CUNA Comment Letter

RE: Settlement-day Finality for Automated Clearing House Credit Transactions

March 18, 1999

Ms. Jennifer J. Johnson
Secretary
Board of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re: Docket No. R-1032, Notice Regarding Settlement-day Finality for Automated Clearing House Credit Transactions

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the notice issued by the Federal Reserve Board (Board) regarding settlement finality for automated clearing house (ACH) credit transactions, which was published in the Federal Register on December 18, 1998. CUNA represents more than 90% of our nation’s 11,000 state and federal credit unions.

Currently, the Federal Reserve Bank’s uniform ACH operating circular gives the Reserve Banks the right to reverse settlement for either debit or credit transactions until 8:30 A.M. Eastern Time on the morning of the business day following the settlement date. The Board has requested comment on the benefits and drawbacks of providing settlement finality on the morning of the settlement day for ACH credit transactions processed by the Federal Reserve. If the Board were to provide such settlement-day finality for ACH credit transactions, it would also adopt risk control measures equivalent to those used in the Fedwire funds transfer and enhanced settlement services, which provide final and irrevocable settlement at the time a transaction is credited to the institution’s account. These risk control measures would include requiring all institutions monitored in real time to prefund the amount of their ACH credit originations. Current risk control measures include requiring institutions at imminent risk of failure to prefund ACH credit originations, ex post monitoring of daylight overdraft trends, and reversing ACH transactions if an originating depository financial institution (ODFI) is unable to settle.

CUNA generally supports settlement-day finality for ACH credit transactions processed by the Federal Reserve. We also understand the Board’s concern with providing alternative risk control measures in any proposal to accelerate settlement finality. We would like to take this opportunity to comment on the proposed risk control measures.

As suggested in the notice, the costs of prefunding ACH credit transactions would be alleviated to some extent if the Board were to provide the ODFI with an as-of credit adjustment to offset the Regulation D reserve requirements and clearing balance requirements. However, the ODFI’s reserve requirement and clearing balance requirement may be lower than the value of the as-of credit adjustments if the ODFI processes a high volume of ACH credit transactions. In this situation, the ODFI would not be able to utilize all of the as-of credit adjustments within a two-week maintenance period. Prefunding ACH credits would, therefore, have a negative impact on ODFIs that process a high volume of ACH credit transactions.

The Board also invited suggestions regarding alternative risk control approaches different than the one described in the notice that may be better suited to the ACH environment. One such approach may be to require ODFIs to establish caps similar to the net debit caps required in connection with daylight overdrafts. This requirement could be an effective means of determining the level of risk associated with the possibility that an ODFI may not fund ACH credit transactions on the settlement date. The ODFI should then be required to prefund the value of the transactions to the extent that it exceeds the cap.

Thank you for the opportunity to comment on the notice regarding settlement finality for ACH credit transactions. If you or other Board staff have questions about our comments, please give me a call at 202-218-7795.

Sincerely


Jeffrey Bloch
Assistant General Counsel