Circular 11115: Federal Reserve Bank Services · 63552 Federal Register/Vol. 63, No. 219/Friday,...

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63551

FridayNovember 13, 1998

Part V

Federal ReserveSystemFederal Reserve Bank Services; Notice

Department of theTreasuryFiscal Service

Fee Structure for the Transfer of U.S.Treasury Book-Entry Securities Held onthe National Book-Entry System; Notice

63552 Federal Register / Vol. 63, No. 219 / Friday, November 13, 1998 / Notices

1 These imputed costs, such as taxes that wouldhave been paid, and the return on capital thatwould have been earned had the services beenprovided by a private business firm are referred toas the Private Sector Adjustment Factor (PSAF).The PSAF is based on data developed in part froma model comprised of the nation’s fifty largest (byasset size) bank holding companies (BHCs). Basedon consolidated financial data for the holdingcompanies in the model for each of the last fiveyears, the targeted ROE is the budgeted after-taxprofit that the Federal Reserve would have earnedhad it been a private business firm. In setting fees,certain costs or adjustments to costs are treateddifferently in the pro forma income statement forpriced services that is published in the Board’sAnnual Report and the Board’s annual FederalRegister notice on priced service fees. In order tocompare total expenses in the pro forma incomestatement with total expenses in Table 3 in thisnotice, the amortization of the initial retirementplan over funding required by Statement ofFinancial Accounting Standards No. 87, and thedeferred costs of automation consolidation must bededucted from the pro forma expenses. Theseadjustments are detailed in Note 10 to the pro formaincome statement in the Annual Report. Under theprocedures used to prepare the pro forma incomestatement, the Reserve Banks recovered 100.4percent of priced services expenses, includingtargeted ROE, for the period 1988 to 1997.

2 These estimates are based on a chained FisherIdeal price index. This index was not adjusted forquality changes in Federal Reserve priced services.

3 The Board recently approved enhancements tothe Reserve Banks’ net settlement services. To betterreflect the ability of these services to accommodatenet and gross transactions, the Federal Reserve nowrefers to this service as the multilateral settlementservice.

FEDERAL RESERVE SYSTEM

[Docket No. R–1023]

Federal Reserve Bank Services

AGENCY: Board of Governors of theFederal Reserve System.

ACTION: Notice.

SUMMARY: The Board has approved feeschedules for Federal Reserve pricedservices and electronic connections anda Private Sector Adjustment Factor(PSAF) for 1999 of $115.8 million.These actions were taken pursuant tothe requirements of the MonetaryControl Act of 1980, which requiresthat, over the long run, fees for FederalReserve priced services be establishedon the basis of all direct and indirectcosts, including the PSAF.

DATES: The fee schedules becomeeffective on January 4, 1999, with theexceptions noted below. For theFedwire funds transfer service, thevolume-based transfer fees and off-linesurcharges take effect on February 1,1999. For the book-entry securitiesservice, the new fee structure and levelsbecome effective on February 1, 1999,and the change in the applicability ofthe account-maintenance fee takes effecton July 1, 1999. The PSAF becomeseffective on January 4, 1999.

FOR FURTHER INFORMATION CONTACT: Forquestions regarding the fee schedules:Erik Kiefel, Financial Services Analyst,Check Payments, (202/721–4559); WesHorn, Manager, ACH Payments, (202/452–2756); Stephen Cohen, FinancialServices Analyst, Funds Transfer andBook-Entry Securities Services, (202/452–3480); Myriam Payne, SeniorFinancial Services Analyst, MultilateralSettlement Services, (202/452–3219);Michael Bermudez, Financial ServicesAnalyst, Noncash Collection Service,(202/452–2216); Kate Connor, SeniorFinancial Services Analyst, SpecialCash Services, (202/452–3917); or AnnePaulin, Senior Information TechnologyAnalyst (electronic connections), (202/452–2560), Division of Reserve BankOperations and Payment Systems. Forquestions regarding the Private SectorAdjustment Factor: Martha Stallard,Senior Accountant, Division of ReserveBank Operations and Payment Systems,(202/452–3758). For users ofTelecommunications Device for the Deaf(TDD) only, please contact DianeJenkins (202/452–3749).

Copies of the 1999 fee schedule forthe check service are available from theBoard or the Reserve Banks.

SUPPLEMENTARY INFORMATION:

I. Priced Services

A. Overview—The Federal ReserveBanks continue to meet the MonetaryControl Act’s requirement that theFederal Reserve recover, over the longrun, its direct and indirect costs,including imputed costs and profits, ofproviding priced services.1 Over theperiod 1988 through 1997, the ReserveBanks recovered 99.6 percent of theirtotal costs for providing priced services,including imputed expenses, specialproject costs that were budgeted forrecovery, and targeted after-tax profits,or return on equity (ROE).

For 1998, the Reserve Banks estimatethat they will recover 102.2 percent ofthe costs of providing priced services,including imputed expenses andtargeted ROE. Reserve Banks project thatthey will recover 101.0 percent of theircosts of providing priced services in1999. The primary risk to the 1999projections lies in the uncertain cost toupgrade the security of electronicconnections to the Federal Reserve.

In their 1999 fee schedules, theReserve Banks include several changesthat reduce fees to depository institutioncustomers and provide a continuedeconomic incentive for those customersto make greater use of electronicpayment services. In particular, theprice index for electronic paymentservices (automated clearing house,funds transfer, book-entry securities,and electronic check) and electronicconnections is projected to decline byapproximately 17.5 percent in 1999, andthe index for paper-based paymentservices (check and noncash collection)is expected to increase 2.8 percent. The

overall 1999 price index for FederalReserve services is projected to decrease3.5 percent, compared with an overalldecline of 4.0 percent in 1998.2

The following are the key changes infee structures and fee levels for pricedservices in 1999:

• The Reserve Banks will reduce thefee for a Fedwire funds transfer for thethird consecutive year. The price indexfor a Fedwire funds transfer will declineby almost 30 percent from the 1998level. (Including the reductions for1999, the price index for Fedwire fundstransfers has declined more than 40percent since 1996. Including 1999, theaverage on-line transfer fee for aFedwire funds transfer has declined 48percent since 1996.) The 1999 feereductions are expected to savedepository institution customersapproximately $27.8 million next year.Reserve Banks will implement avolume-based pricing structure for thefunds transfer service that recognizesthe scale economies and differences indemand for large-value transfers. Thefunds transfer service’s volume-basedpricing structure will be similar to thatemployed by other domestic andinternational large-value transfersystems.

• The Reserve Banks will reduce thefee for an on-line Fedwire book-entrysecurities transfer almost 25 percent in1999. (Including changes in other fees,the price index for the book-entrysecurities service has declined morethan 15 percent since 1996.) The feereduction is expected to save depositoryinstitutions approximately $1.4 millionin 1999. The Reserve Banks willimplement a fee structure for the servicethat will split the transfer fee betweenthe originator and receiver of a transfer(rather than charge the entire transferfee to the originator), convert the off-linefee to a surcharge, and apply theexisting account-maintenance fee morebroadly.

• The Reserve Banks will implementan enhanced multilateral settlementservice in 1999 that will offer finalitycharacteristics similar to the Fedwirefunds transfer service and providesettlement arrangements with anautomated mechanism to submitsettlement files to the Reserve Banks.3The fees and fee structure for the newand existing multilateral settlement

63553Federal Register / Vol. 63, No. 219 / Friday, November 13, 1998 / Notices

services have been revised by loweringthe per-entry fee, introducing asettlement file fee, increasing the off-line surcharge, and introducing aminimum monthly fee.

