Federal Reserve Bank Services

FEDERAL RESERVE SYSTEM

[Docket No. 1054]

Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved the fee schedules for Federal Reserve

priced services and electronic connections and a private sector

adjustment factor (PSAF) for 2000 of $192.6 million. 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 April 3, 2000.

FOR FURTHER INFORMATION CONTACT: For questions regarding the fee

schedules: Jeff Stehm, Assistant Director (202/452-2217); Erik Kiefel,

Financial Services Analyst, Check Payments (202/721-4559); Riaz Ahmed,

Assistant Financial Services Analyst, ACH Payments (202/452-3959);

Joshua Weisbrod, Assistant Financial Services Analyst, Funds Transfer

and Book-Entry Securities Services (202/530-6214); Michele Raville,

Information Technology Analyst (electronic connections) (202/736-5601);

Donna DeCorleto, Financial Services Analyst, Noncash Collection Service

(202/452-3956); or Michael Lambert, Financial Services Analyst, Special

Cash Services (202/452-3376), Division of Reserve Bank Operations and

Payment Systems. For questions regarding the Private Sector Adjustment

Factor: Paul Bettge, Assistant Director (202/452-3174); Bill Pullen,

Accountant (202/736-1947), Division of Reserve Bank Operations and

Payment Systems. For users of Telecommunications Device for the Deaf

(TDD) only, please contact Diane Jenkins (202/452-3749).

Copies of the 2000 fee schedules for the check service are

available from the Board or the Reserve Banks.

SUPPLEMENTARY INFORMATION:

I. Priced Services

A. Overview

The Federal Reserve Banks continue to meet the Monetary Control

Act's requirement that they recover, over the long run, their direct

and indirect costs, including imputed costs and profits, of providing

priced services. Over the period 1989 through 1998, the Reserve Banks

recovered 99.9 percent of their total costs for providing priced

services, including imputed expenses, special project costs that were

budgeted for recovery, and targeted after-tax profits, or return on

equity (ROE).1

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\1\ These imputed costs, such as taxes that would have been paid

and the return on capital that would have been earned had the

services been provided by a private business firm, are referred to

as the PSAF. The PSAF is based on data developed in part from a

model comprising the nation's fifty largest (by asset size) bank

holding companies. Based on consolidated financial data for the

holding companies in the model for each of the last five years, the

targeted ROE is the budgeted after-tax profit that the Federal

Reserve would have earned had it been a private business firm. The

ten-year recovery rate is based on the method used for the pro forma

income statement for Federal Reserve priced services published in

the Board's Annual Report. The pro forma income statement reflects

certain costs and offsets to costs differently than do the pro forma

cost and revenue performance tables used in this memorandum to set

fees. For example, offsets to costs associated with the transition

to and retroactive application of the Financial Accounting Standards

Board's Statement of Financial Accounting Standards No. 87 (SFAS

87), pension accounting, and SFAS 106, other employee retirement

benefits accounting, have not been included in this memorandum. If

the modification to the PSAF calculation described in section II on

the 2000 PSAF were not applied to prior periods, the ten-year

recovery rate would increase to 100.7 percent. The 1998 and 1999

service line recovery data in this memorandum do not reflect the

revisions to the PSAF method in order to provide a more accurate

comparison against the targeted return on equity that was used for

establishing prices within those services.

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For 1999, the Reserve Banks estimate that they will recover 102.8

percent of the costs of providing priced services. They project a 99.0

percent recovery rate in 2000. The primary risk to the 2000 projection

lies in the ability of the Reserve Banks to meet aggressive revenue and

cost targets in the check service, particularly costs associated with

its check automation standardization project.

In their 2000 fee schedules, the Reserve Banks include changes that

reduce fees to depository institution customers that provide a

continued economic incentive for those customers to make greater use of

electronic payment services. In particular, the price index for

electronic payment services (automated clearinghouse, funds transfer

and net settlement, book-entry securities, and electronic check) and

electronic connections is projected to decline approximately 4.9

percent in 2000. The index for paper-based payment services (check,

special cash, and noncash collection) is expected to increase 3.6

percent. The overall 2000 price index for all Federal Reserve priced

services is projected to increase 1.3 percent, compared with an overall

decline of 1.9 percent in 1999.2

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\2\ These estimates are based on a chained Fisher Ideal price

index. This index was not adjusted for quality changes in Federal

Reserve priced services.

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The following are changes in fee structures and levels for priced

services in 2000:

The Reserve Banks will reduce fees for Fedwire funds

transfers for the fourth consecutive year. The weighted average price

for a Fedwire funds transfer will decline 11.9 percent from the 1999

level. The Reserve Banks, however, will increase the surcharge for off-

line Fedwire funds transfers to $15 to reflect better the product's

costs. The 2000 fee changes are expected to save customers

approximately $5.1 million next year. Including the fee changes for

2000, the price index for Fedwire funds transfers has declined

approximately 49 percent since 1996.

The Reserve Banks will reduce the fee for an on-line

Fedwire book-entry securities transfer almost 17.6 percent in 2000. The

Reserve Banks, however, will increase the surcharge for off-line

Fedwire securities transfers to $18 to reflect better the product's

costs. The fee changes are expected to save customers approximately

$1.1 million next year. Including the fee changes for 2000, the price

index for the book-entry securities service has declined about 16

percent since 1996.

[[Page 464]]

The Reserve Banks will make reductions of 15.4 percent for

an ACH small-file origination and 18.2 percent for a large-file

origination in 2000. The price reductions are expected to save

depository institution customers approximately $3.0 million next year.

Including the reductions for 2000, the price index for the ACH service

has decreased nearly 46 percent since 1996. In addition, funding for

ACH promotion and education programs will increase to promote the use

of direct deposit and payment.

The Reserve Banks will increase fees for paper check

products 3.3 percent on a volume-weighted basis over current prices (a

7.1 percent increase from January 1999 fee levels). Paper check

products include forward-processed, fine sort, and returned checks. The

fees for forward-processed items will increase 3.5 percent over current

prices (7.2 percent over January 1999 fee levels). Prices for fine sort

and return items will increase 4.4 and 2.1 percent, respectively, over

current prices (8.9 and 6.5 percent when compared with January 1999 fee

levels). Fees for payor bank services, which include electronic check

products, will increase about 11.0 percent (a 14.8 percent increase

from January 1999 fee levels). Electronic check products include

electronic check presentment, image services, and electronic

information. Reserve Banks are standardizing these products and

implementing a common pricing structure with fixed and per-item fees.

Including the fee changes in 2000, the price index for the check

service has increased approximately 14 percent since 1996. Aggregate

check service fee increases in 2000 are expected to cost depository

institution customers approximately $50 million.

The Reserve Banks will delay the implementation of the

coming year's price and price structure changes until April 3, 2000.

The delay is intended to minimize changes during the period surrounding

the century rollover. Current Reserve Bank prices and products will

remain applicable through the first quarter of next year.

B. Discussion

Table 1 presents an overview of the budgeted 1999, estimated 1999,

and projected 2000 cost recovery performance for all priced services.

Although the 2000 price changes would not go into effect until April 3,

2000, the 2000 cost recovery rate is a projection for the full calendar

year.

Table 1

[In percent]

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1999 1999 2000

Priced service budget estimate budget

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All Services..................... 101.0 102.8 99.0

Check........................ 100.5 101.5 98.7

ACH.......................... 104.5 112.6 100.0

Funds transfer............... 102.0 105.5 100.5

Book-entry................... 105.2 108.1 101.2

Noncash collection........... 118.6 140.2 107.6

Special cash................. 105.8 106.2 101.8

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The aggregate cost-recovery rate is heavily influenced by the check

service, which accounts for approximately 83 percent of the total cost

of priced services. The electronic services (ACH, Fedwire funds

transfer, and Fedwire book-entry securities transfer) account for about

17 percent of costs. The noncash collection and special cash services

represent a de minimis proportion of priced services expenses. Figure 1

shows the proportion of 1999 estimated priced services costs

attributable to each service.

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Table 2 summarizes the cost and revenue performance for priced

services since 1998. In 1999, the Reserve Banks completed their

recovery of transition costs associated with the automation

consolidation project (special project costs) and associated financing

costs. In addition to facilitating fee reductions in electronic payment

services, the consolidation initiative has dramatically improved the

Reserve Banks' disaster recovery and information security capabilities,

increased the System's responsiveness to change, and enhanced the

central bank's management of payment system risk.

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\3\ Calculations on this table and subsequent pro forma cost and

revenue tables may be affected by rounding. If the PSAF method used

to calculate the 2000 aggregate priced service cost in this table is

applied to the actual 1998 and estimated 1999 calculations, the

recovery rate for 1998 would decline to 101.1 percent and that for

1999 would decrease to 99.2 percent.

