Federal Reserve Bank Services
Federal Register, Volume 78 Issue 215 (Wednesday, November 6, 2013)
Federal Register Volume 78, Number 215 (Wednesday, November 6, 2013)
Notices
Pages 66715-66740
From the Federal Register Online via the Government Printing Office www.gpo.gov
FR Doc No: 2013-26560
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FEDERAL RESERVE SYSTEM
Docket No. OP-1468
Federal Reserve Bank Services
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board) has approved the private sector adjustment factor (PSAF) for 2014 of $23.4 million and the 2014 fee schedules for Federal Reserve priced services and electronic access. These actions were taken in accordance with the requirements of the Monetary Control Act of 1980, which requires that, over the long run, fees for Federal Reserve priced services be established on the basis of all direct and indirect costs, including the PSAF.
DATES: The new fee schedules become effective January 2, 2014.
FOR FURTHER INFORMATION CONTACT: For questions regarding the fee schedules: Susan V. Foley, Associate Director, (202/452-3596); Samantha J. Pelosi, Manager, Retail Payments, (202/530-6292); Linda S. Healey, Senior Financial Services Analyst, (202/452-5274), Division of Reserve Bank Operations and Payment Systems. For questions regarding the PSAF: Gregory L. Evans, Deputy Associate Director, (202/452-3945); Brenda L. Richards, Manager, Financial Accounting, (202/452-2753); or John W. Curle, Senior Financial Analyst, (202/452-3916), Division of Reserve Bank Operations and Payment Systems. For users of Telecommunications Device for the Deaf (TDD) only, please call 202/263-4869. Copies of the 2014 fee schedules for the check service are available from the Board, the Federal Reserve Banks, or the Reserve Banks' financial services Web site at www.frbservices.org.
SUPPLEMENTARY INFORMATION:
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Private Sector Adjustment Factor and Priced Services
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Overview--Each year, as required by the Monetary Control Act of 1980, the Reserve Banks set fees for priced services provided to depository institutions. These fees are set to recover, over the long run, all direct and indirect costs and imputed costs, including financing costs, taxes, and certain other expenses, as well as the return on equity (profit) that would have been earned if a private business firm provided the services. The imputed costs and imputed profit are collectively referred to as the PSAF. From 2003 through 2012, the Reserve Banks recovered 99.5 percent of their total expenses (including imputed costs) and targeted after-tax profits or return on equity (ROE) for providing priced services.1 2
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\1\ The ten-year recovery rate is based on the pro forma income statement for Federal Reserve priced services published in the Board's Annual Report. Effective December 31, 2006, the Reserve Banks implemented Statement of Financial Accounting Standards (SFAS) No. 158: Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans Accounting Standards Codification (ASC) 715 Compensation--Retirement Benefits, which resulted in recognizing a cumulative reduction in equity related to the priced services' benefit plans. Including this cumulative reduction from 2006 to 2012 in equity results in cost recovery of 92.1 percent for the ten-year period. This measure of long-run cost recovery is also published in the Board's Annual Report.
\2\ Over this period, the Reserve Banks have undertaken a range of cost-reduction and revenue-generation initiatives as part of their long-term business strategy. These initiatives have included streamlining management structures, reducing staffing levels, increasing productivity, and selectively raising fees. These initiatives largely involved the check service, which contributes significantly to overall cost recovery and drove several years of under recovery in prior periods. For instance, the Reserve Banks reduced the number of offices at which paper checks are processed from forty-five at the beginning of 2003 to one location in 2010. The System's electronic check processing was also consolidated at one Federal Reserve site.
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Table 1 summarizes 2012 actual, 2013 estimated, and 2014 budgeted cost-recovery rates for all priced services. Cost recovery is estimated to be 104.9 percent in 2013 and budgeted to be 102.3 percent in 2014.
Table 1--Aggregate Priced Services Pro Forma Cost and Revenue Performance \a\
$ Millions
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54 \e\ Recovery
2 \c\ Total 3 Net income 4 \d\ Targeted rate after
Year 1 \b\ Revenue expense (roe) 1-2 roe targeted roe 1/
(2+4)(%)
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2012 (actual)............................................ 449.8 423.0 26.8 8.9 104.1
2013 (estimate).......................................... 439.2 414.6 24.6 4.2 104.9
2014 (budget)............................................ 422.0 407.1 14.9 5.5 102.3
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\a\ Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding.
\b\ For 2012, revenue includes net income on clearing balances (NICB). Clearing balances were assumed to be invested in short-term Treasury securities
and federal funds. NICB equals the imputed income from these investments less earnings credits granted to holders of clearing balances. The cost of
earnings credits is based on the discounted three-month Treasury bill rate. For 2013, revenue includes imputed investment income from additional
equity imputed to meet minimum capital requirements.
\c\ The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, FDIC insurance, Board of
Governors' priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pension
plans under FAS 158 ASC 715 are also included.