• After several years of significantprice reductions, Reserve Banks planfurther, more modest price reductions in1999 for the automated clearing house(ACH) service. (Including the reductionsfor 1999, the price index for the ACHservice has decreased more than 40percent since 1996.) The 1999 pricereductions are expected to savedepository institution customersapproximately $6.2 million next year.Working with other industryparticipants, the Reserve Banks alsoplan to expand their efforts to educatedepository institutions and end usersabout the benefits of the ACH. Thiscampaign, coupled with the feedecreases for 1999, is expected to spurcommercial ACH growth and helpbroaden the use of electronic paymentsystems.

• Fees for paper check products,which include forward processed, finesort, and returned checks, will increaseabout 2.6 percent on a volume-weightedbasis (a 3.7 percent increase fromJanuary 1998 fee levels). (Including thefee increases in 1999, the price index forthe paper check service has increasedabout 2 percent since 1996.) Thisincrease will be driven primarily byincreases in fine sort and returned checkfees. Fees for forward-processed itemswill remain stable. Fees for payor bankservices, which include electronic checkproducts, will increase about 0.6percent (a 1.2 percent increase fromJanuary 1998 fee levels). The checkservice has experienced dramaticgrowth in the electronic products itoffers, and the Reserve Banks projectcontinued robust growth during 1999.Electronic check presentment,truncation, and imaging volumes areeach estimated to grow more than 20percent in 1998 and projected to sustainsimilar rates of growth in 1999. Reserve

Banks now provide paying banks withelectronic check data for approximately25 percent of the checks they collect; ofthe checks collected through the FederalReserve, 16.5 percent are presentedelectronically.

• Fee structures and schedules willtake effect on January 4, 1999, with thefollowing exceptions: The fee and feestructure changes for the Fedwire fundstransfer and book-entry securitiestransfer services will take effect onFebruary 1, 1999. (During January 1999,the basic transfer fee for the fundstransfer service will be set at $0.34, a$0.06 reduction from the 1998 per-transfer fee.) The broader application ofthe existing book-entry accountmaintenance fee will become effectiveon July 1, 1999.

Table 1 presents an overview of thebudgeted 1998, estimated 1998, andprojected 1999 cost recoveryperformance for individual pricedservices.

TABLE 1[In percent]

Priced service 1998budget

1998estimate

1999 budg-et

All Services ............................................................................................................................................... 100.8 102.2 101.0Check ................................................................................................................................................ 100.4 100.9 100.4ACH ................................................................................................................................................... 100.4 103.9 104.6Funds transfer ................................................................................................................................... 103.1 108.1 101.5Book-entry ......................................................................................................................................... 100.0 108.5 104.5Noncash collection ............................................................................................................................ 126.8 130.0 117.3Special cash ...................................................................................................................................... 102.4 104.0 104.3

The aggregate cost-recovery rate isheavily influenced by the check service,which accounts for almost 80 percent oftotal priced services costs. Theelectronic services (ACH, Fedwire funds

transfer, and Fedwire book-entrysecurities transfer) account for 20percent of costs. The noncash collectionand special cash services represent a deminimis proportion of priced services

expenses. Figure 1 shows the proportionof 1998 estimated priced services costsattributable to each service.



4 Under an existing Board policy, the ReserveBanks may defer and finance development costs ifthe development costs would have a material effecton unit costs, provided that a conservative periodis set for full cost recovery and a financing factoris applied to the deferred portion of developmentcosts. The financing rates represent the weighted-average imputed costs of the Federal Reserve’s long-term debt and equity. This methodology is similarto the approach a private firm would use infinancing such costs. Starting in 1992, the ReserveBanks deferred and financed the special projectcosts for automation consolidation that wereassociated with employee retention and severancebenefits and excess mainframe computer capacity.By the end of 1999, priced services will haverecovered fully their portion of these deferredexpenses and accumulated finance charges. Thedeferred costs for the automation consolidationproject have been financed at rates of 16.9 percentand 17.2 percent, respectively, in 1998 and 1999.

1. 1999 Projected Performance—In1999, the Reserve Banks project thatthey will recover 101.0 percent of totalexpenses, including imputed expenses,targeted ROE, and full retirement of debtassociated with the automationconsolidation special project. The 1999fees for priced services are projected toyield a net income of $64.2 million,compared with a targeted ROE of $56.0million. The book-entry securitiesservice will recover approximately $1.7million of automation consolidationspecial project expenses and financingcosts, completing the debt retirement forthis project.4

The price index for electronicpayment services (automated clearinghouse, funds transfer, book-entry

securities, and electronic check) andelectronic connections is projected todecline by approximately 17.5 percentin 1999, and the index for paper-basedpayment services (check and noncashcollection) is expected to increase 2.8percent. The overall 1999 price indexfor Federal Reserve services is projectedto decrease 3.5 percent, compared withan overall decline of 4.0 percent in1998. Figure 2 compares the FederalReserve’s price index for priced serviceswith the gross domestic product pricedeflator.

BILLING CODE 6210–01–P


Figure 2—Federal Reserve Payment Services Price Index

Chained Fisher Ideal Index Compared With GDP Price Deflator

BILLING CODE 6210–01–C


5 Certain corporate overhead costs are not closelyrelated to any particular priced service; these costsinclude some or all of the following activities:Reserve Bank and System administrative functions,central mail operations, legal, budget preparationand control, expense accounting, recordsmanagement and contingency planning, motorvehicles, and audit. Therefore, the Federal Reserve,consistent with industry practice, allocates thesecosts among priced services based on management

decision rather than fixed allocation rules. TheFederal Reserve continues to allocate corporateoverhead costs to priced services in total and toother Reserve Bank activities based on theirproportion of total Reserve Bank costs.

6 The only exception to the expense-ratiomethodology for allocating corporate overhead costsamong priced services in 1999 is a shift of $1.1million in costs from the book-entry securities

service to the funds transfer service. The book-entryservice is the only service that has not yet fullyretired its automation consolidation special projectcosts.

7 Through August 1998, the Reserve Banksrecovered 101.1 percent of total priced servicesexpenses, including imputed expenses, automationconsolidation special project costs, and targetedROE.

The significant decline in the priceindex for electronic payment servicesreflects, in large part, the increasedability of the Reserve Banks to capitalizeon the scale economies inherent inproviding payment services throughcentralized electronic paymentprocessing applications. Between 1992and 1998, the Reserve Banks’ automatedprocessing functions were consolidatedinto three sites, significantly reducing

the cost of providing electronic paymentservices.

2. Allocation of Corporate OverheadCosts to Priced Services—In 1997, theReserve Banks changed the method usedto allocate corporate overhead costsamong the priced services.5 In 1997 and1998, and to a much smaller extent in1999, the Reserve Banks used theirincreased flexibility to allocate thesecosts among priced services to

accelerate the retirement of debtassociated with the automationconsolidation special project. For 1999,the allocation of corporate overheadcosts largely returns to the expense-ratiomethodology used to allocate these coststo priced services in total and to otherReserve Bank activities.6 Table 2 showsthe allocation of corporate overheadcosts to each priced service for the years1997 through 1999.

