Federal Reserve's Key Policies for the Provision of Financial Services

Policies: Fee Schedules for Federal Reserve Bank Payment Services

Contents

Announcement of 2012 PSAF & Fee Schedules

1. Privare Sector Adjustment Factor and Priced Services
   • A. Overview
   • B. Private Sector Adjustment Factor
   • C. Earnings Credits on Clearing Balances
   • D. Check Service
   • E. FedACH Service
   • F. Fedwire Funds and National Settlement Services
   • G. Fedwire Securities Service
   • H. Electronic Access

2. Analysis of Competitive Effect

• Fee Schedules:
  
  • FedACH Service 2012 Fee Schedule
  • Fedwire Funds and National Settlement Services 2012 Fee Schedule
  • Fedwire Securities Service 2012 Fee Schedule (Non-Treasury Securities)
  • Electronic Access 2012 Fee Schedule

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 2012 of $29.9 million and the 2012 fee schedules for Federal Reserve priced services and electronic access. These actions were taken in accordance with the requirements of the Monetary Control Act of 1980, which requires that, over the long run, fees for Federal Reserve priced services be established on the basis of all direct and indirect costs, including the PSAF. The Board has also approved maintaining the current earnings credit rate on clearing balances.

Dates:  The new fee schedules and earnings credit rate become effective January 3, 2012.

For further information contact:  For questions regarding the fee schedules: Susan V. Foley, Associate Director, (202/452-3596); Samantha J. Pelosi, Manager, Retail Payments, (202/530-6292); Linda S. Healey, Senior Financial Services Analyst, (202/452-5274), Division of Reserve Bank Operations and Payment Systems. For questions regarding the PSAF and earnings credits on clearing balances: Gregory L. Evans, Deputy Associate Director, (202/452-3945); Brenda L. Richards, Manager, Financial Accounting, (202/452-2753); or John W. Curle, Senior Financial Analyst, (202/452-3916), 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 2012 fee schedules for the check service are available from the Board, the Federal Reserve Banks, or the Reserve Banks' financial services website.

Supplementary Information:

I. Private Sector Adjustment Factor and Priced Services

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. Similarly, investment income is imputed and netted with related direct costs associated with clearing balances to estimate net income on clearing balances (NICB). From 2002 through 2010, the Reserve Banks recovered 97.9 percent of their total expenses (including imputed costs) and targeted after-tax profits or return on equity (ROE) for providing priced services.¹ 

Table 1 summarizes 2010 actual, 2011 estimated, and 2012 budgeted cost-recovery rates for all priced services. Cost recovery is estimated to be 102.3 percent in 2011 and budgeted to be 100.8 percent in 2012. The check service accounts for slightly over half of the total cost of priced services and thus significantly influences the aggregate cost-recovery rate.

Table 2 portrays an overview of cost-recovery performance for the ten-year period from 2001 to 2010, 2010 actual, 2011 budget, 2011 estimate, and 2012 budget by priced service.

1. 2011 Estimated Performance--The Reserve Banks estimate that they will recover 102.3 percent of the costs of providing priced services in 2011, including imputed costs and targeted ROE, compared with a budgeted recovery rate of 102.1 percent, as shown in table 2. The Reserve Banks estimate that all services will achieve full cost recovery. Overall, the Reserve Banks estimate that they will fully recover actual and imputed costs and earn net income of $27.3 million, compared with the target of $16.8 million. The greater-than-targeted net income is driven largely by the performance of the check service, which had greater-than-expected operational cost savings.

2. 2012 Private Sector Adjustment Factor--The 2012 PSAF for Reserve Bank priced services is $29.9 million. This amount represents a decrease of $7.6 million from the revised 2011 PSAF estimate of $37.5 million. This reduction is primarily the result of a change in the FDIC assessment as well as a decrease in the cost of equity, which is due to a lower amount of imputed equity.² 

3. 2012 Projected Performance--The Reserve Banks project a priced services cost recovery rate of 100.8 percent in 2012. The 2012 fees for priced services are projected to result in a net income of $17.1 million compared with the target ROE of $13.8 million.

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 or delays with technological upgrades. In light of these risks, the Reserve Banks will continue to refine their business and operational strategies to manage aggressively operating costs, take advantage of efficiencies gained from technological upgrades, and increase product revenue.

