81 FR 75058 - Federal Reserve Bank Services
FEDERAL RESERVE SYSTEM Federal Register Volume 81, Issue 209 (October 28, 2016)
Federal Register Volume 81, Issue 209 (October 28, 2016)
| Page Range | 75058-75088 | |
| FR Document | 2016-26068 |
[Federal Register Volume 81, Number 209 (Friday, October 28, 2016)] [Notices] [Pages 75058-75088] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-26068] ======================================================================= ----------------------------------------------------------------------- FEDERAL RESERVE SYSTEM [Docket No. OP-1552] Federal Reserve Bank Services AGENCY: Board of Governors of the Federal Reserve System. ACTION: Notice. ----------------------------------------------------------------------- SUMMARY: The Board of Governors of the Federal Reserve System (Board) has approved the private sector adjustment factor (PSAF) for 2017 of $16.6 million and the 2017 fee schedules for Federal Reserve priced services and electronic access. These actions were taken in accordance with the Monetary Control Act of 1980, which requires that, over the long run, fees for Federal Reserve priced services be established on the basis of all direct and indirect costs, including the PSAF. DATES: The new fee schedules become effective January 3, 2017. FOR FURTHER INFORMATION CONTACT: For questions regarding the fee schedules: Susan V. Foley, Senior Associate Director, (202) 452-3596; Linda Healey, Senior Financial Services Analyst, (202) 452-5274, Division of Reserve Bank Operations and Payment Systems. For questions regarding the PSAF: Gregory L. Evans, Deputy Associate Director, (202) 452-3945; Lawrence Mize, Deputy Associate Director, (202) 452-5232; Max Sinthorntham, Senior Financial Analyst, (202) 452-2864, Division of Reserve Bank Operations and Payment Systems. For users of Telecommunications Device for the Deaf (TDD) only, please call (202) 263-4869. Copies of the 2017 fee schedules for the check service are available from the Board, the Federal Reserve Banks, or the Reserve Banks' financial services Web site at www.frbservices.org. SUPPLEMENTARY INFORMATION: I. Private Sector Adjustment Factor, Priced Services Cost Recovery, and Overview of 2017 Price Changes A. Overview--Each year, as required by the Monetary Control Act of 1980, the Reserve Banks set fees for priced services provided to depository institutions. These fees are set to recover, over the long run, all direct and indirect costs and imputed costs, including financing costs, taxes, and certain other expenses, as well as the return on equity (profit) that would have been earned if a private business firm provided the services. The imputed costs and imputed profit are collectively referred to as the PSAF. From 2006 through 2015, the Reserve Banks recovered 102.6 percent of their total expenses (including imputed costs) and targeted after-tax profits or return on equity (ROE) for providing priced services.\1\ --------------------------------------------------------------------------- \1\ The 10-year recovery rate is based on the pro forma income statements for Federal Reserve priced services published in the Board's Annual Report. Effective December 31, 2006, the Reserve Banks implemented the Financial Accounting Standard Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (codified in FASB Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compesation-Retirement Benefits), which resulted in recognizing a cumulative reduction in equity related to the priced services' benefit plans. Including this cumulative reduction in equity from 2006 to 2015 results in cost recovery of 92.8 percent for the ten-year period. This measure of long-run cost recovery is also published in the Board's Annual Report. --------------------------------------------------------------------------- Table 1 summarizes 2015 actual, 2016 estimated, and 2017 budgeted cost-recovery rates for all priced services. Cost recovery is estimated to be 103.6 percent in 2016 and budgeted to be 100.0 percent in 2017. Table 1--Aggregate Priced Services Pro Forma Cost and Revenue Performance \a\ [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- 5 \e\ Recovery 2 \c\ Total 3 Net income 4 \d\ Targeted rate after Year 1 \b\ Revenue expense (ROE) ROE targeted ROE (%) [1-2] [1/(2+4)] ---------------------------------------------------------------------------------------------------------------- 2015 (actual)................... 429.1 397.8 31.3 5.6 106.4 2016 (estimate)................. 432.5 413.3 19.1 4.1 103.6 2017 (budget)................... 439.4 434.8 4.6 4.6 100.0 ---------------------------------------------------------------------------------------------------------------- \a\ Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding. \b\ Revenue includes imputed income on investments when equity is imputed at a level that meets minimum capital requirements and, when combined with liabilities, exceeds total assets. \c\ The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, Board of Governors' priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pension plans under FAS 158 [ASC 715] are also included. \d\ Targeted ROE is the after-tax ROE included in the PSAF. [[Page 75059]] \e\ The recovery rates in this and subsequent tables do not reflect the unamortized gains or losses that must be recognized in accordance with FAS 158 [ASC 715]. Future gains or losses, and their effect on cost recovery, cannot be projected. Table 2 provides an overview of cost-recovery budgets, estimates, and performance for the 10-year period from 2006 to 2015, 2015 actual, 2016 budget, 2016 estimate, and 2017 budget by priced service. Table 2--Priced Services Cost Recovery [Percent] ---------------------------------------------------------------------------------------------------------------- 2016 Budget 2017 Budget Priced service 2006-2015 2015 Actual \a\ 2016 Estimate \b\ ---------------------------------------------------------------------------------------------------------------- All services.................... 102.6 106.4 101.4 103.6 100.0 Check........................... 103.6 113.0 105.7 109.7 104.5 FedACH.......................... 99.5 100.7 99.5 98.8 95.5 Fedwire Funds and NSS........... 101.8 103.9 99.4 103.2 101.0 Fedwire Securities.............. 102.7 108.2 97.5 97.6 97.5 ---------------------------------------------------------------------------------------------------------------- \a\ The 2016 budget figures reflect the final budgets as approved by the Board in December 2015. \b\ The 2017 budget figures reflect preliminary budget information from the Reserve Bank. The Reserve Banks will submit final budget data to the Board in November 2016, for Board consideration in December 2016. 1. 2016 Estimated Performance--The Reserve Banks estimate that they will recover 103.6 percent of the costs of providing priced services in 2016, including total expense and targeted ROE, compared with a 2016 budgeted recovery rate of 101.4 percent, as shown in table 2. Overall, the Reserve Banks estimate that they will fully recover actual and imputed costs and earn net income of $19.1 million, compared with the targeted ROE of $4.1 million. The Reserve Banks estimate that the check service and the Fedwire[supreg] Funds and National Settlement Service will achieve full cost recovery; however, the Reserve Banks estimate that the FedACH[supreg] Service and the Fedwire Securities Service will not achieve full cost recovery because of investment costs associated with multiyear technology initiatives to modernize their processing platforms.\2\ These investments are expected to enhance efficiency, the overall quality of operations, and the Reserve Banks' ability to offer additional services to depository institutions. Greater-than-expected check volume processed by the Reserve Banks has been the single most significant factor influencing priced services cost recovery. --------------------------------------------------------------------------- \2\ The Reserve Banks have been engaged in a multiyear technology initiative to modernize the FedACH processing platform by migrating the service from a mainframe system to a distributed computing environment. In 2016, the Reserve Banks chose a commercially available option as their processing solution to modernize the FedACH platform. The Reserve Banks completed a multiyear technology initiative to modernize the processing platform for the Fedwire Securities Services in 2015. The capitalized software costs of this initiative will be amortized until October 2020 and thus remain a primary factor in the cost recovery calculation for these services in 2016. --------------------------------------------------------------------------- 2. 2017 Private-Sector Adjustment Factor--The 2017 PSAF for Reserve Bank priced services is $16.6 million. This amount represents an increase of $3.5 million from the 2016 PSAF of $13.1 million. This increase is primarily the result of an increase in the total cost of capital, which includes cost of debt and targeted return on equity. 3. 2017 Projected Performance--The Reserve Banks project a priced services cost-recovery rate of 100.0 percent in 2017, with both net income and targeted ROE of $4.6 million. The Reserve Banks project that the price changes will result in a 3.2 percent average price increase for customers. The Reserve Banks project that the check service and the Fedwire Funds and National Settlement Service will fully recover their costs; however, the Reserve Banks project that the FedACH Service and the Fedwire Securities Service will not achieve full cost recovery. Although FedACH is not budgeted to fully recover its costs in 2017, the Reserve Banks are expected to fully recover FedACH costs following finalization of the FedACH technology modernization project and over the long run. In addition, the Board believes the Reserve Banks' 2017 FedACH fee increases are consistent with a multi-year strategy to minimize pricing volatility and provide long-term price stability for customers while undertaking the ongoing technology upgrade that will result in FedACH incurring higher expenses over the next few years. Although the Fedwire Securities Service is not budgeted to fully recover its costs in 2017, the Board believes the Reserve Banks are expected to fully recover Fedwire Securities Service costs over the long run following a few years of under recovery. As a result of an expected decrease in volume as well as the advancement of new initiatives to improve resiliency and operational functionality, the Reserve Banks plan to increase fees gradually over a multi-year period to avoid the dramatic impact of a sharp one-year increase. The primary risks to the Reserve Banks' ability to achieve their targeted cost-recovery rates are unanticipated volume and revenue reductions and the potential for cost overruns with the technology modernization initiatives. In light of these risks, the Reserve Banks will continue refining their business and operational strategies to manage operating costs, to increase product revenue, and to capitalize on efficiencies gained from technology initiatives. 4. 2017 Pricing--The following summarizes the Reserve Banks' fee schedules for priced services in 2017: CheckThe Reserve Banks announced in July 2016, restructured FedForward[supreg], FedReturn[supreg], and FedReceipt[supreg] fee schedules to reflect today's electronic check-processing environment and announced in October 2016 a minor additional modification.\3\ These previously announced fees, discussed in attachment II, will be effective in January 2017, consistent with the fee schedules for other priced services. The Reserve Banks announced the restructured fee schedules earlier in the year to provide customers with sufficient notice. --------------------------------------------------------------------------- \3\ For the July announcement, see https://www.frbservices.org/files/servicefees/pdf/071116_2017_check_pricing_customer_letter.pdf. For the October announcement, see https://frbservices.org/files/communications/pdf/check/100316-check-modification-announcement.pdf. --------------------------------------------------------------------------- FedACH The Reserve Banks will increase the minimum monthly fee for FedACH origination from $45 to $50 and the minimum monthly fee for FedACH receipt from $35 to $40. The Reserve Banks will increase the FedACH Account Servicing fee from [[Page 75060]] $45 to $58. The Reserve Banks will also change the name of the FedACH Account Servicing fee to the FedACH Participation fee. The Reserve Banks will eliminate the on-us receipt credit of $0.0032 per item. The Reserve Banks will increase the FedACH Information Extract File fee from $100 to $150 per file. The Reserve Banks will increase the FedPayments Reporter fee approximately 10 percent rounded to the nearest $5 for each level of the tiered package pricing. The Reserve Banks also will introduce a new top tier, with a $1,800 monthly fee, for a package that includes more than 10,000 reports. The Reserve Banks will introduce a fixed monthly fee and a volume-based tiered pricing structure for the FedGlobal ACH service. The tiered pricing structure will include per-item surcharges that are in addition to the standard FedACH origination fee of $0.0032 and vary according to the transaction's destination, as seen in table 9. The top tier will cover monthly origination volume of more than 500 items and include a $185 fixed monthly fee and a per-item surcharge that is $0.12 lower than current per-item fees. The next tier will cover monthly origination volume between 161 and 500 items and include a $60 fixed monthly fee and a per-item surcharge that is $0.13 higher than current per-item fees. The bottom tier will cover monthly origination volume between 0 and 160 items and include a $20 fixed monthly fee and a per- item surcharge that is $0.38 higher than current per-item fees. Fedwire Funds The Reserve Banks will increase the Tier 1 per-item preincentive fee from $0.790 to $0.820 per transaction, increase the Tier 2 per-item preincentive fee from $0.240 to $0.245, and increase the Tier 3 per-item preincentive fee from $0.155 to $0.170 per transaction.\4\ --------------------------------------------------------------------------- \4\ The per-item preincentive fee is the fee that the Reserve Banks charge for transfers that do not qualify for incentive discounts. The Tier 1 per-item preincentive fee applies to the first 14,000 transfers, the Tier 2 per-item preincentive fee applies to the next 76,000 transfers, and the Tier 3 per-item preincentive fee applies to any additional transfers. The Reserve Banks apply an 80 percent incentive discount to transfers over 60 percent of a customer's historic benchmark volume. --------------------------------------------------------------------------- The Reserve Banks will increase the surcharge for offline transactions from $55 to $60. National Settlement Services The Reserve Banks will keep prices at existing levels for the priced National Settlement Services. Fedwire Securities The Reserve Banks will increase the online agency transfer fee from $0.65 to $0.77. The Reserve Banks will increase the offline origination and receipt surcharge transfer fee from $66 to $80. The Reserve Banks will increase the monthly agency issues maintenance fee from $0.65 to $0.77. The Reserve Banks will increase the monthly account maintenance fee from $48.00 to $57.50. The Reserve Banks will increase the joint custody origination surcharge from $44 to $46. The Reserve Banks will increase the claims adjustment fees from $0.75 to $0.80. FedLine[supreg] Access Solutions The Reserve Banks will increase five existing monthly fees: (1) The FedLine Web[supreg] Plus fee from $140 to $160, (2) the FedLine Direct[supreg] Premier fee from $6,500 to $6,700, (3) the FedComplete[supreg] 200 Plus fee from $1,300 to $1,350, (4) the FedComplete 200 Premier fee from $1,375 to $1,425, and (5) the FedMail[supreg] Fax a la carte fee from $70 to $100. The Reserve Banks will implement a legacy software fee to encourage FedLine Direct customers to migrate to a new messaging solution. The fee will be introduced in July 2017 at $5,000 per month and will increase in steps to $20,000 per month by the end of 2017. The Reserve Banks will remove the legacy email service from all FedLine Web, Advantage[supreg], Command[supreg], and Direct packages and introduce a $20-per-month fee to purchase an a la carte subscription to this service. The Reserve Banks will modify the E-Payments Routing Directory and make associated changes to FedLine packages and fees. A new automated download directory service will be introduced and available only to subscribers of plus- and premier-level FedLine packages. A la carte fees for additional directory download codes, ranging from $75 to $2,000 per month, will also be introduced. In addition, the new lineup of FedLine Exchange packages, discussed below, will allow customers that do not use FedLine for Federal Reserve Financial Services to access the directory. The Reserve Banks will introduce a new FedLine Exchange[supreg] service, along with two new associated packages: A base-level and premier-level. The base package will be priced at $40 per month and include the manual download directory service. The premier package will be priced at $125 per month and include both the manual and automated download directory services. The Reserve Banks will introduce a new FedMail package, priced at $85 per month, which will include the same services as those included in the existing FedLine Exchange package to ensure continuity of this service. All existing FedLine Exchange subscribers will be transitioned to the new FedMail package and experience a fee increase of $45. 