TABLE 2—CORPORATE OVERHEAD ALLOCATIONS TO PRICED SERVICES

[$ millions]

Year Check ACH Fundstransfer Book-entry Noncash

collectionSpecial

cash Total

1997 Actual ............................................... 30.7 0.0 12.3 0.0 0.0 0.3 43.31998 (Est) .................................................. 27.2 0.0 17.7 0.0 0.1 0.2 45.11999 (Bud) ................................................ 37.2 3.9 6.0 0.0 0.1 0.2 47.4

3. 1998 Estimated Performance—TheReserve Banks estimate that pricedservices revenue will yield a net incomeof $70.3 million in 1998, compared witha targeted ROE of $52.3 million.Revenue in 1998 is estimated to recover102.2 percent of the costs of providingpriced services, including imputedexpenses, costs related to theautomation consolidation specialproject, and targeted ROE, comparedwith a targeted recovery rate of 100.8percent.7 The Reserve Banks recovereda larger percentage of costs than targetedprimarily because of a larger-than-expected reduction in expenses relatedto the System’s prepaid pension costsand higher-than-anticipated volume inthe funds transfer and book-entrysecurities services. Approximately $23.1million in automation consolidationspecial project costs will be recovered in

1998, leaving $1.6 million inaccumulated costs to be financed andrecovered.

4. 1997 Performance—In 1997, theReserve Banks’ priced services revenueyielded a net income of $47.3 million,compared with a targeted ROE of $45.8million. The Reserve Banks recovered100.2 percent of total expenses,including imputed expenses,automation consolidation specialproject costs budgeted for recovery, andtargeted ROE, compared with a targetedrecovery rate of 100.5 percent.

5. Long-Term Aggregate CostRecovery—Table 3 summarizes the costand revenue performance for pricedservices since 1988. The costs recoveredthrough 1999 include Reserve Banks’recovery of $130.0 million in transitioncosts associated with the automationconsolidation project (special project

costs) and $11.8 million in deferredfinancing costs. In addition to feereductions in electronic paymentservices, the consolidation initiative hasdramatically improved the ReserveBanks’ disaster recovery andinformation security capabilities,increased the System’s responsivenessto change, and enhanced the centralbank’s management of payment systemrisk.

Because the revenue from the ReserveBanks’ priced services recovers imputedprofits and imputed costs that are notactually incurred, the Federal Reserve’sprovision of priced services hasconsistently had a positive effect on thelevel of earnings transferred by theFederal Reserve to the Treasury. Overthe past ten years, priced servicesrevenue has exceeded operating costs bymore than $900 million.


8 Calculations on this table and subsequent proforma cost and revenue tables may be affected byrounding.

TABLE 3.—PRO FORMA COST AND REVENUE PERFORMANCE (a) 8

[$ millions]

Year Revenue (b)

Operatingcosts and

imputed ex-penses (c)

Specialproject

costs recov-ered (d)

Total ex-pense [2+3]

Net income(ROE)[1¥4]

Target ROE(e)

Recoveryrate after

target ROE(percent)[1/

(4+6)]

Specialproject

costs de-ferred andfinanced (f)

1 2 3 4 5 6 7 8

1988 ................................... 667.7 641.1 3.2 644.3 23.4 32.7 98.6 0.01989 ................................... 718.6 692.1 4.6 696.7 21.9 32.9 98.5 0.01990 ................................... 746.5 698.1 2.8 700.9 45.6 33.6 101.6 0.01991 ................................... 750.2 710.0 1.6 711.6 38.6 32.5 100.8 0.01992 ................................... 760.8 731.0 11.2 742.2 18.6 26.0 99.0 1.61993 ................................... 774.5 722.4 27.1 749.5 25.0 24.9 100.0 12.51994 ................................... 767.2 748.3 8.8 757.1 10.1 34.6 96.9 33.91995 ................................... 765.2 724.0 19.8 743.8 21.4 31.5 98.7 36.31996 ................................... 815.9 736.4 26.8 763.2 52.7 36.7 102.0 30.11997 ................................... 818.8 743.7 27.7 771.4 47.3 45.8 100.2 20.31998 (Est) .......................... 838.6 745.3 23.1 768.3 70.3 52.3 102.2 1.61999 (Bud) ......................... 843.5 777.6 1.7 779.4 64.2 56.0 101.0 0.0

a. The revenues and expenses for 1988 through 1993 include the definitive securities safekeeping service, which was discontinued in 1993.b. Includes net income on clearing balances.c. Imputed expenses include interest on debt, taxes, FDIC insurance, and the cost of float. Credits for prepaid pension costs under SFAS 87

and the charges for post-retirement benefits in accordance with SFAS 106 are included beginning in 1993.d. Special project costs include research and development expenses for evaluating a different computer processing platform for electronic pay-

ments from 1988 through 1990, check image project costs from 1988 through 1993, and automation consolidation costs from 1992 through 1998.e. Targeted ROE is based on the ROE included in the private sector adjustment factor (PSAF) and has been adjusted for taxes, which are in-

cluded in column 2. Targeted ROE has not been adjusted to reflect automation consolidation special project costs deferred and financed.f. Totals include financing costs.

B. Service-Specific Discussions1. Check—Table 4 presents the actual 1997, estimated 1998, and projected 1999 cost recovery performance for the

check service.

TABLE 4.—CHECK PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions]

Year Revenue

Operatingcosts and

imputed ex-penses

Specialproject

costs recov-ered



Target ROE

Recoveryrate after

target ROE(percent) [1/

(4+6)]

Specialproject

costs de-ferred andfinanced

1 2 3 4 5 6 7 8

1997 ................................... 621.6 589.4 7.5 596.9 24.7 35.3 98.3 7.51998 (Est) .......................... 651.5 596.3 8.4 604.7 46.8 40.9 100.9 0.01999 (Bud) ......................... 685.3 637.1 0.0 637.1 48.2 45.1 100.4 0.0

a. 1997 Performance—The checkservice recovered 98.3 percent of totalexpenses in 1997, including imputedexpenses, automation consolidationspecial project costs budgeted forrecovery, and targeted ROE. Higher-than-expected costs because of write-offs for adjustment problems associatedwith infrastructure changes at oneReserve Bank were largely responsiblefor this lower-than-expected recoveryrate. The volume of checks collectedincreased 3.0 percent from 1996 levelsbecause of several factors: (1) The exitof several correspondent banks from theinterbank check market, (2) theintroduction of new check products,and (3) increased reliance on ReserveBank check processing by banksundergoing operational changes

resulting from merger and acquisitionactivity.

b. 1998 Performance—ThroughAugust 1998, the check service hasrecovered 101.3 percent of totalexpenses, including imputed expenses,targeted ROE, and the completion ofdebt retirement related to automationconsolidation special project costs. TheReserve Banks estimate that the checkservice will recover 100.9 percent of itscosts for the full year compared with thetargeted 1998 recovery rate of 100.4percent. This estimated cost recoveryrate, however, may be adversely affectedby potential write-offs associated withadjustment and reconcilement problems

at one Reserve Bank. Even if theultimate write-off is higher thancurrently estimated, the Reserve Banksexpect that they would still be able toachieve full cost recovery in 1998.

For the first eight months of 1998,total forward-processed check volumehas increased 5.2 percent over the year-earlier time period. The Reserve Banksestimate that the total volume offorward-processed checks collectedduring full-year 1998 will increase 5.1percent over 1997 levels. Fine sortvolume fell 0.5 percent through August1998 compared with the same period in1997 and is expected to decline furtherby the end of 1998. Total forward checkcollection volume (processed and finesort) has increased 4.3 percent throughAugust 1998, and is estimated to grow2.5 percent for the full year.


