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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL RESERVE SYSTEM

[Docket No. OP-1448]

Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
SUMMARY: The Board of Governors of the Federal Reserve System (Board) has approved the private sector adjustment factor (PSAF) for 2013 of $14.1 million and the 2013 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, 2013.
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 and earnings credits on clearing balances: 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 2013 fee schedules for the check service are available from the Board, the Federal Reserve Banks, or the Reserve Banks' financial services web site atwww.frbservices.org.
SUPPLEMENTARY INFORMATION: I. Private Sector Adjustment Factor and Priced Services

A. 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.1 From 2002 through 2011, the Reserve Banks recovered 98.6 percent of their total expenses (including imputed costs) and targeted after-tax profits or return on equity (ROE) for providing priced services.2 3

1The methodology for computing imputed profit and imputed costs was changed for 2013 (see Attachment I). This change follows the elimination of the clearing balance program (77 FR 21846, April 12, 2012). In the 2012 methodology, investment income is imputed and netted with related direct costs associated with clearing balances to estimate net income on clearing balances (NICB).

2The ten-year recovery rate is based on the pro forma income statement for Federal Reserve priced services published in the Board'sAnnual 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) 715Compensation—Retirement Benefits], which resulted in recognizing a reduction in equity related to the priced services' benefit plans. Including this reduction in equity results in cost recovery of 95.3 percent for the ten-year period. This measure of long-run cost recovery is also published in the Board'sAnnual Report.

3Over 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, reducingstaffing 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 earlier in the time period. For instance, the Reserve Banks restructured the number of offices at which paper checks were 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.

Table 1 summarizes 2011 actual, 2012 estimated, and 2013 budgeted cost-recovery rates for all priced services. Cost recovery is estimated to be 101.4 percent in 2012 and budgeted to be 102.7 percent in 2013. The check service accounts for nearly half of the total cost of priced services and thus significantly influences the aggregate cost-recovery rate.

Table 1—Aggregate Priced Services Pro Forma Cost and Revenue Performancea [$ millions] 1b 2c 3 4d 5e Year Revenue Total expense Net income
  • (roe)
  • [1-2]
  • Targeted roe Recovery rate after targeted roe [1/(2+4)]
    2011 (actual) 478.6 444.4 34.1 16.8 103.8% 2012 (estimate) 446.3 431.0 15.3 9.1 101.4% 2013 (budget) 423.6 408.3 15.3 4.2 102.7% aCalculations in table 1 and subsequent pro forma cost and revenue tables may be affected by rounding. bFor 2011 and 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. cThe 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. dTargeted ROE is the after-tax ROE included in the PSAF. For the 2012 estimate and 2011 actuals, the targeted ROE reflects average actual clearing balance levels through July 2012 and December 2011, respectively. The clearing balance program was eliminated in 2012; therefore, the clearing balances are not included in the 2013 budget. eThe recovery rates in table 1 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 2002 to 2011, 2011 actual, 2012 budget, 2012 estimate, and 2013 budget by priced service.

    Table 2—Priced Services Cost Recovery [Percent] 2002-2011 2011 2012 2012 2013 Priced service Actual Budget Estimate Budgeta All services 98.6 103.8 101.2 101.4 102.7 Check 97.6 105.4 102.2 103.8 107.2 FedACH 102.4 100.8 100.7 100.3 100.4 Fedwire Funds and NSS 101.8 103.0 99.2 98.3 98.0 Fedwire Securities 102.2 103.1 102.6 98.2 100.9 a2013 budget figures reflect the initial budget submissions from the Reserve Banks. The Reserve Banks will transmit final budget data to the Board in November 2012, for Board consideration in December 2012. 2012 budget figures reflect the final budget as approved by the Board in December 2011.

    1.2012 Estimated Performance—The Reserve Banks estimate that they will recover 101.4 percent of the costs of providing priced services in 2012, including imputed costs and targeted ROE, compared with a budgeted recovery rate of 101.2 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 $15.3 million, compared with the target of $9.1 million. While the check service and the FedACH Service are expected to achieve full cost recovery in 2012, the Fedwire Funds and National Settlement Services and the Fedwire Securities Service are expected to recover 98.3 and 98.2 percent of their costs, respectively. The shortfalls are 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.

    2.2013 Private Sector Adjustment Factor—The 2013 PSAF for Reserve Bank priced services is $14.1 million. This amount represents a decrease of $8.7 million from the revised 2012 PSAF estimate of $22.8 million. This reduction is primarily the result of a decrease in the cost of equity, which is due to a lower amount of imputed equity associated with the elimination of clearing balances, and the elimination of the FDIC assessment.4 5

    4In October 2011, the Board approved a budgeted 2012 PSAF of $29.9 million, which was based on the July 2011 clearing balance level of $2,661.1 million. The 2012 estimated PSAF of $22.8 million, which is based on actual average clearing balances that were $2,073.3 at July 2012, reflects theelimination of the clearing balance program effective July 12, 2012 (77 FR 21846, April 12, 2012). Clearing balances after July 12, 2012 were zero.