5. 2017 Price Index--Figure 1 compares indexes of fees for the Reserve Banks' priced services with the GDP price index.\5\ The price index for Reserve Bank priced services is projected to decrease less than 1 percent in 2017 from the 2016 level. The price index for Check 21 services is projected to decrease approximately 3 percent. The price index for the FedACH Service is projected to increase nearly 1 percent. The price index for the Fedwire Funds and National Settlement Services is projected to increase approximately 2 percent. The price index for the Fedwire Securities Services is projected to increase nearly 1 percent. For the period 2007 to 2017, the price index for total priced services is expected to decrease approximately 19 percent. --------------------------------------------------------------------------- \5\ For the period 2007 to 2015, the GDP price index increased 13 percent. --------------------------------------------------------------------------- [[Page 75061]] [GRAPHIC] [TIFF OMITTED] TN28OC16.038 B. Private Sector Adjustment Factor--The imputed debt financing costs, targeted ROE, and effective tax rate are based on a U.S. publicly traded firm market model.\6\ The method for calculating the financing costs in the PSAF requires determining the appropriate imputed levels of debt and equity and then applying the applicable financing rates. In this process, a pro forma balance sheet using estimated assets and liabilities associated with the Reserve Banks' priced services is developed, and the remaining elements that would exist are imputed as if these priced services were provided by a private business firm. The same generally accepted accounting principles that apply to commercial-entity financial statements apply to the relevant elements in the priced services pro forma financial statements. --------------------------------------------------------------------------- \6\ Data for U.S. publicly traded firms is from the Standard and Poor's Compustat[supreg] database. This database contains information on more than 6,000 U.S. publicly traded firms, which approximates the entirety of the U.S. market. --------------------------------------------------------------------------- The portion of Federal Reserve assets that will be used to provide priced services during the coming year is determined using information about actual assets and projected disposals and acquisitions. The priced portion of these assets is determined based on the allocation of depreciation and amortization expenses of each asset class. The priced portion of actual Federal Reserve liabilities consists of postemployment and postretirement benefits, accounts payable, and other liabilities. The priced portion of the actual net pension asset or liability is also included on the balance sheet.\7\ --------------------------------------------------------------------------- \7\ The pension assets are netted with the pension liabilities and reported as a net asset or net liability as required by ASC 715 Compensation--Retirement Benefits. --------------------------------------------------------------------------- The equity financing rate is the targeted ROE produced by the capital asset pricing model (CAPM). In the CAPM, the required rate of return on a firm's equity is equal to the return on a risk-free asset plus a market risk premium. The risk-free rate is based on the three- month Treasury bill; the beta is assumed to be equal to 1.0, which approximates the risk of the market as a whole; and the market risk premium is based on the monthly returns in excess of the risk-free rate over the most recent 40 years. The resulting ROE reflects the return a shareholder would expect when investing in a private business firm. For simplicity, given that federal corporate income tax rates are graduated, state income tax rates vary, and various credits and deductions can apply, an actual income tax expense is not explicitly calculated for Reserve Bank priced services. Instead, the Board targets a pretax ROE that would provide sufficient income to fulfill the priced services' imputed income tax obligations. To the extent that performance results are greater or less than the targeted ROE, income taxes are adjusted using the effective tax rate. Capital structure. The capital structure is imputed based on the imputed funding need (assets less [[Page 75062]] liabilities), subject to minimum equity constraints. Short-term debt is imputed to fund the imputed short-term funding need. Long-term debt and equity are imputed to meet the priced services long-term funding need at a ratio based on the capital structure of the U.S. publicly traded firm market. The level of equity must meet the minimum equity constraints, which follow the FDIC requirements for a well-capitalized institution. The priced services must maintain equity of at least 5 percent of total assets and 10 percent of risk-weighted assets.\8\ Any equity imputed that exceeds the amount needed to fund the priced services' assets and meet the minimum equity constraints is offset by a reduction in imputed long-term debt. When imputed equity is larger than what can be offset by imputed debt, the excess is imputed as investments in Treasury securities; income imputed on these investments reduces the PSAF. --------------------------------------------------------------------------- \8\ The FDIC rule, which was adopted as final on April 14, 2014, requires that well-capitalized institutions meet or exceed the following standards: (1) Total capital to risk-weighted assets ratio of at least 10 percent, (2) tier 1 capital to risk-weighted assets ratio of at least 8 percent, (3) common equity tier 1 capital to risk-weighted assets ratio of at least 6.5 percent, and (4) a leverage ratio (tier 1 capital to total assets) of at least 5 percent. Because all of the Federal Reserve priced services' equity on the pro forma balance sheet qualifies as tier 1 capital, only requirements 1 and 4 are binding. The FDIC rule can be located at https://www.fdic.gov/news/board/2014/2014-04-08_notice_dis_c_fr.pdf. --------------------------------------------------------------------------- Application of the Payment System Risk (PSR) Policy to the Fedwire Services. The Board's PSR policy reflects the new international standards for financial market infrastructures (FMIs) developed by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions in the Principles for Financial Market Infrastructures. The revised policy retains the expectation that the Fedwire Services meet or exceed the applicable risk-management standards. Principle 15 states that an FMI should identify, monitor, and manage general business risk and hold sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialize. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services. The Fedwire Services do not face the risk that a business shock would cause the service to wind down in a disorderly manner and disrupt the stability of the financial system. In order to foster competition with private- sector FMIs, however, the Reserve Banks' priced services will hold six months of the Fedwire Funds Service's current operating expenses as liquid financial assets and equity on the pro forma balance sheet.\9\ Current operating expenses are defined as normal business operating expenses on the income statement, less depreciation, amortization, taxes, and interest on debt. The Fedwire Funds Service's six months of current operating expenses are computed based on its preliminary 2017 budget at $53.9 million. In 2017, $14.1 million of equity was imputed to meet the FDIC capital requirements. No additional imputed equity was necessary to meet the PSR policy requirement. --------------------------------------------------------------------------- \9\ This requirement does not apply to the Fedwire Securities Service. There are no competitors to the Fedwire Securities Service that would face such a requirement, and imposing such a requirement when pricing the securities services could artificially increase the cost of these services. --------------------------------------------------------------------------- Effective tax rate. Like the imputed capital structure, the effective tax rate is calculated based on data from U.S. publicly traded firms. The tax rate is the mean of the weighted average rates of the U.S. publicly traded firm market over the past 5 years. Debt and equity financing. The imputed short- and long-term debt financing rates are derived from the nonfinancial commercial paper rates from the Federal Reserve Board's H.15 Selected Interest Rates release (AA and A2/P2) and the annual Merrill Lynch Corporate & High Yield Index rate, respectively. The rates for debt and equity financing are applied to the priced services estimated imputed short-term debt, long-term debt, and equity needed to finance short- and long-term assets and meet equity requirements. The increase in the 2017 PSAF to $16.6 million from $13.1 million in 2016 is primarily attributable to a $2.0 million increase in the cost of debt and a $1.0 million increase in the return on equity offset by a $0.3 million decrease in the incremental return on imputed equity necessary for PSR policy compliance, all three of which were driven primarily by increased imputed funding needs arising from higher retail float asset balances. Projected 2017 Federal Reserve priced-services assets, reflected in table 3, have increased $143.1 million from 2016. This increase is primarily due to a $234.0 million increase in the balance of imputed investments in federal funds and a net $42.8 million increase in long- term assets, inclusive of pension, Bank premises, furniture and equipment, and leasehold improvements and long-term prepayments. The increase was partially offset by an $80.0 million decrease in items in process of collection and a $55.8 million decrease in imputed investments in Treasury securities. The significant increase in the imputed investments in federal funds balance is related to a reduction in debit float due to new deposit deadlines associated with the Endpoint-Culled ICL deposit option deadlines implemented in July 2016, which are intended to reduce float and items in process of collection. These balances had increased significantly as a result of the PSR policy implementation in 2015. The Endpoint-Culled ICL deposit option defers the portion of deposits the Federal Reserve is unable to present after a specific deadline during the processing cycle to limit instances where same-day credit is offered under the PSR policy for items that cannot be collected same day. The resulting balance of 2017 imputed investments in federal funds was sufficient to comply with the PSR policy expectations for Fedwire Funds, and no additional costs were incurred. As shown in table 3, imputed equity for 2017 is $58.6 million, an increase of $4.8 million from the equity imputed for 2016. In accordance with ASC 715, this amount includes an accumulated other comprehensive loss of $635.1 million. Table 4 reflects the portion of short- and long-term assets that must be financed with actual or imputed liabilities and equity. Debt and equity imputed to fund the 2017 priced services assets within the observed market leverage ratio produced an equity level that did not meet the FDIC minimum equity requirements. As a result, additional equity was imputed to meet the FDIC requirements, and imputed long-term debt was reduced. The ratio of capital to risk-weighted assets meets the required 10 percent of risk-weighted assets, and equity exceeds 5 percent of total assets (table 6). In 2017, long-term debt and equity was imputed to meet the asset funding requirements and reflects the leverage ratio observed in the market; additional equity of $14.1 million was required (table 5) to meet the market leverage ratio. Table 5 shows the derivation of the 2017 and 2016 PSAF. Financing costs for 2017 are $2.7 million higher than in 2016. In addition to the increase in the levels of debt and equity mentioned above, the cost of equity increased in 2017 to 41.6 percent from 41.5 percent in 2016. The increased equity balance and the slightly higher cost of equity result in a pretax ROE that is $1.0 million higher than the 2016 pretax ROE. Imputed sales taxes increased to [[Page 75063]] $3.2 million in 2017 from $2.8 million in 2016. The priced services portion of the Board's expenses increased $0.4 million to $5.4 million in 2017. The effective income tax rate used in 2017 increased to 22.7 percent from 21.6 percent in 2016. --------------------------------------------------------------------------- \10\ Credit float, which represents the difference between items in process of collection and deferred credit items, occurs when the Reserve Banks debit the paying bank for transactions prior to providing credit to the depositing bank. Float is directly estimated at the service level. \11\ Consistent with the Board's PSR policy, the Reserve Banks; priced services will hold six months of the Fedwire Funds Service's current operating expenses as liquid net financial assets and equity on the pro forma balance sheet. Six months of the Fedwire Funds Service's projected current operating expenses is $53.9 million. In 2017, $58.6 million of equity was imputed to meet the regulatory capital requirements. \12\ Includes the allocation of Board of Governors assets to priced services of $1.2 million for 2017 and $1.3 million for 2016. \13\ Includes the allocation of Board of Governors liabilities to priced services of $0.6 million for 2017 and 2016. \14\ Includes an accumulated other comprehensive loss of $635.1 million for 2017 and $666.1 million for 2016, which reflects the ongoing amortization of the accumulated loss in accordance with FAS 158 [ASC 715]. Future gains or losses, and their effects on the pro forma balance sheet, cannot be projected. See table 5 for calculation of required imputed equity amount. Table 3--Comparison of Pro Forma Balance Sheets for Budgeted Federal Reserve Priced Services [Millions of dollars--projected average for year] ---------------------------------------------------------------------------------------------------------------- 2017 2016 Change ---------------------------------------------------------------------------------------------------------------- Short-term assets: Receivables................................................. $36.6 $35.6 $1.1 Materials and supplies...................................... 0.6 0.5 0.1 Prepaid expenses............................................ 11.2 10.2 1.0 Items in process of collection \10\......................... 241.0 321.0 (80.0) ----------------------------------------------- Total short-term assets................................. 289.4 367.2 (77.9) Imputed investments: \11\ Imputed investment in Treasury Securities................... .............. 55.8 (55.8) Imputed investment in Fed Funds............................. 245.0 11.0 234.0 ----------------------------------------------- Total imputed investments............................... 245.0 66.8 178.2 Long-term assets: Premises \12\............................................... 128.7 111.0 17.7 Furniture and equipment..................................... 39.0 38.5 0.5 Leasehold improvements and long-term prepayments............ 104.8 89.5 15.3 Pension asset............................................... 10.9 .............. 10.9 Deferred tax asset.......................................... 186.1 187.9 (1.8) ----------------------------------------------- Total long-term assets.................................. 469.6 426.8 42.8 ----------------------------------------------- Total assets........................................ 1,003.9 860.9 143.1 =============================================== Short-term liabilities: Deferred credit items....................................... 486.0 332.0 154.0 Short-term debt............................................. 18.1 19.0 (0.9) Short-term payables......................................... 30.2 27.2 3.0 ----------------------------------------------- Total short-term liabilities............................ 534.4 387.2 156.1 Long-term liabilities: Pension liability........................................... .............. 17.6 (17.6) Long-term debt.............................................. 48.4 0.0 48.4 Postemployment/postretirement benefits and net pension 362.5 411.3 48.7 liabilities \13\........................................... ----------------------------------------------- Total liabilities................................... 945.3 807.1 138.3 Equity \14\..................................................... 58.6 53.8 4.8 ----------------------------------------------- Total liabilities and equity................................ 