4. 2012 Pricing--The following summarizes the Reserve Banks' changes in fee schedules for priced services in 2012:

5. 2012 Price Index--Figure 1compares indexes of fees for the Reserve Banks' priced services with the GDP price index. Compared with the price index for 2011, the price index for all Reserve Bank priced services is projected to increase 4 percent in 2012. The price index for total check services is projected also to increase approximately 4 percent. The price index for Check 21 services is projected to increase just over 1 percent, reflecting a slight increase in the effective prices paid to collect and return checks using Check 21 services and stabilization in the adoption of electronic check services. The price index for all other check services is projected to increase approximately 14 percent. The price index for electronic payment services, which include the FedACH Service, Fedwire Funds and National Settlement Services, and Fedwire Securities Service, is projected to increase approximately 5 percent. For the period 2002 to 2012, the price index for all priced services is expected to increase 64 percent. In comparison, for the period 2002 to 2010, the GDP price index increased 21 percent.

B. Private Sector Adjustment Factor--In 2009, the Board requested comment on proposed changes to the methodology for calculating the PSAF.⁷ The Board proposed replacing the current correspondent bank model with a "publicly traded firm model" in which the key components used to determine the priced-services balance sheet and the PSAF costs would be based on data for the market of U.S. publicly traded firms. The proposed changes were prompted by the implementation of the payment of interest on reserve balances held by depository institutions at the Reserve Banks and the anticipated consequent decline in balances held by depository institutions at Reserve Banks for clearing priced-services transactions (clearing balances).

Since the implementation of the payment of interest on reserve balances, clearing balances have not decreased as much as anticipated and remain significant. Between the October 2008 implementation of the payment of interest on reserve balances and January 2009, the total level of clearing balances held by depository institutions decreased approximately $2.0 billion, from $6.5 billion to $4.5 billion. During the first half of 2009, clearing balance levels were nearly flat at approximately $4.5 billion. Since mid-2009, clearing balances have declined further, and as of the end of July 2011, clearing balances were $2.7 billion. As a result of the relative significance of the remaining balances, the Board used the correspondent bank model for the 2011 PSAF, and will continue using the correspondent bank model for the 2012 PSAF.

The Board recently requested public comment on proposed amendments to Regulation D, which implements section 19 of the Federal Reserve Act and requires reserve requirements be held on certain deposits and other liabilities of depository institutions for the purpose of implementing monetary policy.⁸ The proposed amendments eliminate the contractual clearing balance program and its administrative complexities as part of an effort to simplify reserve balance administration. Because contractual clearing balances are a significant element in determining imputed costs that must be recovered by Reserve Bank priced services fees, the Board requested comment on additional questions related to imputing costs to be recovered by Reserve Bank priced services fees after the proposed elimination of the contractual clearing balance program.

The method for calculating the financing and equity 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 if these priced services were provided by a private business firm are imputed. 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.

The portion of Federal Reserve assets that will be used to provide priced services during the coming year is determined using information on actual assets and projected disposals and acquisitions. The priced portion of these assets is determined based on the allocation of the related depreciation expense. The priced portion of actual Federal Reserve liabilities consists of clearing balances and other liabilities such as accounts payable and accrued expenses.

Long-term debt is imputed only when core clearing balances, other long-term liabilities, and equity are not sufficient to fund long-term assets.⁹ Short-term debt is imputed only when other short-term liabilities and clearing balances not used to finance long-term assets are insufficient to fund short-term assets. A portion of clearing balances is used as a funding source for short-term priced-services assets. Long-term assets may be partially funded from core clearing balances.

Imputed equity is set to meet the FDIC requirements for a well-capitalized institution for insurance premium purposes and represents the market capitalization, or shareholder value, for Reserve Bank priced services.¹⁰ The equity financing rate is the targeted ROE rate 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 risk premium. To implement the CAPM, the risk-free rate is based on the three-month Treasury bill; the beta is assumed to equal 1.0, which approximates the risk of the market as a whole; and the monthly returns in excess of the risk-free rate over the most recent 40 years are used as the market risk premium. The resulting ROE influences the dollar level of the PSAF because this is the return a shareholder would require in order to invest 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 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 actual performance results are greater or less than the targeted ROE, income taxes are adjusted using an imputed income tax rate that is the median of the rates paid by the top 50 bank holding companies based on deposit balances over the past five years, adjusted to the extent that they invested in tax-free municipal bonds.

