Mr. William W. Wiles
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Re: Docket R-1009; Advance Notice of Proposed Rulemaking, Collection of Checks and Other Items by Federal Reserve Banks and Availability of Funds and Collection of Checks
Dear Mr. Wiles:
The Treasury Management Association (TMA) welcomes the opportunity to comment on the benefits and drawbacks of the Federal Reserve Board's 1994 same-day settlement rule and the implications of potential modifications of that rule to reduce or eliminate legal disparities between the Federal Reserve Banks and private-sector banks in the presentment and settlement of checks.
TMA represents approximately 12,000 treasury professionals who, on behalf of over 4,000 corporations and other organizations are significant participants in the check payment system. Organizations represented by its members are drawn generally from the Fortune 1,000 companies and the largest of the middle market companies. Many of TMA's members have responsibility for their organizations' disbursement policies and procedures -- including the use of controlled disbursement services -- and decisions on investment and borrowing. They thus have a sizable stake in Federal Reserve policies that impact these treasury functions.
The legal disparity that the Federal Reserve seeks to address in this advance notice of proposed rulemaking relates to the difference between Federal Reserve Banks and private-sector banks in permissible presentment times for same-day settlement. Federal Reserve Banks currently have the right to receive same-day settlement for checks they present to paying banks prior to 2:00 p.m. local time. Private-sector collecting banks receive same-day settlement with no presentment fees if the checks are presented at the designated location of the paying bank by 8:00 a.m. local time. The presentment time for private-sector banks was established by amendment to Regulation CC effective January 1994.
The Federal Reserve understands that check presentment times affect the controlled disbursement services offered by banks to their business customers. Organizations using controlled disbursement receive morning notification of the dollar amount of checks that will be debited from their accounts that night. This information allows them to fund the bank for checks presented and then invest surplus balances, borrow funds, or pay back loans while money markets are active.
The objectives of the Federal Reserve in considering a change in the same-day presentment rule are to promote competition in check collection services, to reduce check collection costs and advance efficiencies, and to encourage the migration of checks to more efficient electronic payment mechanisms.
TMA has long supported efforts to encourage use of electronic payments as a means of achieving a more secure and efficient payment system. TMA believes, however, that the Federal Reserve should not attempt to achieve these worthy goals by increasing costs to businesses and diminishing the efficiency of their treasury management operations. Furthermore, there appears to be no evidence that the banking community is demanding presentment time equality as a means of improving its competitive position. On the contrary, most banks believe that the costs to paying banks and their customers would far outweigh any benefits.
TMA will respond to questions in the advance notice of proposed rulemaking [printed in italic] that relate to business disbursement practices.
Question: Has the same-day settlement rule adversely affected the ability of businesses to manage their disbursements effectively? Has it caused businesses to rely to a greater extent on internal forecasts of daily presentments? Has it influenced businesses' decisions on whether to pay by check or by other means?
Businesses, on the whole, were not adversely affected by the presentment of checks by private-sector banks for same-day settlement by 8:00 a.m. local time. Most banks continue to be able to provide check clearing information to their customers on a timely basis, in part because Federal Reserve payor bank services provide electronic information to controlled disbursement banks on the checks that will subsequently be presented for payment.
The same-day settlement rule has caused a reduction in the percentage of items and dollars reported in banks' first presentment notification to customers. First presentment totals have reportedly dropped from 80%-90% of the dollar value of clearings to a range of between 50%-75% of the day's total. Because first presentment totals are a less useful management tool, companies must now use second presentment figures for decisionmaking. Most second presentment notifications -- although not consistently reliable on a daily basis -- allow treasury managers sufficient time to invest or borrow during morning hours.
The Ernst & Young LLP 1997 Cash Management Services Survey of the major cash management banks found that 65% of reporting banks provide electronic notification of final clearing totals to their customers before 10:00 a.m. Eastern Standard Time, two hours after the presentment deadline. The survey revealed the following reporting time distribution:
Effect of reducing or eliminating the presentment deadline disparity
Question: Should the Board extend the presentment deadline for private-sector collecting banks? If so, to what time?