    5The Board has changed its methodology for calculating the PSAF from a correspondent bank model to a publicly traded firm (PTF) model. These changes affect the comparative analysis of the 2013 and 2012 PSAF. (Published elsewhere in today'sFederal Register.)

    3.2013 Projected Performance—The Reserve Banks project that the check, FedACH, and Fedwire Securities Services will fully recover their costs in 2013. The Reserve Banks also project that the Fedwire Funds and National Settlement Service will achieve close to full-cost recovery. Overall, the Reserve Banks project a priced services cost-recovery rate of 102.7 percent in 2013, with a net income of $15.3 million, compared to a targeted ROE of $4.2 million.

    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 or delays with technological upgrades. In light of these risks, the Reserve Banks will continue to refine their business and operational strategies to manage aggressively operating costs, take advantage of efficiencies gained from technological upgrades, and increase product revenue.

    4.2013 Pricing—The following summarizes the Reserve Banks' changes in fee schedules for priced services in 2013:

    Check

    • The Reserve Banks will retain at current levels FedForward and FedReturn fees for checks presented and returned electronically. At the same time, the Reserve Banks will increase fees for items destined for endpoints that receive substitute checks for forward items and for return items.6 The per item fee charged for electronic deposits that are presented as substitute checks will increase from $0.12 to $0.15 and the per item fee charged for electronic returns that are delivered to the depositary bank as substitute checks will increase from $1.40 to $1.45. The effective average fee for collecting a check destined to a substitute check endpoint is expected to be $.1564, an increase of 19 percent, for forward items and $1.4500, an increase of 4 percent, for return items.

    6A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing in the same manner as the original check.

    • The projected weighted effective average price to collect a check deposited electronically in 2013 will decline 4 percent to $0.0186 and the weighted effective average price to return a check deposited electronically will decline 3 percent to $0.6505. Virtually all forward and return items are now delivered electronically.

    • The Reserve Banks also will simplify the fee structure for paper check forward and return collection deposits. The Reserve Banks will charge for two categories of forward collection deposits: encoded and unencoded. The fees are $10.00 per cash letter and $2.00 for each encoded item and $3.00 for each unencoded item. Additionally, the Reserve Banks will charge for two categories of return item deposits: qualified and unqualified. The fees are $15.00 per cash letter and $5.00 for each qualified item and $12.00 for each unqualified return. The fee to encode Canadian items will increase from $0.50 to $1.00 per item.

    • The Reserve Banks project that approximately 0.01 percent of check forward deposit volume and approximately 0.53 percent of return check volume will be in paper-based products. The weighted effective average price for clearing a forward paper item and processing a return paper item in 2013 is projected to be $6.76 and $7.89 (increases of 55 and 5 percent), respectively, which reflects the high costs of handling the remaining paper volume.

    • The Reserve Banks will reduce their forward presentment and return delivery options to FedReceipt Plus, PDF (for returns only), and paper.7 Additionally, the Helena Pilot, in which paying banks in the former Helena zone received FedReceipt Plus at no charge, will be discontinued.8

    7FedReceipt is electronic presentment with accompanying images of all items delivered to a paying bank or depositary bank.

    8The Helena pilot was put in place in mid-2007 before the Helena office closed to encourage Helena zone customers to move to FedReceipt Plus, which would minimize the transportation costs associated with delivering paper items once the office closed.

    • The Reserve Banks also will introduce incentive pricing for depository institutions that designate the Reserve Banks as their electronic presentment and return point. Such depository institutions will receive discounts on fees charged for electronically deposited and returned items of $0.002 and $0.10, respectively. To receive the discounts, depository institutions will be required to register for the incentive, which will then begin the first full month after registration.

    • With the 2013 fees, the price index for the total check service will have increased 54 percent since 2003. In comparison, since 2005, the first full year in which the Reserve Banks offered Check 21 services, the price index for Check 21 services will have decreased about 51 percent.

    FedACH

    • The Reserve Banks will raise the fee charged to receivers of ACH returns from $0.005 to $0.0075. The Reserve Banks will also increase the FedACH monthly settlement fee from $45 to $50 per routing number and the monthly international ACH transaction (IAT) output file sort fee from $50 to $75 per routing number. The fee for facsimile exception return and notification of change will rise from $30 to $45.

    • The Reserve Banks will also introduce volume-tiered package pricing for the FedACH Risk Management and FedPayments Reporter Services, to make more attractive the usage of these services.

    • With the 2013 fees, the price index for the FedACH service will have decreased 6 percent since 2003.