Table 2.--Pro Forma Cost and Revenue Performance 3

[$ millions]

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Special

Operating Special Recovery project

costs and project Total Net income Target ROE rate after costs

Year Revenue (a) imputed costs expense (ROE) [1- (d) target ROE deferred

expenses recovered [2+3] 4] [1/(4+6)] and

(b) (c) financed

1 2 3 4 5 6 7 8

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1998........................................... 839.7 753.2 15.7 768.9 70.8 52.3 102.3% 1.7

1999 (Est)..................................... 871.4 789.7 1.7 791.4 80.0 56.0 102.8% 0.0

2000 (Bud)..................................... 925.5 823.7 13.2 836.8 88.7 98.4 99.0% 0.0

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a Includes net income on clearing balances.

b Imputed expenses include interest on debt, taxes, FDIC insurance, and the cost of float. Credits for prepaid pension costs under SFAS 87 and the

charges for retirement benefits in accordance with SFAS 106 are included.

c Special project costs include the priced portion of automation consolidation costs through 1999 and check standardization costs in 2000.

d Targeted ROE is based on the ROE included in the PSAF and has been adjusted for taxes, which are included in column 2. Targeted ROE has not been

adjusted to reflect automation consolidation special project costs deferred and financed in 1998.

e Totals include financing costs.

1. 2000 Projected Performance

The Reserve Banks project that they will recover 99.0 percent of

total expenses related to priced services, including imputed expenses

and targeted ROE, in 2000. The 2000 fees for priced services will

result in a net income of $88.7 million, compared with a targeted ROE

of $98.4 million. The check service will recover approximately $13.2

million of priced services costs associated with the check automation

standardization special project.4

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\4\ Under an existing Board policy, the Reserve Banks may defer

and finance special project costs if they would have a material

effect on unit costs, provided that a conservative period is set for

full cost recovery and a financing factor is applied to the deferred

portion of special project costs. The financing rates represent the

weighted-average imputed costs of the Federal Reserve's long-term

debt and equity. This method is similar to the approach a private

firm would use in financing such costs. The check automation

standardization special project did not meet the requirements for

deferral and financing. Costs associated with this special project

will be fully recovered in 2000.

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The price index for electronic payment services and electronic

connections is projected to decline approximately 4.9 percent in 2000,

and the index for paper-based payment services is expected to increase

3.6 percent. The overall 2000 price index for Federal Reserve services

is projected to increase 1.3 percent, compared with an overall decline

of 1.9 percent in 1999. Increases in prices for check products are the

primary reasons for the higher overall price index in 2000. Figure 2

compares the Federal Reserve's price index for priced services with the

gross domestic product price deflator, illustrating that Federal

Reserve priced services have historically increased more slowly than

the deflator.

The continued decline in the price index for electronic payment

services reflects, in large part, the ability of the Reserve Banks to

capitalize on the operational efficiencies and scale economies inherent

in providing payment services through centralized electronic payment

processing applications. Between 1992 and 1998, the Reserve Banks'

automated data processing facilities were consolidated into three

sites, significantly reducing the cost of providing electronic payment

services.

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2. Allocation of Corporate Overhead Costs to Priced Services

Corporate overhead costs are allocated to priced services in total

and to other Reserve Bank activities based on their proportion of total

Reserve Bank costs (expense-ratio basis). Because corporate overhead

costs are not closely related to any particular priced service, these

costs are assigned among the individual services to facilitate the

funding of significant multiyear strategic investments that would

otherwise result in short-term price fluctuations, subject to

established minimum and maximum amounts.5 In 1998, and to a

much smaller extent in 1999, the Reserve Banks assigned these costs

among priced services to accelerate the retirement of debt associated

with the automation consolidation special project. For 2000, the

assignment of corporate overhead costs to individual priced services

will support the Reserve Banks' strategic check automation project.

Table 3 shows the assignment of corporate overhead costs for the years

1998-2000.

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\5\ Corporate overhead costs include all or portions of the

following activities: Reserve Bank and System administrative

functions, central mail operations, legal, budget preparation and

control, expense accounting, records management and contingency

planning, motor vehicles, and audit.

Table 3.--Corporate Overhead Allocations to Priced Services

[$ millions]

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Funds Noncash Special

Year Check ACH transfer Book-entry collection cash Total

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1998 Actual.................................................. 27.3 0.0 17.4 0.0 0.1 0.2 45.0

1999 (Est)................................................... 38.8 3.7 5.9 0.0 0.1 0.2 48.7

2000 (Bud)................................................... 36.1 8.2 4.6 1.2 0.1 0.1 50.4

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3. 1999 Estimated Performance

The Reserve Banks estimate that priced services will yield a net

income of $80.0 million in 1999, compared with a targeted ROE of $56.0

million. In 1999, the Reserve Banks estimate that they will recover

102.8 percent of the costs of providing priced services, including

imputed expenses, all remaining automation consolidation special

project costs, and targeted ROE, compared with a targeted recovery rate

of 101.0 percent.6 The Reserve Banks recovered a larger-

than-expected percentage of costs primarily because of increased

revenues associated with higher-than-expected volumes for most priced

services, substantial midyear price increases within the check service,

and reductions in operating costs in the funds transfer service.

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\6\ Through October 1999, the Reserve Banks recovered 103.6

percent of total priced services expenses, including imputed

expenses, automation consolidation special project financing, and

targeted ROE.

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4. 1998 Performance

In 1998, the Reserve Banks'' priced services revenue yielded a net

income of $70.8 million, compared with a targeted ROE of $52.3 million.

The Reserve Banks recovered 102.3 percent of total expenses, including

imputed expenses, automation consolidation special project costs

budgeted for recovery, and targeted ROE, compared with a targeted

recovery rate of 100.8 percent. The Reserve Banks recovered a larger-

than-expected percentage of costs primarily because of higher revenues

from larger-than-anticipated increases in volume across most services,

midyear price increases in the check service, operational cost

reductions in the funds transfer service, and lower-than-anticipated

support costs in ACH.

C. Check

Table 4 presents the actual 1998, estimated 1999, and projected

2000 cost recovery performance for the check service.

Table 4.--Check Pro Forma Cost and Revenue Performance

[$ millions]

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Special

Operating Special Recovery project

costs and project Total Net Income rate after costs

Year Revenue imputed costs expense (ROE) [1- Target ROE target ROE deferred

expenses recovered [2+3] 4] [1/(4+6)] and

(percent) financed

1 2 3 4 5 6 7 8

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1998............................................ 651.8 601.7 5.7 607.5 44.4 40.9 100.5 0.0

1999 (Est)...................................... 708.9 653.5 0.0 653.5 55.4 45.1 101.5 0.0

2000 (Bud)...................................... 768.0 684.4 13.2 697.6 70.4 80.8 98.7 0.0

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1. 1998 Performance

The check service recovered 100.5 percent of total expenses in

1998, including imputed expenses, the completion of debt retirement

related to automation consolidation special project costs, and targeted

ROE. Substantial volume growth at most Reserve Banks and midyear price

increases helped actual cost recovery to exceed the targeted rate of

100.4 percent. The volume of checks collected increased 5.3 percent

from 1997 levels because of several factors, including (1) The exit of

several correspondent banks from the interbank check market; (2) The

introduction of new check products; (3) The acquisition of new

customers beyond those gained from the exit of correspondent banks; and

(4) The increased reliance on Reserve Bank check processing by some

banks during merger-and-acquisition-related operational changes.

2. 1999 Performance

Through October 1999, the check service has recovered 102.4 percent

of

[[Page 469]]

total expenses, including imputed expenses, and targeted ROE. The

Reserve Banks estimate that the check service will recover 101.5

percent of its costs for the full year compared with the targeted 1999

recovery rate of 100.5 percent. The higher recovery rate reflects

improved income from higher than expected volumes, midyear 1999 price

increases, and higher than expected pension credits.

Volume growth within paper check products has been higher through

October 1999 than originally budgeted at all Reserve Banks, largely

because of increases in the number of forward-processed items at one

Reserve Bank as a major regional bank exited the local correspondent

banking business. Table 5 summarizes the year-to-date and currently

estimated growth rates for all paper check products for the entire

year.

Table 5.--Paper Check Product Growth Rates

[In percent]

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Volume

Budgeted growth

Check product or service 1999 through Estimated

growth October 1999 growth

1999

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Total Forward Collected.......... 1.4 3.0 3.9

Forward-processed............ 3.1 4.6 5.5

Fine Sort.................... -9.5 -6.0 -9.0

Returns.......................... 2.2 -1.9 -9.7

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The Board considers the Reserve Banks' 1999 volume estimates for

forward-processed items to be slightly optimistic given current trends.

Because of the current volume growth rates and the apparent effects of

midyear price increases on these product lines, the Board also expects

a much less dramatic reduction in fine sort and return volumes for the

full year than that in the Reserve Banks' estimate. The Board believes

cost recovery for the full year will likely remain closer to its

current level of 102.4 percent than to the 101.5 percent estimated by

the Reserve Banks.