1,003.9 860.9 143.1 ---------------------------------------------------------------------------------------------------------------- Table 4--Imputed Funding for Priced-Services Assets [Millions of dollars] ------------------------------------------------------------------------ 2017 2016 ------------------------------------------------------------------------ A. Short-term asset financing: Short-term assets to be financed: Receivables..................... $36.6 $35.6 Materials and supplies.......... 0.6 0.5 Prepaid expenses................ 11.2 10.2 ------------------------------- Total short-term assets to be 48.4 46.2 financed........................... Short-term payables............. 30.2 27.2 Net short-term assets to be financed 18.1 19.0 Imputed short-term debt financing 18.1 19.0 \15\............................... B. Long-term asset financing: Long-term assets to be financed: .............. Premises........................ 128.7 111.0 [[Page 75064]] Furniture and equipment......... 39.0 38.5 Leasehold improvements and long- 104.8 89.5 term prepayments............... Pension asset................... 10.9 .............. Deferred tax asset.............. 186.1 187.9 ------------------------------- Total long-term assets to be 469.6 426.8 financed........................... Pension liability............... .............. 17.6 Postemployment/postretirement 362.5 411.3 benefits and net pension liabilities.................... Net long-term assets to be 107.0 (2.0) financed....................... Imputed long-term debt \15\..... 48.4 .............. Imputed equity \15\............. 58.6 53.8 ------------------------------- Total long-term financing... 107.0 53.8 ------------------------------------------------------------------------ --------------------------------------------------------------------------- \15\ See table 5 for calculation. \16\ If minimum equity constraints are not met after imputing equity based on the capital structure observed in the market, additional equity is imputed to meet these constraints. The long- term funding need was met by imputing long-term debt and equity based on the capital structure observed in the market (see tables 4 and 6). In 2017, the amount of imputed equity exceeded the minimum equity requirements for risk-weighted assets. \17\ Equity adjustment offsets are due to a shift of long-term debt funding to equity in order to meet FDIC capital requirements for well-capitalized institutions. \18\ Additional equity in excess of that needed to fund priced services assets is offset by an asset balance of imputed investments in treasury securities. \19\ Imputed short-term debt and long-term debt are computed at table 4. \20\ The 2017 ROE is equal to a risk-free rate plus a risk premium (beta * market risk premium). The 2017 after-tax CAPM ROE is calculated as 0.30% + (1.0 * 7.59%) = 7.89%. Using a tax rate of 22.7%, the after-tax ROE is converted into a pretax ROE, which results in a pretax ROE of (7.89%/(1-22.7%)) = 10.21%. Calculations may be affected by rounding. Table 5--Derivation of the 2017 and 2016 PSAF [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- 2017 2016 --------------------------------------------------------------------------- Debt Equity Debt Equity ---------------------------------------------------------------------------------------------------------------- A. Imputed long-term debt and equity: Net long-term assets to finance. $107.0 $107.0 $(2.0) $(2.0) Capital structure observed in 58.4% 41.6% 58.5% 41.5% market......................... --------------------------------------------------------------------------- Pre-adjusted long-term debt and $62.5 $44.5 $(1.2) $(0.8) equity......................... Equity adjustments: \16\ Equity to meet capital ................. 58.6 ................. 51.1 requirements............... Adjustment to debt and (14.1) 14.1 1.2 (1.2) equity funding given capital requirements \17\.. Adjusted equity balance..... -- 58.6 -- (2.0) Equity to meet capital -- -- -- 53.1 requirements \18\.......... --------------------------------------------------------------------------- Total imputed long-term $48.4 $58.6 -- $51.1 debt and equity........ B. Cost of capital: Elements of capital costs: Short-term debt \19\........ $18.1 x 0.6% = $0.1 $19.0 x 0.3% = $0.1 Long-term debt \19\......... 48.4 x 4.0% = 1.9 -- x 4.2% = -- Equity \20\................. 58.6 x 10.2% = 6.0 51.1 x 9.8% = 5.0 --------------------------------------------------------------------------- ................. $8.0 ................. $5.1 C. Incremental cost of PSR policy: Equity to meet policy........... $ -- x 10.2% = $ -- $2.7 x 9.8% = $0.3 --------------------------------------------------------------------------- D. Other required PSAF costs: Sales taxes..................... $3.2 ................. $2.8 ................. Board of Governors expenses..... 5.4 ................. 5.0 ................. ................. 8.6 ................. 7.8 --------------------------------------------------------------------------- ................. $16.6 ................. $13.1 E. Total PSAF: As a percent of assets.......... ................. 1.7% ................. 1.5% As a percent of expenses........ ................. 3.9% ................. 3.6% F. Tax rates:....................... ................. 22.7% ................. 21.6% ---------------------------------------------------------------------------------------------------------------- [[Page 75065]] Table 6--Computation of 2017 Capital Adequacy for Federal Reserve Priced Services [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- Weighted Assets Risk weight assets ($) ---------------------------------------------------------------------------------------------------------------- Imputed investments: 1-Year Treasury securities \21\............................. $ -- -- -- Federal funds \22\.......................................... 245.0 0.2 49.0 ----------------------------------------------- Total imputed investments............................... 245.0 .............. 49.0 Receivables..................................................... 36.6 0.2 7.3 Materials and supplies.......................................... 0.6 1.0 0.6 Prepaid expenses................................................ 11.2 1.0 11.2 Items in process of collection.................................. 241.0 0.2 48.2 Premises........................................................ 128.7 1.0 128.7 Furniture and equipment......................................... 39.0 1.0 39.0 Leasehold improvements and long-term prepayments................ 104.8 1.0 104.8 Pension asset................................................... 10.9 1.0 10.9 Deferred tax asset.............................................. 186.1 1.0 186.1 ----------------------------------------------- Total....................................................... 1,003.9 .............. 585.8 Imputed equity: Capital to risk-weighted assets............................. 10.0% Capital to total assets..................................... 5.8% ---------------------------------------------------------------------------------------------------------------- C. Check Service -- Table 7 shows the 2015 actual, 2016 estimated, and 2017 budgeted cost-recovery performance for the commercial check service. Table 7--Check Service Pro Forma Cost and Revenue Performance [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- Recovery rate Net income after targeted Year Revenue Total expense (ROE) [1-2] Targeted ROE ROE (%) [1/(2 + 4)] 1 2 3 4 5 ---------------------------------------------------------------------------------------------------------------- 2015 (actual)................... 160.6 140.2 20.4 2.0 113.0 2016 (estimate)................. 152.9 138.1 14.8 1.3 109.7 2017 (budget)................... 141.2 133.7 7.5 1.4 104.5 ---------------------------------------------------------------------------------------------------------------- 1. 2016 Estimate--The Reserve Banks estimate that the check service will recover 109.7 percent of total expenses and targeted ROE, compared with a 2016 budgeted recovery rate of 105.7 percent. Greater-than- expected check volumes processed by the Reserve Banks and lower-than- expected costs have influenced significantly the check service's cost recovery. --------------------------------------------------------------------------- \21\ If minimum equity constraints are not met after imputing equity based on all other financial statement components, additional equity is imputed to meet these constraints. Additional equity imputed to meet minimum equity requirements is invested solely in Treasury securities. The imputed investments are similar to those for which rates are available on the Federal Reserve's H.15 statistical release, which can be located at http://www.federalreserve.gov/releases/h15/data.htm. \22\ The investments are imputed based on the amounts arising from the collection of items prior to providing credit according to established availability schedules. --------------------------------------------------------------------------- The decline in Reserve Bank check volume, which is attributable to the decline in the number of checks written generally, was not as great as anticipated. Through August, total commercial forward check volume is 3.9 percent lower and total commercial return check volume is 3.3 percent lower than for the same period last year. For full-year 2016, the Reserve Banks estimate that their total forward check volume will decline 5.2 percent (compared with a budgeted decline of 6.2 percent) and their total return check volume will decline 6.8 percent (compared with a budgeted decline of 12.7 percent) from 2015 levels.\23\ --------------------------------------------------------------------------- \23\ Total Reserve Bank forward check volumes are expected to drop from 5.5 billion in 2015 to 5.2 billion in 2016. Total Reserve Bank return check volumes are expected to drop from 33.2 million in 2015 to 30.9 million in 2016. --------------------------------------------------------------------------- 2. 2017 Pricing--The Reserve Banks expect the check service to recover 104.5 percent of total expenses and targeted ROE in 2017. The Reserve Banks project revenue to be $141.2 million, a decline of 7.7 percent from the 2016 estimate. This decline is driven largely by the Reserve Banks' restructured FedForward, FedReturn, and FedReceipt fee schedules, discussed below.\24\ Total expenses for the check service are projected to decrease to $133.7 million, a decline of $4.4 million, or 3.2 percent, from 2016 expenses primarily due to reduced operating costs, including cost savings associated with increased efficiencies of the Reserve Banks' customer support services for the FedACH and check service lines. --------------------------------------------------------------------------- \24\ This decline is also driven, in part, by anticipated continuing decline in the number of checks written generally. The Reserve Banks estimate that total commercial forward check volumes in 2017 will decline 5.0 percent, to 4.9 billion, and total commercial return check volumes will decline 10.1 percent to 27.8 million in 2017. --------------------------------------------------------------------------- [[Page 75066]] In July 2016, the Reserve Banks announced restructured FedForward, FedReturn and FedReceipt fee schedules designed to reflect the efficiencies of electronic check processing and better serve the needs of the marketplace in today's electronic environment.\25\ The Reserve Banks announced the restructured fee schedules earlier in the year to provide customers with sufficient notice.\26\ --------------------------------------------------------------------------- \25\ As part of the Board's approval of the Reserve Banks' 2016 check fee schedules, the Board noted that the Reserve Banks would announce changes to the check service to reflect the efficiencies of today's electronic check processing environment. 79 FR 65937, 70785 (Nov. 16, 2015). \26\ A full summary of the modifications was included with Reserve Bank's announcement and is available at https://frbservices.org/files/servicefees/pdf/071116_2017_check_pricing_summary_of_changes.pdf. The Reserve Banks' modified fee schedules are available at https://www.frbservices.org/servicefees/check_services_2016.html. --------------------------------------------------------------------------- Specifically, the Reserve Banks announced simplified FedFoward and FedReturn deposit products. The simplified deposit products will offer two fixed-fee options: a per-image cash letter (ICL) fee and a daily subscription fee.\27\ Both options will offer standard and premium variations, with premium variations offering higher fixed and lower per-item fees than the standard variations. Both options will also include per-item fees, based on a modified volume-based tiered pricing structure, with tiers defined by volume of items received by a chartered institution from the Reserve Banks.\28\ Tiers for the three premium variations of the daily subscription fee deposit options, FedFoward Premium Daily Fee A, B, and C and FedReturn Premium Daily Fee A, will be based only on volume received by a chartered institution from a subset of the Reserve Banks' customers.\29\ The volumes used to define all tiers will be evaluated and set annually as part of the Board's approval of annual fee schedules.\30\ --------------------------------------------------------------------------- \27\ The per-ICL fee structure offers a fixed fee for each deposited image cash letter and a per-item fee for each item in the cash letter. The subscription structure offers a daily subscription fee and a per-item fee for each item. Per-item fees are determined by the Reserve Banks' volume-based tiered pricing structure. \28\ Under the tiered pricing structure, depositors pay a variable per-item fee based on the endpoint to which an item is being delivered. Tiers are currently determined at the individual routing number. \29\ The Reserve Banks believe the top 15 customers, which account for approximately 33 percent of the Reserve Banks' deposit volume, represent the most-likely users of the Premium Daily Fee deposit options because of the high daily fixed fees and lower per- item fees. \30\ The tiers for 2017 are available at https://www.frbservices.org/servicefees/check21_endpoint_listing.html. --------------------------------------------------------------------------- The Premium Daily Fee deposit options will include a fifth tier, Tier 0, comprised of routing numbers for which the Reserve Banks currently receive little to no volume from the specified subset of Reserve Bank customers (and therefore cannot currently be assigned to the other tiers with sufficient certainty). Tier 0 will also be evaluated annually, along with all other tiers, so that if volume migrates to routing numbers in tier 0 (enabling more information on which to assign a tier) those routing numbers will be moved to the appropriate tier. In October 2016, the Reserve Banks announced minor modifications to the Premium Daily Fee products.\31\ To clarify Tier 0's transitional purpose, the Reserve Banks announced that routing numbers cannot be placed in Tier 0 if they have previously been assigned to one of the other tiers. Based on additional review of Tier 0's composition, the Reserve Banks also announced that a routing number will only be assigned to Tier 0 if the chartered institution receives a minimum of 150 items daily.\32\ As a result, the Reserve Banks determined that approximately 3,800 routing numbers initially included in Tier 0 could more appropriately be placed in another tier, Tier 4.\33\ --------------------------------------------------------------------------- \31\ For the announcement, see https://frbservices.org/files/communications/pdf/check/100316-check-modification-announcement.pdf. \32\ The Reserve Banks determined after further analysis that a floor of 150 items daily was appropriate to avoid placing small institutions in Tier 0 because of limited total volumes (institutions below the floor receive an average of only 47 items daily). \33\ To minimize any customer impact of these changes, the Reserve Banks also reduced the Tier 4 per-item fees and daily fixed fees for two of the Premium Daily Fee deposit options. --------------------------------------------------------------------------- The Reserve Banks also announced that most sorted-deposit options will be eliminated, including the Fine Sort ICL, Deferred Fine Sort ICL, and Fixed Mixed ICL deposit options.\34\ The Reserve Banks announced that they will not, however, modify the Endpoint-Culled ICL deposit option, the Dollar Cut Mixed ICL (renamed ``Dollar-Culled ICL'') option, or the Deferred Mixed ICL (renamed ``Deferred ICL'') option.