The PSAF also includes the estimated priced-services-related expenses of the Board of Governors and imputed sales taxes based on Reserve Bank estimated expenditures. An assessment for FDIC insurance is imputed based on current FDIC rates during 2012 and projected clearing balances held with the Reserve Banks.

1. Net Income on Clearing Balances--The NICB calculation is performed each year along with the PSAF calculation and is based on the assumption that the Reserve Banks invest clearing balances net of an imputed reserve requirement and balances used to finance priced services assets.¹¹ The Reserve Banks impute a constant spread, determined by the return on a portfolio of investments, over the three-month Treasury bill rate and apply this investment rate to the net level of clearing balances.¹² A return on the imputed reserve requirement, which is based on the level of clearing balances on the pro forma balance sheet, is imputed to reflect the return that would be earned on a required reserve balance held at a Reserve Bank.

The calculation also involves determining the priced services cost of earnings credits (amounts available to offset service fees) on contracted clearing balances held, net of expired earnings credits, based on a discounted three-month Treasury bill rate. Rates and clearing balance levels used in the 2012 projected NICB are based on July 2011 rates and clearing balance levels. Because clearing balances are held for clearing priced services transactions or offsetting priced-services fees, they are directly related to priced services. The net earnings or expense attributed to the investments and the cost associated with holding clearing balances, therefore, are considered net income for priced services.

NICB is projected to be $1.0 million for 2012, including earnings on imputed reserve requirements.¹³ The imputed rate is equal to the three-month Treasury bill rate with no constant spread due to the results of the interest rate sensitivity analysis. See the section of this memo "Analysis of the 2012 PSAF" for more information on the interest rate sensitivity analysis results and the effect on the 2012 NICB.

2. Calculating Cost Recovery--The PSAF and NICB are incorporated into the projected and actual annual cost-recovery calculations for Reserve Bank priced services. Each year, the Board projects the PSAF for the following year using July clearing balance and rate data during the process of establishing priced services fees. When calculating actual cost recovery for the priced services at the end of each year, the Board historically has used the PSAF derived during the price-setting process with only minimal adjustments for actual rates or balance levels.¹⁴ Beginning in 2009, in light of the uncertainty about the long-term effect that the payment of interest on reserve balances would have on the level of clearing balances, the Board adjusts the PSAF used in the actual cost-recovery calculation to reflect the actual clearing balance levels maintained throughout the year. NICB is projected in the fall of each year using July data and is recalculated to reflect actual interest rates and clearing balance levels during the year when calculating actual priced services cost recovery.

3. Analysis of the 2012 PSAF--The decrease in the 2012 PSAF is due primarily to a reduction in the level of imputed equity associated with a decrease in assets and credit float.

Projected 2012 Federal Reserve priced-services assets, reflected in Table 3, have decreased $850.8 million, mainly due to a decline in imputed investments in marketable securities of $477.9 million as a result of lower expected credit float. The priced services balance sheet includes projected clearing balances of $2,661.1 million for 2012, which represents an increase of $60.8 million from the amount of clearing balances on the balance sheet for the budgeted 2011 PSAF. Because of the continued uncertainty regarding the level of clearing balances in an interest-on-reserves environment, the actual PSAF costs used in cost-recovery calculations will continue to be based on the actual levels of clearing balances held throughout 2012.

Credit float, which represents the difference between items in process of collection and deferred credit items, decreased from $1,800.0 million in 2011 to $1,100.0 million in 2012.¹⁵ The decrease is primarily a result of credit float generated by a less use of Check 21 deferred-availability products.

As previously mentioned, clearing balances are available as a funding source for priced-services assets. As shown in Table 4, in 2012, $19.2 million in clearing balances is used as a funding source for short-term assets. Long-term liabilities and equity exceed long-term assets by $124.9 million; therefore, no core clearing balances are used to fund long-term assets.

The Board uses an interest rate sensitivity analysis to ensure that the interest rate risk of the priced services balance sheet, and its effect on cost recovery, are appropriately managed and that the priced services long-term assets are appropriately funded with long-term liabilities and equity. The interest rate sensitivity analysis measures the relationship between rate sensitive assets and liabilities when they reprice as a result of a change in interest rates.¹⁶ If a 200 basis point increase or decrease in interest rates changes priced services cost recovery by more than 2 percentage points, rather than using core clearing balances to fund long-term assets, long-term debt is imputed.

