CUNA Regulatory Comment Call
May 13, 2008
Fed Proposes Changes to ACH Posting Times and Changes to its Payments System Risk Policy
- The Federal Reserve Board (Board) Is Proposing To Change The Posting Time For Commercial And Government Ach Debit Transfers Processed By The Fedach Service From 11:00 A.M. Et To 8:30 A.M. Et.
- The New Settlement Time Would Coincide With Commercial And Government Ach Credit Transfers And With Settlement Times Of Its Private-Sector Competitor.
- Approximately 35 Corporate Credit Unions And Banker's Banks That Are Not Eligible To Incur Daylight Overdrafts Would Need To Make Arrangements To Hold Higher Account Balances Overnight Or Obtain Funding Earlier To Account For The Settlement Time Change.
- The Board Is Also Proposing A New Strategy For Providing Intraday Credit To Depository Institutions In Its Payments System Risk (Psr) Policy.
- Changes To Its Psr Policy Include Allowing Institutions To Pledge Collateral Voluntarily To Secure Daylight Overdrafts And Providing Collateralized Daylight Overdrafts At A Zero Fee.
- Additional Changes Include Raising The Fee For Uncollateralized Daylight Overdrafts To 50 Basis Points And Increasing The Biweekly Fee Waiver To $150.
- Please Submit Your Comments To Cuna By May 27, 2008. Comments Are Due To The Fed By June 4, 2008.
Please feel free to email your comments to SVP and Deputy General Counsel Mary Dunn at firstname.lastname@example.org or Assistant General Counsel Lilly Thomas at email@example.com; or mail letters to Mary or Lilly c/o CUNA's Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of the proposed changes to the ACH posting rules. A copy of the proposed changes to the Fed's PSR policy can be accessed here.
The Federal Reserve Banks' (Reserve Banks) Fed ACH service currently posts commercial and government automated clearinghouse (ACH) credit transfers at 8:30 a.m. ET and debit transfers at 11:00 a.m. ET.
For several years, the Board has been reviewing long-term developments in intraday liquidity and risk management in financial markets and the payments system, including increased use of daylight overdrafts at the Reserve Banks and increased Fedwire funds transfers late in the day. The Board evaluated the simultaneous posting of ACH credit and debit transfers at 8:30 a.m. ET, which is the same time as EPN, the other ACH operator posts these transfers, and believed this change would remove competitive disparities between these systems or their participants arising from different settlement times for ACH debit transfers. In its evaluation the Board recognized that these changes could prompt depository institutions to maintain higher account balances overnight or require staff to be at their jobs earlier to manage Reserve account balances.
The Board also identified concerns related to risk and efficiency that suggest that a change in the Fed's approach to daylight overdrafts is needed. In its review the Board noted:
- A long-term trend of declining end-of-day balances held in Reserve accounts has resulted in a need for daylight credit to fund payments-system transactions.
- Some financial utilities can absorb large amounts of intraday funding from participants to meet their risk management requirements. These funding requirements result in large transfers of balances from participants' Federal Reserve accounts that often are not reversed until the late afternoon.
- Many large depository institutions hold a significant number of large-value payments in ``liquidity queues'' primarily to avoid daylight overdraft fees causing payment delays.
- Reserve Banks' credit exposure has increased over time in real terms, despite increasing fees to financial institutions.
- Daylight overdraft fees paid by the banking system have continued to rise, increasing the cost burden of the PSR policy on the industry.
DISCUSSION OF PROPOSALS
Proposed Changes to ACH Posting Rules
The Board proposes to change the posting time for commercial and government ACH debit transfers that are processed by the FedACH service to 8:30 a.m. ET to coincide with the posting time for ACH credit transfers. The Board also intends to move the posting time for Treasury Tax and Loan investments associated with Electronic Federal Tax Payment System ACH debit transfers to 8:30 a.m. ET to maintain the simultaneous posting of ACH transactions and related Treasury transactions.