\d\ Targeted ROE is the after-tax ROE included in the PSAF. For 2012, the targeted ROE reflects average actual clearing balance levels through July
2012. The clearing balance program was eliminated in 2012; therefore, the clearing balances are not included in the 2013 or 2014 priced services
balance sheet.
\e\ The recovery rates in this and subsequent tables do not reflect the unamortized gains or losses that must be recognized in accordance with FAS 158
ASC 715. Future gains or losses, and their effect on cost recovery, cannot be projected.
Table 2 portrays an overview of cost-recovery performance for the ten-year period from 2003 to 2012, 2012 actual, 2013 budget, 2013 estimate, and 2014 budget by priced service.
Table 2--Priced Services Cost Recovery
Percent
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Priced service 2003-2012 2012 Actual 2013 Budget 2013 Estimate 2014 Budget \a\
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All services............................................. 99.5 104.1 102.7 104.9 102.3
Check.................................................... 98.8 108.8 107.1 111.9 108.0
FedACH................................................... 102.1 101.0 100.0 100.5 99.5
Fedwire Funds and NSS.................................... 101.6 98.8 98.3 98.0 98.5
Fedwire Securities....................................... 102.2 100.3 101.6 103.0 98.5
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\a\ The 2014 budget figures reflect preliminary budget information from the Reserve Banks. The Reserve Banks will transmit final budget data to the
Board in November 2013, for Board consideration in December 2013. The 2013 budget figures reflect the final budgets as approved by the Board in
December 2012.
1. 2013 Estimated Performance--The Reserve Banks estimate that they will recover 104.9 percent of the costs of providing priced services in 2013, including total expense and targeted ROE, compared with a budgeted recovery rate of 102.7 percent, as shown in table 2. Overall, the Reserve Banks estimate that they will fully recover actual and imputed costs and earn net income of $24.6 million, compared with the target of $4.2 million. Although the check service, the FedACH Service, and the Fedwire Securities Service are expected to achieve full cost recovery in 2013, the Fedwire Funds and National Settlement Services is expected to recover 98.0 percent of its costs. The shortfall is due to both lower revenue, associated with less-than-anticipated volume growth, and greater costs, associated with technological upgrades. Greater-than-expected check volume processed by the Reserve Banks has been the single most significant factor influencing priced services cost recovery.
2. 2014 Private Sector Adjustment Factor--The 2014 PSAF for Reserve Bank priced services is $23.4 million. This amount represents an increase of $9.3 million from the 2013 PSAF of $14.1 million. This increase is primarily the result of a change in the net assets to be financed on the imputed priced-services balance sheet and an increase in the cost of equity.
3. 2014 Projected Performance--The Reserve Banks project a priced services cost-recovery rate of 102.3 percent in 2014, with a net income of $14.9 million, compared to a targeted ROE of $5.5 million. The Reserve Banks project that the check service will fully recover its costs in 2014. The Reserve Banks also anticipate that the FedACH Service, the Fedwire Funds and National Settlement Service, and Fedwire Securities Service will not achieve full-cost recovery because of costs associated with multiyear technology initiatives to
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modernize their processing platforms. These investments are expected to gain efficiencies, improve the overall quality of operations, and enhance the Reserve Banks' ability to offer additional services to depository institutions.
The primary risks to the Reserve Banks' ability to achieve their targeted cost recovery rates are unanticipated volume and revenue reductions and the potential for cost overruns with the technology modernization initiatives. In light of these risks, the Reserve Banks will continue to refine their business and operational strategies to manage aggressively operating costs, to leverage efficiencies gained from technology initiatives, and to increase product revenue.
4.2014 Pricing--The following summarizes the Reserve Banks' changes in fee schedules for priced services in 2014:
Check
The Reserve Banks will introduce a new tier to each level of the FedForward Select Mixed Image Cash Letter (ICL) products.\3\ The Reserve Banks also will raise the daily fee for Select Mixed Level 1 from $2,000 to $2,200.
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\3\ The Reserve Banks offer customers the option of sending FedForward ICLs for items drawn on specific endpoints in a separate cash letter, which combines a high fixed fee with a lower variable fee. All eligible items in the cash letter receive immediate availability while ineligible items receive deferred availability of the next business day. A current list of FedForward endpoint tier listings and Select Mixed endpoints can be found at http://www.frbservices.org/servicefees/check21_endpoint_listing.html.
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The Reserve Banks announced in October a 12:30 p.m. deadline for FedReturn Mixed ICL deposits, which will provide an opportunity for paying banks to return items to the bank of first deposit one day earlier.\4\ The ICL fee will be the same as the ICL fee for the 1:00 a.m. deadline for FedReturn Mixed ICL deposits, while the item fees will be the same as the item fees for the 9:00 p.m. deadline. The Reserve Banks also will reduce the FedReturn Mixed ICL per-item fees for tier 1 and tier 2, and increase the per-item fees for tier 3, tier 4, PDF, and substitute checks.\5\
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\4\ The announcement can be found at http://www.frbservices.org/files/communications/pdf/check/100313_deposit_deadline.pdf.