The interest rate sensitivity analysis shown in table 5 indicates that a 200 basis point decrease in rates decreases cost recovery 3.9 percentage points, while an increase of 200 basis points in rates increases cost recovery 3.8 percentage points. The greater-than-two-percentage-point effect on cost recovery is the result of a large gap between rate-sensitive assets and liabilities, and the relationship to priced services net income. The gap is caused by an increase in rate sensitive assets, specifically, the imputed federal funds investment needed to offset the projected level of credit float in 2011. The results of the analysis have the following effects on the 2012 PSAF and NICB:

Generally, the results of the interest rate sensitivity analysis indicate when long-term debt should be imputed rather than using core clearing balances to fund long-term assets. The requirement to impute debt remedies an asset mismatch when too many clearing balances (rate sensitive liabilities) are being used to fund long-term assets and there is a need for another funding source (i.e. long-term debt). For the 2011 and 2012 PSAF, however, the mismatch arises from the level of credit float rather than the use of clearing balances to fund long-term assets. If the Board were to impute debt for the 2012 PSAF, clearing balances now used to finance assets would be invested in rate-sensitive assets. Therefore, imputing debt would cause the gap between interest-rate-sensitive assets and liabilities to widen further, resulting in an even greater effect on cost recovery than shown in table 5. Accordingly, the Board will not impute debt for the 2012 PSAF. Imputed debt is limited to the amount of clearing balances used to finance long-term assets. (See table 4 for the portion of clearing balances used to fund priced-services assets.)

Because of the heightened cost recovery sensitivity to interest rate fluctuations, the investment of clearing balances is limited to three-month Treasury bills (with no additional imputed constant spread). As shown in table 3, the amount of equity imputed for the 2012 PSAF is $234.7 million, a decrease of $42.5 million from the imputed equity for 2011. In accordance with FAS 158 [ASC 715], this amount includes an accumulated other comprehensive loss of $537.7 million. Both the capital-to-total-assets ratio and the capital-to-risk-weighted-assets ratio meet or exceed the regulatory requirements for a well-capitalized depository institution. Equity is calculated as 5 percent of total assets, and the ratio of capital to risk-weighted assets exceeds 10 percent.¹⁷ The Reserve Banks imputed an FDIC assessment for the priced services based on the FDIC's assessment rates and the level of total priced services assets held at Reserve Banks.¹⁸ For 2012, the FDIC assessment is imputed at $2.2 million, compared with an FDIC assessment of $5.3 million in 2011.

Table 6 shows the imputed PSAF elements for 2012 and 2011, including the pretax ROE and other required PSAF costs. The $4.9 million decrease in ROE is caused by a lower amount of imputed equity and a lower target ROE rate. Imputed sales taxes decreased from $4.2 million in 2011 to $3.7 million in 2012. The effective income tax rate used in 2012 decreased to 30.9 percent from 32.4 percent in 2011. The priced services portion of the Board's expenses decreased $1.1 million, from $5.2 million in 2011 to $4.1 million in 2012.

C. Earnings Credits on Clearing Balances--The Reserve Banks will maintain the current rate of 80 percent of the three-month Treasury bill rate to calculate earnings credits on clearing balances.³⁶ 

Clearing balances were introduced in 1981, as part of the Board's implementation of the Monetary Control Act, to facilitate access to Federal Reserve priced services by institutions that did not have sufficient reserve balances to support the settlement of their payment transactions. The earnings credit calculation uses a percentage discount on a rolling 13-week average of the annualized coupon equivalent yield of three-month Treasury bills in the secondary market. Earnings credits, which are calculated monthly, can be used only to offset charges for priced services and expire if not used within one year.³⁷ 

D. Check Service--Table 8 shows the 2010 actual, 2011 estimated, and 2012 budgeted cost recovery performance for the commercial check service.

1. 2011 Estimate--For 2011, the Reserve Banks estimate that the check service will recover 103.6 percent of total expenses and targeted ROE, compared with the budgeted recovery rate of 102.9 percent. The Reserve Banks expect to recover all actual and imputed costs of providing check services and earn a net income of $17.7 million (see table 8).

The general decline in the number of checks written continues to influence the decline in checks collected by the Reserve Banks. Through September, total forward check volume and return check volume is 14 percent and 17 percent lower, respectively, than the same period last year. For full-year 2011, the Reserve Banks estimate that their total forward check collection volume will decline nearly 16 percent and return check volume will decline 15 percent from 2010 levels.³⁸ The proportion of checks deposited and presented electronically has grown steadily in 2011 (see table 9). The Reserve Banks expect that year-end 2011 FedForward deposit and FedReceipt presentment penetration rates will reach 99.9 percent and 99.6 percent, respectively. The Reserve Banks also expect that year-end 2011 FedReturn and FedReceipt Return volume penetration rates will reach 98.8 percent and 99.1 percent, respectively.