\35\ The Reserve Banks will continue to allow separately sorted Treasury Check, Postal Money Order, and Savings Bond ICLs. --------------------------------------------------------------------------- \34\ In a paper check processing environment, the fine-sort products allowed the Reserve Banks to gain efficiencies because the checks did not require processing on reader-sorters. In today's electronic check processing environment, all ICLs are processed through the Reserve Banks' electronic system in the same manner, and the Reserve Banks do not gain any efficiencies by having the depositing bank fine-sort electronic checks before deposit. \35\ Under the Endpoint-Culled ICL deposit option (offered only at 12:00 p.m. ET), items drawn on routing numbers enrolled in the Reserve Banks' Premium Presentment service and those presented as substitute checks are culled from the cash letter by the Reserve Banks and placed into a Deferred Imaged Cash Letter, with depositors receiving next-day credit availability on those items. The product allows the Reserve Banks to limit instances where same-day credit is offered for items that cannot be collected same day (the Reserve Banks similarly cull items deposited on the 12:00 p.m. ET deposit deadline offered as part of the Premium Daily Fee deposit options). Under the Deferred ICL deposit option, credit for all items deposited is deferred until the next business day. Under the Dollar- Culled ICL deposit option, items written for less than $1,000, plus all items for $1,000 or more that are drawn on a substitute check endpoint, are culled from the cash letter by the Reserve Banks and placed into a Deferred Imaged Cash Letter, with depositors receiving the next-day credit availability of that deposit option. Items of $1,000 or more (except for those that will be presented as substitute checks) are kept in the original cash letter, with same- day credit availability at the next deadline according to the Federal Reserve Policy on Payment System Risk. --------------------------------------------------------------------------- Finally, the Reserve Banks announced modifications to their FedReceipt product, including reduced FedReceipt fees for forward and return items and elimination of the FedReceipt Plus Deposit Discount for both FedForward and FedReturn deposits.\36\ The Reserve Banks also announced that they will modify volume tiers for their Courtesy Delivery service (renamed ``Accelerated Delivery Service'') and that the Retail Payments Premium Receiver discount will be applied to items deposited by a chartered institution rather than on items received. Both products remain otherwise unchanged. --------------------------------------------------------------------------- \36\ The Reserve Banks implemented the deposit discount structure to encourage banks to transition from paper to electronic items. With the Reserve Banks presenting and returning more than 99 percent of items electronically, the discount is no longer necessary to encourage banks to move away from paper. --------------------------------------------------------------------------- The Reserve Banks estimate that the price changes will result in a 3.5 percent average price decrease for check customers. The primary risks to the Reserve Banks' ability to achieve budgeted 2017 cost recovery for the check service include lower-than-expected check volume due to reductions in check writing overall and competition from correspondent banks, aggregators, and direct exchanges, which would result in lower-than-anticipated revenue. D. FedACH Service--Table 8 shows the 2015 actual, 2016 estimate, and 2017 budgeted cost-recovery performance for the commercial FedACH service. [[Page 75067]] Table 8--FedACH Service Pro Forma Cost and Revenue Performance [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- Recovery rate Net income after targeted Year Revenue Total expense (ROE) [1-2] Targeted ROE ROE %, [1/(2 + 4)] 1 2 3 4 5 ---------------------------------------------------------------------------------------------------------------- 2015 (actual)................... 125.5 122.8 2.7 1.8 100.7 2016 (estimate)................. 130.7 131.0 -0.3 1.3 98.8 2017 (budget)................... 140.4 145.4 -5.1 1.6 95.5 ---------------------------------------------------------------------------------------------------------------- 1. 2016 Estimate--The Reserve Banks estimate that the FedACH service will recover 98.8 percent of total expenses and targeted ROE, compared with a 2016 budgeted recovery rate of 99.5 percent. Through August, FedACH commercial origination and receipt volume was 5.8 percent higher than it was during the same period last year. For full- year 2016 the Reserve Banks estimate that FedACH commercial origination and receipt volume will increase 4.9 percent, compared with a budgeted increase of 4.5 percent. Although volume is higher than originally projected, the Reserve Banks estimate lower-than-budgeted 2016 cost recovery due to higher than anticipated environmental costs such as an increase in pension expense and refinement in the accounting treatment between capital and expenses for the FedACH technology modernization program.\37\ --------------------------------------------------------------------------- \37\ The Reserve Banks have been engaged in a multiyear technology initiative to modernize the FedACH processing platform by migrating the service from a mainframe system to a distributed computing environment. In 2016, the Reserve Banks chose a commercially available option as their processing solution to modernize the FedACH platform. --------------------------------------------------------------------------- 2. 2017 Pricing--The Reserve Banks expect the FedACH service to recover 95.5 percent of total expenses and targeted ROE in 2017. FedACH commercial origination and receipt volume is projected to grow 5.7 percent, contributing to an increase of $9.7 million in total revenue from the 2016 estimate. Total expenses are budgeted to increase $14.4 million from 2016 expenses, primarily because of costs associated with the development of a new FedACH technology platform. The Reserve Banks will increase the minimum monthly fee for forward origination from $45 to $50 and the minimum monthly fee for receipt from $35 to $40.\38\ The Reserve Banks also will increase the FedACH Account Servicing Fee from $45 to $58 and change the fee name to the ``FedACH Participation fee,'' to reflect more accurately the intention of the fee, which is to recover fixed costs related to participation in the FedACH network. The Reserve Banks also will eliminate the on-us receipt credit of $0.0032 per item. All on-us items will be charged the current FedACH receipt per-item fee of $0.0032 per item. --------------------------------------------------------------------------- \38\ Any originating depository financial institution (ODFI) incurring less than $50 for the following fees will be charged the difference to reach the minimum: Forward value and nonvalue item origination fees, FedGlobal ACH origination surcharges, and FedACH SameDay forward origination surcharges. Any receiving depository financial institution (RDFI) that incurs less than $40 in receipt fees and originates forward value and nonvalue items incurring less than $50 in origination fees will only be charged the difference in the origination fee to reach the minimum monthly origination fee of $50. Any RDFI that incurs less than $40 in receipt fees and is not originating forward value and nonvalue items will incur the $40 minimum monthly fee for receipt. --------------------------------------------------------------------------- The Reserve Banks will increase the FedACH Information Extract File fee from $100 to $150 per file. The Reserve Banks also will increase the FedPayments Reporter fee approximately 10 percent rounded to the nearest $5 for each level of the tiered package pricing. They also will introduce a new top tier, with a $1,800 monthly fee, for a package that includes more than 10,000 reports. Further, the Reserve Banks will introduce a fixed monthly fee and a volume-based tiered pricing structure for the FedGlobal ACH service.\39\ The tiered pricing structure will include per-item surcharges that are in addition to the standard FedACH origination fee of $0.0032 and vary according to the transaction's destination, as seen in table 9. The top tier will cover monthly origination volume over 500 items and include a $185 fixed monthly fee and a per-item surcharge that is $0.12 lower than current per-item fees. The next tier will cover monthly origination volume between 161 and 500 items and include a $60 fixed monthly fee and a per-item surcharge that is $0.13 higher than current per-item fees. The bottom tier will cover monthly origination volume between 0 and 160 items and include a $20 fixed monthly fee and a per-item surcharge that is $0.38 higher than current per-item fees. --------------------------------------------------------------------------- \39\ The FedGlobal ACH pricing changes meet the Federal Reserve Board's guidance on the Reserve Banks' use of volume-based pricing for electronic payment services and products. 62 FR 14146 (March 25, 1997) (FRB Docket No. R-0967). Table 9--FedGlobal ACH Service Volume-Based Origination Surcharges \40\ -------------------------------------------------------------------------------------------------------------------------------------------------------- Fixed monthly Canada (per Mexico (per Panama (per Europe (per Volume (items) fee transaction) transaction) transaction) transaction) -------------------------------------------------------------------------------------------------------------------------------------------------------- More than 500................................................. $185 $0.50 $0.55 $0.60 $1.13 161-500....................................................... 60 0.75 0.80 0.85 1.38 0-160......................................................... 20 1.00 1.05 1.10 1.63 -------------------------------------------------------------------------------------------------------------------------------------------------------- The Reserve Banks estimate that the price changes will result in a 5.3 percent average price increase for FedACH customers. --------------------------------------------------------------------------- \40\ These per-item surcharges are in addition to the standard domestic FedACH origination fees. --------------------------------------------------------------------------- While the Reserve Banks are not budgeted to fully recover costs in 2017, they are expected to fully recover costs [[Page 75068]] following finalization of the FedACH technology modernization project. The Reserve Banks' FedACH fee increases balance raising fees dramatically during a temporary period of increased costs associated with a defined technology upgrade that will be expected to result in significant over recovery following this defined period. The approach to moderately increase fees only is consistent with a multi-year strategy to minimize pricing volatility and provide long-term price stability for customers while undertaking the ongoing technology upgrade that will result in FedACH incurring higher expenses over the next few years. The primary risks to the Reserve Banks' ability to achieve budgeted 2017 cost recovery for the FedACH service are cost overruns associated with unanticipated problems related to efforts to modernize the FedACH processing platform and higher-than-expected support and overhead costs. Other risks include lower-than-expected volume and associated revenue due to unanticipated mergers and acquisitions and loss of market share due to direct exchanges and a shift of volume to the private-sector operator. E. Fedwire Funds and National Settlement Services--Table 10 shows the 2015 actual, 2016 estimate, and 2017 budgeted cost-recovery performance for the Fedwire Funds and National Settlement Services. Table 10--Fedwire Funds and National Settlement Services Pro Forma Cost and Revenue Performance [Dollars in millions] -------------------------------------------------------------------------------------------------------------------------------------------------------- Recovery rate Net income after targeted Year Revenue Total expense (ROE) [1-2] Targeted ROE ROE (%) [1/(2 + 4)] 1 2 3 4 5 -------------------------------------------------------------------------------------------------------------------------------------------------------- 2015 (actual)............................................. 116.0 110.1 5.9 1.6 103.9 2016 (estimate)........................................... 123.1 118.0 5.1 1.3 103.2 2017 (budget)............................................. 128.8 126.3 2.6 1.3 101.0 -------------------------------------------------------------------------------------------------------------------------------------------------------- 1. 2016 Estimate--The Reserve Banks estimate that the Fedwire Funds and National Settlement Services will recover 103.2 percent of total expenses and targeted ROE, compared with a 2016 budgeted recovery rate of 99.4 percent. Through August, Fedwire Funds Service online volume was 3.6 percent higher than for the same period last year. For full- year 2016, the Reserve Banks estimate Fedwire Funds Service online volume to increase 1.9 percent from 2015 levels, compared with the 0.3 percent volume decrease that had been budgeted. The Reserve Banks do not expect the volume growth in 2015 and early 2016 to continue at that level through year-end. Through August, National Settlement Service settlement file volume was 1.0 percent lower than for the same period last year, and settlement entry volume was 3.0 percent lower. For the full year, the Reserve Banks estimate that settlement file volume will decrease 1.1 percent (compared with a budgeted 5.3 percent increase) and settlement entry volume will decrease 4.0 percent from 2015 levels (compared with a budgeted 0.8 percent decrease). NSS settlement file and entry volumes are anticipated to be lower than budgeted, as the onboarding of a new arrangement originally expected to occur in the fourth quarter of 2016 has now been delayed until 2017. 2. 2017 Pricing--The Reserve Banks expect the Fedwire Funds and National Settlement Services to recover 101.0 percent of total expenses and targeted ROE. Revenue is projected to be $128.8 million, an increase of 4.6 percent from the 2016 estimate. The Reserve Banks project total expenses to be $8.3 million higher than the 2016 expenses, primarily because of capitalized software costs associated with the Fedwire Funds modernization program that will be amortized until January 2022 and other costs related to new resiliency initiatives. The Reserve Banks will adjust the incentive pricing fees for the Fedwire Funds Service by increasing the Tier 1 per-item preincentive fee (the fee before volume discounts are applied) from $0.790 to $0.820, increasing the Tier 2 per-item preincentive fee from $0.240 to $0.245, and increasing the Tier 3 per-item preincentive fee from $0.155 to $0.170.\41\ The Reserve Banks also will increase the surcharge for offline transactions from $55 to $60. The Reserve Banks estimate that the price changes will result in a 3.3 percent average price increase for Fedwire Funds customers. --------------------------------------------------------------------------- \41\ The per-item preincentive fee is the fee that the Reserve Banks charge for transfers that do not qualify for incentive discounts. The Tier 1 per-item preincentive fee applies to the first 14,000 transfers, the Tier 2 per-item preincentive fee applies to the next 76,000 transfers, and the Tier 3 per-item preincentive fee applies to any additional transfers. The Reserve Banks apply an 80 percent incentive discount to transfers over 60 percent of a customer's historic benchmark volume. --------------------------------------------------------------------------- The Reserve Banks will not change National Settlement Service fees for 2017. The primary risks to the Reserve Banks' ability to achieve budgeted 2017 cost recovery for these services are cost overruns from new initiatives to improve resiliency and operational functionality. F. Fedwire Securities Service--Table 11 shows the 2015 actual, 2016 estimate, and 2017 budgeted cost recovery performance for the Fedwire Securities Service.\42\ --------------------------------------------------------------------------- \42\ The Reserve Banks provide transfer services for securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international institutions. The priced component of this service consists of revenues, expenses, and volumes associated with the transfer of all non-Treasury securities. For Treasury securities, the U.S. Treasury assesses fees for the securities transfer component of the service. The Reserve Banks assess a fee for the funds settlement component of a Treasury securities transfer; this component is not treated as a priced service. [[Page 75069]] Table 11--Fedwire Securities Service Pro Forma Cost and Revenue Performance [Dollars in millions] ---------------------------------------------------------------------------------------------------------------- Recovery rate Net income after targeted Year Revenue Total expense (ROE) [1-2] Targeted ROE ROE (%) [1/(2 + 4)] 1 2 3 4 5 ---------------------------------------------------------------------------------------------------------------- 2015 (actual)................... 27.1 24.7 2.4 0.3 108.2 2016 (estimate)................. 25.8 26.2 -0.4 0.3 97.6 2017 (budget)................... 29.0 29.4 -0.4 0.3 97.5 ---------------------------------------------------------------------------------------------------------------- 1. 