\5\ The FedReturn endpoint tiers listing may be found at http://www.frbservices.org/servicefees/check21_endpoint_listing.html.
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The Reserve Banks will discontinue the Choice Receiver program, which provides pricing incentives to those customers that agree to designate the Federal Reserve as their sole electronic presentment point and electronic return point. At the same time, the Reserve Banks will reduce the per-item fees for the FedReceipt Plus Forward and Return products from $0.005 to $0.004.\6\
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\6\ FedReceipt is electronic presentment of forward items to paying banks or delivery of return items to depositary banks.
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FedACH
The Reserve Banks will increase the FedACH monthly settlement fee from $50 to $55 per routing number and increase the account servicing fee from $37 to $45 per routing number. In addition, Reserve Banks will raise the fee for the use of automated notification of change (NOC) functionality from $0.15 to $0.20 per item and introduce a participation fee of $5 per month for each routing number with NOC activity during a month.
The Reserve Banks also will restructure the batch/item monitoring fee for the Origination Monitoring Service and RDFI Alert Service by implementing two volume-based tiers with per batch fees of $0.007 for up to 500,000 batches each month and $0.0035 for greater than 500,000 batches each month.\7\
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\7\ The FedACH Risksupreg Origination Monitoring Service helps originating depository financial institutions (ODFIs) mitigate ACH origination risk for forward item batches. The service addresses operational, credit, and third-party risk associated with ACH payments, regardless of the location or number of sending points. The service allows ODFIs to set cumulative credit and/or debit processing limits (caps) for certain forward ACH batches processed by FedACH. The FedACH Risk RDFI Alert Service is available to help RDFIs manage their ACH receipt risk. The RDFI File Alert Service allows an RDFI to set debit and credit thresholds (dollar amount, addenda/item count, or both) for FedACH output files.
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The Reserve Banks will offer a discount of $0.0025 off FedACH receipt fees for receiving depository financial institutions (RDFIs) that originate and receive items on the same routing number (``on-us'' transactions).
Fedwire Funds and National Settlement
The Reserve Banks will increase the per-item fee on all transfers that exceed $10 million (high-value transfer surcharge) from $0.12 to $0.15 and the per-item fee on all transfers that exceed $100 million from $0.30 to $0.36. The Reserve Banks will also increase the end-of-day origination surcharge from $0.21 to $0.26 and increase the monthly fee for the usage of the FedPayments Manager import/export tool from $30 to $45.\8\ In addition, the Reserve Banks will increase the monthly participation fee from $85 to $90.\9\
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\8\ This fee is charged to any Fedwire Funds participant that originates a Fedwire Funds transfer message via the FedPayments Manager (FPM) Funds tool and has the import/export processing option setting active at any point during the month.
\9\ This fee is only charged when there is Fedwire Funds transfer activity in a given month.
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The Reserve Banks will increase the Tier 1 per-item pre-
incentive fee from $0.65 to $0.69 per transaction, decrease the Tier 2 per-item pre-incentive fee from $0.25 to $0.24, and decrease the Tier 3 per-item pre-incentive fee from $0.145 to $0.14.\10\
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\10\ The per-item pre-incentive fee is the fee that the Reserve Banks charge for transfers that do not qualify for incentive discounts. The Tier 1 per-item pre-incentive fee applies to the first 14,000 transfers, the Tier 2 per-item pre-incentive fee applies to the next 76,000 transfers, and the Tier 3 per-item pre-
incentive fee applies to any additional transfers. The Reserve Banks apply an 80 percent incentive discount to every transfer over 60 percent of a customer's historic benchmark volume.
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The Reserve Banks will increase the National Settlement Service's settlement file charge from $25 to $30 and the settlement charge per entry from $1.20 to $1.50.
Fedwire Securities
The Reserve Banks will keep prices unchanged in 2014.
FedLine Access Solutions
The Reserve Banks will increase the price for FedLine Command Plus by $200 per month and FedLine Direct by $500 per month.
The Reserve Banks will no longer include user subscriptions for priced services within FedLine packages. Depository institutions that wish to access priced services will be required to purchase user subscriptions in packs of five (5-packs). The FedMail email subscriber 5-packs will be $10 per month, and 5-packs for all other FedLine packages will be $80 per month. FedLine packages will continue to include unlimited subscriptions to nonpriced services.
The Reserve Banks will raise the monthly fees for the 56K additional dedicated electronic access connection by $500 and the dial-
only VPN surcharge by $200. The Reserve Banks will also raise the monthly fee for FedMail fax by $10. Additionally, the Reserve Banks will increase the monthly fees for the Accounting Totals by Service Line (ACTS) reports.
The Reserve Banks will include one FedLine subscriber 5-
pack and one FedMail subscriber 5-pack within the FedComplete 100 Plus and FedComplete 200 Plus bundled products without an increase in published fees. Additionally, the FedComplete 100 product will be eliminated.