2. 2012 Pricing--In 2012, the Reserve Banks project that the check service will recover 101.0 percent of total expenses and targeted ROE. Revenue is projected to be $209.1 million, a decline of $45.7 million from 2011. This decline is driven largely by projected reductions in both forward check collection and return check volume. Total expenses for the check service are projected to be $200.4 million, a decline of $36.7 million from 2011. The reduction in check costs is driven primarily by the cost savings associated with a mature electronic check environment and the implementation of a more efficient check processing platform.

The Reserve Banks estimate that total Reserve Bank forward check volumes and return check volumes will decline approximately 14 percent, to 5.5 billion and 53.5 million, respectively. The decline in Reserve Bank check volume can be attributed to increased competition, increased use of direct exchanges, and the continued decline in check use nationwide.

The Reserve Banks will reduce by half the number of forward and return deadlines from 8 to 4 and 4 to 2, respectively, to respond to customer requests for a simplified deadline structure. The Reserve Banks will also eliminate the presort deposit options, which result in higher per item fees for those depositors. Reserve Banks project far fewer cash letters will be submitted in 2012 and that cash letters that are submitted will have a larger number of items per cash letter thus decreasing the per item cash letter fee. Savings in cash letter fees are partially offset by a 4 percent increase in FedForward fees for checks presented electronically and a 2 percent increase in FedForward fees for checks presented as substitute checks, resulting in only a modest increase in the per item weighted effective average fee (see Table 10). ³⁹ 

The Reserve Banks will retain at current levels FedReturn fees for checks returned electronically and for endpoints that receive substitute checks.⁴⁰ The effective average fee paid by FedReturn depositors will decrease approximately 16 percent as the number of institutions that accept their returns electronically increases. The effective average fee for forward collection and returned checks that are deposited with Reserve Banks in electronic form and presented in electronic form is projected to be $0.02 and $0.57, respectively.

The Reserve Banks project that approximately 0.02 percent of check forward deposit volume and approximately 0.74 percent of return check volume will be in traditional paper-based products. The effective average fee for forward collection and returned checks that are deposited with Reserve Banks in paper form is projected to be $5.29 and $10.31, respectively, which reflects the high costs of handling the small remaining paper volume. The Reserve Banks will retain paper check collection fees at their current levels.

The Reserve Banks will charge for two categories of adjustments: encoding errors and a subset of non-conforming items. The fees are $5.00 for each encoding error and for each non-conforming item up to 20 items. If a non-conforming item adjustment request includes more than 20 instances of the same edit failure, then a flat fee of $125 will be charged for the group of non-conforming items. The fees will be charged to the depositor. The pricing strategy is designed to increase the efficiency of Reserve Bank operations, improve the efficiency of the adjustment process, and reduce the risk associated with the check payments system. The implementation date has not been finalized.

Risks to the Reserve Banks' ability to achieve budgeted 2012 cost recovery for the check service include greater-than-expected check volume losses to correspondent banks, aggregators, and direct exchanges, which would result in lower-than-anticipated revenue, and cost overruns associated with unanticipated problems with technology upgrades.

E. FedACH Service--Table 11 shows the 2010 actual, 2011 estimate, and 2012 budgeted cost-recovery performance for the commercial FedACH service.

1. 2011 Estimate--The Reserve Banks estimate that the FedACH service will recover 100.2 percent of total expenses and targeted ROE. The Reserve Banks expect to recover all actual and imputed costs of providing FedACH services and earn net income of $4.3 million. Through September, FedACH commercial origination volume was nearly 1 percent higher than it was during the same period last year. For the full year, the Reserve Banks estimate that volume growth will continue at current trends.

2. 2012 Pricing--The Reserve Banks project that the FedACH service will recover 100.5 percent of total expenses and targeted ROE in 2012. Total revenue and total expenses are budgeted to increase $2.3 million and $2.4 million, respectively. The Reserve Banks expect both FedACH commercial origination and receipt volume to grow approximately 2.5 percent in 2012.