Returned check volume has decreasedby 3.6 percent through August 1998compared with the first eight months of1997 and is expected to decrease 4.1percent for full-year 1998 as customers’

merger-related quality problems areresolved and greater competition erodesvolume in several Districts.

The check service has experiencedsubstantial growth in electronic checkproducts. Reserve Banks now provide

paying banks with electronic check datafor approximately 25 percent of thechecks they collect. Growth andpenetration rates for electronic checkproducts are summarized in table 5.

TABLE 5.—ELECTRONIC CHECK PRODUCT GROWTH AND PENETRATION RATES

[In percent]

Penetrationrate through

August1998

Year-to-dategrowth

through Au-gust 1998

Estimated1998 growth

Electronic Check Presentment ................................................................................................................. 16.4 29.7 25.9Truncation ......................................................................................................................................... 4.1 28.4 33.0Non-Truncation .................................................................................................................................. 12.3 30.1 23.5

Electronic Check Information ................................................................................................................... 8.6 ¥4.7 ¥11.3

Beginning this year, all Reserve Banksprovide check image services, and checkimage volumes are growing rapidly.Through August 1998, check imagevolume has grown 139.8 percent. Forthe remainder of the year, the growth incheck image volume is expected to slowsomewhat, with the year-over-yeargrowth rate declining to approximately105.6 percent. The Reserve Banksprovide check image services forapproximately 3.6 percent of all checksthey collect; these services are generallyprovided as an adjunct to electroniccheck presentment.

c. 1999 Pricing—The Reserve Bankscontinue to improve operationalefficiency in check processing throughchanges to their operating environmentand new product offerings. For example,over the next several years, the ReserveBanks plan to implement an enterprise-wide adjustment system that will enable

them to process adjustment cases moreefficiently. In addition, the ReserveBanks have adopted a new checkautomation strategy. Under this strategy,the Reserve Banks will consolidatecheck data processing at several sites,allowing them to improve efficiency andreduce costs over the long term. Also, bymid-year 1999, Reserve Banks expect tooffer electronic deposit options for allmajor check products to improveinternal processing efficiency.

In 1999, fees for paper-based checkproducts, which include forward-processed, fine sort, and returnedchecks, are expected to increase on avolume-weighted basis about 2.6percent over current prices and 3.7percent over January 1998 prices,mainly because of a 25 percent increasein fine sort fees. (Including the feeincreases in 1999, the price index forthe paper check service has increased

about 2 percent since 1996.) Prices forforward-processed checks will decrease0.3 percent from current fee levels, or0.2 percent from January 1998 prices.Prices for return items will increase 2.8percent from current fee levels, or 6.2percent from January 1998 prices.

Prices for payor bank services wouldincrease 0.6 percent over current pricesand 1.2 percent over January 1998levels. Payor bank services includeelectronic information, electronic checkpresentment, truncation, imageproducts, and large dollar returnnotifications. Higher magnetic inkcharacter recognition (MICR)information fees account for most of thisfee increase. Prices for electronic checkpresentment products, which includeboth truncation and non-truncationproducts, would decrease 0.2 percent ona volume-weighted basis in 1999.

Table 6 summarizes key check fees.

TABLE 6.—SELECTED CHECK FEES

Products 1998 price ranges 1999 price ranges

Items: (per item) (per item)Forward-processed

City ..................................................................................................................................................... $0.002 to 0.080 .... $0.002 to 0.080RCPC ................................................................................................................................................. $0.003 to 0.180 .... $0.003 to 0.180

Fine SortCity ..................................................................................................................................................... $0.002 to 0.013 .... $0.002 to 0.015RCPC ................................................................................................................................................. $0.003 to 0.018 .... $0.003 to 0.018

Qualified returned checksCity ..................................................................................................................................................... $0.065 to 1.110 .... $0.065 to 1.110RCPC ................................................................................................................................................. $0.068 to 1.560 .... $0.065 to 1.750

Raw returned checksCity ..................................................................................................................................................... $0.90 to 5.00 ........ $0.90 to 5.75RCPC ................................................................................................................................................. $0.90 to 5.00 ........ $0.90 to 5.75

Cash letters: (per cash letter) (per cash letter)Forward processed ............................................................................................................................ $1.50 to 9.00 ........ $2.50 to 9.00Forward fine-sort ................................................................................................................................ $3.00 to 14.00 ...... $3.00 to 14.00Returned checks: raw & qualified ...................................................................................................... $1.75 to 12.00 ...... $1.75 to 12.00

Payor bank services: (min.) (peritem).

(min.) (peritem)

MICR information ............................................................................................................................... $5–$30 $0.001–0.0060.

$5–$30 $0.001–0.0060


TABLE 6.—SELECTED CHECK FEES—Continued

Products 1998 price ranges 1999 price ranges

Electronic presentment ...................................................................................................................... $2–$14 $0.001–0.0045.

$3–$14 $0.001–0.0045

Truncation .......................................................................................................................................... $2–$25 $0.004–0.0170.

$3–$25 $0.004–0.0170

For 1999, the Reserve Banks projectthat the check service will recover 100.4percent of total costs, including imputedexpenses and targeted ROE. Totalexpenses, excluding special projectcosts, are projected to increaseapproximately $40.8 million, or 6.8percent, from estimated 1998 expenses.The increased costs reflect theanticipated addition of staff andequipment to process increased checkvolume, the development andimplementation of the enterprise-wideadjustment system, the implementationof the future check automation strategy,and a higher allocation of corporateoverhead costs.

Total revenue is expected to increaseapproximately $33.8 million, or 5.2percent, in 1999. Forward check-collection revenue is projected toincrease $15.4 million, or 3.9 percent.Returned check revenue is expected togrow $4.1 million, or 3.2 percent.Revenue from payor bank services isprojected to increase $9.2 million, or15.0 percent. Other operating andimputed revenues account for theremaining increase in revenue. Paper-based check products—forwardcollection and returns—will account for

about 80 percent of total check revenuesin 1999. The Reserve Banks expectpayor bank services to account for about10 percent of the check service’s totalrevenues in 1999. Other operating andimputed revenues account for theremaining 10 percent.

The Reserve Banks expect a modestvolume increase for paper-based checkproducts in 1999. Total forward checkcollection volume (processed and finesort) is projected to increase 1.4 percentin 1999, reflecting a projected increaseof 3.1 percent in processed volume anda decrease of 9.5 percent in fine sortvolume. Returned check volume isprojected to increase 2.2 percent.Volumes for electronic checkpresentment with paper checkssubsequently delivered, electronicpresentment of truncated checks, andcheck imaging are expected to grow 28.7percent, 19.2 percent, and 66.4 percent,respectively. Electronic checkinformation volume is expected todecline 15.1 percent as volumecontinues to shift to electronic checkpresentment products.

The Reserve Banks view interstatebranch banking and competition in theinterbank check collection market as

important external factors affecting theirvolume projections for paper-basedproducts. Although interstate branchbanking may eventually reduce the sizeof the interbank check collectionmarket, Reserve Bank check collectionvolumes may increase in 1999 as banksfocus on resolving merger-relatedoperational concerns. In addition, someReserve Banks have seen increasedcheck collection and returned checkvolumes as smaller third-partyprocessors and correspondent bankshave exited the interbank checkcollection market. Thus, the projectedvolume increase for paper-basedproducts appears reasonable. Theprojection of substantially increasedvolumes and penetration rates forelectronic and image services, however,may be optimistic given the level ofresources that most banks arecommitting to year 2000 preparations.