The Board should not extend the presentment deadline. Controlled disbursement service is widely used by businesses as a cash management tool. Surveys have shown that over 80% of companies with annual sales of $100 million or more use controlled disbursement. The 68 banks reporting their controlled disbursement services to the Ernst & Young LLP 1997 Cash Management Services Survey handle close to 200 million checks per month for about 35,000 customers.
Companies use controlled disbursement services primarily for information. Float has been sharply reduced by the Fed's earlier actions and is not a major factor in the use of controlled disbursement. Current cash forecasting methodology is widely viewed as inaccurate in many cases.
Therefore, the morning controlled disbursement report is the key tool that enables treasury managers to borrow at reasonable rates, to sell commercial paper, to invest at favorable rates -- especially important when companies are active investors seeking higher returns than an overnight sweep -- and to pay down loans. The Federal Reserve's advance notice recognizes that U.S. money markets become progressively less liquid after noon Eastern Time.
Many companies with contractual borrowing arrangements for syndicated loans must notify syndicate leaders by 11:00 a.m. Eastern Time of the amount of their daily borrowings. A delay in the controlled disbursement presentment time would disrupt these privately negotiated contracts. As a result, companies would be forced to borrow at higher prime-based rates.
TMA recommends that the Fed take no action that would reduce the usefulness of controlled disbursement and prevent treasury managers from optimizing their cash management practices.
Question: What would be the latest presentment deadline that could be implemented without significantly disrupting cash management operations?
In a survey conducted earlier this year, TMA asked its members to indicate to what hour of the day the private-sector bank presentment deadline could be extended without seriously interfering with an organization's ability to invest or borrow at favorable rates. Over half of respondents indicated that they anticipated serious disruption after 9:00 a.m., one hour later than the current presentment time. Assuming a two-hour processing delay, customers would receive final notification of clearing totals by 11:00 a.m. As a consequence, they would have to act on investment and borrowing decisions as the capital markets are becoming less liquid. For companies with an 11:00 a.m. borrowing deadline, the notification would be too late.
Private-sector banks report that the impact of a one-hour change in presentment time on their competitive position vis-a-vis the Federal Reserve Banks and on the efficiency and cost-effectiveness of their check collection processes would be minimal.
Question: What would be the implications to check drawers if the presentment deadline for private-sector banks were moved to 10 a.m.? noon? 2:00 pm?
If the presentment deadline were moved to noon, with controlled disbursement information available by 2:00 p.m, TMA survey respondents reported that their organizations would be impacted to a "great" or "very great" extent in the following ways:
- Diminished ability to meet external deadlines for borrowing or investing (70% of respondents)
- Diminished ability to determine the daily amount of disbursements to fund (58%)
- Increased reliance on cash flow forecasts and need to improve their accuracy (47%)
- Decreased short-term investment income (41%)
- Diminished ability to review positive pay exceptions prior to return deadline (39%)
- Increased borrowing costs (37%)
Respondents at larger firms in all industries judged that the impact on their cash management practices of a noon presentment would be greater than respondents from smaller firms in each of the above categories. About 22% of respondents come from companies with $1 to $4.9 billion in sales revenues; 20% from companies with sales under $250 million, and 24% from companies with sales of $250 million to $1 billion.
TMA members have commented that they would be required to leave excess balances in their accounts because daily forecasting estimates are unreliable, and they would earn lower returns from sweep account services than from active investments. Companies would not be able to borrow or issue commercial paper on a timely basis, or would pay higher rates for the use of automated borrowing services. Companies that borrow funds to cover estimated disbursements that do not clear would earn less on their excess balances than the cost of the loan.
The disruption in controlled disbursement services resulting from a noon presentment would increase risk in the banking system as well as costs to the customer. Companies forced to rely on less-than-accurate end-of-day forecasts would experience overdrafts and incur overdraft fees. If capital markets do not respond adequately to the need for late day liquidity by businesses and banks, regulations regarding overdraft facilities would need to be changed.