According to the proposal, posting ACH debit transfers at 8:30 is a 'more attractive' approach to the current 11 a.m. settlement time and would:
- Increase significantly the liquidity of institutions that originate a large value of ACH debit transfers over the FedACH network
- Increase liquidity for institutions that originate ACH debit transfers over the EPN network but have transfers delivered to receiving depository institutions over the FedACH network (inter-operator transactions);
- Align the Reserve Banks' FedACH settlement times with those of its private-sector competitor; and
- Conform more closely to the Board's guidelines for measuring daylight overdrafts.
The Board contends that up to 170 institutions that are eligible to incur daylight overdrafts could incur higher daylight overdraft fees if funding patterns remained the same; about 35 institutions that are not eligible to incur daylight overdrafts would need to make arrangements to hold higher account balances overnight or to obtain funding earlier. The proposal indicates that banker's banks and corporate credit unions make up those 35 institutions.
Proposed Changes to the PSR Policy
The Board is also requesting comment on proposed changes to its Payments System Risk (PSR) policy in response to the Board's 2006 Consultation Paper on intraday liquidity, operational risk, and daylight overdrafts. The proposal presents a new strategy for providing intraday credit to depository institutions that would encourage institutions to collateralize their daylight overdrafts.
The Board believes that this new strategy would "explicitly recognize that the Federal Reserve has an important role in providing intraday balances to foster the smooth operation of the payments system, provide temporary, intraday balances to healthy depository institutions predominantly through collateralized intraday overdrafts, and reduce over time the reliance of the banking industry on uncollateralized daylight credit if this can be done without significantly disrupting the operation of the payments system or causing other unintended adverse consequences."
The Board proposes the following:
- To allow depository institutions to pledge collateral voluntarily to secure daylight overdrafts;
- To provide collateralized daylight overdrafts at a zero fee;
- To raise the fee for uncollateralized daylight overdrafts to 50 basis points (annual rate) from the current 36 basis points;
- To increase the biweekly fee waiver to $150 from $25;
- To adjust net debit caps, streamlining procedures for the expansion of daylight overdraft capacity for certain foreign banking organizations, eliminating the current deductible for daylight overdraft fees; and increasing the penalty daylight overdraft fee for ineligible institutions to 150 basis points (annual rate) from the current 136 basis points.
The proposal seeks comment on several questions and provides a simple fee calculator https://www.federalreserve.gov/apps/RPFCalc/ that will allow institutions to estimate daylight overdraft fees under the proposed policy.
QUESTIONS REGARDING THE PROPOSAL
- If you originate debit transfers through FedACH, to what extent would you incur
competitive disparities because of the difference in settlement times between operators?
To what extent would adopting the proposal alter this situation?
- To what extent are there competitive disparities between ACH operators because
of the difference in settlement times? To what extent would adopting the proposal alter
a. Yes _____ b. No _____
- Would the proposed change have an effect on the availability of funds to credit
a. Yes _____ b. No _____
- What costs would you expect to incur to fund their Federal Reserve accounts by
8:30 a.m. for ACH debit transfers, particularly if the you did not want or were ineligible
to incur daylight overdrafts?
- If the Board changed the posting times for ACH debit transfers and EFTPS ACH debit
transfers to 8:30 a.m., is six months a sufficient lead time for implementation to enable
institutions to make plans to secure additional funding, as needed?
a. Yes _____ b. No _____
- Should the Board implement the change to the posting rules at the same time as the
proposed broader PSR policy changes to provide institutions an opportunity to pledge
(additional) collateral to manage a possible increase in fees?
a. Yes ______ b. No _____
- Do you regularly use Federal Reserve daylight credit? If so, do you currently have
sufficient unencumbered eligible collateral to pledge to the Reserve Banks to take advantage
of a zero fee for collateralized overdrafts?
- Do you believe that a zero fee for collateralized daylight overdrafts will contribute
to an overall reduction in liquidity, operational, and credit risks in the payments system?
a. Yes _____ b. No _____
- What procedural or systems changes do you expect to make as a result of this proposed
a. Yes _____ b. No _____
- Please provide any additional comments.
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Lilly Thomas Assistant General Counsel (202) 508-6733 email@example.com
Luke Martone Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org