The Reserve Banks also have seen steadily increasing demand for

some electronic check products. Electronic check presentment (ECP) and

check image products have seen approximately 15 percent and 36 percent

growth rates, respectively, in 1999. Reserve Banks now provide paying

banks with electronic check data or images for approximately 32 percent

of Reserve Bank-collected checks, or about 4.5 billion items, up from

about 27 percent of all Reserve Bank-collected checks in 1998. Growth

and penetration rates for electronic check products are summarized in

table 6.

Table 6.--Electronic Check Product Penetration and Growth Rates

[Versus net checks collected, in percent]

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Penetration Year-over-year

rate through growth through Estimated 1999

October 1999 October 1999 growth

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Electronic Check Presentment.................................... 18.7 15.3 5.2

Truncation.................................................. 4.9 22.3 25.4

Non-truncation.............................................. 13.8 13.0 -1.5

Electronic Check Information.................................... 8.0 -3.4 -15.6

Images.......................................................... 5.0 36.2 31.9

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The Reserve Banks' growth estimates for 1999 appear to

underestimate the growth rates for all electronic check products,

except ECP with truncation, when compared with the year-to-date growth

rates. The primary reason for this difference appears to be the Reserve

Banks' expectation that the current freeze on adding new customers

during the months surrounding the century rollover will have a

significant effect on volume growth. The Board does not agree with this

conclusion and believes that volume growth from current customers will

enable the Reserve Banks to sustain growth rates for the full year

similar to those seen through October.

3. 2000 Pricing

For the coming year, the Reserve Banks have developed national

product and pricing strategies and committed to major infrastructure

investments to improve check services, reduce costs, and respond to

structural changes, such as mergers and bank operations consolidation,

that are occurring in the financial services industry. To serve a

growing number of national and interregional customers while still

providing flexible and quality service to meet the needs of local

customers, the Reserve Banks are establishing a series of national

product lines and prices. In 2000, standard national products and price

ranges for payor bank services are being initiated.7 The

Reserve Banks expect to establish similar standard products and price

ranges for paper check products in the future.

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\7\ These services include electronic information, electronic

check presentment, truncation, image products, large dollar return

notifications, and other services.

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The Reserve Banks also have several major automation initiatives

that will affect 2000 expenses, including a critical effort to

standardize check processing platforms and software, a national effort

to standardize check adjustments software, and several check imaging

projects. These automation initiatives are expected to reduce costs and

improve service over the long term. For example, the Reserve Banks

expect pilot image projects in Montana and Utica, N.Y., to identify

operational, legal, and customer service benefits and drawbacks

associated with using images and electronic information instead of

physical items for processing and collecting checks.

[[Page 470]]

In 2000, the total forward check collection volume (processed and

fine sort) is projected to increase 3.0 percent, reflecting a projected

increase of 3.5 percent in processed volume and a decrease of 1.9

percent in fine sort volume. Returned check volume is projected to

decrease by half a percent. With respect to payor bank services,

volumes for electronic check presentment with paper checks subsequently

delivered, electronic presentment of truncated checks, and check

imaging are expected to grow 17.2 percent, 12.0 percent, and 50.3

percent, respectively. Electronic check information volume is expected

to decline 4.2 percent as volume continues to shift to electronic check

presentment products.

In response to the rising costs associated with large

infrastructure investments and short-term operational inefficiencies

stemming from recent, unanticipated volume increases, the Reserve Banks

have modified their pricing strategies to focus upon improving the

check service's net revenue position. To that end, the Reserve Banks

are establishing more substantial and widespread fee and pricing

structure changes in 2000. Table 7 provides details on the 2000 price

changes.8

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\8\ Table 7 shows volume-weighted calculations for 2000 based on

a comparison of January 1, 1999, or current transaction fees with

the 2000 fees for check products weighted by the 2000 volumes for

those services. These volume-weighted calculations summarize changes

in specific check product transaction fees while an aggregate price

index would include the all-in cost to a customer of purchasing a

market basket of Federal Reserve check products. The market basket

would include, for example, the effect of changing transaction fees,

electronic connection fees, and imputed income.

Table 7.--2000 Price Changes

[Percent change]

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2000 vs. 2000 vs.

Products January 1, current

1999 fees 1999 fees

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Total Paper Products.......................... 7.1 3.3

Forward-processed......................... 7.2 3.5

Fine Sort................................. 8.9 4.4

Returns................................... 6.5 2.1

Payor Bank Services........................... 14.8 11.0

Electronic Check Presentment.................. 2.6 -1.4

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The Reserve Banks will increase fees for paper-based check products

on a volume-weighted basis 7.1 percent compared with fees at the

beginning of 1999 (3.3 percent compared with current prices). The

substantial increase in paper check prices in 2000 result from (a) The

initiation of several major projects requiring significant

infrastructure investments; (b) Short-term operational inefficiencies

within the Reserve Banks' check processing operations as a result of

significant volume increases, shifts in the quality and product mix of

items being processed, and local market labor constraints; and (c) A

revised private sector adjustment factor (PSAF) method. There are no

planned changes to Check Relay's consolidated shipment surcharges in

2000.

Prices for payor bank services will increase 14.8 percent in 2000

compared with fees at the beginning of 1999 (11.0 percent compared with

current fees) as standard national pricing ranges and product

structures and definitions are introduced. Instead of bundled services

with a daily minimum fee plus a per-item fee, the new structure

includes national, unbundled products with fixed and per-item fee

components. For example, customers formerly purchasing a bundled check

image product with a single daily minimum and per-item fee will be

charged the sum of the individual fixed fees for each part of the

unbundled service, such as image capture, retrieval, and archiving, and

the individual per-item fees for those services. Under this new

structure, fixed fees will generally tend to decrease in 2000 compared

with 1999 price levels, while most per-item fees will increase. These

changes are part of a longer-term strategy to enhance payor bank

services' net revenue contribution to the check service.

The Board supports the Reserve Banks' new focus on improving net

revenue in the check service through price increases on highly demanded

forward check products. The Board also supports the Reserve Banks'

continuing efforts to standardize and unbundle payor bank services and

to continue this effort with forward and return products in the future.

Table 8 summarizes ranges of key check fees for 2000.

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Table 8.--Selected Check Fees

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Products 1999 price ranges 2000 price ranges

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Items: (per item) (per item)

Forward-processed

City.............................. $0.004 to 0.081 $0.004 to 0.079

RCPC.............................. $0.004 to 0.180 $0.003 to 0.200

Fine Sort

City.............................. $0.004 to 0.015 $0.004 to 0.017

RCPC.............................. $0.0025 to 0.018 $0.003 to 0.018

Qualified returned checks

City.............................. $0.17 to 1.11 $0.17 to 1.15

RCPC.............................. $0.21 to 1.75 $0.21 to 1.50

Raw returned checks

City.............................. $1.00 to 5.50 $1.00 to 5.50

RCPC.............................. $1.00 to 5.50 $1.00 to 5.50

Cash letters: (per cash letter) (per cash letter)

Forward-processed................. $1.75 to 9.25 $1.75 to 10.25

Forward fine sort................. $3.00 to 14.00 $3.00 to 14.00

Returned checks: raw/qualified........ $1.75 to 14.00 $1.75 to 14.00

Payor bank services: (min.) (per item) (Fixed) (per item)

MICR information.................. $5-$30 $0.001-0.0060 $2-$15 $0.0013-0.0060

Electronic presentment............ $3-$14 $0.001-0.0045 $2-$11 $0.0010-0.0120

Truncation........................ $3-$25 $0.004-0.0170 $2-$10 $0.0060-0.0200

Image............................. ................................... $2-$15 $0.0010-0.0200

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For 2000, the Reserve Banks project that the check service will

recover 98.7 percent of total costs, including imputed expenses, costs

associated with the check automation standardization special project,

and targeted ROE. The check service is projected to have expenses

totaling $697.6 million and a targeted ROE of $80.8 million. Total

expenses, including targeted ROE, are projected to increase

approximately $79.3 million, or 11.4 percent, from estimated 1999

expenses. These incremental expenses for 2000 include $35.2 million

additional ROE, $29.6 million for automation initiatives, and $14.5

million for other expenses, such as recruitment and retention of staff

and new equipment purchases to process increasing check volumes.

Total expenses for 2000 include approximately $81.5 million for

check automation initiatives (check standardization, check image

projects, and check adjustments standardization), an increase of $29.6

million or 56.9 percent over 1999 estimated expenses for those same

projects. Of that total in 2000, approximately $34 million is budgeted

for standardizing check processing platforms and software, of which

$13.2 million in priced services costs has been budgeted as a special

project. Excluding these automation initiatives and the imputed tax

effect, total expenses in 2000 would increase $14.5 million or 2.4

percent ($23.6 million or 3.8 percent when the resulting tax effect is

imputed) versus $44.1 million or 6.8 percent with the automation

initiatives.