5. 2014 Price Index--Figure 1 compares indexes of fees for the Reserve Banks' priced services with the GDP price index starting in 2005, which is the first full year the Reserve Banks offered Check 21 services. The price
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index for Reserve Bank priced services is projected to increase approximately 1 percent in 2014 from the 2013 level. The price index for Check 21 services is projected to decrease approximately 2 percent. The price index for the FedACH Service is projected to decrease nearly 1 percent. The price index for the Fedwire Funds and National Settlement Services is projected to increase approximately 8 percent. The price index for the Fedwire Securities Services is projected to decrease approximately 1 percent. For the period 2005 to 2014, the price index for total priced services is expected to decrease 31 percent. In comparison, for the period 2005 to 2012, the GDP price index increased 14 percent.
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Private Sector Adjustment Factor--The method for calculating the financing and equity costs in the PSAF requires determining the appropriate imputed levels of debt and equity and then applying the applicable financing rates. In this process, a pro forma balance sheet using estimated assets and liabilities associated with the Reserve Banks' priced services is developed, and the remaining elements that would exist are imputed, as if these priced services were provided by a private business firm. The same generally accepted accounting principles that apply to commercial-entity financial statements apply to the relevant elements in the priced services pro forma financial statements.
The portion of Federal Reserve assets that will be used to provide priced services during the coming year is determined using information about actual assets and projected disposals and acquisitions. The priced portion of these assets is determined based on the allocation of the related depreciation expense. The priced portion of actual Federal Reserve liabilities consists of postemployment/postretirement benefits, accounts payable, and other liabilities. The priced portion of the actual net pension asset or liabilities is also included on the balance sheet.\11\
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\11\ The pension assets are netted with the pension liabilities and reported as a net asset or net liability as required by Accounting Standards Codification (ASC) 715 Compensation--Retirement Benefits.
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The equity financing rate is the targeted ROE rate produced by the capital asset pricing model (CAPM). In the CAPM, the required rate of return on a firm's equity is equal to the return on a risk-free asset plus a market risk premium. To implement the CAPM, the risk-free rate is based on the three-month Treasury bill; the beta is assumed to equal to 1.0, which approximates the risk of the market as a whole; and the
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market risk premium is based on the monthly returns in excess of the risk-free rate over the most recent 40 years. The resulting ROE influences the dollar level of the PSAF because this is the return a shareholder would require in order to invest in a private business firm.
For simplicity, given that federal corporate income tax rates are graduated, state income tax rates vary, and various credits and deductions can apply, an actual income tax expense is not calculated for Reserve Bank priced services. Instead, the Board targets a pretax ROE that would provide sufficient income to fulfill the priced services' imputed income tax obligations. To the extent that actual performance results are greater or less than the targeted ROE, income taxes are adjusted using an imputed income tax rate.
Capital structure. The capital structure is imputed based on the imputed funding need (assets less liabilities), subject to minimum equity constraints. Short-term debt is imputed to fund the imputed short-term funding need. The ratio of long-term debt and equity is imputed to meet the priced services long-term funding need based on the capital structure of the U.S. publicly traded firm market. The level of equity must meet the minimum equity constraints, which follow the FDIC requirements for a well-capitalized institution of at least 5 percent of total assets and 10 percent of risk-weighted assets. Any imputed equity that exceeds that needed to meet minimum equity constraints is offset by a reduction in imputed long-term debt. When imputed equity is larger than what can be offset by imputed debt, the excess is imputed as investments in Treasury Securities.
Effective tax rate. As with the imputed capital structure, the effective tax rate is calculated based on data from U.S. publicly traded firms. The tax rate is the mean of the weighted average rates of the U.S. publicly traded firm market over the past 5 years.
Debt and equity financing. The imputed short- and long-term debt financing rates are derived from the nonfinancial commercial paper rates from the Federal Reserve Board's H.15 Selected Interest Rates release and the annual Merrill Lynch Corporate & High Yield Index rate, respectively. The rates for debt and equity financing are applied to the priced services estimated imputed liabilities and imputed equity derived from the target capital structure.
The increase in the 2014 PSAF is due primarily to an increase in the debt and equity costs resulting from imputed debt and equity that was required to offset a reduction in pension and other benefit liabilities that were used to fund priced services assets in 2013.
Projected 2014 Federal Reserve priced-services assets, reflected in table 3, have increased $85.7 million 2013 levels, as a result of the increase in imputed investments from estimated items in process of collection and the shift in the net pension liability to a net pension asset.
Credit float, which represents the difference between items in process of collection and deferred credit items, increased to $600.0 million in 2014 from $550.0 million in 2013.\12\ The projected increase for 2014 is primarily due to the increased use of products that generate credit float.
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\12\ Credit float occurs when the Reserve Banks present transactions to the paying bank prior to providing credit to the depositing bank.