    Fedwire Funds and National Settlement

    • The Reserve Banks will implement a new per item fee of $0.30 on all transfers sent and received that exceed $100 million (high-value transfer surcharge). The Reserve Banks will also increase the end-of-day origination surcharge from $0.20 to $0.21, the surcharge for offline transfers from $40 to $45, and the monthly fee for the usage of the FedPayments Manager import/export tool from $20 to $30.9

    9This 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.

    • The Reserve Banks will increase the Tier 1 per item pre-incentive fee from $0.58 to $0.65 per transaction, the Tier 2 per item pre-incentive fee from $0.24 to $0.25, and the Tier 3 per item pre-incentive fee from $.0135 to $.0145.10

    10The 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 50 percent of a customer's historic benchmark volume.

    • The Reserve Banks will increase the National Settlement Service's settlement file charge from $21 to $25 and the settlement charge per entry from $1.00 to $1.20. The Reserve Banks will also increase the National Settlement Service's surcharge for offline file origination from $40 to $45.

    • With the 2013 fees, the price index for the Fedwire Funds and NationalSettlement Services will have increased 77 percent since 2003.

    Fedwire Securities

    • The Reserve Banks will increase the online transfer fee from $0.45 to $0.54.

    • The Reserve Banks will increase the monthly issue maintenance fee from $0.45 to $0.54 per issue. The Reserve Banks will also increase the claim adjustment fee from $0.66 to $0.75.

    • With the 2013 fees, the price index for the Fedwire Securities Service will have increased 65 percent since 2003.

    FedLine Access Solutions

    • The Reserve Banks will increase the fees on legacy services, such as an additional $10 per month for FedMail Fax, $450 per month for FedLine Direct (56K), and $100 per month for the Dial-Only VPN surcharge. The Reserve Banks will also increase the monthly fees for basic cash management reports within the accounting services.

    • The Reserve Banks will increase the monthly fees for FedLine Direct Plus (256K) and FedLine Direct Premier (T1) by $100 and $300, respectively. Fees for additional 256K and T1 connections will also increase by $50, as well as the fees for additional FedLine Command and FedLine Direct certificates by $20 per month. The Reserve Banks will also increase FedMail Email by $10 per month. Monthly fees for enhanced cash management reports, which include respondent and subaccount activity will also increase.

    • Although the Reserve Banks will not change published fees, they will raise certain volume thresholds for FedComplete packages, which will improve the business case for customers.

    • Electronic access fees are allocated to each priced service and are not separately reflected in comparison with the GDP price index.

    5.2013 Price Index—Figure 1 compares indexes of fees for the Reserve Banks' priced services with the GDP price index. Compared with the price index for 2012, the price index for all Reserve Bank priced services is projected to increase less than 1 percent in 2013. The price index for total check services is projected to decrease approximately 4 percent. The price index for Check 21 services is projected to decrease approximately 5 percent, reflecting a slight decrease in the effective prices paid to collect and return checks using Check 21 services and wide adoption of electronic check services. The price index for all other check services is projected to increase less than 1 percent. The price index for electronic payment services, which include the FedACH Service, Fedwire Funds and National Settlement Services, and Fedwire Securities Service, is projected to increase approximately 3 percent. For the period 2003 to 2013, the price index for all priced services is expected to increase 64 percent. In comparison, for the period 2003 to 2011, the GDP price index increased 20 percent.

    EN08NO12.044

    B. 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 on 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 pension and other benefits, accounts payable, and other liabilities.

    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 1.0, which approximates the risk of the market as a whole; and the monthly returns in excess of the risk-free rate over the most recent 40 years are used as the market risk premium. The resulting ROE influences the dollar level of the PSAF because this is the return a shareholder would 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.

    The Board has changed its methodology for calculating the PSAF from a correspondent bank model to a publicly traded firm (PTF) model. Thesechanges affect the comparative analysis of the 2013 and 2012 PSAF. (Published elsewhere in today'sFederal Register.)

    Capital structure.In the new PTF model, the capital structure is imputed based on the funding need (assets less liabilities), subject to minimum equity constraints. If estimated assets are in excess of estimated liabilities, the Board imputes first debt funding (either short- or long-term) and then equity to meet the capital structure of the U.S. publicly traded firm market or minimum equity constraints. Minimum equity follows the FDIC requirements for a well-capitalized institution of at least 5 percent of total assets and 10 percent of risk-weighted assets. If minimum equity constraints are not met after imputing equity based on all other financial statement components, additional equity is imputed to meet these constraints. Additional equity imputed to meet minimum equity requirements is imputed as invested in Treasury securities.