The Reserve Banks will maintain core transaction fees at current levels with one exception. The Reserve Banks will increase the per item fee charged to receivers of ACH returns from $0.0025 to $0.005. Additionally, the Reserve Banks will increase fees for select value added services. Specifically, the Reserve Banks will increase per item fees for FedLine Web origination returns and notification of change, monthly fees for information extract file, and the IAT output file sort fee. The National Automated Clearing House Association (NACHA) will also increase the per entry network administration fee. The Reserve Banks estimate that the effective price will remain at the 2011 level.

Risks to the Reserve Banks' ability to achieve budgeted 2012 cost recovery for the FedACH service include greater-than-expected volume losses due to unanticipated mergers and acquisitions, direct exchanges, and the competitive environment, which could result in lower-than-anticipated revenue, and cost overruns associated with unanticipated problems with technology upgrades.

F. Fedwire Funds and National Settlement Services--Table 12 shows the 2010 actual, 2011 estimate, and 2012 budgeted cost-recovery performance for the Fedwire Funds and National Settlement Services.

1. 2011 Estimate--The Reserve Banks estimate that the Fedwire Funds and National Settlement Services will recover 101.5 percent of total expenses and targeted ROE, compared with a 2011 budgeted recovery rate of 100.5 percent. Through September, online Fedwire Funds volume was up 2.2 percent from the same period in 2010. For the full year, the Reserve Banks estimate that online Fedwire Funds volume will decline by 0.9 percent. With respect to the National Settlement Service, the volume of settlement files decreased 6.2 percent while the volume of settlement file entries increased 8.3 percent through September. For the full year, the Reserve Banks estimate that the volume of settlement files will decrease by 7.2 percent while the volume of settlement entries will increase by 4.7 percent.

2. 2012 Pricing--The Reserve Banks expect the Fedwire Funds and National Settlement Services to recover 100.0 percent of total expenses and targeted ROE in 2012. The Reserve Banks project total expenses to increase $7.0 million from the 2011 estimate. This increase is primarily due to technology upgrades and related infrastructure projects, and the establishment of a program management office to support these projects. The Reserve Banks project total revenue to increase $5.5 million from the 2011 estimate. This projected revenue increase is primarily due to the implementation of new fees for Fedwire Funds and price increases for both the Fedwire Funds and the National Settlement Services.

The Reserve Banks will implement two new fees for the Fedwire Funds Service. First, a high-value transfer per item fee of $0.12 will apply to both senders and receivers of transfers that exceed $10 million.⁴¹ This high-value transfer surcharge is expected to increase revenue for the Fedwire Funds Service by $0.9 million.⁴² Second, a payment notification per item fee of $0.20 will apply to transfers sent that contain any data in the new field tag {3620} that supports payment notification and tracking. The Reserve Banks assume no new revenue increases as a result of the payment notification surcharge.⁴³ In calculating projected Fedwire Funds revenue for 2012, the Reserve Banks project flat volume growth.

The implementation of the high-value transfer surcharge is consistent with the Reserve Banks' objective to maintain the safety and resilience of the Fedwire Funds Service, which is especially important for funds transfers that are of high value. Although only about 3 percent of Fedwire Funds transfers are valued at $10 million or more, these transfers collectively account for roughly 95 percent of the value settled by the Fedwire Funds Service. The Reserve Banks believe that the high-value transfer surcharge is an equitable way to shift more of the cost associated with Fedwire resiliency to those payments that drive the need for such resiliency. The implementation of the payment notification surcharge is consistent with the Reserve Banks' goals of improving their ability to retain existing business and attract new volume by aligning the services provided by the Reserve Banks with the evolving needs of their customers.

In addition to implementing the two new surcharges mentioned above, the Reserve Banks will adjust various fees for the Fedwire Funds Service. First, the Reserve Banks will increase the Tier 1 per item pre-incentive fee from $0.52 to $0.58, the Tier 2 per item pre-incentive fee from $0.23 to $0.24, and the Tier 3 per item pre-incentive fee from $0.13 to $0.135.⁴⁴ Second, the Reserve Banks will increase the end-of-day origination surcharge from $0.18 to $0.20. Third, the Reserve Banks will increase the Fedwire Funds monthly participation fee from $75 to $85. Lastly, the Reserve Banks will increase the FedLine Advantage import/export monthly fee from $10 to $20. The Reserve Banks estimate that the new surcharges and price increases will result in an effective price increase of approximately 9 percent.