2. Automated Clearing House(ACH)—Table 7 presents the actual1997, estimated 1998, and projected1999 cost recovery performance for thecommercial ACH service.

TABLE 7.—ACH PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions]

Year Revenue

Operatingcosts and

imputed ex-penses

Specialproject

costs recov-ered



Target ROE

Recoveryrate after


(4+6)]

Specialproject


1 2 3 4 5 6 7 8

1997 ................................... 72.7 53.1 11.1 64.2 8.5 4.0 106.6 10.81998 (Est) .......................... 68.2 49.6 12.0 61.6 6.6 4.0 103.9 0.01999 (Bud) ......................... 65.1 57.8 0.0 57.8 7.4 4.5 104.6 0.0

a. 1997 Performance—The ACHservice recovered 106.6 percent of totalexpenses, including imputed expenses,automation consolidation specialproject costs budgeted for recovery, andtargeted ROE, in 1997. ACH volume in1997 was 9.7 percent higher than 1996volume.

b. 1998 Performance—ThroughAugust 1998, the ACH service recovered105.3 percent of total expenses,including imputed expenses, targeted

ROE, and the completion of debtretirement related to automationconsolidation special project costs. Forthe full year, Reserve Banks estimatethat the service will recover 103.9percent of total expenses, comparedwith the targeted 1998 recovery rate of100.4 percent. The estimatedoverrecovery is due to lower-than-budgeted overhead and support costs.Through August 1998, commercial ACHvolume has increased 13.2 percent over

the same period in 1997. For the fullyear, Reserve Banks expect commercialvolume to increase 11.5 percent,compared with the 15.4 percent increaseoriginally projected. Volume growth isprojected to be lower than planned dueto the aggressive 1998 volume target andconsolidation in the banking industry.

c. 1999 Pricing—After several years ofsignificant price reductions, ReserveBanks plan further, more modest pricereductions in 1999 for the automated


9 Small files contain fewer than 2,500 items; largefiles contain 2,500 items or more.

clearing house (ACH) service (see table8). (Including the reductions for 1999,fees for ACH items have decreased morethan 40 percent since 1996.) Thesechanges support the System’s strategicdirection to encourage the migrationfrom a paper-based to a more electronicpayments system.

TABLE 8[In dollars]

Fee category 1998fee

1999fee

Item originated in smallfile 9 ................................ 0.008 0.007

Item received .................... 0.008 0.007Premium cycle surcharge 0.005 0.000Return item surcharge ...... 0.040 0.000

The Reserve Banks will reduce the feefor items originated in small files by onemill, generating $0.2 million inaggregate savings to depositoryinstitutions in 1999. In addition, theReserve Banks will reduce the fee forforward items received by one mill,saving customers $3.4 million in 1999.Finally, the Reserve Banks willeliminate both the premium and return-item surcharges, generating anadditional $2.5 million in feereductions. Based on 1998 volume

estimates, changes to the ACH feeschedule will reduce fees to depositoryinstitutions by a total of approximately$6.2 million in 1999.

In addition to the fee changes, theReserve Banks have received approvalto no longer accept paper or telephonereturn items and paper notifications ofchange, beginning in January 1999.Instead, depository institutions will beexpected to submit those itemselectronically (either through acomputer connection or a voiceresponse system). A facsimile servicewill be available in limitedcircumstances in which an item cannotbe submitted electronically. This changeis intended to expedite the return ofitems and help move the ACH service toa more electronic environment. Inaddition, the Reserve Banks now offer anew product to enable receivingdepository financial institutions (RDFIs)that use a third-party processor for theirACH processing to receive a copy oftheir ACH items so that they canprovide remittance information to theircustomers.

The Reserve Banks project that theACH service will recover 104.6 percentof its costs in 1999, including imputedexpenses and targeted ROE. Expenses in1999 are projected to be $8.2 million, or

16.5 percent, higher than 1998estimated costs, excluding 1998 specialproject costs. Total expenses for 1999are projected to decline $3.9 million, or6.3 percent, from their 1998 level whenspecial project costs are included in the1998 estimate. Total revenue in 1999 isprojected to be $65.1 million, or 4.4percent less than the 1998 estimate. Thelower revenue is attributable to 1999price reductions and potential changesin the way the Reserve Banks provideservices to private-sector ACHoperators. The Reserve Banks areevaluating the way they treat private-sector ACH operators and theircustomers with respect to fees anddeadlines to determine if an alternativeapproach would better promotecompetition in the market for ACHservices.

ACH volume in 1999 is projected toincrease 14.5 percent over 1998estimates. This volume projectionincludes the expected effects ofmarketing and education initiatives thatare planned for next year.

3. Funds Transfer and MultilateralSettlement—Table 9 presents the actual1997, estimated 1998, and projected1999 cost recovery performance for thefunds transfer and multilateralsettlement services.

TABLE 9.—FUNDS TRANSFER PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions]

Year Revenue

Operatingcosts and

imputed ex-penses

Specialproject

costs recov-ered



Target ROE

Recoveryrate after


(4+6)]

Specialproject


1 2 3 4 5 6 7 8

1997 ................................... 97.8 78.6 7.4 85.9 11.9 5.1 107.4 0.01998 (Est) .......................... 94.2 80.7 0.2 80.9 13.3 6.2 108.1 0.01999 (Bud) ......................... 71.2 65.0 0.0 65.0 6.2 5.2 101.5 0.0

a. 1997 Performance—For 1997, thefunds transfer and multilateralsettlement services recovered 107.4percent of total expenses, includingimputed expenses, automationconsolidation special project costsbudgeted for recovery, and targetedROE, compared with a targeted recoveryrate of 104.3 percent. Operating costswere 2.1 percent lower than originalbudget estimates because of greater-than-expected efficiencies realized fromprocessing funds transfers in acentralized processing environment anda decrease in overhead costs.

Funds transfer on-line volumeincreased 8.2 percent over the 1996level, compared with a budgeted

increase of 4.2 percent. This volumeincrease was due to strong economicactivity.

b. 1998 Performance—ThroughAugust 1998, the funds transfer andmultilateral settlement servicesrecovered 110.9 percent of totalexpenses, including imputed expenses,targeted ROE, and the completion ofdebt retirement related to automationconsolidation special project costs. Forfull-year 1998, the Reserve Banksestimate that the funds transfer andmultilateral settlement services willrecover 108.1 percent of total expenses,compared with a targeted recovery rateof 102.8 percent. The higher recoveryrate is primarily attributable to a largeincrease in on-line transaction revenueand small increases in electronic

connection and off-line transactionrevenues.

On-line funds transfer volumethrough August 1998 has increased 10.1percent relative to the same period in1997. This robust volume growth isabove historical trend and is attributablemainly to sustained strong economicgrowth. For the full year, the ReserveBanks expect volume to increase 7.3percent, compared with the moreconservative original target of 3.8percent.

c. 1999 Funds Transfer Pricing—Starting in 1998 and continuing throughfirst quarter 1999, the Reserve Banks areconsolidating their off-line transferprocessing functions at the FederalReserve Banks of Boston and Kansas


10 The settlement sheet service refers to thetransmission to a Reserve Bank of settlementinformation that is then posted to participants’accounts via the Reserve Banks’ accounting system.