2016 Estimate--The Reserve Banks estimate that the Fedwire Securities Service will recover 97.6 percent of total expenses and targeted ROE, close to the 2016 budgeted recovery rate of 97.5 percent. Through August, Fedwire Securities Service online agency transfer volume was 13.1 percent lower than during the same period last year. For full-year 2016, the Reserve Banks estimate Fedwire Securities Service online agency transfer volume will decline 13.5 percent from 2015 levels, compared with a budgeted decline of 5.4 percent. The lower-than-expected online agency transfer volume resulted from lower- than-projected Agency debt issuance, as Fannie Mae and Freddie Mac continue to reduce the overall size of their portfolios in accordance with Federal Housing Finance Agency guidelines. In addition, new mortgage originations and mortgage paydowns from refinancing activity are expected to decline before year-end if interest rates rise in the fourth quarter, which will result in falling levels of issuance and settlement activity for agency mortgage-backed securities over Fedwire Securities. Through August, account maintenance volume was 4.4 percent lower than during the same period last year. For the full year 2016, the Reserve Banks estimate that account maintenance volume will decline 5.0 percent over 2015 levels, compared with a budgeted decline of 8.8 percent. The higher account maintenance volume is the result of conservative estimates for customer account closures that have not materialized. 2. 2017 Pricing--The Reserve Banks expect the Fedwire Securities Service to recover 97.5 percent of total expenses and targeted ROE in 2017. The Reserve Banks project that online agency transfer activity will decline 7.5 percent in 2017, the number of accounts maintained will decrease 7.4 percent, and the number of agency issues maintained will decrease 2.4 percent.\43\ The projected decline in both online transfer and account maintenance volume in 2017 reflects, in part, an anticipated drop in demand resulting from JP Morgan Chase's exit from the U.S. government securities clearing and settlement business for its broker-dealer services by mid-2018.\44\ Moreover, as in 2016, the Reserve Banks continue to project a decrease in online transfers as interest rates may possibly increase, leading to less mortgage refinancing, and, in turn, reducing issuances of mortgage-backed securities. In addition, the reduction in agency debt issuance will continue to reflect a reduction in government-sponsored enterprise portfolios, as required by the U.S. Treasury and the Federal Housing Finance Agency, leading to a reduced funding need for new debt issuance.\45\ New settlement logic launched by the Fixed Income Clearing Corporation in January 2016, and further changes in mid-2017 are also expected to reduce the number of agency debt transfers over the Fedwire Securities Service.\46\ --------------------------------------------------------------------------- \43\ The online transfer fee, monthly account maintenance fee, and monthly issue maintenance fee accounted for approximately 93 percent of total Fedwire Securities Service revenue through June 2016. \44\ JP Morgan Chase announced in July 2016, its intent to exit the government securities clearing and settlement business. It is expected that the exit will result in significant reductions of transfer volume over Fedwire Securities as more transactions shift to in-house activity at the remaining custodian banks. \45\ Government-sponsored enterprises are reducing their retained portfolio by 15 percent annually through 2018, as mandated by the Senior Preferred Stock Purchase Agreements, until each portfolio reaches a target level of $250 billion. Further information on these agreements can be found at: http://www.fhfa.gov/Conservatorship/Pages/Senior-Preferred-Stock-Purchase-Agreements.aspx. \46\ Information on the Fixed Income Clearing Corporation's new settlement logic can be found at http://www.dtcc.com/~/media/Files/ pdf/2015/6/22/GOV045-15.pdf. --------------------------------------------------------------------------- Revenue is projected to be $29.0 million, an increase of 12.4 percent from the 2016 estimate; this projected rise in revenue results from higher fees, discussed below, that offset the anticipated online transfer and account maintenance volume declines. The Reserve Banks also project that 2017 expenses will increase by $3.2 million, compared with 2016 expenses, reflecting higher expected operating costs. Higher operating costs in 2017 reflect the amortization of capital software costs from completed modernization initiatives as well as the advancement of new initiatives to improve resiliency and operational functionality. The Reserve Banks will increase the online agency transfer fee from $0.65 to $0.77 and increase the offline origination and receipt surcharge transfer fee from $66 to $80. The Reserve Banks also will increase the monthly agency issues maintenance fee from $0.65 to $0.77 and will increase the monthly account maintenance fee from $48 to $57.50. Moreover, the Reserve Banks will increase the joint custody origination surcharge from $44 to $46. Finally, the Reserve Banks will increase the claims adjustment fees from $0.75 to $0.80. The Reserve Banks estimate that the price changes will result in an 18.0 percent average price increase for Fedwire Securities customers. The primary risks to the Reserve Banks' ability to achieve budgeted 2017 cost recovery for these services are lower-than-expected volume resulting from the pace of structural changes in government securities settlement, and cost overruns from new initiatives to improve resiliency and operational functionality. G. FedLine Access--The Reserve Banks charge fees for the electronic connections that depository institutions use to access priced services and allocate the costs and revenue associated with this electronic access to the various priced services. There are currently five FedLine channels through which customers can access the Reserve Banks' priced services: FedMail, FedLine Web, FedLine Advantage, FedLine Command, and FedLine [[Page 75070]] Direct.\47\ The Reserve Banks package these channels into nine FedLine packages, described below, that are supplemented by a number of premium (or a la carte) access and accounting information options. In addition, the Reserve Banks offer FedComplete packages, which are bundled offerings of a FedLine Advantage connection and a fixed number of FedACH, Fedwire Funds, and Check 21-enabled services. --------------------------------------------------------------------------- \47\ FedMail, FedLine Web, FedLine Advantage, FedLine Command, and FedLine Direct are registered trademarks of the Federal Reserve Banks. --------------------------------------------------------------------------- Six attended access packages offer manual access to critical payment and information services via a web-based interface. The FedLine Exchange package provides access to basic information services via email, while two FedLine Web packages offer an email option plus online attended access to a range of services, including cash services, FedACH information services, and check services. Three FedLine Advantage packages expand upon the FedLine Web packages and offer attended access to critical transactional services: FedACH, Fedwire Funds, and Fedwire Securities. Three unattended access packages are computer-to-computer, IP-based interfaces. The FedLine Command package offers an unattended connection to FedACH, as well as most accounting information services. The two remaining options are FedLine Direct packages, which allow for unattended connections at one of two connection speeds to FedACH, Fedwire Funds, and Fedwire Securities transactional and information services and to most accounting information services.\48\ --------------------------------------------------------------------------- \48\ None of the FedLine packages offer an unattended connection to check services. The Reserve Banks offer an unattended check product, Check 21 Large File Delivery, outside of the FedLine suite that allows a depository institution to upload and download check image cash letters automatically via a direct network connection to the Reserve Banks. --------------------------------------------------------------------------- For the 2017 FedLine fees, the Reserve Banks will increase five existing monthly fees: (1) The FedLine Web Plus fee from $140 to $160, (2) the FedLine Direct Premier fee from $6,500 to $6,700, (3) the FedComplete 200 Plus fee from $1,300 to $1,350, (4) the FedComplete 200 Premier fee from $1,375 to $1,425, and (5) the FedMail Fax a la carte fee from $70 to $100. As in previous years, the Reserve Banks will introduce new fees on legacy services. In particular, the Reserve Banks will implement a legacy software fee to encourage FedLine Direct customers to migrate to an enhanced messaging solution.\49\ To provide customers sufficient time to migrate, the fee will not become effective until the third quarter of 2017. The fee will be introduced on July 1, 2017, at $5,000 per month and will increase in steps to $20,000 per month by the end of 2017.\50\ In addition, the Reserve Banks will remove the legacy email service from all FedLine Web, Advantage, Command, and Direct packages and introduce a $20-per-month fee to purchase an a la carte subscription to this service. Customers in these packages that currently use the email service will have the opportunity to cancel the service to avoid the a la carte fee. --------------------------------------------------------------------------- \49\ To avoid the fee, FedLine Direct customers will need to configure their systems to run a supported version of the MQ platform. MQ is a critical messaging component that facilitates the exchange of information between applications, systems, services and files. \50\ The fee will increase to $10,000 per month on September 1, 2017, and to $20,000 per month on November 1, 2017. --------------------------------------------------------------------------- In addition, the Reserve Banks will modify the E-Payments Routing Directory and make several associated changes to FedLine packages and fees.\51\ Currently, all FedLine Web, Advantage, Command, and Direct packages include two services to download the directory: manual and automated.\52\ The Reserve Banks will introduce a new automated download service that will allow subscribers to provide access to the directory to their customers (that is, non-financial institutions that require access to the directory). Access to the directory will be controlled through the use of download codes, and financial institutions will be responsible for distributing the codes to their respective customers. Additionally, the Reserve Banks will include the automated download service in only plus- and premier-level FedLine packages.\53\ Five download codes will be included in these packages, and additional codes will be available to purchase through an a la carte option (codes will be available in bundles ranging in price from $75 to $2,000 per month). --------------------------------------------------------------------------- \51\ E-Payments Routing Directory provides basic routing information for Fedwire Funds, Fedwire Securities, and FedACH transactions. \52\ The manual service allows subscribers to download the directory in a manual fashion via a web-based interface. The automated service allows subscribers to schedule daily, weekly, or monthly automated (unattended) downloads of the directory. \53\ Plus- and premier-level packages are FedLine Web Plus, FedLine Advantage Plus and Premier, FedLine Command Plus, and FedLine Direct Plus and Premier. In addition the new FedLine Exchange Premier package will have access to the automated service. --------------------------------------------------------------------------- To accommodate the enhancements to the E-payments Directory, the Reserve Banks will introduce a new FedLine Exchange service, along with a new set of associated packages. Currently, the FedLine Exchange service is an email-based interface, and there is only one package available. The new FedLine Exchange service--which will be a web-based interface (that is, accessible via a web browser rather than email)-- will allow customers that do not use FedLine for Federal Reserve Financial Services to access the E-Payments Routing Directory.\54\ The new service will be available in two packages: A base-level and premier-level. The base package, priced at $40 per month, will include the manual download directory service. The premier package, priced at $125 month, will include both the manual and automated download directory services.\55\ To ensure continuity of service, the services available in the existing FedLine Exchange package will continue to be available through a new package, FedMail, as discussed below. --------------------------------------------------------------------------- \54\ Customers that do not use FedLine to access Federal Reserve Financial Services are generally small financial institutions that partner with a payment processor or other third party for transactional processing. \55\ FedLine Exchange customers will need to request credentials to access the manual directory download service. These credentials will be billed via a FedMail-FedLine Exchange Subscriber 5-pack. The automated download directory service under the FedLine Exchange Premier package includes five download codes so a separate subscriber 5-pack is not required. --------------------------------------------------------------------------- The Reserve banks will introduce a new FedMail package, priced at $85 per month, which will include the same email-based services included in the existing FedLine Exchange package.\56\ Subscribers of the existing FedLine Exchange package will be transitioned to the new FedMail package and experience a fee increase of $45.\57\ --------------------------------------------------------------------------- \56\ The addition of the FedMail package and the FedLine Exchange Premier package will increase the total number of FedLine packages from nine to eleven. \57\ The $45 increase represents the difference in price between the new FedMail package ($85) and the existing FedLine Exchange package ($40). --------------------------------------------------------------------------- The Reserve Banks estimate that the price changes will result in an 8.1 percent average price increase for FedLine customers. II. 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 ``The Federal Reserve in the Payments System.'' \58\ Under this policy, the Board assesses whether proposed changes will have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal [[Page 75071]] Reserve in providing similar services because of differing legal powers or constraints or because of a dominant market position deriving from such legal differences. If any proposed changes create such an effect, the Board must further evaluate the changes to assess whether the benefits associated with the changes--such as contributions to payment system efficiency, payment system integrity, or other Board objectives--can be achieved while minimizing the adverse effect on competition. --------------------------------------------------------------------------- \58\ Federal Reserve Regulatory Service (FRRS) 9-1558. --------------------------------------------------------------------------- The 2017 fees, fee structures, and changes in service will not have a direct and material adverse effect on the ability of other service providers to compete effectively with the Reserve Banks in providing similar services. The changes should permit the Reserve Banks to earn a ROE that is comparable to overall market returns and provide for full cost recovery over the long run. III. 2017 Fee Schedules BILLING CODE 6210-01-P [[Page 75072]] [GRAPHIC] [TIFF OMITTED] TN28OC16.039 [[Page 75073]] [GRAPHIC] [TIFF OMITTED] TN28OC16.040 [[Page 75074]] [GRAPHIC] [TIFF OMITTED] TN28OC16.041 [[Page 75075]] [GRAPHIC] [TIFF OMITTED] TN28OC16.042 [[Page 75076]] [GRAPHIC] [TIFF OMITTED] TN28OC16.043 [[Page 75077]] [GRAPHIC] [TIFF OMITTED] TN28OC16.044 [[Page 75078]] [GRAPHIC] [TIFF OMITTED] TN28OC16.045 [[Page 75079]] [GRAPHIC] [TIFF OMITTED] TN28OC16.046 [[Page 75080]] [GRAPHIC] [TIFF OMITTED] TN28OC16.047 [[Page 75081]] [GRAPHIC] [TIFF OMITTED] TN28OC16.048 [[Page 75082]] [GRAPHIC] [TIFF OMITTED] TN28OC16.049 [[Page 75083]] [GRAPHIC] [TIFF OMITTED] TN28OC16.050 [[Page 75084]] [GRAPHIC] [TIFF OMITTED] TN28OC16.051 [[Page 75085]] [GRAPHIC] [TIFF OMITTED] TN28OC16.052 [[Page 75086]] [GRAPHIC] [TIFF OMITTED] TN28OC16.053 [[Page 75087]] [GRAPHIC] [TIFF OMITTED] TN28OC16.054 [[Page 75088]] [GRAPHIC] [TIFF OMITTED] TN28OC16.055 By order of the Board of Governors of the Federal Reserve System, October 25, 2016. Robert deV. Frierson, Secretary of the Board. [FR Doc. 2016-26068 Filed 10-27-16; 8:45 am] BILLING CODE 6210-01-C
![75058 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices
24. For a thorough discussion of the Federal Communications Commission. Sinthorntham, Senior Financial Analyst,
prohibition of certain communications Gary D. Michaels, (202) 452–2864, Division of Reserve
during the incentive auction, please Deputy Chief, Auctions and Spectrum Access Bank Operations and Payment Systems.