    The capital structure in the correspondent bank model was derived from the portion of Federal Reserve assets and liabilities associated with priced services. Short-term debt was imputed only when short-term liabilities were insufficient to fund short-term assets. Long-term debt was imputed only when core clearing balances, other long-term liabilities, and equity were not sufficient to fund long-term assets.11 Short-term debt was imputed only when other short-term liabilities and clearing balances not used to finance long-term assets were insufficient to fund short-term assets. A portion of clearing balances was used as a funding source for short-term priced-services assets. In addition, long-term assets have been partially funded from core clearing balances. Imputed equity was set to meet the FDIC requirements for a well-capitalized institution for insurance premium purposes and represents the market capitalization, or shareholder value, for Reserve Bank priced services.12

    11For 2012, $1 billion of core clearing balances were considered the portion of the balances that has remained stable over time without regard to the magnitude of actual clearing balances.

    12For 2013 and 2012 PSAF, the FDIC requirements for a well-capitalized depository institution are 1) a ratio of total capital to risk-weighted assets of 10 percent or greater, 2) a ratio of Tier 1 capital to risk-weighted assets of 6 percent or greater, and 3) a leverage ratio of Tier 1 capital to total assets of 5 percent or greater. The priced services balance sheet has no components of Tier 1 or total capital other than equity; therefore, requirements 1 and 2 are essentially the same measurement.

    As used in this context, the term “shareholder” does not refer to the member banks of the Federal Reserve System, but rather to the implied shareholders that would have an ownership interest if the Reserve Banks' priced services were provided by a private firm.

    Effective tax rate.As with the imputed capital structure, the effective tax rate in the PTF model is based on data from U.S. publicly traded firms. This tax rate is the mean of the weighted average rates of the U.S. publicly traded firm market over the past 5 years.

    The effective tax rate used in the correspondent bank model was an imputed income tax rate that is the median of the rates paid by the top 50 bank holding companies based on deposit balances over the past five years, adjusted to the extent that they invested in tax-free municipal bonds.

    Debt and equity financing.In the PTF model, the imputed short- and long-term debt financing rates are derived from 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. In the correspondent bank model, the debt financing rate, where applicable, was based on the debt financing rate observed from data from the top 50 bank holding companies.

    Net income on clearing balances.In 2012, the correspondent bank model imposed investment constraints based on interest rate fluctuations. Because of cost recovery sensitivity constraints to interest rate fluctuations, the investment of clearing balances in 2012 was limited to three-month Treasury bills (with no additional imputed constant spread from an imputed investment portfolio). Clearing balances were eliminated in July 2012, and therefore are no longer a factor in calculating the PSAF.

    1.Calculating Cost Recovery—In 2012, the PSAF and NICB are incorporated into the projected and actual cost-recovery calculations for Reserve Bank priced services. When calculating actual cost recovery for the priced services at the end of each year, the Board historically has used the PSAF derived during the price-setting process with only minimal adjustments for actual rates or balance levels.13 Beginning in 2009, in light of the uncertainty about the long-term effect that the payment of interest on reserve balances would have on the level of clearing balances, the Board adjusted the PSAF used in the actual cost-recovery calculation to reflect the actual clearing balance levels maintained throughout the year.

    13The largest portion of the PSAF, the target ROE, historically has been fixed. Imputed sales tax, income tax, and the FDIC assessment (where applicable) are recalculated at the end of each year to adjust for actual expenditures, net income, and clearing balance levels.

    The NICB in the correspondent bank model was imputed based on the assumption that the Reserve Banks invest clearing balances net of an imputed reserve requirement and balances used to finance priced services assets.14 The Reserve Banks imputed a constant spread, determined by the return on a portfolio of investments, over the three-month Treasury bill rate and applied this investment rate to the net level of clearing balances.15 A return on the imputed reserve requirement, which was based on the level of clearing balances on the pro forma balance sheet, was imputed to reflect the return that would be earned on a required reserve balance held at a Reserve Bank. The clearing balance program was eliminated effective July 12, 2012 as a part of reserve simplification efforts.16

    14Reserve requirements are the amount of funds that a depository institution must hold, in the form of vault cash or deposits with Federal Reserve Banks, in reserve against specified deposit liabilities. The dollar amount of a depository institution's reserve requirement is determined by applying the reserve ratios specified in the Board's Regulation D to the institution's reservable liabilities. The Reserve Banks priced services impute a reserve requirement of 10 percent, which is applied to the amount of clearing balances held with the Reserve Banks and to credit float.

    15The allowed portfolio of investments is comparable to a bank holding company's investment holdings, such as short-term Treasury securities, government agency securities, federal funds, commercial paper, long-term corporate bonds, and money market funds. The investments imputed for 2012 are three-month Treasury bills and federal funds.

    1677 FR 21846, April 12, 2012.

    The calculation also involved determining the priced services cost of earnings credits (amounts available to offset service fees) on contracted clearing balances held, net of expired earnings credits, based on a discounted three-month Treasury bill rate. Rates and clearing balance levels used in the 2012 estimated NICB were based on July 2012 rates and clearing balance levels.