The check service is projected to have revenue in 2000 totaling

$768.0 million from forward collection and return item processing (75.6

percent), payor bank services (12.2 percent), and other operating and

imputed revenues (12.2 percent). Total revenue is expected to increase

approximately $59.1 million, or 8.3 percent, in 2000, as a result of

increased forward check-collection revenue ($30.2 million), returned

check revenue ($6.6 million), payor bank services revenue ($17.6

million), and other operating and imputed revenues ($4.7 million).

Two important risks to the Reserve Banks' ability to realize their

cost recovery projections lies in meeting float, volume, and national

cost targets and in retaining customers and revenue during a period of

substantial price increases. Risks regarding the costs of check

automation initiatives and operational risks may also materially affect

the check service's cost recovery in 2000.

External challenges that may affect the Reserve Banks' volumes and

cost recovery include interstate branch banking and the level of

continued competition in the interbank check collection market.

Although interstate branch banking may eventually reduce the size of

the interbank check collection market, Reserve Bank check collection

volumes may increase in 2000 as banks face merger-related operational

challenges, exit the correspondent check-clearing business, or

outsource their check-processing operations. In addition to increased

volumes, some Reserve Banks face a changing mix and quality of

processed items that are more costly to process and more complex to

price. Many Reserve Banks also face tight local labor markets that have

made it increasingly difficult to recruit and retain employees,

creating pressures on operational costs, productivity, and quality. To

help address these labor-related concerns, the Reserve Banks are

identifying and implementing appropriate human resources strategies and

programs.

The Board believes that projected 2000 volume increases for paper-

based products are reasonable compared with current volume growth rates

and the potential negative effect of next year's planned price

increases. The Board views the Reserve Banks' projection of

substantially increased volumes and revenue for payor bank services to

be optimistic given the implementation of a new standardized product

structure and its accompanying pricing structure. It also is not clear

whether, as the Reserve Banks believe, customers will begin to move

aggressively to electronics following the century rollover.

Should the Reserve Banks gain higher-than-projected processing

volumes, short-term operational costs associated with adjusting to

those new levels may rise faster than their associated revenues. In

that case or if the Reserve Banks are unable to manage their internal

costs or achieve expected revenue levels, they may have to consider

further price increases during the year. The Reserve Banks, however,

may have limited opportunities for further price increases during 2000,

[[Page 472]]

given the delayed effective date of April 3 for implementing the 2000

price and price structure changes.

To address this concern, the Reserve Banks are working to improve

their market intelligence capabilities and operational efficiency to

minimize any adverse effects of unexpected volume increases. The

Reserve Banks are also examining other areas for improving net revenue

to address any unanticipated volumes or other exigencies during the

coming year. The Board supports the Reserve Banks' 2000 pricing while

underlining the need for continual vigilance to effectively manage the

check service and to address quickly any unanticipated complications

that may arise during the year.

D. Automated Clearinghouse (ACH)

Table 9 presents the actual 1998, estimated 1999, and projected

2000 cost recovery performance for the commercial ACH service.

Table 9.--ACH Pro Forma Cost and Revenue Performance

[$ millions]

--------------------------------------------------------------------------------------------------------------------------------------------------------

Special

Operating Special Recovery project

costs and project Total Net income rate after costs

Year Revenue imputed costs expense (ROE) [1- Target ROE target ROE deferred

expenses recovered [2+3] 4] [1/(4+6)] and

financed

1 2 3 4 5 6 7 8

--------------------------------------------------------------------------------------------------------------------------------------------------------

1998............................................ 68.4 52.2 8.2 60.4 8.0 4.0 106.3% 0.0

1999 (Est)...................................... 68.6 56.4 0.0 56.4 12.2 4.5 112.6% 0.0

2000 (Bud)...................................... 70.4 62.5 0.0 62.5 8.0 8.0 100.0% 0.0

--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance

The ACH service recovered 106.3 percent of total expenses,

including imputed expenses, automation consolidation special project

costs, and targeted ROE, in 1998. Commercial ACH volume in 1998 was

13.9 percent higher than 1997 volume, less than the 15.4 percent

increase originally projected. The lower-than-expected volume level

resulted from consolidation within the industry.

2. 1999 Performance

Through October 1999, the ACH service recovered 112.1 percent of

total expenses, including imputed expenses and targeted ROE. For the

full year, Reserve Banks estimate that the service will recover 112.6

percent of total expenses compared with the targeted 1999 recovery rate

of 104.5 percent. The estimated overrecovery is due to higher revenues

($3.2 million), primarily because possible changes in the pricing

structure for products offered to private sector operators were not

implemented this year, and due to a reduction in support costs of $2.9

million. During the year, ACH lowered all origination fees an

additional $0.0005.

Through October 1999, commercial ACH volume has increased 12.7

percent over the same period in 1998. For the full year, Reserve Banks

expect commercial volume to increase 12.7 percent, compared with the

12.0 percent increase originally projected for 1999.

3. 2000 Pricing

After several years of significant price reductions, Reserve Banks

will make further price reductions effective April 3, 2000, in the fees

for originated ACH items (see table 10). The Reserve Banks will reduce

the fee for items originated in small and large files by one mill,

generating $3.0 million in aggregate savings to depository institutions

next year at projected 2000 volumes. (Including the reductions for

2000, the price index for ACH items has decreased 46 percent since

1996.) These price decreases support the System's strategic direction

to encourage the migration from a paper-based to a more electronic

payments system and are possible because of ongoing scale efficiencies

of centralized ACH processing.

Table 10.--2000 Price Changes

------------------------------------------------------------------------

Fee category \9\ Current fee 2000 fee

------------------------------------------------------------------------

Item originated in small file........... $0.0065 $0.0055

Item originated in large file........... 0.0055 0.0045

------------------------------------------------------------------------

\9\ Small files contain fewer than 2,500 items; large files contain

2,500 items or more.

The Reserve Banks project that the ACH service will recover 100.0

percent of its costs in 2000, including imputed expenses and targeted

ROE. Total expenses are projected to increase $6.1 million, or 10.8

percent, from the 1999 estimate due to increased joint priced corporate

overhead and higher funding for ACH promotion and education programs.

Total revenue in 2000 is projected to be $70.4 million, or 2.7 percent

higher than the 1999 estimate. The higher revenue is attributable to

projected commercial volume growth but also includes a placeholder

revenue reduction for possible price and price structure changes

associated with resolution of the outstanding issues related to

transactions involving private-sector operators.

A risk to the 2000 revenue and cost projections lies in the

uncertain effect of potential changes in price and service levels for

ACH volume received from or sent to private sector ACH operators. The

Board requested comment on potential changes to the Reserve Banks' ACH

prices and service level practices with regard to private sector ACH

operators (64 FR 27793, May 21, 1999). The Board is evaluating comments

on the benefits and drawbacks of modifying the Reserve Banks' pricing

practices and deposit deadlines for ACH transactions that they exchange

with private sector ACH providers.

[[Page 473]]

ACH volume in 2000 is projected to increase 13.9 percent over 1999

estimates. The 2000 volume estimate assumes the same rate of growth as

in 1998 and is higher than the 1999 estimate of 12.7 percent. The Board

believes that given the overall anticipated growth rate in the ACH

industry and the uncertain effects of potential changes in price and

service levels that may affect ACH operators and their customers, the

projected 2000 volumes are reasonable.

E. Funds Transfer and Net Settlement

Table 11 presents the actual 1998, estimated 1999, and projected

2000 cost recovery performance for the funds transfer and net

settlement services.

Table 11.--Funds Transfer and Net Settlement Pro Forma Cost and Revenue Performance

[$millions]

--------------------------------------------------------------------------------------------------------------------------------------------------------

Special

Operating Special Recovery project

costs and project Total Net income rate after costs

Year Revenue imputed costs expense (ROE) [1-4] Target ROE target ROE deferred

expenses recovered [2+3] [1/(4+6)] and

(percent) financed

1 2 3 4 5 6 7 8

--------------------------------------------------------------------------------------------------------------------------------------------------------

1998............................................ 94.5 79.4 0.2 79.6 14.9 6.2 110.2 0.0

1999 (Est)...................................... 70.7 61.9 0.0 61.9 8.9 5.2 105.5 0.0

2000 (Bud)...................................... 66.0 58.2 0.0 58.2 7.8 7.5 100.5 0.0

--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance

For 1998, the funds transfer and net settlement services recovered

110.2 percent of total expenses, including imputed expenses, automation

consolidation special project costs, and targeted ROE, compared with a

targeted recovery rate of 102.8 percent. Service revenue for 1998 was

approximately $5.9 million, or 6.7 percent, greater than original

budget projections due to higher-than-expected transaction volume.

Funds transfer on-line origination volume increased 9.6 percent over

the 1997 level, compared with expected near-zero growth.