refer to the Prohibited Communications Division, WTB. For users of Telecommunications
Public Notice, 80 FR 63216, October 19, [FR Doc. 2016–26196 Filed 10–27–16; 8:45 am] Device for the Deaf (TDD) only, please
2015. BILLING CODE 6712–01–P call (202) 263–4869. Copies of the 2017
25. Making Modifications to fee schedules for the check service are
Applications. The Task Force and available from the Board, the Federal
Bureau remind each reverse and FEDERAL RESERVE SYSTEM Reserve Banks, or the Reserve Banks’
forward auction applicant that the financial services Web site at
Commission’s rules require an applicant [Docket No. OP–1552] www.frbservices.org.
to maintain the accuracy and
Federal Reserve Bank Services SUPPLEMENTARY INFORMATION:
completeness of information furnished
in its application to participate in AGENCY: Board of Governors of the I. Private Sector Adjustment Factor,
Auctions 1001 and 1002, respectively. Federal Reserve System. Priced Services Cost Recovery, and
Each applicant should amend its ACTION: Notice. Overview of 2017 Price Changes
application to furnish additional or
corrected information within five days SUMMARY: The Board of Governors of the A. Overview—Each year, as required
of a significant occurrence, or no more Federal Reserve System (Board) has by the Monetary Control Act of 1980,
than five days after the applicant approved the private sector adjustment the Reserve Banks set fees for priced
becomes aware of the need for an factor (PSAF) for 2017 of $16.6 million services provided to depository
amendment. Any applicant that needs and the 2017 fee schedules for Federal institutions. These fees are set to
to make changes must do so using the Reserve priced services and electronic recover, over the long run, all direct and
procedures described in the Auction access. These actions were taken in indirect costs and imputed costs,
1000 Application Procedures Public accordance with the Monetary Control including financing costs, taxes, and
Notice and the Auction 1002 Qualified Act of 1980, which requires that, over certain other expenses, as well as the
Bidders Public Notice. the long run, fees for Federal Reserve return on equity (profit) that would have
26. To make changes to its FCC Form priced services be established on the been earned if a private business firm
177 or FCC Form 175 while the Auction basis of all direct and indirect costs, provided the services. The imputed
System is available, the applicant must including the PSAF. costs and imputed profit are collectively
make those changes electronically using DATES: The new fee schedules become referred to as the PSAF. From 2006
the Auction System and submit a letter effective January 3, 2017. through 2015, the Reserve Banks
briefly summarizing the changes to its FOR FURTHER INFORMATION CONTACT: For recovered 102.6 percent of their total
FCC Form 177 by email to questions regarding the fee schedules: expenses (including imputed costs) and
auction1001@fcc.gov, or to its FCC Form Susan V. Foley, Senior Associate targeted after-tax profits or return on
175 by email to auction1002@fcc.gov. Director, (202) 452–3596; Linda Healey, equity (ROE) for providing priced
To make changes at a time when the Senior Financial Services Analyst, (202) services.1
Auction System is unavailable, the 452–5274, Division of Reserve Bank Table 1 summarizes 2015 actual, 2016
applicant must make those changes Operations and Payment Systems. For estimated, and 2017 budgeted cost-
using the procedures described in the questions regarding the PSAF: Gregory recovery rates for all priced services.
Auction 1000 Application Procedures L. Evans, Deputy Associate Director, Cost recovery is estimated to be 103.6
Public Notice. All changes are subject to (202) 452–3945; Lawrence Mize, Deputy percent in 2016 and budgeted to be
review by Commission staff. Associate Director, (202) 452–5232; Max 100.0 percent in 2017.
TABLE 1—AGGREGATE PRICED SERVICES PRO FORMA COST AND REVENUE PERFORMANCE A
[Dollars in millions]
5e
3 Recovery rate
1b 2c 4d
Year Revenue Total expense Net income Targeted ROE after targeted
(ROE) ROE
(%)
[1–2] [1/(2+4)]
2015 (actual) ........................................................................ 429.1 397.8 31.3 5.6 106.4
2016 (estimate) .................................................................... 432.5 413.3 19.1 4.1 103.6
2017 (budget) ....................................................................... 439.4 434.8 4.6 4.6 100.0
a Calculationsin this table and subsequent pro forma cost and revenue tables may be affected by rounding.
b Revenue includes imputed income on investments when equity is imputed at a level that meets minimum capital requirements and, when
combined with liabilities, exceeds total assets.
c The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, Board of Gov-
ernors’ priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pension
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plans under FAS 158 [ASC 715] are also included.
d Targeted ROE is the after-tax ROE included in the PSAF.
1 The 10-year recovery rate is based on the pro Standards (SFAS) No. 158, Employers’ Accounting related to the priced services’ benefit plans.
forma income statements for Federal Reserve priced for Defined Benefit Pension and Other Including this cumulative reduction in equity from
services published in the Board’s Annual Report. Postretirement Plans (codified in FASB Accounting 2006 to 2015 results in cost recovery of 92.8 percent
Effective December 31, 2006, the Reserve Banks Standards Codification (ASC) Topic 715 (ASC 715), for the ten-year period. This measure of long-run
implemented the Financial Accounting Standard Compesation-Retirement Benefits), which resulted cost recovery is also published in the Board’s
Board’s (FASB) Statement of Financial Accounting in recognizing a cumulative reduction in equity Annual Report.
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e The recovery rates in this and subsequent tables do not reflect the unamortized gains or losses that must be recognized in accordance with
FAS 158 [ASC 715]. Future gains or losses, and their effect on cost recovery, cannot be projected.
Table 2 provides an overview of cost- performance for the 10-year period from 2016 estimate, and 2017 budget by
recovery budgets, estimates, and 2006 to 2015, 2015 actual, 2016 budget, priced service.
TABLE 2—PRICED SERVICES COST RECOVERY
[Percent]
Priced service 2006–2015 2015 Actual 2016 Budget a 2016 Estimate 2017 Budget b
All services ........................................................................... 102.6 106.4 101.4 103.6 100.0
Check ................................................................................... 103.6 113.0 105.7 109.7 104.5
FedACH ............................................................................... 99.5 100.7 99.5 98.8 95.5
Fedwire Funds and NSS ..................................................... 101.8 103.9 99.4 103.2 101.0
Fedwire Securities ............................................................... 102.7 108.2 97.5 97.6 97.5
a The2016 budget figures reflect the final budgets as approved by the Board in December 2015.
b The 2017 budget figures reflect preliminary budget information from the Reserve Bank. The Reserve Banks will submit final budget data to
the Board in November 2016, for Board consideration in December 2016.
1. 2016 Estimated Performance—The This amount represents an increase of avoid the dramatic impact of a sharp
Reserve Banks estimate that they will $3.5 million from the 2016 PSAF of one-year increase.
recover 103.6 percent of the costs of $13.1 million. This increase is primarily The primary risks to the Reserve
providing priced services in 2016, the result of an increase in the total cost Banks’ ability to achieve their targeted
including total expense and targeted of capital, which includes cost of debt cost-recovery rates are unanticipated
ROE, compared with a 2016 budgeted and targeted return on equity. volume and revenue reductions and the
recovery rate of 101.4 percent, as shown 3. 2017 Projected Performance—The potential for cost overruns with the
in table 2. Overall, the Reserve Banks Reserve Banks project a priced services technology modernization initiatives. In
estimate that they will fully recover cost-recovery rate of 100.0 percent in light of these risks, the Reserve Banks
actual and imputed costs and earn net 2017, with both net income and targeted will continue refining their business
income of $19.1 million, compared with ROE of $4.6 million. The Reserve Banks and operational strategies to manage
the targeted ROE of $4.1 million. The project that the price changes will result operating costs, to increase product
Reserve Banks estimate that the check in a 3.2 percent average price increase revenue, and to capitalize on
service and the Fedwire® Funds and for customers. The Reserve Banks efficiencies gained from technology
National Settlement Service will project that the check service and the initiatives.
achieve full cost recovery; however, the Fedwire Funds and National Settlement 4. 2017 Pricing—The following
Reserve Banks estimate that the Service will fully recover their costs; summarizes the Reserve Banks’ fee
FedACH® Service and the Fedwire however, the Reserve Banks project that schedules for priced services in 2017:
Securities Service will not achieve full the FedACH Service and the Fedwire Check
cost recovery because of investment Securities Service will not achieve full • The Reserve Banks announced in
costs associated with multiyear cost recovery. Although FedACH is not July 2016, restructured FedForward®,
technology initiatives to modernize budgeted to fully recover its costs in FedReturn®, and FedReceipt® fee
their processing platforms.2 These 2017, the Reserve Banks are expected to schedules to reflect today’s electronic
investments are expected to enhance fully recover FedACH costs following check-processing environment and
efficiency, the overall quality of finalization of the FedACH technology announced in October 2016 a minor
operations, and the Reserve Banks’ modernization project and over the long additional modification.3 These
ability to offer additional services to run. In addition, the Board believes the previously announced fees, discussed in
depository institutions. Greater-than- Reserve Banks’ 2017 FedACH fee attachment II, will be effective in
expected check volume processed by increases are consistent with a multi- January 2017, consistent with the fee
the Reserve Banks has been the single year strategy to minimize pricing schedules for other priced services. The
most significant factor influencing volatility and provide long-term price Reserve Banks announced the
priced services cost recovery. stability for customers while restructured fee schedules earlier in the
2. 2017 Private-Sector Adjustment undertaking the ongoing technology year to provide customers with
Factor—The 2017 PSAF for Reserve upgrade that will result in FedACH sufficient notice.
Bank priced services is $16.6 million. incurring higher expenses over the next FedACH
few years. Although the Fedwire • The Reserve Banks will increase the
2 The Reserve Banks have been engaged in a
Securities Service is not budgeted to minimum monthly fee for FedACH
multiyear technology initiative to modernize the
FedACH processing platform by migrating the
fully recover its costs in 2017, the Board origination from $45 to $50 and the
service from a mainframe system to a distributed believes the Reserve Banks are expected minimum monthly fee for FedACH
computing environment. In 2016, the Reserve Banks to fully recover Fedwire Securities receipt from $35 to $40.
chose a commercially available option as their Service costs over the long run • The Reserve Banks will increase the
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processing solution to modernize the FedACH
platform. following a few years of under recovery. FedACH Account Servicing fee from
The Reserve Banks completed a multiyear As a result of an expected decrease in
technology initiative to modernize the processing volume as well as the advancement of 3 For the July announcement, see https://
platform for the Fedwire Securities Services in new initiatives to improve resiliency www.frbservices.org/files/servicefees/pdf/071116_
2015. The capitalized software costs of this 2017_check_pricing_customer_letter.pdf.
initiative will be amortized until October 2020 and
and operational functionality, the For the October announcement, see https://
thus remain a primary factor in the cost recovery Reserve Banks plan to increase fees frbservices.org/files/communications/pdf/check/
calculation for these services in 2016. gradually over a multi-year period to 100316-check-modification-announcement.pdf.
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$3.2 million in 2017 from $2.8 million million to $5.4 million in 2017. The increased to 22.7 percent from 21.6
in 2016. The priced services portion of effective income tax rate used in 2017 percent in 2016.
the Board’s expenses increased $0.4
TABLE 3—COMPARISON OF PRO FORMA BALANCE SHEETS FOR BUDGETED FEDERAL RESERVE PRICED SERVICES
[Millions of dollars—projected average for year]
2017 2016 Change
Short-term assets:
Receivables .......................................................................................................................... $36.6 $35.6 $1.1
Materials and supplies .......................................................................................................... 0.6 0.5 0.1
Prepaid expenses ................................................................................................................. 11.2 10.2 1.0
Items in process of collection 10 ........................................................................................... 241.0 321.0 (80.0)
Total short-term assets ................................................................................................. 289.4 367.2 (77.9)
Imputed investments: 11
Imputed investment in Treasury Securities .......................................................................... ........................ 55.8 (55.8)
Imputed investment in Fed Funds ........................................................................................ 245.0 11.0 234.0
Total imputed investments ............................................................................................ 245.0 66.8 178.2
Long-term assets:
Premises 12 ........................................................................................................................... 128.7 111.0 17.7
Furniture and equipment ...................................................................................................... 39.0 38.5 0.5
Leasehold improvements and long-term prepayments ........................................................ 104.8 89.5 15.3
Pension asset ....................................................................................................................... 10.9 ........................ 10.9
Deferred tax asset ................................................................................................................ 186.1 187.9 (1.8)
Total long-term assets ................................................................................................... 469.6 426.8 42.8
Total assets ............................................................................................................ 1,003.9 860.9 143.1
Short-term liabilities:
Deferred credit items ............................................................................................................ 486.0 332.0 154.0
Short-term debt ..................................................................................................................... 18.1 19.0 (0.9)
Short-term payables ............................................................................................................. 30.2 27.2 3.0
Total short-term liabilities .............................................................................................. 534.4 387.2 156.1
Long-term liabilities:
Pension liability ..................................................................................................................... ........................ 17.6 (17.6)
Long-term debt ..................................................................................................................... 48.4 0.0 48.4
Postemployment/postretirement benefits and net pension liabilities 13 ................................ 362.5 411.3 48.7
Total liabilities ......................................................................................................... 945.3 807.1 138.3
Equity 14 ....................................................................................................................................... 58.6 53.8 4.8
Total liabilities and equity ..................................................................................................... 1,003.9 860.9 143.1
TABLE 4—IMPUTED FUNDING FOR PRICED-SERVICES ASSETS
[Millions of dollars]
2017 2016
A. Short-term asset financing:
Short-term assets to be financed:
Receivables ............................................................................................................................................... $36.6 $35.6
Materials and supplies .............................................................................................................................. 0.6 0.5
Prepaid expenses ...................................................................................................................................... 11.2 10.2
Total short-term assets to be financed ............................................................................................................ 48.4 46.2
Short-term payables .................................................................................................................................. 30.2 27.2
Net short-term assets to be financed ............................................................................................................... 18.1 19.0
Imputed short-term debt financing 15 ................................................................................................................ 18.1 19.0
B. Long-term asset financing:
Long-term assets to be financed: ........................