    2.Analysis of the 2013 PSAF—The decrease in the 2013 PSAF is due primarily to the elimination of the clearing balance program and the resulting reduction in the level of imputed investments and equity.

    Projected 2013 Federal Reserve priced-services assets, reflected in table 3, have decreased $3,324.3 million as compared to 2012, as a result of the decline in imputed investments associated with the elimination of clearing balances.

    Credit float, which represents the difference between items in process ofcollection and deferred credit items, decreased to $550.0 million in 2013 from $1,100.0 million in 2012.17 The decrease is primarily a result of decreased use of products that tend to generate credit float.

    17Credit float occurs when the Reserve Banks present transactions to the paying bank prior to providing credit to the depositing bank.

    As previously mentioned, the clearing balance program was discontinued in 2012, eliminating clearing balances as a funding source in 2013. The PTF methodology for calculating PSAF in 2013 does not incorporate clearing balances; therefore, funding for assets is derived exclusively from debt and equity. In 2013, $14.4 million in short-term debt was imputed to meet financing needs of short-term assets. Additional equity was imputed to meet the minimum capital to risk-weighted asset ratio constraint of the PTF model. In 2012, clearing balances are available as a funding source for priced-services assets. As shown in table 4, in 2012, $19.2 million in clearing balances was used as a funding source for short-term assets. Long-term liabilities and equity exceeded long-term assets by $124.9 million; therefore, no core clearing balances were used to fund long-term assets. In 2013, additional equity imputed was $58.1 million and the corresponding investment income was $0.1 million.

    In 2013, minimum equity constraints were not met after imputing equity based on all other financial statement components. The calculation of cost recovery included imputing investment income associated with additional equity that resulted from imputing equity to meet the equity constraints in the model. If additional equity is imputed to meet these constraints, it is invested in Treasury securities.

    As shown in table 3, the amount of equity imputed for the 2013 PSAF is $72.3 million, a decrease of $162.4 million from the imputed equity for 2012. In accordance with FAS 158 [ASC 715], this amount includes an accumulated other comprehensive loss of $615.3 million. In 2013, 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 is calculated at 10 percent, and equity exceeds 5 percent of total assets.18 For 2013, with the replacement of the correspondent bank model, the FDIC assessment no longer applies. For 2012, the Reserve Banks imputed an FDIC assessment of $2.2 million for the priced services based on the FDIC's assessment rates and the level of total priced services assets on the pro forma balance sheet.19

    18In December 2006, the Board, the FDIC, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision announced an interim ruling that excludes FAS 158 [ASC 715]-related accumulated other comprehensive income or losses from the calculation of regulatory capital. The Reserve Banks, however, elected to include accumulated other comprehensive income or losses, as indicated above, until the regulators announce a final ruling.

    19The FDIC changed the base of its assessments from deposits to total assets. For information on the FDIC assessment rates, see the Final Rule athttp://www.fdic.gov/news/news/press/2011/pr11028.html.

    Table 5 shows the imputed PSAF elements for 2013 and 2012, including the pretax ROE and other required PSAF costs. The $13.1 million decline in the 2012 ROE of $19.9 million is mainly caused by a lower amount of imputed equity. Imputed sales taxes decreased to $3.3 million in 2013 from $3.7 million in 2012. The effective income tax rate used in 2013 increased to 38.5 percent from 30.9 percent in 2012. The priced services portion of the Board's expenses decreased $0.1 million to $4.0 million in 2013 from $4.1 million in 2012.

    BILLING CODE 6210-01-P EN08NO12.045 EN08NO12.046 EN08NO12.047 EN08NO12.048

    C.Check Service—Table 8 shows the 2011 actual, 2012 estimated, and 2013 budgeted cost recovery performance for the commercial check service.

    EN08NO12.049

    1.2012 Estimate—For 2012, the Reserve Banks estimate that the check service will recover 103.8 percent of total expenses and targeted ROE, compared with the budgeted recovery rate of 102.2 percent. The Reserve Banks expect to recover all actual and imputed costs of providing check services and earn a net income of $12.2 million (see table 8). Greater-than-expected check volume processed by the Reserve Banks has influenced significantly the check services cost recovery as additional fee revenue has exceeded the costs of processing new volumes.34

    34The greater-than-expected check volume is attributed to two new FedForward deposit options, which 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.