11 Includes purchase and sale activity.12 The Reserve Banks provide securities transfer

services for securities issued by the U.S. Treasury,federal government agencies, governmentsponsored enterprises, and certain internationalinstitutions. The priced component of this service,reflected in this notice, consists of the revenues,expenses, and volumes associated with the transferof all non-Treasury securities. For Treasurysecurities, the Reserve Banks act as fiscal agents forthe Treasury Department, which assesses fees forthe securities transfer component of the service.The Reserve Banks assess a fee for the moneysettlement component of a Treasury securitiestransfer; this component is not treated as a pricedservice.

City. By consolidating the off-lineportion of the funds transfer business,the Reserve Banks expect to reduce totaloff-line processing costs, streamline off-line activity, and ensure uniformcustomer service levels nationwide.

The Reserve Banks will implement ablock-declining price structure for thebasic funds transfer fee on February 1,1999. Under the new price structure, aper transfer fee of $0.34 will be chargedfor the first 2,500 funds transfersoriginated and received by a depositoryinstitution each month; a per transferfee of $0.27 will be charged foradditional transactions up to 80,000transfers each month; and, for everytransaction above 80,000 transfers eachmonth, a per transfer fee of $0.21 willbe assessed. Prior to implementing theblock-declining price schedule, theReserve Banks will lower the basicfunds transfer fee from $0.40 to $0.34for January 1999.

On average, basic funds transfer feeswill decline by 35.0 percent under thenew structure compared with thecurrent fee level. (Including thereductions for 1999, fees for Fedwirefunds transfers have declined nearly 50percent since 1996. Including 1999, theaverage on-line transfer fee for aFedwire funds transfer has declined 48percent since 1996.) This thirdconsecutive reduction in the fundstransfer fee will save depositoryinstitutions approximately $27.8 millionin 1999, reflecting both the continuedbenefit of scale economies fromcentralized processing and thereduction of corporate overheadallocations in 1999. The implementationof a volume-based pricing structure willbring Fedwire pricing in line with otherfunds transfer and payment messagingsystems and is expected to increase theefficiency of the service.

The Reserve Banks will increase theoff-line transaction surcharge from$12.00 to $13.00 to reflect more fully thecosts of processing off-line transfers andto encourage off-line customers withhigher transfer volume to installelectronic connections. This increasewill become effective on February 1,1999.

Reserve Banks project that theFedwire funds transfer service willrecover 101.5 percent of total expenses,including imputed expenses andtargeted ROE, in 1999. Total costs areexpected to decline $15.6 million, or19.4 percent, from the 1998 estimateprimarily because of a significantreduction in the allocation of corporateoverhead to the service. Lower dataprocessing costs associated withautomation consolidation alsocontribute to the lower costs. Excluding

corporate overhead expenses, total costsfor the funds transfer service areprojected to decline $3.9 million, or 6.2percent, from 1998 to 1999. Servicerevenue is projected to decline $23.0million, or 24.4 percent, in 1999compared with the 1998 estimate as aresult of the lower fees contained in thevolume-based pricing structure.

On-line funds transfer volume isexpected to increase 5.8 percent over1998 estimated levels. This volumeprojection is consistent with long-termhistorical trends for the service andreflects an anticipated slowdown ingrowth relative to the high volumegrowth over the last three years.

d. 1999 Multilateral SettlementPricing—During the first quarter of1999, the Reserve Banks will implementan enhanced multilateral settlementservice that will allow participants insettlement arrangements to submitsettlement files to them via a computerinterface connection or a Fedline

terminal. The enhanced service willimprove operational efficiency overcurrent methods and reduce settlementrisk to participants by grantingsettlement finality on the settlementday. It also enables Reserve Banks tomanage and limit risk by incorporatingrisk controls that are as robust as thoseused currently in the Fedwire fundstransfer service. The Reserve Banks willcontinue to offer the current ‘‘settlementsheet’’ and Fedwire-based multilateralsettlement services.10 The settlementsheet service, however, will be phasedout gradually and all participatingarrangements will need to make plans tomigrate to the enhanced service by year-end 2001.

The Reserve Banks will adopt a pricestructure for the enhanced service thatis similar to the price structure for thecurrent settlement sheet service. Thenew price structure will consist of afixed charge for each settlement file anda fixed price for each settlement entryon the file. The Reserve Banks also willassess the same prices for the enhancedservice and the current settlement sheetservice. This approach will eliminate aneconomic incentive for clearingarrangements to postpone migrating tothe enhanced service.

The Reserve Banks will imp lement afee of $0.95 for each settlement entry ona settlement file or settlement sheetsubmitted to the Reserve Banks. This isa reduction of $0.05 from the current$1.00 per entry fee. A $12.00 fee will becharged for each settlement file or

settlement sheet submitted to theReserve Banks. This is a new feedesigned to recover the fixed costsassociated with maintaining staticsettlement information for eacharrangement and processing dailysettlements. Each settlementarrangement that incurs total settlementcharges of less than $60 during acalendar month will pay a minimum feethat raises total charges for the month to$60. This minimum fee is designed torecover the fixed costs of supportingarrangements that are not active users ofthe Reserve Banks’ multilateralsettlement services, including thosearrangements that use Reserve Bankmultilateral settlement services ascontingency back-up to anothersettlement method.

The current off-line surcharge forarrangements that submit settlementinformation via non-electronic means(fax, phone, or paper) will increase from$10.00 to $13.00. The revised surchargewill be consistent with the Fedwirefunds transfer and book-entry securitiestransfer off-line surcharges, and,similarly, it will reflect more fully thecosts of processing off-line settlements.The higher fee will provide anadditional economic incentive forsettlement participants to migrate to themore efficient enhanced service. Theoff-line origination surcharge will bewaived by Reserve Banks that do notprovide an electronic submissioncapability for the settlement sheetservice. The current $10.00 surchargefor telephone notification will increaseto $13.00 in 1999.

Fees for the Fedwire-basedmultilateral settlement service used bynational, small-dollar and large-dollarsettlement arrangements will remainunchanged for 1999. A per transfer feeis also charged for each Fedwire fundstransfer sent and received into or out ofthe settlement account for Fedwire-based arrangements.

4. Book-Entry Securities—Table 10presents the actual 1997, estimated1998, and projected 1999 cost recoveryperformance for the book-entrysecurities service.11 12


TABLE 10.—BOOK-ENTRY SECURITIES TRANSFER PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions]

Year Revenue

Operatingcosts andimputed

expenses

Specialprojectcosts

recovered



Target ROE

Recoveryrate after

target ROE(percent)[1/

(4+6)]

Specialproject


1 2 3 4 5 6 7 8

1997 ................................... 17.1 14.4 1.5 15.9 1.3 0.9 101.9 3.61998 (Est) .......................... 18.5 13.7 2.4 16.1 2.5 1.0 108.5 1.61999 (Bud) ......................... 16.7 13.2 1.7 15.0 1.8 1.0 104.5 0.0

a. 1997 Performance—The book-entrysecurities service recovered 101.9percent of total expenses in 1997,including imputed expenses,automation consolidation specialproject costs budgeted for recovery, andtargeted ROE. On-line volume increased0.3 percent from the 1996 level,compared with a budgeted decrease of3.4 percent. This higher-than-budgetedvolume may partially have been theresult of increased securities movementsassociated with mergers and higher-than-expected mortgage refinancingactivity, which affects activity in themortgage-backed securities market.

b. 1998 Performance—ThroughAugust 1998, the book-entry securitiesservice recovered 104.3 percent of totalexpenses, including imputed expenses,automation consolidation specialproject costs budgeted for recovery, andtargeted ROE. For full-year 1998, theReserve Banks estimate that the book-entry securities service will recover108.5 percent of total costs comparedwith a targeted recovery rate of 100.0percent. This overrecovery isattributable to higher-than-expectedtransaction volume.