Premises .................................................................................................................................................... 128.7 111.0
10 Credit float, which represents the difference Fedwire Funds Service’s projected current 14 Includes an accumulated other comprehensive
between items in process of collection and deferred operating expenses is $53.9 million. In 2017, $58.6 loss of $635.1 million for 2017 and $666.1 million
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credit items, occurs when the Reserve Banks debit million of equity was imputed to meet the for 2016, which reflects the ongoing amortization of
the paying bank for transactions prior to providing regulatory capital requirements. the accumulated loss in accordance with FAS 158
credit to the depositing bank. Float is directly
estimated at the service level.
12 Includes the allocation of Board of Governors [ASC 715]. Future gains or losses, and their effects
11 Consistent with the Board’s PSR policy, the assets to priced services of $1.2 million for 2017 on the pro forma balance sheet, cannot be projected.
Reserve Banks; priced services will hold six months and $1.3 million for 2016. See table 5 for calculation of required imputed
of the Fedwire Funds Service’s current operating 13 Includes the allocation of Board of Governors equity amount.
expenses as liquid net financial assets and equity liabilities to priced services of $0.6 million for 2017
on the pro forma balance sheet. Six months of the and 2016.
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![75064 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices
TABLE 4—IMPUTED FUNDING FOR PRICED-SERVICES ASSETS—Continued
[Millions of dollars]
2017 2016
Furniture and equipment ........................................................................................................................... 39.0 38.5
Leasehold improvements and long-term prepayments ............................................................................. 104.8 89.5
Pension asset ............................................................................................................................................ 10.9 ........................
Deferred tax asset ..................................................................................................................................... 186.1 187.9
Total long-term assets to be financed .............................................................................................................. 469.6 426.8
Pension liability .......................................................................................................................................... ........................ 17.6
Postemployment/postretirement benefits and net pension liabilities ........................................................ 362.5 411.3
Net long-term assets to be financed ......................................................................................................... 107.0 (2.0)
Imputed long-term debt 15 ......................................................................................................................... 48.4 ........................
Imputed equity 15 ....................................................................................................................................... 58.6 53.8
Total long-term financing ................................................................................................................... 107.0 53.8
TABLE 5—DERIVATION OF THE 2017 AND 2016 PSAF
[Dollars in millions]
2017 2016
Debt Equity Debt Equity
A. Imputed long-term debt and equity:
Net long-term assets to finance ....................................... $107.0 $107.0 $(2.0) $(2.0)
Capital structure observed in market ............................... 58.4% 41.6% 58.5% 41.5%
Pre-adjusted long-term debt and equity ........................... $62.5 $44.5 $(1.2) $(0.8)
Equity adjustments: 16
Equity to meet capital requirements ......................... .............................. 58.6 .............................. 51.1
Adjustment to debt and equity funding given capital
requirements 17 ...................................................... (14.1) 14.1 1.2 (1.2)
Adjusted equity balance ............................................ — 58.6 — (2.0)
Equity to meet capital requirements 18 ...................... — — — 53.1
Total imputed long-term debt and equity ........... $48.4 $58.6 — $51.1
B. Cost of capital:
Elements of capital costs:
Short-term debt 19 ...................................................... $18.1 × 0.6% = $0.1 $19.0 × 0.3% = $0.1
Long-term debt 19 ...................................................... 48.4 × 4.0% = 1.9 — × 4.2% = —
Equity 20 ..................................................................... 58.6 × 10.2% = 6.0 51.1 × 9.8% = 5.0
.............................. $8.0 .............................. $5.1
C. Incremental cost of PSR policy:
Equity to meet policy ........................................................ $ — × 10.2% = $— $2.7 × 9.8% = $0.3
D. Other required PSAF costs:
Sales taxes ....................................................................... $3.2 .............................. $2.8 ..............................
Board of Governors expenses ......................................... 5.4 .............................. 5.0 ..............................
.............................. 8.6 .............................. 7.8
.............................. $16.6 .............................. $13.1
E. Total PSAF:
As a percent of assets ..................................................... .............................. 1.7% .............................. 1.5%
As a percent of expenses ................................................ .............................. 3.9% .............................. 3.6%
F. Tax rates: ............................................................................ .............................. 22.7% .............................. 21.6%
15 See table 5 for calculation. 17 Equity adjustment offsets are due to a shift of 20 The 2017 ROE is equal to a risk-free rate plus
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16 Ifminimum equity constraints are not met after long-term debt funding to equity in order to meet a risk premium (beta * market risk premium). The
imputing equity based on the capital structure FDIC capital requirements for well-capitalized 2017 after-tax CAPM ROE is calculated as 0.30% +
observed in the market, additional equity is institutions. (1.0 * 7.59%) = 7.89%. Using a tax rate of 22.7%,
imputed to meet these constraints. The long-term 18 Additional equity in excess of that needed to
the after-tax ROE is converted into a pretax ROE,
funding need was met by imputing long-term debt fund priced services assets is offset by an asset
which results in a pretax ROE of (7.89%/(1–22.7%))
and equity based on the capital structure observed balance of imputed investments in treasury
securities. = 10.21%. Calculations may be affected by
in the market (see tables 4 and 6). In 2017, the
amount of imputed equity exceeded the minimum 19 Imputed short-term debt and long-term debt are rounding.
equity requirements for risk-weighted assets. computed at table 4.
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TABLE 6—COMPUTATION OF 2017 CAPITAL ADEQUACY FOR FEDERAL RESERVE PRICED SERVICES
[Dollars in millions]
Weighted
Assets Risk weight assets
($)
Imputed investments:
1-Year Treasury securities 21 ................................................................................................ $— — —
Federal funds 22 .................................................................................................................... 245.0 0.2 49.0
Total imputed investments ............................................................................................ 245.0 ........................ 49.0
Receivables ................................................................................................................................. 36.6 0.2 7.3
Materials and supplies ................................................................................................................. 0.6 1.0 0.6
Prepaid expenses ........................................................................................................................ 11.2 1.0 11.2
Items in process of collection ...................................................................................................... 241.0 0.2 48.2
Premises ...................................................................................................................................... 128.7 1.0 128.7
Furniture and equipment ............................................................................................................. 39.0 1.0 39.0
Leasehold improvements and long-term prepayments ............................................................... 104.8 1.0 104.8
Pension asset .............................................................................................................................. 10.9 1.0 10.9
Deferred tax asset ....................................................................................................................... 186.1 1.0 186.1
Total ...................................................................................................................................... 1,003.9 ........................ 585.8
Imputed equity:
Capital to risk-weighted assets ............................................................................................ 10.0%
Capital to total assets ........................................................................................................... 5.8%
C. Check Service — Table 7 shows the budgeted cost-recovery performance for
2015 actual, 2016 estimated, and 2017 the commercial check service.
TABLE 7—CHECK SERVICE PRO FORMA COST AND REVENUE PERFORMANCE
[Dollars in millions]
Recovery rate
Net income after targeted
Year Revenue Total expense (ROE) Targeted ROE ROE
[1–2] (%)
[1/(2 + 4)]
1 2 3 4 5
2015 (actual) ........................................................................ 160.6 140.2 20.4 2.0 113.0
2016 (estimate) .................................................................... 152.9 138.1 14.8 1.3 109.7
2017 (budget) ....................................................................... 141.2 133.7 7.5 1.4 104.5
1. 2016 Estimate—The Reserve Banks decline in the number of checks written million, a decline of 7.7 percent from
estimate that the check service will generally, was not as great as the 2016 estimate. This decline is driven
recover 109.7 percent of total expenses anticipated. Through August, total largely by the Reserve Banks’
and targeted ROE, compared with a commercial forward check volume is 3.9 restructured FedForward, FedReturn,
2016 budgeted recovery rate of 105.7 percent lower and total commercial and FedReceipt fee schedules, discussed
percent. Greater-than-expected check return check volume is 3.3 percent below.24 Total expenses for the check
volumes processed by the Reserve lower than for the same period last year. service are projected to decrease to
Banks and lower-than-expected costs For full-year 2016, the Reserve Banks $133.7 million, a decline of $4.4
have influenced significantly the check estimate that their total forward check million, or 3.2 percent, from 2016
service’s cost recovery. volume will decline 5.2 percent
expenses primarily due to reduced
The decline in Reserve Bank check (compared with a budgeted decline of
operating costs, including cost savings
volume, which is attributable to the 6.2 percent) and their total return check
volume will decline 6.8 percent associated with increased efficiencies of
(compared with a budgeted decline of the Reserve Banks’ customer support
21 If minimum equity constraints are not met after
12.7 percent) from 2015 levels.23 services for the FedACH and check
imputing equity based on all other financial
statement components, additional equity is imputed 2. 2017 Pricing—The Reserve Banks service lines.
to meet these constraints. Additional equity expect the check service to recover
imputed to meet minimum equity requirements is 104.5 percent of total expenses and
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invested solely in Treasury securities. The imputed
investments are similar to those for which rates are targeted ROE in 2017. The Reserve
available on the Federal Reserve’s H.15 statistical Banks project revenue to be $141.2 24 This decline is also driven, in part, by
release, which can be located at http:// anticipated continuing decline in the number of
www.federalreserve.gov/releases/h15/data.htm. 23 Total Reserve Bank forward check volumes are checks written generally. The Reserve Banks
22 The investments are imputed based on the
expected to drop from 5.5 billion in 2015 to 5.2 estimate that total commercial forward check
amounts arising from the collection of items prior billion in 2016. Total Reserve Bank return check volumes in 2017 will decline 5.0 percent, to 4.9
to providing credit according to established volumes are expected to drop from 33.2 million in billion, and total commercial return check volumes
availability schedules. 2015 to 30.9 million in 2016. will decline 10.1 percent to 27.8 million in 2017.
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TABLE 8—FEDACH SERVICE PRO FORMA COST AND REVENUE PERFORMANCE
[Dollars in millions]
Recovery rate
Net income after targeted
Year Revenue Total expense (ROE) Targeted ROE ROE
[1–2] %,
[1/(2 + 4)]
1 2 3 4 5
2015 (actual) ........................................................................ 125.5 122.8 2.7 1.8 100.7
2016 (estimate) .................................................................... 130.7 131.0 ¥0.3 1.3 98.8
2017 (budget) ....................................................................... 140.4 145.4 ¥5.1 1.6 95.5
1. 2016 Estimate—The Reserve Banks million in total revenue from the 2016 package pricing. They also will
estimate that the FedACH service will estimate. Total expenses are budgeted to introduce a new top tier, with a $1,800
recover 98.8 percent of total expenses increase $14.4 million from 2016 monthly fee, for a package that includes
and targeted ROE, compared with a expenses, primarily because of costs more than 10,000 reports.
2016 budgeted recovery rate of 99.5 associated with the development of a
Further, the Reserve Banks will
percent. Through August, FedACH new FedACH technology platform.
The Reserve Banks will increase the introduce a fixed monthly fee and a
commercial origination and receipt
volume was 5.8 percent higher than it minimum monthly fee for forward volume-based tiered pricing structure
was during the same period last year. origination from $45 to $50 and the for the FedGlobal ACH service.39 The
For full-year 2016 the Reserve Banks minimum monthly fee for receipt from tiered pricing structure will include per-
estimate that FedACH commercial $35 to $40.38 The Reserve Banks also item surcharges that are in addition to
origination and receipt volume will will increase the FedACH Account the standard FedACH origination fee of
increase 4.9 percent, compared with a Servicing Fee from $45 to $58 and $0.0032 and vary according to the
budgeted increase of 4.5 percent. change the fee name to the ‘‘FedACH transaction’s destination, as seen in
Although volume is higher than Participation fee,’’ to reflect more table 9. The top tier will cover monthly
originally projected, the Reserve Banks accurately the intention of the fee, origination volume over 500 items and
estimate lower-than-budgeted 2016 cost which is to recover fixed costs related include a $185 fixed monthly fee and a
recovery due to higher than anticipated to participation in the FedACH network. per-item surcharge that is $0.12 lower
environmental costs such as an increase The Reserve Banks also will eliminate than current per-item fees. The next tier
in pension expense and refinement in the on-us receipt credit of $0.0032 per will cover monthly origination volume
the accounting treatment between item. All on-us items will be charged between 161 and 500 items and include
capital and expenses for the FedACH the current FedACH receipt per-item fee a $60 fixed monthly fee and a per-item
technology modernization program.37 of $0.0032 per item. surcharge that is $0.13 higher than
2. 2017 Pricing—The Reserve Banks The Reserve Banks will increase the
current per-item fees. The bottom tier
expect the FedACH service to recover FedACH Information Extract File fee
will cover monthly origination volume
95.5 percent of total expenses and from $100 to $150 per file. The Reserve
targeted ROE in 2017. FedACH Banks also will increase the between 0 and 160 items and include a
commercial origination and receipt FedPayments Reporter fee $20 fixed monthly fee and a per-item
volume is projected to grow 5.7 percent, approximately 10 percent rounded to surcharge that is $0.38 higher than
contributing to an increase of $9.7 the nearest $5 for each level of the tiered current per-item fees.