    The general decline in the number of checks written continues to influence the decline in checks collected by the Reserve Banks. Through August, total forward check volume and return check volume is 3 percent and 19 percent lower, respectively, than for the same period last year. For full-year 2012, the Reserve Banks estimate that their total forward check collection volume will decline nearly 5 percent and return check volume will decline 21 percent from 2011 levels.35 The proportion of checks deposited and presented electronically continues to grow (see table 9). The Reserve Banks expect that year-end 2012 FedForward deposit and FedReceipt presentment penetration rates will exceed 99.9 percent.36 The Reserve Banks also expect that year-end 2012 FedReturn and FedReceipt Return volume penetration rates will reach 99.2 percent and 95.0 percent, respectively.37

    35Total Reserve Bank forward check volumes are expected to drop from roughly 6.7 billion in 2011 to 6.4 billion in 2012. Total Reserve Bank return check volumes are expected to drop from roughly 60.4 million in 2011 to 47.7 million in 2012.

    36FedForward is the electronic forward check collection product. FedReceipt is electronic presentment with accompanying images.

    37FedReturn is the electronic check return product. FedReceipt Return is the electronic delivery of returned checks with accompanying images.

    EN08NO12.050

    2.2013 Pricing—In 2013, the Reserve Banks project that the check service will recover 107.2 percent of total expenses and targeted ROE. Revenue is projected to be $185.3 million, a decline of 15 percent from 2012. 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 $171.1 million, a decline of 17 percent from 2012. The reduction in check costs is driven primarily by the cost savings associated with a mature electronic check environment and the implementation of a more efficient check processing platform.38

    38The Reserve Banks are scheduled to complete a multi-year check platform modernization initiative in October 2012.

    The Reserve Banks estimate that total Reserve Bank forward check volumes will decline approximately 8 percent to 5.9 billion and return check volumes will decline approximately 16 percent to 40.2 million. The decline in Reserve Bank check volume can be attributed to the continued decline in check use nationwide.39

    39In addition, return items have declined due to posting practices at paying banks.

    The Reserve Banks will retain at current levels FedForward and FedReturn fees for checks presented and returned electronically. At the same time, the Reserve Banks will increase fees for items destined for endpoints that receive substitute checks for forward items and for return items.40 The per item fee charged for FedForward items that are presented as substitute checks will increase from $0.12 to $0.15 and the per item fee charged for FedReturn items that are delivered to the depositary bank as substitute checks will increase from $1.40 to $1.45. The effective average fee for collecting a check for a substitute check endpoint is expected to be $.1564, an increase of 19 percent, for forward items and $1.4500, an increase of 4 percent, for return items.

    40A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing in the same manner as the original check.

    The projected weighted effective average price to collect a check deposited electronically in 2013 will decline 4 percent to $0.0186 and the weighted effective average price to return a check deposited electronically will decline 3 percent to $0.6505.41 This result is because virtually all forward and return items are now delivered electronically.

    41The weighted average prices are dependent on deposit product mix, deadlines, and electronic receipt penetration rates. The weighted average fees are based on continued movement to lower priced deposit options and increased electronic receipt penetration rates for full year 2012 and projected for full year 2013.

    The Reserve Banks will also simplify the fee structure for paper check forward and return collection deposits. The Reserve Banks will charge for two categories of forward collection deposits: encoded and unencoded. The fees are $10.00 per cash letter and $2.00 for each encoded item and $3.00 for each unencoded item. Additionally, the Reserve Banks will charge for two categories of return item deposits: qualified and unqualified. The fees are $15.00 per cash letter and $5.00 for each qualified item and $12.00 for each unqualified. The fee to encode Canadian items will increase from $0.50 to $1.00 per item.

    The Reserve Banks project that approximately 0.01 percent of check forward deposit volume and approximately 0.53 percent of return check volume will be in paper-based products. The weighted effective average price for clearing a forward paper item and processing a return paper item in 2013 is projected to be $6.7586 and $7.8891 (increases of 55 and 5 percent), respectively, which reflects the high costs of handling the remaining paper volume.

    The Reserve Banks will reduce their forward presentment and return delivery options to FedReceipt Plus, PDF (for Returns only), and paper.42 Additionally, the Helena Pilot, in which paying banks in the former Helena zone received FedReceipt Plus at no charge, will be discontinued.43

    42FedReceipt is electronic presentment with accompanying images of all items delivered to a paying bank or depositary bank. For those depository institutions that do not have the ability to accept forward or return items in X9.37 format, the Reserve Banks can send a PDF file of the depository institution's inclearings and incoming returns directly to a printer located at the depository institution. The PDF file takes the place of physical delivery of paper checks.

    43The Helena pilot was put in place in mid-2007 before the Helena office closed to encourage Helena zone customers to move to FedReceipt Plus, which would minimize the transportation costs associated with delivering paper items once the office closed.

    The Reserve Banks will introduce incentive pricing for depository institutions that designate the Reserve Banks as their electronic presentment and return point. Such depository institutions will receive discounts on fees charged for electronically deposited and returned items of $0.002 and $0.10, respectively. To receive the discounts, depository institutions will be required to register for the incentive, which will then begin the first full month after registration.