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As shown in table 3, the amount of equity imputed for the 2014 PSAF is $82.3 million, an increase of approximately $10.1 million from the equity imputed for 2013. In accordance with FAS 158 ASC 715, this amount includes an accumulated other comprehensive loss (AOCI) of $497.5 million. The capital-to-total-assets ratio and the capital-to-
risk-weighted-assets ratio must be equal to or greater than the regulatory requirements for a well-capitalized depository institution. The ratio of capital to risk-weighted assets exceeds 10 percent, and equity exceeds 5 percent of total assets.\13\ In 2013, additional equity of $58.1 million was imputed to meet the minimum capital-to-
risk-weighted-asset constraint (the corresponding imputed investment income from this additional equity was $0.1 million). In 2014, equity was imputed to meet the ratio of long-term debt to long-term debt plus equity observed in the market.
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\13\ On September 10, 2013, the FDIC issued an interim rule, effective in 2015, pertaining to the risk weighting of regulatory capital and to the inclusion of AOCI in the calculation of regulatory capital. Under the agencies' general risk-based capital rules, most components of AOCI are not reflected in a banking organization's regulatory capital. The Reserve Banks will continue to include accumulated other comprehensive income or losses (78 FR 55346, September 10, 2013). The Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System published a final rule that replaces their existing risk-based and leverage capital rules and this final rule is consistent with the interim final rule published by the FDIC (78 FR 62017, October 11, 2013).
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In 2014, $22.2 million and $119.3 million of short- and long-term debt, respectively, was imputed to meet the asset funding requirements and to reflect the ratio of long-term debt to equity observed in the market (Table 4). In 2013, $14.4 million in short-term debt was imputed to meet short-term funding requirements.
Table 5 shows the imputed PSAF elements for 2014 and 2013, including the pretax ROE and other required PSAF costs. The 2014 long-
term debt costs increased to $7.0 million from zero in 2013 due to imputing $119.3 million in long-term debt. The 2014 ROE of $8.7 million represents an increase of $1.9 million over the 2013 ROE of $6.8 million and is due to a higher equity level and pre-tax ROE. Imputed sales taxes increased to $3.5 million in 2014 from $3.3 million in 2013. The effective income tax rate used in 2014 decreased to 37.2 percent from 38.5 percent in 2013. The priced services portion of the Board's expenses increased $0.1 million to $4.1 million in 2014 from $4.0 million in 2013.
BILLING CODE 6210-01-P
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Check Service--Table 7 shows the 2012 actual, 2013 estimated, and 2014 budgeted cost-recovery performance for the commercial check service.
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1. 2013 Estimate--For 2013, the Reserve Banks estimate that the check service will recover 111.9 percent of total expenses and targeted ROE, compared with the budgeted recovery rate of 107.1 percent. The Reserve Banks expect to recover all actual and imputed costs of providing check services and earn a net income of $22.7 million (see table 7). Greater-than-expected check volumes processed by the Reserve Banks and lower-than-expected costs have influenced significantly the check services cost recovery.\25\
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\25\ The greater-than-expected check volume is attributed to two new FedForward deposit options that were introduced in late 2011: premium mixed and select mixed. The premium mixed option allows customers to send forward collection items in a mixed cash letter for a higher cash letter fee and lower electronic per-item fee. The select mixed option offers similar incentives; however, the customer sends forward collection items drawn on specific forward collection routing numbers in separate cash letters.
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The decline in checks collected by the Reserve Banks reflects the decline in the number of checks written generally. Through August, total forward check volume is 7 percent lower and total return check volume is 13 percent lower than for the same period last year. For full-year 2013, the Reserve Banks estimate that their total forward check collection volume will decline nearly 7 percent and their total return check volume will decline 14 percent from 2012 levels.\26\ The proportion of checks deposited and presented electronically through the Reserve Banks continues to grow (see table 8). The Reserve Banks expect that year-end 2013 FedForward deposit and FedReceipt presentment penetration rates will exceed 99.9 percent.\27\ The Reserve Banks also expect that year-end 2013 FedReturn and FedReceipt Return volume penetration rates will reach 99.0 percent and 97.0 percent, respectively.\28\
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\26\ Total Reserve Bank forward check volumes are expected to drop from roughly 6.4 billion in 2012 to 6.0 billion in 2013. Total Reserve Bank return check volumes are expected to drop from roughly 48.8 million in 2012 to 41.9 million in 2013.
\27\ FedForward is the electronic forward check collection product. FedReceipt is electronic presentment with accompanying images.
\28\ FedReturn is the electronic check return product. FedReceipt Return is the electronic delivery of returned checks with accompanying images.
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2. 2014 Pricing--In 2014, the Reserve Banks project that the check service will recover 108.0 percent of total expenses and targeted ROE. Revenue is projected to be $163.4 million, a decline of 17 percent from 2013. This decline is driven largely by projected reductions in both forward check collection and return check volume. Total expenses for the check service are projected to be $149.4 million, a decline of 14 percent from 2013. The reduction in check costs is driven primarily by the cost savings associated with the implementation of a more efficient check processing platform and the decommissioning of the legacy platform.\29\
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\29\ The Reserve Banks completed a multi-year check platform modernization initiative in October 2012.