TABLE 9—FEDGLOBAL ACH SERVICE VOLUME-BASED ORIGINATION SURCHARGES 40
Volume Fixed Canada Mexico Panama Europe
(items) monthly fee (per transaction) (per transaction) (per transaction) (per transaction)
More than 500 .................................................. $185 $0.50 $0.55 $0.60 $1.13
161–500 ........................................................... 60 0.75 0.80 0.85 1.38
0–160 ............................................................... 20 1.00 1.05 1.10 1.63
The Reserve Banks estimate that the average price increase for FedACH While the Reserve Banks are not
price changes will result in a 5.3 percent customers. budgeted to fully recover costs in 2017,
they are expected to fully recover costs
37 The Reserve Banks have been engaged in a minimum: Forward value and nonvalue item and is not originating forward value and nonvalue
multiyear technology initiative to modernize the origination fees, FedGlobal ACH origination items will incur the $40 minimum monthly fee for
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FedACH processing platform by migrating the surcharges, and FedACH SameDay forward receipt.
service from a mainframe system to a distributed origination surcharges. 39 The FedGlobal ACH pricing changes meet the
computing environment. In 2016, the Reserve Banks Any receiving depository financial institution Federal Reserve Board’s guidance on the Reserve
chose a commercially available option as their (RDFI) that incurs less than $40 in receipt fees and
processing solution to modernize the FedACH Banks’ use of volume-based pricing for electronic
originates forward value and nonvalue items
platform. incurring less than $50 in origination fees will only payment services and products. 62 FR 14146
38 Any originating depository financial institution be charged the difference in the origination fee to (March 25, 1997) (FRB Docket No. R–0967).
40 These per-item surcharges are in addition to the
(ODFI) incurring less than $50 for the following fees reach the minimum monthly origination fee of $50.
will be charged the difference to reach the Any RDFI that incurs less than $40 in receipt fees standard domestic FedACH origination fees.
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![75068 Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices
following finalization of the FedACH while undertaking the ongoing volume and associated revenue due to
technology modernization project. The technology upgrade that will result in unanticipated mergers and acquisitions
Reserve Banks’ FedACH fee increases FedACH incurring higher expenses over and loss of market share due to direct
balance raising fees dramatically during the next few years. exchanges and a shift of volume to the
a temporary period of increased costs The primary risks to the Reserve private-sector operator.
associated with a defined technology Banks’ ability to achieve budgeted 2017
cost recovery for the FedACH service E. Fedwire Funds and National
upgrade that will be expected to result
in significant over recovery following are cost overruns associated with Settlement Services—Table 10 shows
this defined period. The approach to unanticipated problems related to the 2015 actual, 2016 estimate, and 2017
moderately increase fees only is efforts to modernize the FedACH budgeted cost-recovery performance for
consistent with a multi-year strategy to processing platform and higher-than- the Fedwire Funds and National
minimize pricing volatility and provide expected support and overhead costs. Settlement Services.
long-term price stability for customers Other risks include lower-than-expected
TABLE 10—FEDWIRE FUNDS AND NATIONAL SETTLEMENT SERVICES PRO FORMA COST AND REVENUE PERFORMANCE
[Dollars in millions]
Recovery rate
Net income after targeted
Year Revenue Total expense (ROE) Targeted ROE ROE
[1–2] (%)
[1/(2 + 4)]
1 2 3 4 5
2015 (actual) ........................................................................ 116.0 110.1 5.9 1.6 103.9
2016 (estimate) .................................................................... 123.1 118.0 5.1 1.3 103.2
2017 (budget) ....................................................................... 128.8 126.3 2.6 1.3 101.0
1. 2016 Estimate—The Reserve Banks will decrease 4.0 percent from 2015 per-item preincentive fee (the fee before
estimate that the Fedwire Funds and levels (compared with a budgeted 0.8 volume discounts are applied) from
National Settlement Services will percent decrease). NSS settlement file $0.790 to $0.820, increasing the Tier 2
recover 103.2 percent of total expenses and entry volumes are anticipated to be per-item preincentive fee from $0.240 to
and targeted ROE, compared with a lower than budgeted, as the onboarding $0.245, and increasing the Tier 3 per-
2016 budgeted recovery rate of 99.4 of a new arrangement originally item preincentive fee from $0.155 to
percent. Through August, Fedwire expected to occur in the fourth quarter $0.170.41 The Reserve Banks also will
Funds Service online volume was 3.6 of 2016 has now been delayed until increase the surcharge for offline
percent higher than for the same period 2017. transactions from $55 to $60. The
last year. For full-year 2016, the Reserve 2. 2017 Pricing—The Reserve Banks Reserve Banks estimate that the price
Banks estimate Fedwire Funds Service expect the Fedwire Funds and National changes will result in a 3.3 percent
online volume to increase 1.9 percent Settlement Services to recover 101.0 average price increase for Fedwire
from 2015 levels, compared with the 0.3 percent of total expenses and targeted Funds customers.
percent volume decrease that had been ROE. Revenue is projected to be $128.8 The Reserve Banks will not change
budgeted. The Reserve Banks do not million, an increase of 4.6 percent from National Settlement Service fees for
expect the volume growth in 2015 and the 2016 estimate. The Reserve Banks 2017.
early 2016 to continue at that level project total expenses to be $8.3 million The primary risks to the Reserve
through year-end. Through August, higher than the 2016 expenses, Banks’ ability to achieve budgeted 2017
National Settlement Service settlement primarily because of capitalized cost recovery for these services are cost
file volume was 1.0 percent lower than software costs associated with the overruns from new initiatives to
for the same period last year, and Fedwire Funds modernization program improve resiliency and operational
settlement entry volume was 3.0 percent that will be amortized until January functionality.
lower. For the full year, the Reserve 2022 and other costs related to new F. Fedwire Securities Service—Table
Banks estimate that settlement file resiliency initiatives. 11 shows the 2015 actual, 2016
volume will decrease 1.1 percent The Reserve Banks will adjust the estimate, and 2017 budgeted cost
(compared with a budgeted 5.3 percent incentive pricing fees for the Fedwire recovery performance for the Fedwire
increase) and settlement entry volume Funds Service by increasing the Tier 1 Securities Service.42
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41 The per-item preincentive fee is the fee that the discount to transfers over 60 percent of a customer’s the transfer of all non-Treasury securities. For
Reserve Banks charge for transfers that do not historic benchmark volume. Treasury securities, the U.S. Treasury assesses fees
qualify for incentive discounts. The Tier 1 per-item 42 The Reserve Banks provide transfer services for
for the securities transfer component of the service.
preincentive fee applies to the first 14,000 transfers, securities issued by the U.S. Treasury, federal The Reserve Banks assess a fee for the funds
the Tier 2 per-item preincentive fee applies to the government agencies, government-sponsored settlement component of a Treasury securities
next 76,000 transfers, and the Tier 3 per-item enterprises, and certain international institutions.
transfer; this component is not treated as a priced
preincentive fee applies to any additional transfers. The priced component of this service consists of
The Reserve Banks apply an 80 percent incentive revenues, expenses, and volumes associated with service.
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![Federal Register / Vol. 81, No. 209 / Friday, October 28, 2016 / Notices 75069
TABLE 11—FEDWIRE SECURITIES SERVICE PRO FORMA COST AND REVENUE PERFORMANCE
[Dollars in millions]
Recovery rate
Net income after targeted
Year Revenue Total expense (ROE) Targeted ROE ROE
[1–2] (%)
[1/(2 + 4)]
1 2 3 4 5
2015 (actual) ........................................................................ 27.1 24.7 2.4 0.3 108.2
2016 (estimate) .................................................................... 25.8 26.2 ¥0.4 0.3 97.6
2017 (budget) ....................................................................... 29.0 29.4 ¥0.4 0.3 97.5
1. 2016 Estimate—The Reserve Banks maintained will decrease 2.4 percent.43 discussed below, that offset the
estimate that the Fedwire Securities The projected decline in both online anticipated online transfer and account
Service will recover 97.6 percent of total transfer and account maintenance maintenance volume declines. The
expenses and targeted ROE, close to the volume in 2017 reflects, in part, an Reserve Banks also project that 2017
2016 budgeted recovery rate of 97.5 anticipated drop in demand resulting expenses will increase by $3.2 million,
percent. from JP Morgan Chase’s exit from the compared with 2016 expenses,
U.S. government securities clearing and reflecting higher expected operating
Through August, Fedwire Securities costs. Higher operating costs in 2017
settlement business for its broker-dealer
Service online agency transfer volume services by mid-2018.44 Moreover, as in reflect the amortization of capital
was 13.1 percent lower than during the 2016, the Reserve Banks continue to software costs from completed
same period last year. For full-year project a decrease in online transfers as modernization initiatives as well as the
2016, the Reserve Banks estimate interest rates may possibly increase, advancement of new initiatives to
Fedwire Securities Service online leading to less mortgage refinancing, improve resiliency and operational
agency transfer volume will decline 13.5 and, in turn, reducing issuances of functionality.
percent from 2015 levels, compared mortgage-backed securities. In addition, The Reserve Banks will increase the
with a budgeted decline of 5.4 percent. the reduction in agency debt issuance online agency transfer fee from $0.65 to
The lower-than-expected online agency will continue to reflect a reduction in $0.77 and increase the offline
transfer volume resulted from lower- government-sponsored enterprise origination and receipt surcharge
than-projected Agency debt issuance, as portfolios, as required by the U.S. transfer fee from $66 to $80. The
Fannie Mae and Freddie Mac continue Treasury and the Federal Housing Reserve Banks also will increase the
to reduce the overall size of their Finance Agency, leading to a reduced monthly agency issues maintenance fee
portfolios in accordance with Federal funding need for new debt issuance.45 from $0.65 to $0.77 and will increase
Housing Finance Agency guidelines. In New settlement logic launched by the the monthly account maintenance fee
addition, new mortgage originations and Fixed Income Clearing Corporation in from $48 to $57.50. Moreover, the
mortgage paydowns from refinancing January 2016, and further changes in Reserve Banks will increase the joint
activity are expected to decline before mid-2017 are also expected to reduce custody origination surcharge from $44
the number of agency debt transfers over to $46. Finally, the Reserve Banks will
year-end if interest rates rise in the
the Fedwire Securities Service.46 increase the claims adjustment fees from
fourth quarter, which will result in
Revenue is projected to be $29.0 $0.75 to $0.80. The Reserve Banks
falling levels of issuance and settlement estimate that the price changes will
activity for agency mortgage-backed million, an increase of 12.4 percent from
the 2016 estimate; this projected rise in result in an 18.0 percent average price
securities over Fedwire Securities. increase for Fedwire Securities
Through August, account maintenance revenue results from higher fees,
customers.
volume was 4.4 percent lower than 43 The online transfer fee, monthly account The primary risks to the Reserve
during the same period last year. For the maintenance fee, and monthly issue maintenance Banks’ ability to achieve budgeted 2017
full year 2016, the Reserve Banks fee accounted for approximately 93 percent of total cost recovery for these services are
estimate that account maintenance Fedwire Securities Service revenue through June lower-than-expected volume resulting
2016.
volume will decline 5.0 percent over 44 JP Morgan Chase announced in July 2016, its
from the pace of structural changes in
2015 levels, compared with a budgeted intent to exit the government securities clearing and government securities settlement, and
decline of 8.8 percent. The higher settlement business. It is expected that the exit will cost overruns from new initiatives to
account maintenance volume is the result in significant reductions of transfer volume improve resiliency and operational
over Fedwire Securities as more transactions shift functionality.
result of conservative estimates for to in-house activity at the remaining custodian
customer account closures that have not banks.
G. FedLine Access—The Reserve
materialized. 45 Government-sponsored enterprises are Banks charge fees for the electronic
reducing their retained portfolio by 15 percent connections that depository institutions
2. 2017 Pricing—The Reserve Banks annually through 2018, as mandated by the Senior use to access priced services and
expect the Fedwire Securities Service to Preferred Stock Purchase Agreements, until each allocate the costs and revenue
mstockstill on DSK3G9T082PROD with NOTICES
recover 97.5 percent of total expenses portfolio reaches a target level of $250 billion.
associated with this electronic access to
Further information on these agreements can be
and targeted ROE in 2017. The Reserve found at: http://www.fhfa.gov/Conservatorship/ the various priced services. There are
Banks project that online agency Pages/Senior-Preferred-Stock-Purchase- currently five FedLine channels through
transfer activity will decline 7.5 percent Agreements.aspx. which customers can access the Reserve
in 2017, the number of accounts 46 Information on the Fixed Income Clearing
Banks’ priced services: FedMail,
Corporation’s new settlement logic can be found at
maintained will decrease 7.4 percent, http://www.dtcc.com/∼/media/Files/pdf/2015/6/22/ FedLine Web, FedLine Advantage,
and the number of agency issues GOV045-15.pdf. FedLine Command, and FedLine
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Document Created: 2018-02-13 16:39:51
Document Modified: 2018-02-13 16:39:51
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| Action | Notice. | |
| Dates | The new fee schedules become effective January 3, 2017. | |
| Contact | For questions regarding the fee schedules: Susan V. Foley, Senior Associate Director, (202) 452-3596; Linda Healey, Senior Financial Services Analyst, (202) 452-5274, Division of Reserve Bank Operations and Payment Systems. For questions regarding the PSAF: Gregory L. Evans, Deputy Associate Director, (202) 452-3945; Lawrence Mize, Deputy Associate Director, (202) 452-5232; Max Sinthorntham, Senior Financial Analyst, (202) 452-2864, Division of Reserve Bank Operations and Payment Systems. For users of Telecommunications Device for the Deaf (TDD) only, please call (202) 263-4869. Copies of the 2017 fee schedules for the check service are available from the Board, the Federal Reserve Banks, or the Reserve Banks' financial services Web site at www.frbservices.org. | |
| FR Citation | 81 FR 75058 |
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