2. 1999 Performance

Through October 1999, the funds transfer and net settlement

services recovered 103.8 percent of total expenses, including imputed

expenses and targeted ROE. For full-year 1999, the Reserve Banks

estimate that the funds transfer and net settlement services will

recover 105.5 percent of total expenses, compared with a targeted

recovery rate of 102.0 percent. The higher-than-budgeted recovery rate

is attributable to cost reductions of $2.6 million, or 3.7 percent,

primarily in the areas of support, overhead, and personnel. In

particular, the Reserve Banks achieved cost reductions of $1.1 million

in 1999 from the consolidation of their off-line processing functions

to the Federal Reserve Banks of Boston and Kansas City.

On-line funds transfer volume through October 1999 has increased

4.4 percent relative to the same period in 1998. For the full year, the

Reserve Banks expect on-line volume to increase 5.4 percent from the

1998 level, more than the originally budgeted 3.5 percent growth rate.

In the first year of the tiered price structure for the Fedwire funds

transfer service, there was a greater percentage of total volume in the

high-volume, low-price tier than the Reserve Banks had anticipated. The

Reserve Banks project that the movement of volume to the low-price tier

may be even more pronounced in 2000.

3. 2000 Funds Transfer Pricing

The Reserve Banks will reduce the per-transfer fees charged within

all three volume categories and maintaining the current thresholds for

volume-based discounts. The Reserve Banks will offer the following per-

transfer prices for 2000:

[[Page 474]]

Table 12

------------------------------------------------------------------------

Volume category Current fee 2000 fee

------------------------------------------------------------------------

First 2,500 transfers per month......... $0.34 $0.33

Additional transactions up to 80,000 per 0.27 0.24

month..................................

Additional transactions over 80,000 per 0.21 0.17

month..................................

Average (volume-weighted) price paid 0.262 0.231

\10\...................................

------------------------------------------------------------------------

\10\ Based on 1999 estimated and 2000 projected volume distributions

across depository institution customers.

In addition, the Reserve Banks will increase the off-line surcharge

from $13 to $15 to reflect more accurately the cost of processing an

off-line funds transfer.

Reserve Banks project that the Fedwire funds transfer service will

recover 100.5 percent of total expenses, including imputed expenses and

targeted ROE, in 2000. Total costs are expected to decline $3.7

million, or 6.0 percent, from the 1999 estimate, due in part to a

decrease in total operating costs and a reduction in corporate overhead

costs.

On-line funds transfer volume is expected to increase 6.0 percent

over 1999 estimated levels. Despite this anticipated volume growth,

service revenue is projected to decline $4.7 million, or 6.6 percent,

in 2000 compared with the 1999 estimate because of the lower transfer

fees.

4. 2000 Net Settlement Pricing

The Reserve Banks will retain the net settlement per-entry and file

fees at their current levels and increase the off-line settlement

surcharge from $13 to $15 per transaction to reflect more accurately

the costs of off-line processing. Fees for the Fedwire-based settlement

service will remain unchanged for 2000.11

---------------------------------------------------------------------------

\11\ Participants in arrangements and settlement agents are also

charged the applicable Fedwire funds transaction fee for each

transfer into and out of the settlement account.

---------------------------------------------------------------------------

In March 1999, the Reserve Banks implemented an enhanced net

settlement service that allows participants in settlement arrangements

to submit settlement files to them via a computer interface connection

or a Fedline terminal. The Reserve Banks continue to offer the current

``settlement sheet'' and Fedwire-based settlement

services.12 The settlement sheet service, however, will be

phased out, and all participating arrangements will need to migrate to

the enhanced service by year-end 2001. Overall use of the net

settlement services is not projected to change significantly in 2000.

---------------------------------------------------------------------------

\12\ The settlement sheet service refers to the transmission to

a Reserve Bank of settlement information that is then posted to

participants' accounts via the Reserve Banks' accounting system.

---------------------------------------------------------------------------

F. Book-Entry Securities 13

Table 13 presents the actual 1998, estimated 1999, and projected

2000 cost recovery performance for the book-entry securities

service.14

Table 13.--Book Entry Securities Transfer Pro Forma Cost and Revenue Performance

[$ millions]

--------------------------------------------------------------------------------------------------------------------------------------------------------

Special

Operating Special Recovery project

costs and project Total Net income rate after costs

Year Revenue imputed costs expense (ROE) [1-4] Target ROE target ROE deferred

expenses recovered [2+3] [1/(4+6)] and

financed

1 2 3 4 5 6 7 8

--------------------------------------------------------------------------------------------------------------------------------------------------------

1998............................................ 18.8 14.8 1.6 16.4 2.4 1.0 107.8% 1.6

1999 (Est)...................................... 17.4 13.3 1.7 15.0 2.3 1.0 108.1% 0.0

2000 (Bud)...................................... 17.0 14.9 0.0 14.9 2.1 1.9 101.2% 0.0

--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance

The book-entry securities service recovered 107.8 percent of total

expenses in 1998, including imputed expenses, automation consolidation

special project costs budgeted for recovery, and targeted ROE. On-line

origination volume increased 24.6 percent from the 1997 level, compared

with an expected decrease of 4.5 percent, due mainly to an

exceptionally high level of repackaging and new issuance of mortgage-

backed securities.

2. 1999 Performance

Through October 1999, the book-entry securities service recovered

107.0 percent of total expenses, including imputed expenses, automation

consolidation special project costs, and targeted ROE. For full-year

1999, the Reserve Banks estimate that the book-entry securities service

will recover 108.1 percent of total costs compared with a targeted

recovery rate of 105.2 percent. This higher-than-budget recovery rate

comprises revenue that is 4.3 percent above budget and expense growth

that is 1.5 percent above budget. The Reserve Banks expect revenue to

be higher than projected due to higher-than-anticipated on-line

transaction and monthly maintenance revenue. Costs are expected to be

higher than budgeted because the level of government agency securities

transfers as a percentage of total book-entry securities transfers

processed by the Reserve Banks was higher than anticipated. This

resulted in a higher-than-expected allocation of costs to the priced

portion of the book-entry securities service.

Book-entry securities transfer on-line origination volume has

increased 5.5 percent through October 1999 compared with the same

period in 1998 because of continued growth in the level of repackaging

and new issuance of mortgage-backed securities. The Reserve Banks

expect this growth rate to level off substantially, however, reducing

the full-year growth rate to 2.8 percent, compared with the projected

6.1 percent volume decline originally forecast at the beginning of the

year.

In March 1999, the Reserve Banks completed the consolidation of

their off-

[[Page 475]]

line processing functions to the Federal Reserve Banks of Boston and

Kansas City. Thus far, the consolidation of these functions has reduced

costs approximately $1.6 million.

3. 2000 Pricing

The Reserve Banks will reduce the on-line transfer fee to $0.70 on

each side of the transaction from the current $0.85 per side to better

reflect the costs of processing on-line transfers of securities. This

17.6 percent decrease in the fee builds upon last year's 24.4 percent

fee decrease; combined, these price decreases will make the 2000 fee

for a book-entry securities transfer 37.8 percent lower than the 1998

fee.

The Reserve Banks also will increase the off-line surcharge to $18

from $13 to better reflect the costs of providing the off-line service

for book-entry securities. Other fees related to book-entry securities

will remain the same.

The purchase and sale service represents less than 2 percent of the

costs and revenues of the book-entry securities service line. Provision

of the service, which facilitates the purchase and sale of Treasury and

government agency securities by depository institutions on the

secondary market, is consolidated at the Federal Reserve Bank of

Chicago. The Reserve Banks will maintain the $40 transaction fee for

securities purchases and sales.

The Reserve Banks project that the book-entry securities service

will recover 101.2 percent of costs in 2000, including imputed expenses

and targeted ROE. Total expenses are projected to decrease $0.1

million, or 0.7 percent, from the 1999 estimate.

G. Noncash Collection

Table 14 lists the actual 1998, estimated 1999, and projected 2000

cost recovery performance for the noncash collection service.

---------------------------------------------------------------------------

\13\ Includes purchase and sale activity. All volume comparisons

prior to 1999 consist of on-line origination volume only, as the

Reserve Banks did not charge a fee for the on-line receipt of a

transfer until then.

\14\ The Reserve Banks provide securities transfer services for

securities issued by the U.S. Treasury Department, 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 Reserve Banks act as fiscal agents for

the United States on behalf of the Treasury Department, which

assesses fees for the securities transfer component of the service.

The Reserve Banks assess a fee for the money settlement component of

a Treasury securities transfer; this component is not treated as a

priced service.