The positive pay service used by many companies as a fraud-prevention tool requires matching a file of checks issued against checks presented. The earlier in the day this process starts, the more time the check issuer has to research and resolve suspect items. Later same-day settlement could reduce this time by as much as half a day and increase exposure to fraud.
An increase in banks' check processing charges to customers is also likely. A later processing window for paying banks might require rescheduling of back office operations and could negatively impact work flow. Check transportation, now scheduled during less crowded night and early morning hours, would have to be adjusted to accommodate later delivery. Even if schedules did change, some collecting banks reportedly do not see any advantage to delaying check shipments, since the major float reduction benefits have already been achieved.
Question: Should a later presentment deadline imposed on private-sector banks apply to presentments by Federal Reserve Banks? Alternatively, should the Board impose an earlier presentment deadline on Federal Reserve Banks?
From a controlled disbursement perspective, there does not appear to be a major disparity in the actual presentment times of the Federal Reserve Banks and the private-sector banks. Many banks reportedly do not consider that current presentment deadlines place them at a competitive disadvantage with the Fed.
Banks that are controlled disbursement service providers report that the Fed does not take advantage of its later presentment deadline. Generally, the Fed presents checks to banks' controlled disbursement points through payor bank services and high dollar group sort before 9:00 a.m. In addition, through bilateral clearing arrangements, private-sector banks are sometimes able to offer later deposit deadlines than the Fed for the same availability.
The Fed advance notice states that, in practice, Reserve Banks present most checks substantially earlier than 2:00 p.m. In November 1997, more than 45% of the value of checks were presented by 10:00 a.m. Eastern Time (ET), nearly 60% by 11:00 a.m. ET, and almost 75% by noon ET.
Current presentment time practices appear to satisfy the need of corporate customers for timely controlled disbursement notification, the need of paying banks for processing efficiency and product delivery, and the need of collecting banks for float reduction. There appears to be no reason for change.
Question: What steps would businesses take to manage their payment disbursements if early-in-the-day presentment totals were not available from their banks? Rely on internal forecasting? on electronic payments? Shift capital market activity to later in the day? To what extent would these steps enable businesses to continue to manage their disbursements effectively?
The TMA survey on same-day settlement contained a list of potential actions and asked respondents to indicate which actions they would take if final controlled disbursement funding totals were not available until later in the day. The actions most frequently chosen were:
- Use controlled disbursement in conjunction with an overnight sweep.
- Move more payments from check to electronic payment (primarily vendor payments).
- Use controlled disbursement and rely more on internal cash forecasts.
- Move controlled disbursement point to lessen impact.
If daily clearing totals are not available until the markets have lost much of their liquidity, controlled disbursement services will have lost much of their value. However, most respondents to the survey do not plan to switch to regular disbursement accounts.
Electronic transmission of check information
Question: Should the Federal Reserve condition a later-in-the-day presentment deadline for private-sector collecting banks on an earlier transmission of the MICR data on the checks to be presented?
It would be advantageous to companies to continue to receive final funding notification during the morning. However, many banks currently do not have electronic transmission capability. With Year 2000 preparations taking priority, banks lack the resources to develop new systems or to improve existing systems until several years into the future. Therefore, the imposition by the Federal Reserve of a requirement for collecting banks to send an electronic transmission to paying banks would appear to be premature. The minimal value that some collecting banks place on a later presentment also raises the question of whether they would take advantage of the later deadline under this condition.
Effect of elimination of prohibition to pay interest on demand deposits
Question: If Congress were to remove the current restriction on the ability of banks to pay interest on demand deposits, would the answers to the above questions be affected? To what extent are controlled disbursement arrangements designed to minimize the interest earnings lost by holding funds in demand deposits? If banks paid an explicit market rate of return, would controlled disbursement arrangements be necessary?