    Risks to the Reserve Banks' ability to achieve budgeted 2013 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.

    D.FedACH Service—Table 11 shows the 2011 actual, 2012 estimate, and 2013 budgeted cost-recovery performance for the commercial FedACH service.

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    1.2012 Estimate—The Reserve Banks estimate that the FedACH service will recover 100.3 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 $2.7 million. Through August, FedACH commercial origination volume was nearly 4 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 current trends.

    2.2013 Pricing—The Reserve Banks project that the FedACH service will recover 100.4 percent of total expenses and targeted ROE in 2013. Total revenue is expected to increase $1.5 million from the 2012 estimate, primarily due to projected growth in FedACH commercial origination and receipt volume of 3.0 percent. Total expenses are budgeted to increase $3.7 million from the 2012 estimate, generally due to costs associated with development of a new FedACH technology platform.

    The Reserve Banks will maintain core transaction fees at current levels with one exception. The Reserve Banks will increase the per item fee charged to receivers of ACH returns from $0.005 to $0.0075. In addition, the Reserve Banks will increase fees for select FedACH services. Specifically, the Reserve Banks will increase monthly fees for FedACH settlement and IAT output file sort, as well as, the per item fees for facsimile exception return and notification of change. The Reserve Banks will also introduce volume-tiered package pricing for the FedACH Risk Management and FedPayments Reporter Services, to make these services more attractive to customers. The Reserve Banks will also standardize the on-demand report fee for the FedPayments Reporter Service.

    The primary risk to the Reserve Banks' ability to achieve budgeted 2013 cost recovery for the FedACH service is higher-than-expected support and overhead costs. Other risks include lower-than-expected volume due to unanticipated mergers and acquisitions, direct exchanges, and the competitive environment, which would result in lower-than-anticipated revenue, and cost overruns associated with unanticipated problems with technology upgrades.

    E.Fedwire Funds and National Settlement Services—Table 12 shows the 2011 actual, 2012 estimate, and 2013 budgeted cost-recovery performance for the Fedwire Funds and National Settlement Services.

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    1.2012 Estimate—The Reserve Banks estimate that the Fedwire Funds and National Settlement Services will recover 98.3 percent of total expenses and targeted ROE, compared with a 2012 budgeted recovery rate of 99.2 percent. The lower-than-projected recovery rate is primarily attributed to higher-than-expected information technology costs. Through August, average daily Fedwire Funds volume was up 4.3 percent from the same period in 2011. For the full year, the Reserve Banks estimate that Fedwire Funds volume will increase by 2.5 percent. With respect to the National Settlement Service, the volume of settlement files increased 29.4 percent and the volume of settlement files increased 21.5 percent through August.44 For the full year, the Reserve Banks estimate that the volume of settlement files will increase by 20.0 percent while the volume of settlement entries will increase by 15.1 percent. The Board believes full-year volume growth will likely exceed the Reserve Banks' volume projections, which would raise marginally the 2012 cost recovery rate.

    44Although large in percentage terms, the increase in National Settlement Service activity is relatively small in magnitude. For instance, the 29.4 percent increase in settlement files represents about 7 new files per day.

    2.2013 Pricing—The Reserve Banks expect the Fedwire Funds and National Settlement Services to recover 98.0 percent of total expenses and targeted ROE. The Reserve Banks project total expenses to increase $9.8 million from the 2012 estimate. This increase is primarily due to their ongoing projects to upgrade the Fedwire application and related information technology infrastructure. The Reserve Banks project total revenue to increase $7.5 million from the 2012 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 will introduce a $0.30 surcharge for transfers exceeding $100 million.45 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.

    45In 2012, the Reserve Banks introduced a $0.12 high-value surcharge for both the senders and receivers of transfers exceeding $10 million and outlined plans to introduce additional high-value surcharges in future years.

    The Reserve Banks will also adjust various existing fees 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 $0.58 to $0.65, the Tier 2 per item pre-incentive fee from $0.24 to $0.25, and the Tier 3 per item pre-incentive fee from $0.135 to $0.145. Second, the Reserve Banks will increase the late-day (after 5 p.m. ET) origination surcharge from $0.20 to $0.21. Third, the Reserve Banks will increase the Fedwire Funds offline transfer fee from $40 to $45. Lastly, the Reserve Banks will increase the FedPayments Manager import/exportmonthly fee from $20 to $30. The Reserve Banks estimate that the new surcharge and price increases will result in an approximate 9.4 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 $21 to $25, the settlement entry fee from $1.00 to $1.20, and the offline origination fee per file from $40 to $45. In calculating projected revenue, the Reserve Banks project no volume growth.