Table 14.--Noncash Collection Pro Forma Cost and Revenue Performance

[$ millions]

--------------------------------------------------------------------------------------------------------------------------------------------------------

Special

Operating Special Recovery project

costs and project Total Net income rate after costs

Year Revenue imputed costs expense (ROE) [1- Target ROE target ROE deferred

expenses recovered [2+3] 4] [1/(4+6)] and

(percent) financed

1 2 3 4 5 6 7 8

--------------------------------------------------------------------------------------------------------------------------------------------------------

1998............................................ 3.6 2.6 0.0 2.6 1.0 0.2 130.9 0.0

1999 (Est)...................................... 3.0 2.0 0.0 2.0 1.0 0.1 140.2 0.0

2000 (Bud)...................................... 2.0 1.7 0.0 1.7 0.3 0.2 107.6 0.0

--------------------------------------------------------------------------------------------------------------------------------------------------------

1. 1998 Performance

The noncash collection service recovered 130.9 percent of total

expenses in 1998 (including imputed expenses and targeted ROE) compared

with a target recovery rate of 126.8 percent. Volume for 1998 decreased

14.8 percent from 1997 volumes. This is smaller than the budgeted 19.7

percent reduction.

2. 1999 Performance

Through October 1999, the noncash collection service recovered

141.2 percent of its costs. For full-year 1999, the Reserve Banks

estimate that the noncash collection service will recover 140.2 percent

of costs, including imputed expenses and targeted ROE, compared with

the projected recovery rate of 118.6 percent. The higher recovery rate

is attributable to higher-than-expected revenue from additional called-

bond activity and higher-than-budgeted coupon volume. Through October,

volume had decreased 21.7 percent compared with the same period in

1998. The Reserve Banks estimate that full-year 1999 volume will

decline 21.4 percent from 1998 levels compared with a 26.0 percent

budgeted decline.

3. 2000 Pricing

The Reserve Banks will reduce two fees relative to 1999 fee levels.

Specifically, the Reserve Banks will decrease the fee for bond

collections from $50.00 per bond to $40.00 per bond and the per-

envelope fee for deposits containing six to fifty coupon envelopes from

$3.00 to $2.50. Even with these decreases, the Reserve Banks project

that the noncash collection service will recover 108.4 percent of total

costs, including imputed expenses and targeted ROE, in 2000. Total

expenses are projected to decline approximately $0.3 million, or 13.3

percent, in 2000, due to a projected volume decline of 29.3 percent.

Total revenues are projected to decline approximately $1.0 million, or

33 percent, because of the projected volume decline and the fee

reductions. Volume declines will continue as the number of bearer

municipal securities declines. New issues of bearer municipal

securities effectively ceased in mid-1983 when the Tax Equity and

Fiscal Responsibility Act of 1982 (TEFRA) removed the tax advantage for

investors.

H. Special Cash

Table 15 presents the actual 1998, estimated 1999, and projected

2000 cost recovery performance for the special cash service.

[[Page 476]]

Table 15.--Special Cash Pro Forma Cost and Revenue Performance

[$ millions]

--------------------------------------------------------------------------------------------------------------------------------------------------------

Special

Operating Special Recovery project

costs and project Total Net income rate after costs

Year Revenue imputed costs expense (ROE) [1- Target ROE target ROE deferred

expenses recovered [2+3] 4] [1/(4+6)] and

(percent) financed

1 2 3 4 5 6 7 8

--------------------------------------------------------------------------------------------------------------------------------------------------------

1998............................................ 2.7 2.5 0.0 2.5 0.1 0.1 102.9 0.0

1999 (Est)...................................... 2.9 2.6 0.0 2.6 0.2 0.0 106.2 0.0

2000 (Bud)...................................... 2.1 2.0 0.0 2.0 0.1 0.1 101.8 0.0

--------------------------------------------------------------------------------------------------------------------------------------------------------

Priced special cash services represent a very small portion (less

than one percent) of overall cash services provided by the Reserve

Banks to depository institutions. Special cash services include wrapped

coin, packaging of nonstandard currency orders and deposits as well as

coin deposits, and registered mail shipments of currency and coin.

1. 1998 Performance

In 1998, the special cash service recovered 102.9 percent of total

expenses (including imputed expenses and targeted ROE) compared with a

targeted recovery rate of 103.1 percent. In May 1998, the uniform cash

access policy was implemented. Due to the governmental nature of this

function, the costs and revenue associated with nonstandard access are

now treated as a nonpriced service.

2. 1999 Performance

Through October 1999, the special cash service recovered 103.6

percent of total expenses, including imputed expenses and targeted ROE.

For full-year 1999, the Reserve Banks estimate that the special cash

service will recover 106.2 percent of total expenses, compared with a

targeted recovery rate of 105.8 percent. Revenue in 1999 is estimated

to increase approximately $.2 million, or 7.4 percent from 1998 levels,

due mainly to stronger-than-anticipated volume in coin-wrapping in the

Helena office and the entrance of the Chicago office in the business of

nonstandard packaging of currency orders and deposits.

3. 2000 Pricing

For 2000, the Reserve Banks project that the special cash service

will recover 101.8 percent of costs, including imputed expenses and

targeted ROE. Total costs in 2000 are projected to decline $.6 million,

or 21.6 percent, from the 1999 level. Revenue in 2000 is expected to

decline $.8 million, or 27.6 percent, from the 1999 level.

The Fourth District's decision to exit the coin-wrapping business

in April 2000 is the primary factor in both the overall anticipated

revenue reduction and cost reduction for the year. With Cleveland's

departure from coin wrapping, registered mail is likely to constitute

approximately 65 percent of special cash revenue.

The Helena office will reduce the fee per box of wrapped coin from

$2.50 to $2.25, and the nonstandard packaging fee per coin bag

deposited from $3.00 to $2.00.

Changes to surcharges for registered mail shipments of currency

reflect a System effort to standardize the method for pricing this

product. To that end, the El Paso office will reduce the registered

mail surcharge from $80.00 to $31.00, while the Helena office will

increase the surcharge from $8.50 to $14.00, and the Tenth District

will increase the surcharge for all offices from $12.00 to $13.00. The

San Antonio office discontinued registered mail service in April 1999.

II. Private Sector Adjustment Factor

A. Overview

As required by the Monetary Control Act, the Reserve Bank's fee

schedule for priced services includes ``taxes that would have been paid

and the return on capital that would have been provided had the

services been furnished by a private business firm.'' These imputed

costs are based on data developed in part from a model comprising

consolidated financial data for the nation's fifty largest (in asset

size) bank holding companies (BHCs).

The method for calculating the PSAF involves determining the value

of Federal Reserve assets that will be used in providing priced

services during the coming year. Short-term assets are assumed to be

financed with short-term liabilities; long-term assets are assumed to

be financed with a combination of long-term debt and equity derived

from the BHC model.

Imputed capital costs are determined by applying related interest

rates and rates of return on equity from the BHC model. The long-term

debt and equity rates are based on BHCs in the model for each of the

last five years. Because short-term debt, by definition, matures within

one year, only data for the most recent year are used for computing the

short-term debt rate.

B. Discussion

The PSAF for 2000 of $192.6 million represents an increase of $76.8

million, or 66 percent, from the PSAF of $115.8 million for 1999. The

large increase in the PSAF for 2000 is due mainly to recognition of the

effect of including pension assets and postretirement/postemployment

benefit liabilities in the PSAF balance sheet and, therefore, in the

computation of imputed asset financing costs and return on equity

inherent in the PSAF. Estimates of the priced pension credit were

included in pricing decisions beginning in 1993 when accounting

standards were implemented to recognize postretirement benefit expenses

based on actuarial estimates. Results of actual pension credits and

other benefit costs have been included in published pro forma financial

statements for the priced services since the inception of the related

accounting requirements for pension plans in 1987. The same pension

asset and postretirement/postemployment liability have not previously

been reflected in balance sheet accounts for PSAF calculation purposes

since the pension asset is self-financed through actual income

generated by the plan's assets, not through imputed long-term debt and

equity factors inherent in the PSAF. 15 The same cumulative

effect of income and expenses from pension and other benefits

accounting procedures is,

[[Page 477]]

however, included in the balance sheets of bank holding companies

(BHCs) used to compute financing rates and return on equity rates

applied to Reserve Bank assets to be financed for the 2000 PSAF. These

items should be included in the Federal Reserve's PSAF calculation.

Including the net cumulative effect of these items in the PSAF would

add $60.5 million of additional imputed costs to the 2000 PSAF. Had

this net cumulative asset been included historically in PSAF

calculations, the ten-year cost recovery amount for 1989-1998 would

have been 99.9 percent rather than the 100.7 percent originally

calculated. In the future, cost recovery percentages that incorporate

these additional financing costs for each rolling ten-year period will

be cited.

---------------------------------------------------------------------------

\15\ In addition, contributions to fund the Federal Reserve's

retirement plan were recognized in expenses when paid and subject to

recovery through explicit fees or other recovery methods in those

years.