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The Reserve Banks estimate that total Reserve Bank forward check volumes will decline nearly 9 percent to 5.4 billion and return check volumes will decline approximately 14 percent to 36.2 million in 2014. The decline in Reserve Bank check volume can be attributed to the continued decline in check use nationwide.
The Reserve Banks offer depository institutions the option of sending FedForward Select Mixed Image Cash Letters (ICL), for items drawn on specific routing numbers in a separate cash letter, which combines a high fixed fee with a lower variable fee. The Reserve Banks will introduce a third tier to each level of the FedForward Select Mixed ICL product and will expand the number of eligible routing numbers by 828 for a total of 5,411 routing numbers. At the same time, the Reserve Banks will raise the daily fee for FedForward Select Mixed Level 1 from $2,000 to $2,200 (see Table 9).
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The Reserve Banks announced in October a 12:30 p.m. deadline for FedReturn Mixed ICL deposits, which will provide an opportunity for paying banks to return items to the bank of first deposit one day earlier. The ICL fee will be the same as the ICL fee for the 1:00 a.m. deadline for FedReturn Mixed ICL deposits, and item fees will be the same as the item fees for the 9:00 p.m. deadline. The Reserve Banks also will reduce FedReturn Mixed ICL per-item fees for tier 1 and tier 2, and increase per-item fees for tier 3, tier 4, PDF, and substitute checks (see Table 10).
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The Reserve Banks will discontinue the Choice Receiver program, which provides pricing incentives to those customers that agree to designate the Federal Reserve as their sole electronic presentment point and electronic return point. At the same time, the Reserve Banks will reduce the per-item fees for the FedReceipt Plus Forward and Return products from $0.005 to $0.004.
Risks to the Reserve Banks' ability to achieve budgeted 2014 cost recovery for the check service include greater-than-expected check volume losses to correspondent banks, aggregators, and direct exchanges, which would result in lower-than-anticipated revenue, and higher-than-expected support and overhead costs.
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FedACH Service--Table 11 shows the 2012 actual, 2013 estimate, and 2014 budgeted cost-recovery performance for the commercial FedACH service.
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1. 2013 Estimate--The Reserve Banks estimate that the FedACH service will recover 100.5 percent of total expenses and targeted ROE. The Reserve Banks expect to recover all actual and imputed costs of providing FedACH services and earn net income of $1.8 million. Through August, FedACH commercial origination volume was 3.6 percent higher than it was during the same period last year. For the full year, the Reserve Banks estimate that volume growth will continue at the current trend.
2. 2014 Pricing--The Reserve Banks project that the FedACH service will recover 99.5 percent of total expenses and targeted ROE in 2014. Total revenue is expected to increase $5.6 million from the 2013 estimate, primarily because of the projected 3.0 percent growth in FedACH commercial origination and receipt volume. Total expenses are budgeted to increase $6.4 million from the 2013 estimate because of costs associated with the development of a new FedACH technology platform.
The Reserve Banks will increase the FedACH monthly settlement fee from $50 to $55 per routing number and will increase the account servicing fee from $37 to $45 per routing number. In addition, Reserve Banks will raise the fee for the use of automated notification of change (NOC) functionality from $0.15 to $0.20 per item and will introduce a NOC participation fee of $5 per month. The Reserve Banks also will restructure the batch/item monitoring fee for the Origination Monitoring Service and RDFI Alert Service by implementing two volume-
based tiers
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with per-batch fees of $0.007 for up to 500,000 batches each month and $0.0035 for greater than 500,000 batches each month. The Reserve Banks will offer a discount of $0.0025 off FedACH receipt fees for RDFIs that originate and receive items on the same routing number (``on-us'' transactions).\30\
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\30\ An RDFI's use of the FedACH risk management services could be enhanced with the inclusion of on-us items.
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The primary risk to the Reserve Banks' ability to achieve budgeted 2014 cost recovery for the FedACH service is cost overruns associated with unanticipated problems with technology upgrades and higher-than-
expected support and overhead costs. Other risks include lower-than-
expected volume and associated revenue due to unanticipated mergers and acquisitions and loss of market share due to direct exchanges and a shift of volume to the private-sector operator.
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Fedwire Funds and National Settlement Services--Table 12 shows the 2012 actual, 2013 estimate, and 2014 budgeted cost-recovery performance for the Fedwire Funds and National Settlement Services.
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1. 2013 Estimate--The Reserve Banks estimate that the Fedwire Funds and National Settlement Services will recover 98.0 percent of total expenses and targeted ROE, compared with a 2013 budgeted recovery rate of 98.3 percent. For the full year, the Reserve Banks estimate that Fedwire Funds online volume will exceed the budget by 3.0 percent. Although volume is higher than originally projected, revenue is expected to be lower because of a different-than-projected distribution of volume across the fee structure. With regard to the National Settlement Service, the Reserve Banks estimate that the volume of settlement files will exceed projections by 6.3 percent while the volume of settlement entries will be higher by 2.4 percent.