    F.Fedwire Securities Service—Table 13 shows the 2011 actual, 2012 estimate, and 2013 budgeted cost recovery performance for the Fedwire Securities Service.46

    46The 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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    1.2012 Estimate—The Reserve Banks estimate that the Fedwire Securities Service will recover 98.2 percent of total expenses and targeted ROE, compared with a 2012 budgeted recovery rate of 102.6 percent. The lower-than-projected recovery is primarily attributed to higher-than-expected pension and information technology costs combined with lower revenue due to decreased transfer volume and claims adjustment requests. Through August, securities transfer volume was down 13.9 percent from the same period in 2011 while claims adjustment requests were down 48 percent. For the full year, the Reserve Banks estimate that Fedwire Securities transfer volume will decline by 13.6 percent, reflecting lower issuance of mortgage-backed securities and the implementation of expanded multilateral pool netting of mortgage-backed securities by the Fixed Income Clearing Corporation (FICC). Claims adjustments are estimated to decline by about 55 percent for the year, reflecting corresponding declines in settlement fails in the marketplace.

    2.2013 Pricing—The Reserve Banks project that the Fedwire Securities Service will recover 100.9 percent of total expenses and targeted ROE. The Reserve Banks project that revenue and expenses will each increase by $0.5 million compared with the 2012 estimates.

    In calculating projected Fedwire Securities revenue for 2013, the Reserve Banks project that securities transfer activity will decline by 17.9 percent and the number of accounts maintained will decrease by 7.5 percent. The estimated decrease in transfer volumes reflects the projected lower issuance of mortgage-backed securities and the full-year impact of multilateral pool netting at FICC. The number of accounts is also expected to continue to decrease because of prior year account maintenance fee increases and customers continuing to assess their account structures in light of changes to the maximum amount of deposits insured by the Federal Deposit Insurance Corporation.47

    47The increase in the maximum deposit insurance amount has reduced the demand by certain Fedwire Securities customers to hold deposits in collateral-backed accounts.

    The Reserve Banks will adjust various existing fees for the Fedwire Securities Service. First, the Reserve Banks will increase the online transfer fee from $0.45 to $0.54. Second, the Reserve Banks will increase the monthly issue maintenance fee from $0.45 to $0.54 per issue. Lastly, the Reserve Banks will increase the claim adjustment fee from $0.66 to $0.75. The Reserve Banks' fees will represent an 11.6 percent increase in average prices to achieve a target recovery rate of approximately 100.9 percent.

    G.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: FedMail®, FedLine Web®, FedLine Advantage®, FedLine Command®, and FedLine Direct®.48 The Reserve Banks package these channels into ten FedLine packages that are supplemented by a number of premium (or à la carte) access and accounting information options. In addition, the Reserve Banks offer three FedComplete packages, which are bundled offerings of a FedLine Advantage connection and a fixed number of FedACH, Fedwire Funds, and Check 21-enabled services.

    48FedLine Direct, FedLine Command, FedLine Advantage, FedLine Web, and FedMail are registered trademarks of the Federal Reserve Banks. These channels may also be used to access nonpriced services provided by the Reserve Banks.

    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 broad range of informational services, including cash services, FedACH services, and check services. Three FedLine Advantage packages expand upon the FedLine Web informational service packages and offer attended access to transactional services: Check, FedACH, Fedwire Funds, and Fedwire Securities.

    Unattended access packages are computer-to-computer, IP-basedinterfaces 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 final three 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 2013 are designed to encourage customers to migrate to more efficient payments solutions. Customers that continue to use legacy solutions will see greater increases in fees for those services. To that end, the Reserve Banks will increase the fees on legacy services, such as an additional $10 per month for FedMail Fax, $450 per month for FedLine Direct (56K), and $100 per month for the Dial-Only VPN surcharge. The Reserve Banks will also increase the monthly fees for basic cash management reports within the accounting services.

    In addition, the Reserve Banks will make other changes to FedLine pricing for 2013 in order to improve the alignment of value and revenue. In particular, the Reserve Banks will increase the monthly fees for FedLine Direct Plus (256K) and FedLine Direct Premier (T1) by $100 and $300, respectively. Fees for additional 256K and T1 connections will also increase by $50, as well as the fees for additional FedLine Command and FedLine Direct certificates by $20 per month. The Reserve Banks will also increase FedMail Email by $10 per month. Monthly fees for two enhanced cash management reports, which include respondent and subaccount activity will also increase.

    The Reserve Banks will not change published fees for FedComplete packages; however, the Reserve Banks will raise certain volume thresholds for each of the packages to improve the business case for customers.

    II. 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.”49 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 associated benefits—such as contributions to payment system efficiency, payment system integrity, or other Board objectives—can be achieved while minimizing the adverse effect on competition.

    49Federal Reserve Regulatory Service (FRRS) 9-1558.

    The Board projects that the 2013 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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