On-line volume has increased 17.5percent through August 1998 comparedwith the same period in 1997. This largeincrease in volume is due to asignificantly higher level of repackagingand new issuance of mortgage-backedsecurities. For the full year, the ReserveBanks estimate that on-line volume willincrease 14.5 percent, which issignificantly higher than the originalbudgeted 0.8 percent volume decline.

c. 1999 Pricing—Starting in 1998 andcontinuing through first quarter 1999,the Reserve Banks are consolidatingtheir off-line processing functions at theFederal Reserve Banks of Boston andKansas City. By consolidating the off-line portion of the book-entry securitiestransfer service, the Reserve Banksexpect to reduce total off-line activitycosts, streamline off-line activity, andensure uniform customer service levelsnationwide.

Starting February 1, 1999, the ReserveBanks will split the current $2.25 on-line origination fee into a basic transferfee charged to the sending bank andreceiving bank of both on-line and off-line transfers. The Reserve Banks willimplement a $0.85 fee for eachsecurities transfer and reversal sent andreceived, a 24.4 percent fee decrease inthe total fee per transfer. (Includingchanges in other fees, the price index forthe book-entry securities service hasdeclined more than 15 percent since1996.) The Reserve Banks also willconvert the current $10 off-line fee intoan off-line surcharge and raise thissurcharge to $13 to be consistent withthe off-line surcharge in the Fedwirefunds transfer and multilateralsettlement services. An additionalpricing change, applying the existingaccount-maintenance fee to all joint-custody collateral accounts, will beimplemented on July 1, 1999. Delayingimplementation of this change untilmid-year 1999 will allow affectedcustomers time to consolidate accounts,make any necessary system changes,and notify pledgees.

Changing the on-line transfer fee to afee assessed to both senders andreceivers more accurately aligns thecosts and benefits to participants in atransfer. The new price structurepromotes pricing consistency with otherFederal Reserve electronic paymentservices and is consistent with practicesin the securities industry. The decisionto charge for all joint-custody accountsheld by a customer, rather than just thefirst account, is intended to implementa consistent, cost-based, Systemwidepricing practice following thecompletion of the Reserve Banks’conversion to the centralized NationalBook-Entry System (NBES). Prior to theconversion of all Reserve Banks toNBES, account maintenance pricing forjoint custody securities accounts wasdifferent across the Reserve Banks.During the transition to NBES, theinterim pricing practice for theseaccounts was standardized to charge

one account-maintenance fee percustomer regardless of the number ofpledgees. This interim practice achievedconsistency and minimized the effect oncustomers converting to the new systembut resulted in reduced revenue andincomplete recovery of processing costs.

The Purchase and Sale servicerepresents less than 3.0 percent of thecosts and revenues of the book-entrysecurities service. Provision of theservice is consolidated at the FederalReserve Bank of Chicago. The ReserveBanks will increase the transaction feefor securities purchases and sales from$34 to $40 to recover the costs ofproviding the service.

The Reserve Banks project that thebook-entry securities service willrecover 104.5 percent of costs in 1999,including imputed expenses, targetedROE, and the complete retirement ofdebt relating to automationconsolidation special project costs.Total expenses, excluding specialproject costs, are projected to decrease$0.5 million, or 3.6 percent, in 1999versus the 1998 estimate because fullimplementation of NBES (the New YorkDistrict was the last to convert inFebruary 1998) and full consolidation atFederal Reserve Automation Services(FRAS) have created scale economiesthat lower per-item data processingcosts.

Book-entry securities transfer servicerevenue is expected to decline $1.8million, or 9.9 percent, in 1999compared with the 1998 estimate as aresult of the fee levels contained in thenew pricing structure and price levels.The reduced fees are expected to savedepository institutions approximately$1.4 million in 1999.

The Reserve Banks expect on-linebook-entry securities transfer volume todecline 4.0 percent in 1999 from the1998 estimated level. According toReserve Bank projections, the unusuallyhigh volume growth rate in 1998 is anaberration and 1999 volume will likelydecline from its 1998 level. In addition,some volume losses are expected as


large customers consolidate theiroperations.

5. Noncash Collection—Table 11 liststhe actual 1997, estimated 1998, andprojected 1999 cost recovery

performance for the noncash collectionservice.

TABLE 11.—NONCASH COLLECTION PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions]

Year Revenue

Operatingcosts and

Imputed ex-penses

Specialproject

costs recov-ered



Target ROE

Recoveryrate after

target(ROE) (per-

cent) [1/(4+6)]

Specialproject


1 2 3 4 5 6 7 8

1997 ................................... 4.4 3.5 0.3 3.8 0.7 0.2 110.9 0.01998 (Est) .......................... 3.7 2.7 0.0 2.7 1.0 0.2 130.0 0.01999 (Bud) ......................... 2.6 2.0 0.0 2.0 0.5 0.1 117.3 0.0

a. 1997 Performance—The noncashcollection service recovered 110.9percent of total expenses in 1997,including imputed expenses,automation consolidation specialproject costs budgeted for recovery, andtargeted ROE, compared with a targetrecovery rate of 103.8 percent. Volumefor 1997 decreased 17.1 percent from1996 volumes compared with a 19.6percent budgeted volume decline.

b. 1998 Performance—ThroughAugust 1998, the noncash collectionservice recovered 135.0 percent of itscosts. For full-year 1998, the ReserveBanks estimate that the noncash servicewill recover 130.0 percent of costs,including imputed expenses andtargeted ROE, compared with theprojected recovery rate of 126.8 percent.The higher recovery rate is attributableto higher-than-expected revenue fromadditional called bond activitygenerated by lower interest rates and

slightly higher-than-budgeted couponvolume. The higher recovery rate alsoreflects lower costs resulting fromefficiencies gained from full-yearcentralized operations at theJacksonville Branch.

Through August, volume hasdecreased 13.8 percent compared withthe same period in 1997. The ReserveBanks estimate that full-year 1998volume will decline 14.1 percent from1997 levels compared with a 19.7percent budgeted volume decline.

c. 1999 Pricing—The Reserve Bankswill retain 1999 fees at their 1998 levels.The Reserve Banks project that thenoncash collection service will recover117.3 percent of total costs, includingimputed expenses and targeted ROE, in1999. These fees will yield a ten-yearrecovery rate for the noncash collectionservice of approximately 96 percent.Total expenses are projected to decline$0.6 million, or 23.0 percent, in 1999,

and total revenues are projected todecline $1.1 million, or 30.3 percent,because of a projected volume decline of26.0 percent. Volume declines willcontinue as the number of unmaturedbearer municipal securities declines.New issues of bearer municipalsecurities effectively ceased in mid-1983when the Tax Equity and FiscalResponsibility Act of 1982 (TEFRA)removed the tax advantage for investors.

6. Special Cash—Priced special cashservices represent a very small portion(approximately 0.05 percent) of overallcash services provided by the ReserveBanks to depository institutions. Specialcash services include wrapped coin,nonstandard packaging of currencyorders and deposits, and registered mailshipments of currency and coin.

Table 12 presents the actual 1997,estimated 1998, and projected 1999 costrecovery performance for the specialcash service.