2. 2014 Pricing--The Reserve Banks will increase prices on average by 13.5 percent in order for the Fedwire Funds and National Settlement Services to recover 98.5 percent of total expenses and targeted ROE. The pricing strategy is sensitive to the competitive vulnerabilities of different customer segments and focuses price increases on value-added aspects of the service. The Reserve Banks project total revenue to increase $12.6 million from the 2013 estimate. This projected revenue increase is primarily the result of price increases for the Fedwire Funds and the National Settlement Services and a 2.0 percent projected growth in Fedwire Funds volume. The Reserve Banks project total expenses to increase $11.8 million from the 2013 estimate. This increase is due primarily to ongoing projects to upgrade the Fedwire application and related information technology infrastructure.
The Reserve Banks will increase the surcharge for transfers exceeding $10 million from $0.12 to $0.15 and the surcharge for transfers exceeding $100 million from $0.30 to $0.36.\31\ The Reserve Banks believe that high-value transfer surcharges are an equitable way to shift more of the cost associated with Fedwire resiliency to those high-value payments that drive the need for such resiliency.
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\31\ In 2013, the Reserve Banks introduced a $0.30 high-value surcharge for both the senders and receivers of transfers exceeding $100 million.
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The Reserve Banks also will adjust the incentive pricing fees and related benchmark volume for the Fedwire Funds Service. First, the Reserve Banks will increase the Tier 1 per item pre-incentive fee (the fee before volume discounts are applied) from $0.65 to $0.69. Second, the Reserve Banks will decrease the Tier 2 per item pre-incentive fee from $0.25 to $0.24. Third, the Reserve Banks will decrease the Tier 3 per item pre-incentive fee from $0.145 to $0.140. Finally, the Reserve Banks will increase the benchmark at which customers receive volume-
based discounts from 50 percent of a customer's historical average of daily transfer activity to 60 percent.
The Reserve Banks will increase the late-day (after 5:00 p.m. ET) origination surcharge from $0.21 to $0.26. In addition, the Reserve Banks will increase the FedPayments Manager import/export monthly fee from $30 to $45. The Reserve Banks believe that these increases are reasonable given the significant value that these services provide to the customer. Lastly, the Reserve Banks will increase the monthly participation fee from $85 to $90. The Reserve Banks estimate that the price increases will result in an approximate 13.5 percent average price increase for Fedwire Funds customers.
With respect to the National Settlement Service, the Reserve Banks will increase the settlement file fee from $25 to $30 and the settlement entry fee from $1.20 to $1.50. The Reserve Banks project volume growth to remain at 2013 levels.
The Reserve Banks' proposed Fedwire Funds and National Settlement Services fees are consistent with their multi-year strategy to minimize pricing volatility while undertaking the ongoing technology upgrades and related information technology infrastructure projects.\32\ The primary risk to the Reserve Banks' ability to achieve budgeted 2014 cost recovery for these services is cost overruns associated with managing the complexity of these technology upgrades.
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\32\ The Reserve Banks expect costs associated with the upgrades to peak in 2013 and 2014.
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Fedwire Securities Service--Table 13 shows the 2012 actual, 2013 estimate, and 2014 budgeted cost
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recovery performance for the Fedwire Securities Service.\33\
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\33\ The Reserve Banks provide transfer services for securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international institutions. The priced component of this service, reflected in this memorandum, consists of revenues, expenses, and volumes associated with the transfer of all non-Treasury securities. For Treasury securities, the U.S. Treasury assesses fees for the securities transfer component of the service. The Reserve Banks assess a fee for the funds settlement component of a Treasury securities transfer; this component is not treated as a priced service.
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1. 2013 Estimate--The Reserve Banks estimate that the Fedwire Securities Service will recover 103.0 percent of total expenses and targeted ROE, compared with a 2013 budgeted recovery rate of 101.6 percent. The higher-than-expected cost recovery is primarily due to higher-than-projected volumes and associated revenue. Specifically, continued low mortgage rates have resulted in higher mortgage-backed securities issuance and thus higher issues maintenance and online transfer activity. In addition, account maintenance activity is higher than expected as customers have been closing empty accounts at a slower rate than originally projected. For the full year, the Reserve Banks expect total revenue to exceed the budget by 8.9 percent or $2.2 million.
2. 2014 Pricing--The Reserve Banks project that the Fedwire Securities Service will recover 98.5 percent of total expenses and targeted ROE driven by a projected decrease in volume and revenue in 2014. The Reserve Banks project that revenue will decrease by $1.4 million compared with 2013 estimates. Expenses are expected to decrease by $0.4 million, partly reflecting higher Treasury reimbursements.\34\ The Reserve Banks expect costs associated with the Fedwire modernization program to increase.