When faced with a 2:00 p.m. disbursement notification, most treasury managers responding to the TMA survey would continue to rely on controlled disbursement service -- combined with a sweep service or internal cash forecasting -- or switch to electronic payments. When asked if they would take the same actions if they received interest at competitive rates on demand deposit accounts, 56% of respondents answered "no." If banks were able to pay a market rate of interest on business demand deposit accounts, many investing companies would not find it necessary to rely on complex sweep services to earn interest on excess balances.
Other Legal Differences: Presentment location for same-day settlement
Question: Should the Reserve Banks and private-sector collecting banks be subject to the same rules regarding presentment locations for checks presented for same-day settlement?
Under the same-day settlement rule, a private-sector presenting bank must present a check to a paying bank "at a location designated by the paying bank...in the check-processing region consistent with the routing number encoded in magnetic ink on the check." However, a paying bank does not have the legal right to designate a single location for check presentment by a Federal Reserve Bank. In practice, the Reserve Banks generally do present checks to the location designated by the paying bank.
The Reserve Banks' practice of presenting checks to locations designated by paying banks promotes operational efficiency and reduces risk. Presentment of checks by the Federal Reserve Banks to any location of the paying bank permitted by Regulation CC would negatively impact the bank's ability to post checks accurately and increase the risk of untimely returns.
Moreover, the Routing Number Policy adopted by the Routing Number Administrative Board in 1996 was revised specifically to permit a bank to have a routing number that identifies a presentment point designated by the bank. The policy was adopted to increase check processing efficiency and take into account the consolidation of financial institutions as a result of interstate banking.
Federal Reserve policies regarding presentment location do not match actual practices that promote processing efficiency and the safety and soundness of the payments system. The Fed should design measures to eliminate disparities between Reserve Banks and private-sector banks in ways that promote these objectives.
TMA Conclusions and Recommendations
Controlled disbursement is a valuable, widely used tool that enhances the efficiency and effectiveness of treasury managers' investment and borrowing decisions and actions.
The Federal Reserve's 1994 same-day settlement rule for private-sector banks reduced float while retaining the benefits of morning information for corporate customers.
The Federal Reserve should not extend the private-sector presentment deadline to later in the day. This action would disrupt corporate cash management operations, decrease the cash that companies have to expand or improve their businesses, increase risk to the banking system, and have unforeseen consequences for the capital markets. However, if banks were able to pay a competitive rate of interest on business demand deposit accounts, many investing companies would not find it necessary to rely on complex sweep services or inaccurate daily clearing forecasts.
There appears to be no evidence that the banking community is demanding presentment time equality with the Federal Reserve Banks as a means of improving its competitive position. The disruption to back office operations resulting from a later presentment would unduly increase administrative burdens on banks that are focusing their efforts on Year 2000 compliance and lack the resources to develop electronic transmission systems to mitigate the impact.
Federal Reserve rules that would result in a later presentment and afternoon notification of clearing totals to businesses would cause some companies to migrate vendor payments from checks to electronic payment mechanisms. However worthy a goal, this action is premature -- and may increase inefficiency -- because most vendors and banks lack the ability to receive electronic remittance information together with the payments. The Federal Reserve's move to equip banks to provide that information to their customers is a positive step that will do more to encourage use of electronic payments than the negative approach represented by the disruption of a valuable service. The Federal Reserve should promote a further increase in electronic payment system efficiencies before reducing the efficiencies of the check-based system, and TMA would be pleased to cooperate with the Federal Reserve in this endeavor.
TMA thanks the Federal Reserve for the opportunity to comment on this important issue. Please call Arlene S. Chapman of TMA at 301-907-2862 if you have further questions on the Association's statement.
Sincerely,
/s/ Arthur R. Cunningham, CCM, CPA
Senior Assistant Treasurer
Pioneer Hi-Bred International Inc.
Chair, TMA Government Relations Committee
/s/ Frank P. Curran
President and Chief Executive Officer
Treasury Management Association