TABLE 12.—SPECIAL CASH PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions]

Year Revenue

Operatingcosts and

imputed ex-penses

Specialproject

costs recov-ered



Target ROE

Recoveryrate after tar-

getROE(percent)

[1/(4+6)]

Specialproject


1 2 3 4 5 6 7 8

1997 ................................ 5.1 4.7 0.0 4.7 0.4 0.3 102.5 0.01998 (Est) ........................ 2.6 2.4 0.0 2.4 0.2 0.1 104.0 0.01999 (Bud) ...................... 2.6 2.5 0.0 2.5 0.2 0.0 104.3 0.0

a. 1997 Performance—In 1997, thespecial cash service recovered 102.5percent of total expenses, includingimputed expenses and targeted ROE,compared with a targeted recovery rateof 102.3 percent.

b. 1998 Performance—ThroughAugust 1998, the special cash servicerecovered 101.8 percent of total

expenses, including imputed expensesand targeted ROE. For full-year 1998,the Reserve Banks estimate that thespecial cash service will recover 104.0percent of total expenses, comparedwith a targeted recovery rate of 103.5percent. Costs are lower than budgetedin most offices.

Revenue is estimated to declineapproximately $2.5 million, or 49.4percent, in 1998 compared with 1997,due mainly to the reclassification ofcash access as a nonpriced service.Before 1998, nonstandard access to cashservices was treated as a priced service.In anticipation of implementing theuniform cash access policy in May 1998,


13 The uniform cash access policy provides for abase level of free currency access to all depositoryinstitutions but restricts the number of officesserved and the frequency of access. Depositoryinstitutions that meet minimum volume thresholdscan obtain more frequent free access. Fees arecharged for additional access beyond the free level.

the Federal Reserve concluded that, dueto the governmental nature of thisfunction, the costs and revenueassociated with nonstandard accessshould be treated as a nonpricedservice.13

In June 1998, the Chicago office beganoffering a nonstandard packagingservice for a fee of $12.00 per order ordeposit. The Detroit Branch offers thisservice for the same fee.

c. 1999 Pricing—For 1999, the ReserveBanks project that the special cashservice will recover 104.3 percent ofcosts, including imputed expenses andtargeted ROE. Total costs in 1999 areprojected to rise $0.1 million, or 2.7percent, from the 1998 level. Revenue in1999 is expected to increase $0.1million, or 2.6 percent, from the 1998level.

The Cleveland, Cincinnati, andPittsburgh offices will implement auniform District fee of $1.80 per box forwrapped coin to replace the previousrange of $1.95 to $2.25 per box. TheHelena office will reduce its wrappedcoin fee from $2.90 to $2.50 per box toreflect more accurately the cost ofproviding this service.

The El Paso and San Antonio officeswill reduce the registered mailsurcharge from $100 to $80 to reflectmore accurately the costs of providingthis service. The San Antonio officeplans to discontinue this service inApril 1999.

II. Private Sector Adjustment Factor

A. Overview—The Board hasapproved a 1999 PSAF for FederalReserve priced services of $115.8million. This amount represents anincrease of $7.3 million, or 6.7 percent,from the 1998 PSAF of $108.5 million.

As required by the Monetary ControlAct, the Federal Reserve’s fee schedulefor priced services includes ‘‘taxes thatwould have been paid and the return oncapital that would have been providedhad the services been furnished by aprivate business firm.’’ These imputedcosts are based on data developed inpart from a model comprisingconsolidated financial data for the

nation’s fifty largest (in asset size) bankholding companies (BHCs).

The methodology for calculating thePSAF involves determining the value ofFederal Reserve assets that will be usedin providing priced services during thecoming year. Short-term assets areassumed to be financed with short-termliabilities; long-term assets are assumedto be financed with a combination oflong-term debt and equity derived fromthe BHC model.

Imputed capital costs are determinedby applying related interest rates andrates of return on equity from the BHCmodel. The long-term debt and equityrates are based on BHCs in the model foreach of the last five years. Becauseshort-term debt, by definition, matureswithin one year, only data for the mostrecent year are used for computing theshort-term debt rate.

The PSAF comprises these capitalcosts as well as imputed sales taxes,expenses of the Board of Governorsrelated to priced services, and animputed FDIC insurance assessment onclearing balances held with the FederalReserve Banks to settle transactions.

B. Asset Base—The total estimatedvalue of Federal Reserve assets to beused in providing priced services in1999 is reflected in table 13. Table 14shows that the assets assumed to befinanced through debt and equity areprojected to total $651.4 million. Thisrepresents a net increase of $35.1million, or 5.7%, from 1998 assets of$616.3 million, as shown in table 15.This increase results from a buildingproject in one District, offset somewhatby a lower asset base associated withFederal Reserve Automation Services(FRAS).

C. Cost of Capital, Taxes, and OtherImputed Costs—Table 15 also shows thefinancing and tax rates and the otherrequired PSAF recoveries approved for1999 and compares the 1999 rates withthe rates used for developing the PSAFfor 1998. The pre-tax return on equityrate increased from 22.4% for 1998 to23.5% for 1999. The increase is a resultof stronger 1997 BHC financialperformance included in the 1999 BHCmodel relative to the 1992 BHCfinancial performance used in the 1998BHC model.

D. Capital Adequacy—As shown intable 16, the amount of capital imputedfor the 1999 PSAF totals 27.2% of risk-weighted assets and 3.0% of total assets.

The capital to risk-weighted asset ratiowell exceeds the 8% guideline foradequately capitalized state memberbanks and BHCs. The capital to totalasset ratio meets the 3% guideline foradequately capitalized institutions thatare rated composite 1 under theCAMELS rating system.

III. Analysis of Competitive Effect

All operational and legal changesconsidered by the Board that have asubstantial effect on payment systemparticipants are subject to thecompetitive impact analysis describedin the March 1990 policy statement‘‘The Federal Reserve in the PaymentsSystem.’’ In this analysis, Board staffassesses whether the proposed changewould have a direct and materialadverse effect on the ability of otherservice providers to compete effectivelywith the Federal Reserve in providingsimilar services because of differinglegal powers or constraints or because ofa dominant market position of theFederal Reserve deriving from suchlegal differences. If the fees or feestructures create such an effect, theFederal Reserve must further evaluatethe changes to assess whether theirbenefits—such as contributions topayment system efficiency, paymentsystem integrity, or other Boardobjectives—can be retained whilereducing the hindrances to competition.

The Board does not believe that thefees and fee structures will have a directand material adverse effect on theability of other service providers tocompete effectively with the FederalReserve in providing similar services.Assuming the Reserve Banks’ volumeand cost projections are accurate, thefees are set to provide the FederalReserve a return on equity at least equalto that earned on average by large bankholding companies during the past fiveyears. Moreover, the 1999 fee schedulesenable the Reserve Banks to continue torecover all actual and imputed costs ofproviding priced services over the longrun; these fees also provide for projectedfull cost recovery in 1999. Therefore, theBoard believes the 1999 Reserve Bankprice and service levels will notadversely affect the ability of otherservice providers to compete effectivelywith the Reserve Banks in providingsimilar services.

BILLING CODE 6210–01–P











By order of the Board of Governors of theFederal Reserve System, November 4, 1998.Jennifer J. Johnson,Secretary of the Board.[FR Doc. 98–30338 Filed 11–12–98; 8:45 am]BILLING CODE 6210–01–C

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