---------------------------------------------------------------------------

1. Asset Base

The total estimated value of Federal Reserve assets to be used in

providing priced services in 2000 is reflected in table 16. Table 17

shows that the assets assumed to be financed through debt and equity

are projected to total $1,116.5 million. This represents a net increase

of $465.1 million, or 71.4 percent, from 1999 assets of $651.4 million,

as shown in table 17. More than three quarters of this increase results

from including net pension assets (prepaid costs less postretirement/

postemployment liabilities) of $361.5 million in priced assets to be

financed through the PSAF, with building projects in two Districts and

check standardization and imaging initiatives accounting for the

remaining increase.

2. Cost of Capital, Taxes, and Other Imputed Costs

Table 17 also shows the financing and tax rates and the other

required PSAF recoveries for 2000 and compares the 2000 rates with the

rates used for developing the PSAF for 1999. The pretax return on

equity rate decreased slightly from 23.5 percent for 1999 to 23.3

percent for 2000. The decrease is a result of lower 1998 BHC financial

performance included in the 2000 BHC model relative to the 1993 BHC

financial performance used in the 1999 BHC model.

3. Capital Adequacy

As shown in table 18, the amount of capital imputed for the 2000

PSAF totals 30.0 percent of risk-weighted assets and 4.82 percent of

total assets. The capital to risk-weighted asset ratio and the capital

to total assets ratio exceed regulatory guidelines for adequately

capitalized institutions and the BHCs.

III. Analysis of Competitive Effect

All operational and legal changes considered by the Board that have

a substantial effect on payment system participants are subject to the

competitive impact analysis described in the March 1990 policy

statement ``The Federal Reserve in the Payments System.'' 16

Under this policy, Board assesses whether the change 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 of the Federal Reserve deriving

from such legal differences. If the fees or fee structures create such

an effect, the Board must further evaluate the changes to assess

whether their benefits--such as contributions to payment system

efficiency, payment system integrity, or other Board objectives--can be

retained while reducing the hindrances to competition.

---------------------------------------------------------------------------

\16\ FRRS 7-145.2.

---------------------------------------------------------------------------

The Board does not believe that the fees and fee structures will

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. Assuming the Reserve Banks' volume and cost

projections are accurate, the fees are set to provide the Federal

Reserve a return on equity similar to that earned on average by large

bank holding companies during the past five years. Moreover, the

recommended 2000 fee schedules will enable the Reserve Banks to

continue to recover all actual and imputed costs of providing priced

services over the long run. The Board, however, is evaluating changes

to certain price and service levels that affect private-sector ACH

operators and their customers to determine whether such changes may

better promote competition within the market for ACH services (64 FR

27793, May 21, 1999).

[[Page 478]]

Table 16.--Comparison of Pro Forma Balance Sheets for Federal Reserve

Priced Services

[millions of dollars--average for year]

------------------------------------------------------------------------

2000 1999

------------------------------------------------------------------------

Short-term assets:

Imputed reserve requirement on $762.2 $757.7

clearing balances..................

Investment in marketable securities. 6,859.5 6,819.6

Receivables \17\.................... 74.2 69.1

Materials and supplies \17\......... 3.4 4.1

Prepaid expenses \17\............... 21.4 20.2

Items in process of collection...... 3,804.2 3,470.7

-------------------------------

Total short-term assets......... 11,524.9 11,141.4

Long-term assets:

Premises \17\ \18\.................. 411.7 386.6

Furniture and equipment 17.......... 180.1 150.3

Leasehold improvements and long-term 64.2 21.1

prepayments 17.....................

Prepaid Pension Costs 17............ 599.8 ..............

-------------------------------

Total long-term assets.......... 1,255.8 558.1

Total assets............................ $12,780.7 $11,699.5

===============================

Short-term liabilities:

Clearing balances and balances $7,621.7 $7,577.3

arising from early credit of

uncollected items..................

Deferred credit items............... 3,804.2 3,470.7

Short-term debt 19.................. 99.0 93.4

-------------------------------

Total short-term liabilities.... 11,524.9 11,141.4

Long-term liabilities:

Postemployment/retirement benefits 238.3 ..............

17.................................

Long-term debt 19................... 400.9 207.6

-------------------------------

Total long-term liabilities..... 639.2 207.6

-------------------------------

Total liabilities....................... 12,164.1 11,349.0

Equity 19............................... 616.6 350.5

-------------------------------

Total liabilities and equity............ $12,780.7 $11,699.5

Note: Details may not add to totals due

to rounding.

------------------------------------------------------------------------

\17\ Financed through PSAF; other assets are self-financing.

\18\ Includes allocations of Board of Governors' assets to priced

services of $0.5 million for 2000 and $0.4 million for 1999.

\19\ Imputed figures represent the source of financing for certain

priced services assets.

[[Page 479]]

Table 17.--Derivation of the 2000 and 1999 PSAF

[millions of dollars]

----------------------------------------------------------------------------------------------------------------

2000 1999

----------------------------------------------------------------------------------------------------------------

A. Assets to be financed: 20

Short-term................ $99.0 $93.4

Long-term 21.............. 1,017.5 558.1

---------------- ---------------

$1,116.5 $651.4

B. Weighted average cost:

1. Capital Structure 22

Short-term debt....... 9.0% 14.8%

Long-term debt........ 35.8% 31.7%

Equity................ 55.1% 53.5%

2. Financing rates/costs

22

Short-term debt....... 5.1% 5.1%

Long-term debt........ 6.6% 6.6%

Pre-tax equity 23..... 23.3% 23.5%

3. Elements of capital

costs:

Short-term debt....... $99.0 x 5.1% = $5.0 $93.4 x 5.1% = $4.8

Long-term debt........ 400.9 x 6.6% = 26.5 207.6 x 6.6% = 13.7

Equity................ 616.6 x 23.3% = 143.7 350.5 x 23.5% = 82.4

---------------- ---------------

$175.2 $100.8

C. Other required PSAF

recoveries:

Sales taxes............... $10.3 $8.7

Federal Deposit Insurance 2.9 2.8

assessment...............

Board of Governors 4.2 3.4

expenses.................

---------------- ---------------

17.4 14.9

================ ===============

D. Total PSAF recoveries: $192.6 $115.8

---------------- ---------------

As a percent of capital... 17.2% 17.8%

As a percent of expenses 28.5% 18.2%

24.......................

E. Tax rate................... 31.5% 32.0%

----------------------------------------------------------------------------------------------------------------

Note: Details may not add to totals due to rounding.

\20\ Priced service asset base is based on the direct determination of assets method.

\21\ Consists of total priced long-term assets less postretirement/postemployment benefit liabilities (for 2000

only).

\22\ All short-term assets are assumed to be financed with short-term debt. Of the total long-term assets for

2000, 39.4% are assumed to be financed with long-term debt and 60.6% with equity.

\23\ The pre-tax rate of return on equity is based on the average after-tax rate of return on equity, adjusted

by the effective tax rate to yield the pre-tax rate of return on equity for each bank holding company for each

year. These data are then averaged over five years to yield the pre-tax return on equity for use in the PSAF.

\24\ Systemwide 2000 budgeted priced service expenses less shipping are $675.0 million.

[[Page 480]]

Table 18.--Computation of 2000 Capital Adequacy for Federal Reserve Priced Services

[Millions of dollars]

----------------------------------------------------------------------------------------------------------------

Assets Risk weighted Weight assets

----------------------------------------------------------------------------------------------------------------

Imputed reserve requirement on clearing balances................ $762.2 0.0 $0.0

Investment in marketable securities............................. 6,859.5 0.0 0.0

Receivables..................................................... 74.2 0.2 14.8

Materials and supplies.......................................... 3.4 1.0 3.4

Prepaid expenses................................................ 21.4 1.0 21.4

Items in process of collection.................................. 3,804.2 0.2 760.8

Premises........................................................ 411.7 1.0 411.7

Furniture and equipment......................................... 180.1 1.0 180.1

Leases, leasehold improvements & long-term prepayments.......... 64.2 1.0 64.2

Prepaid Pension Costs........................................... 599.8 1.0 599.8

-----------------------------------------------

Total....................................................... $12,780.7 .............. $2,056.3

Imputed Equity for 2000......................................... $616.6

Capital to Risk-Weighted Assets................................. 30.0%

Capital to Total Assets......................................... 4.82%

----------------------------------------------------------------------------------------------------------------

Note: Details may not add to totals due to rounding.

