returned check; or
    (iii) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter,
    (2) Upon entry of a final judgment or decree in an action or 
proceeding described in paragraph (f)(1), a Reserve Bank may recover 
from the paying bank or returning bank the amount of attorneys' fees 
and other expenses of litigation incurred, as well as any amount the 
Reserve Bank is required to pay because of the judgment or decree or 
the tender of defense, together with interest thereon.
    (g) Methods of recovery.
    (1) The Reserve Bank may recover the amount stated in paragraph (f) 
of this section by charging any account on its books that is maintained 
or used by the paying bank or returning bank (or by charging another 
returning Reserve Bank), if--
    (i) The Reserve Bank made seasonable written demand on the paying 
bank or returning bank to assume defense of the action or proceeding; 
and
    (ii) The paying bank or returning bank has not made any other 
arrangement for payment that is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that 
has been charged under this paragraph (g) may recover from the paying 
or returning bank in the manner and under the circumstances set forth 
in this paragraph (g).
    (3) A Reserve Bank's failure to avail itself of the remedy provided 
in this paragraph (g) does not prejudice its enforcement in any other 
manner of the indemnity agreement referred to in paragraph (c)(4) of 
this section.
* * * * *
0
13. Amend Sec.  210.25 by:
0
a. Revising the introductory text of paragraph (b)(2); and
0
b. Adding paragraph (e).
    The revisions and additions read as follows:

Subpart B--Funds Transfers Through Fedwire


Sec.  210.25   Authority, purpose, and scope.

* * * * *
    (b) * * *
    (2) Except as otherwise provided in paragraphs (b)(3) and (b)(4) of 
this section, including Article 4A as incorporated herein, and 
operating circulars of the Reserve Banks issued in accordance with 
paragraph (c) of this section, this subpart governs the rights and 
obligations of:
* * * * *
    (e) Financial Messaging Standards. Financial messaging standards 
(e.g., ISO

[[Page 11443]]

20022), including the financial messaging components, elements, 
technical documentation, tags, and terminology used to implement those 
standards, do not confer or connote legal status or responsibilities. 
This subpart, including Article 4A as incorporated herein, and the 
operating circulars of the Reserve Banks issued in accordance with 
paragraph (c) of this section govern the rights and obligations of 
parties to funds transfers sent through the Fedwire Funds Service as 
provided in paragraph (b) of this section. To the extent there is any 
inconsistency between a financial messaging standard adopted by the 
Fedwire Funds Service and this subpart, this subpart shall prevail.
0
14. In Sec.  210.26, revise paragraph (e) to read as follows:


Sec.  210.26   Definitions.

* * * * *
    (e) Fedwire Funds Service and Fedwire means the funds-transfer 
system owned and operated by the Federal Reserve Banks that is used 
primarily for the transmission and settlement of payment orders 
governed by this subpart. Fedwire does not include the system for 
making automated clearing house transfers.
* * * * *


Sec. Sec.  210.9, 210.25, and 210.29   [Amended]

0
15. In addition to the amendments set forth above, in 12 CFR part 210, 
remove the words ``Fedwire'' and add, in their place, the words ``the 
Fedwire Funds Service'' in the following places:
    (a) Section 210.9(b)(4)(i)(A);
    (b) Sections 210.25(a), (b)(3); and
    (c) Section 210.29(b).
    Appendix A to subpart B of part 210 [Amended]
0
16. In Appendix A to subpart B of part 210:
    (a) Under ``Section 210.25--Authority, Purpose, and Scope'', add 
paragraph (e).
    (b) Under ``Section 210.32--Federal Reserve Bank Liability; Payment 
of Interest'', revise paragraph (b).
    The additions and revisions read as follows:

Appendix A to Subpart B of Part 210--Commentary

* * * * *
    Section 210.25--Authority, Purpose, and Scope
* * * * *
    (e) Financial messaging standards. This paragraph makes clear 
that financial messaging standards, including the financial 
messaging components, elements, technical documentation, tags, and 
terminology used to implement those standards, do not confer or 
connote legal status or responsibilities. Instead, subpart B of 
Regulation J and Federal Reserve Bank operating circulars govern the 
rights and obligations of parties to funds transfers sent through 
the Fedwire Funds Service as provided in section 210.25(b). Thus, to 
the extent there is any inconsistency between a financial messaging 
standard adopted by the Fedwire Funds Service and subpart B of 
Regulation J, subpart B of Regulation J, including Article 4A as 
adopted in its appendix, will prevail. In the ISO 20022 financial 
messaging standard, for example, the term agent is used to refer to 
a variety of bank parties to a funds transfer (e.g., debtor agent, 
creditor agent, intermediary agent). Notwithstanding use of that 
term in the standard and in message tags, such banks are not the 
agents of any party to a funds transfer and owe no duty to any other 
party to such a funds transfer except as provided in subpart B of 
Regulation J (including Article 4A) or by express agreement. The ISO 
20022 financial messaging standard also permits information to be 
carried in a funds-transfer message regarding persons that are not 
parties to that funds transfer (e.g., ultimate debtor, ultimate 
creditor, initiating party) for regulatory, compliance, remittance, 
or other purposes. An ``ultimate debtor'' is not an ``originator'' 
as defined in Article 4A. The relationship between the ultimate 
debtor and the originator (what the ISO 20022 standard calls the 
``debtor'') is determined by law other than Article 4A.
* * * * *
    Section 210.32--Federal Reserve Bank Liability; Payment of 
Interest
* * * * *
    (b) Payment of interest. (1) Under article 4A, a Federal Reserve 
Bank may be required to pay compensation in the form of interest to 
another party in connection with its handling of a funds transfer. 
For example, payment of compensation in the form of interest is 
required in certain situations pursuant to sections 4A-204 (relating 
to refund of payment and duty of customer to report with respect to 
unauthorized payment order), 4A-209 (relating to acceptance of 
payment order), 4A-210 (relating to rejection of payment order), 4A-
304 (relating to duty of sender to report erroneously executed 
payment order), 4A-305 (relating to liability for late or improper 
execution or failure to execute a payment order), 4A-402 (relating 
to obligation of sender to pay receiving bank), and 4A-404 (relating 
to obligation of beneficiary's bank to pay and give notice to 
beneficiary).
    (2) Section 210.32(b) requires Federal Reserve Banks to provide 
compensation through an explicit interest payment. Under section 4A-
506(a), the amount of such interest may be determined by agreement 
between the sender and receiving bank or by funds-transfer system 
rule. If there is no such agreement, under section 4A-506(b), the 
amount of interest is based on the federal funds rate.
    Similarly, compensation in the form of explicit interest will be 
paid to government senders, receiving banks, or beneficiaries 
described in Sec.  210.25(d) if they are entitled to interest under 
this subpart. A Federal Reserve Bank may also, in its discretion, 
pay explicit interest directly to a remote party to a Fedwire funds 
transfer that is entitled to interest, rather than providing 
compensation to its direct sender or receiving bank.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, February 28, 2018.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2018-04486 Filed 3-14-18; 8:45 am]
 BILLING CODE 6210-01-P