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\34\ Treasury reimbursement is calculated largely by multiplying costs by the ratio of Treasury to agency transfers. In 2014, Treasury projects its transfer volume will remain flat, while the Reserve Banks expect agency transfers to decrease. Therefore, the higher projected ratio of Treasury to agency transfers will result in Treasury reimbursing a higher portion of total costs.
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In calculating projected Fedwire Securities revenue for 2014, the Reserve Banks project that online transfer activity will decline by 7.6 percent, the number of accounts maintained will decrease by 6.2 percent, and the number of agency securities maintained will decrease by 1.2 percent. The estimated decrease in securities maintenance and online transfer activity reflects a lower issuance of mortgage-backed securities due to the recent uptick in mortgage rates. The number of accounts is also expected to decrease largely due to the historically high proportion of empty accounts, which customers continue to close.
The Reserve Banks propose no price change for the Fedwire Securities Service for 2014.
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FedLine Access--The Reserve Banks charge fees for the electronic connections that depository institutions use to access priced services and allocate the costs and revenue associated with this electronic access to the various priced services. There are currently five FedLine channels through which customers can access the Reserve Banks' priced services: FedMailsupreg, FedLine Websupreg, FedLine Advantagesupreg, FedLine Commandsupreg, and FedLine Directsupreg.\35\ The Reserve Banks package these channels into nine FedLine packages, described in the two paragraphs that follow, that are supplemented by a number of premium (or agrave la carte) access and accounting information options. In addition, the Reserve Banks offer FedComplete packages, which are bundled offerings of a FedLine Advantage connection and a fixed number of FedACH, Fedwire Funds, and Check 21-enabled services.
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\35\ FedMail, FedLine Web, FedLine Advantage, FedLine Command, and FedLine Direct are registered trademarks of the Federal Reserve Banks.
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Five attended access packages offer access to critical payment and information services via a web-based interface. The FedMail email package provides access to basic information services via fax or email, while two FedLine Web packages offer FedMail email options plus online attended access to a range of services, including cash services, FedACH information services, and check services. Two FedLine Advantage packages expand upon the FedLine Web packages and offer attended access to critical transactional services: FedACH, Fedwire Funds, and Fedwire Securities.
Four unattended access packages are computer-to-computer, IP-based interfaces designed for medium-to high-volume customers. The FedLine Command package offers an unattended connection to FedACH, as well as most accounting information services. The three remaining packages are FedLine Direct packages, which allow for unattended connections at one of three connection speeds to FedACH, Fedwire Funds, and Fedwire Securities transactional and information services and to most accounting information services.
Many of the FedLine access solutions fee changes in 2014 are designed to encourage customers to migrate to more efficient access solutions. The Reserve Banks will increase the fees on legacy services, such as an additional $10 per month for FedMail Fax, $500 per month for FedLine Direct (56K), $500 for a 56K additional connection, and $200 per month for the Dial-Only VPN surcharge.
In addition, the Reserve Banks will make other changes to FedLine pricing for 2014 to improve alignment of value and revenue. In particular, the Reserve
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Banks will increase the monthly fees for FedLine Command Plus by $200 and monthly fees for Accounting Totals by Service Line (ACTS) reports.
The Reserve Banks will no longer include user subscriptions for priced services within FedLine packages. Depository institutions that wish to access priced services will be required to purchase user subscriptions in packs of five (5-packs). The FedMail email subscriber 5-pack will be $10 per month, and 5-packs for all other FedLine packages will be $80 per month. FedLine packages will continue to include unlimited subscriptions to nonpriced services.
The Reserve Banks will eliminate the FedComplete 100 product. Depository institutions will have the option to choose either the FedComplete 100 Plus or FedComplete 200 Plus packages, which are $775 and $1,300 per month, respectively. These FedComplete packages will include one FedLine subscriber 5-pack and one FedMail subscriber 5-
pack.
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Analysis of Competitive Effect
All operational and legal changes considered by the Board that have a substantial effect on payments system participants are subject to the competitive impact analysis described in the March 1990 policy, ``The Federal Reserve in the Payments System.'' \36\ Under this policy, the Board assesses whether proposed changes would have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services because of differing legal powers or constraints or because of a dominant market position deriving from such legal differences. If any proposed changes create such an effect, the Board must further evaluate the changes to assess whether the benefits associated with the changes--such as contributions to payment system efficiency, payment system integrity, or other Board objectives--can be achieved while minimizing the adverse effect on competition.
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\36\ Federal Reserve Regulatory Service, 9-1558.
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The Board projects that the 2014 fees, fee structures, and changes in service will not have a direct and material adverse effect on the ability of other service providers to compete effectively with the Reserve Banks in providing similar services. The fees should permit the Reserve Banks to earn a ROE that is comparable to overall market returns and provide for full cost recovery over the long run.
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By order of the Board of Governors of the Federal Reserve System, October 31, 2013.
Robert deV. Frierson,
Secretary of the Board.
FR Doc. 2013-26560 Filed 11-5-13; 8:45 am
BILLING CODE 6210-01-C