[[Page 481]]

Automated Clearinghouse Fee Schedule \25\

------------------------------------------------------------------------

Fees

------------------------------------------------------------------------

Origination (per item or record):

Items in small files \26\................................ $0.0055

Items in large files \27\................................ $0.0045

Addenda record........................................... $0.002

Receipt (per item or record):

Item..................................................... $0.007

Addenda record........................................... $0.002

Input file processing fees (per file):

Small file............................................... $1.75

Large file............................................... $6.75

Monthly fees:

Account servicing fee (per routing number)............... $25.00

Information extract file................................. $10.00

Return item/notification of change (NOC) fees \28\:

Voice response return/NOC \29\........................... $2.00

Nonelectronic input/output fees \30\:

Tape input/output........................................ $25.00

Paper output............................................. $15.00

Diskette output.......................................... $15.00

Facsimile return/NOC \31\................................ $15.00

------------------------------------------------------------------------

\25\ The Reserve Banks will delay implementing the coming year's price

and service level changes until April 3, 2000. The delay is intended

to minimize changes during the period surrounding the century

rollover. Current Reserve Bank prices and products will remain

applicable through the first quarter of next year.

\26\ Small files contain fewer than 2,500 items.

\27\ Large files contain 2,500 or more items.

\28\ The Reserve Banks also assess a $15 fee for every government paper

return/NOC they process. This service is not considered a priced

service. The fee includes the transaction fee in addition to the

conversion fee.

\29\ The fee includes the transaction fee in addition to the voice-

response fee.

\30\ These services are offered in contingency situations only.

\31\ The fee includes the transaction fee in addition to the conversion

fee.

[[Page 482]]

Funds Transfer and Net Settlement Fee Schedule \32\

------------------------------------------------------------------------

Fees

------------------------------------------------------------------------

Funds transfer:

Volume-based pricing fees (originations and

receipts)

Per transfer for the first 2,500 transfers $0.33

per month..................................

Per transfer for additional transfers up to $0.24

80,000 per month...........................

Per transfer for every transfer over 80,000 $0.17

per month..................................

Surcharge

Off-line transfer originated................ $15.00

Telephone notification...................... $15.00

Net settlement:

Basic fee

Settlement charge per entry................. $0.95

Settlement file charge...................... $12.00

Surcharge

Off-line origination per file \33\.......... $15.00

Telephone notification per file............. $15.00

Minimum monthly fee............................. $60.00

Fedwire-based, small-dollar arrangement per $100.00

settlement day \34\............................

Fedwire-based, large-dollar arrangement per $100.00--$175.00

settlement day \34\............................

------------------------------------------------------------------------

\32\ The Reserve Banks will delay implementing the coming year's price

and service level changes until April 3, 2000. The delay is intended

to minimize changes during the period surrounding the century

rollover. Current Reserve Bank prices and products will remain

applicable through the first quarter of next year.

\33\ The off-line origination surcharge will be waived by Reserve Banks

that do not provide an electronic submission capability for the

settlement sheet service.

\34\ Participants in arrangements and settlement agents are also charged

the applicable Fedwire funds transfer fee for each transfer into and

out of the settlement account.

[[Page 483]]

Book-Entry Securities Fee Schedule \35\

------------------------------------------------------------------------

Fees

------------------------------------------------------------------------

Book-entry securities transfer:

Basic transfer fee:

Transfer originated.................................. $0.70

Transfer received.................................... 0.70

Reversal originated.................................. 0.70

Reversal received.................................... 0.70

Surcharge:

Off-line transfer originated or received............. 18.00

Off-line reversal originated or received............. 18.00

Monthly maintenance fees:

Account maintenance (per account).................... 15.00

Issues maintained (per issue/per account)............ 0.45

Purchase & sale:

Transaction fee.......................................... 40.00

------------------------------------------------------------------------

\35\ The Reserve Banks will delay implementing the coming year's price

and service level changes until April 3, 2000. The delay is intended

to minimize changes during the period surrounding the century

rollover. Current Reserve Bank prices and products will remain

applicable through the first quarter of next year.

Noncash Collection Fee Schedule \36\

------------------------------------------------------------------------

Fees

------------------------------------------------------------------------

Coupon collection:

Cash letters:

With five or fewer coupon envelopes.................. $7.50

With six to fifty coupon envelopes................... 15.00

Coupon envelopes:

With five or fewer coupon envelopes.................. 4.75

With six to fifty coupon envelopes................... 2.50

Return items............................................. 15.00

Bond collection (per bond):.................................. \37\ 40.0

0

------------------------------------------------------------------------

\36\ The Reserve Banks will delay implementing the coming year's price

and service level changes until April 3, 2000. The delay is intended

to minimize changes during the period surrounding the century

rollover. Current Reserve Bank prices and products will remain

applicable through the first quarter of next year.

\37\ Plus actual shipping costs.

[[Page 484]]

Special Cash Services Fee Schedule \38\

------------------------------------------------------------------------

Fee

------------------------------------------------------------------------

Wrapped Coin (per box \39\)

All Fourth District offices--Discontinued April 2000

Helena office............................................ $2.25

Nonstandard Packaging

All Seventh District offices (per currency order or \40\ 12.0

deposit)................................................ 0

Helena office (per coin bag deposited)................... 2.00

El Paso office (Express Cash Orders)..................... \41\ 60.0

0

------------------------------------------------------------------------

\38\ The Reserve Banks will delay implementing the coming year's price

and service level changes until April 3, 2000. The delay is intended

to minimize changes during the period surrounding the century

rollover. Current Reserve Bank prices and products will remain

applicable through the first quarter of next year.

\39\ There are fifty rolls of coin in each box.

\40\ This service only applies to the $1 through $20 denominations.

\41\ El Paso's Express Cash Order Fee applies only to orders that need

same day preparation and delivery.

Registered Mail Fees \42\

Surcharge Insurance fee \43\

------------------------------------------------------------------------

First District............ $30.00 $0.80

Helena office \44\........ 14.00 ...........................

All Tenth District offices 13.00 0.27

El Paso office............ 31.00 0.26

San Antonio office--

Discontinued April 1999

All Twelfth District 14.00 0.20 (Cont. U.S.)

offices.

........... 0.30 (Other)

42 Depository institutions also pay any postage fees incurred for

registered mail. Postage fees are billed separately from Federal

Reserve Bank surcharges and insurance fees.

\43\ Insurance fees are per $1,000 shipped via the registered mail

service in excess of the first $25,000, which is covered by the U.S.

Postal Service.

\44\ The Helena office only ships registered mail packages valued up to

$25,000, so no additional insurance is needed in excess of the $25,000

covered by the U.S. Postal Service.

[[Page 485]]

Electronic Connection Fee Schedule \45\, \46\

The Reserve Banks charge fees for the electronic connections used

by depository institutions to access priced services and allocate the

cost and revenue associated with electronic access to the various

priced services. At this time, electronic access fees for 2000 remain

at their 1999 levels.

----------------------------------------------------------------------------------------------------------------

Fees

----------------------------------------------------------------------------------------------------------------

Connection types:

Dial--receive and send (FedLine)....................... $75.00 per month.

Link encrypted dial.................................... $200.00 per month.

High-speed dial @ 56 kbps.............................. $350.00 per month.

Multidrop leased line.................................. $450.00 per month.

Dedicated leased line (to 9.6 kbps).................... $750.00 per month.

High-speed leased line @ 19.2 kbps..................... $850.00 per month.

High-speed leased line @ 56 kbps....................... $1,000.00 per month.

High-speed leased line @ 128 kbps...................... $1,800.00 per month.

High-speed leased line @ 256 kbps...................... $2,000.00 per month.

Cross-district......................................... Actual cost.47

Contingency testing options: 48

Premium dedicated dial test connection................. $500.00 per month.

Basic dedicated dial test connection................... $250.00 per month.

Shared dial test connection............................ $150.00 per month.

Third-party contingency site dial test connection...... $45.00 per month.

----------------------------------------------------------------------------------------------------------------

\45\ Installation, training, contingency hardware, and software certification are not considered priced

services, and the fees for these services are not listed here. For a copy of the full electronic access fee

schedule, contact the local Federal Reserve Bank.

\46\ The Reserve Banks will delay implementing the coming year's price and service level changes until April 3,

2000. The delay is intended to minimize changes during the period surrounding the century rollover. Current

Reserve Bank prices and products will remain applicable through the first quarter of next year.

\47\ The customer pays the actual costs of the circuit and a monthly surcharge to cover an equitable share of

expenses associated with customer support, depreciation of hardware (that is, link encryption units), and

other overhead expenses. At a minimum, this fee must be equivalent to the standard fee for the particular type

of leased line connection.

\48\ Use of Dial Test connections should not exceed 60 hours per month for the Premium service and 120 hours per

year for the Basic and Shared services. Customers exceeding this guideline should establish a Dedicated Leased

Line connection for testing.

The Reserve Banks anticipate introducing frame relay as an

electronic access service during the second half of 2000. Frame relay

will provide higher throughput and enhanced security to leased-line

customers. With the deployment of frame relay, the Reserve Banks will

develop an additional fee schedule for those customers wanting to

migrate to the new network, while still providing access through the

current system at the fee levels for those that do not.

By order of the Board of Governors of the Federal Reserve

System, December 28, 1999.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 00-42 Filed 1-4-00; 8:45 am]

BILLING CODE 6210-01-P