With respect to the National Settlement Service, the Reserve Banks will increase the NSS file fee from $20 to $21 and the per entry fee from $0.90 to $1.00. In calculating projected NSS revenue for 2012, the Reserve Banks project flat volume growth.

G. Fedwire Securities Service--Table 13 shows the 2010 actual, 2011 estimate, and 2012 budgeted cost recovery performance for the Fedwire Securities Service.⁴⁵ 

1. 2011 Estimate--The Reserve Banks estimate that the Fedwire Securities Service will recover 100.4 percent of total expenses and targeted ROE, compared with a 2011 budgeted recovery rate of 106.5 percent. The lower-than-budgeted recovery is primarily attributed to higher-than-expected costs associated with technology upgrades and infrastructure projects. Through September, online securities volume was down 5.3 percent from the same period in 2010. For the full year, the Reserve Banks estimate that online Fedwire Securities volume will decline by 8.9 percent.

2. 2012 Pricing--The Reserve Banks project that the Fedwire Securities Service will recover 102.5 percent of total expenses and targeted ROE in 2012. The Reserve Banks project that 2011 revenue and expenses will increase by $3.2 million and $2.6 million, respectively, compared with the 2011 estimates.⁴⁶ In calculating projected Fedwire Securities revenue for 2012, the Reserve Banks project flat volume growth.

The Reserve Banks will adjust various fees for the Fedwire Securities Service. First, the Reserve Banks will increase the online transfer fee from $0.35 to $0.45. Second, the Reserve Banks will increase the monthly account maintenance fee from $36 to $40 and the monthly issue maintenance fee from $0.40 to $0.45 per issue. Third, the Reserve Banks will increase the offline surcharge from $60 to $66. Lastly, the Reserve Banks will increase the claim adjustment fee from $0.60 to $0.66.

The Reserve Banks' 2012 Fedwire Securities Service fees are consistent with their multi-year cost projections for a pricing strategy that takes into account technology upgrades and infrastructure projects. Under this approach, the Reserve Banks are targeting a 102.5 percent recovery rate for 2012, which would result in an effective price increase of approximately 11 percent.

H. Electronic Access--The Reserve Banks allocate the costs and revenues associated with electronic access to the Reserve Banks' priced services. There are currently six electronic access channels through which customers can access the Reserve Banks' priced services: FedPhone^®, FedMail^®, FedLine Web^®, FedLine Advantage^®, FedLine Command^®, and FedLine Direct^®.⁴⁷ The Reserve Banks package these channels into ten electronic access packages that are supplemented by a number of premium (or à la carte) access and accounting information options. In addition, the Reserve Banks offer three FedComplete packages, which are bundled offerings of a FedLine Advantage connection and a fixed number of FedACH, Fedwire Funds, and Check 21-enabled services.

The FedPhone access package provides a telephone link to the FedACH services' automated voice response system, which is used to submit return items and notifications of change. The other access packages are broken into attended and unattended offerings.

Attended access packages offer access to critical payment and information services via a web-based interface. The FedMail e-mail package provides access to basic information services via fax or email, while two FedLine Web packages offer FedMail e-mail options plus online attended access to a broad range of informational services, including cash services, FedACH services, and check services. Three FedLine Advantage packages expand upon the FedLine Web informational service packages and offer attended access to transactional services: Check, FedACH, Fedwire Funds, and Fedwire Securities.

Unattended access packages are computer-to-computer, IP-based interfaces designed for medium-to high-volume customers. The FedLine Command package offers an unattended connection to FedACH, as well as most accounting information services. The final three packages are FedLine Direct packages, which allow for unattended connections at one of three connection speeds to Check, FedACH, Fedwire Funds, and Fedwire Securities transactional and information services and to most accounting information services.

For 2012, the Reserve Banks will introduce a new package to and increase the fees for select FedLine packaged solutions, to better meet their customers' needs for access options, delivery solutions, and information services and to address increasing costs. The new package, FedLine Advantage Premier, priced at $500 per month, will accommodate the growth and expansion of value-add services as cross-business risk and information services expand. For example, the Transaction Analyzer service will be tiered based on a customers' transaction volume with the top volume tiers covered by the new FedLine Advantage Premier package. In addition, the Reserve Banks will begin to charge $15 per month for FedPhone for current customers that use the FedPhone channel to access the Reserve Banks' priced services; the introduction of this fee supports the Reserve Banks' strategic direction of moving to web-based electronic access. The Reserve Banks will also charge an additional $20 per month for the FedLine Advantage Plus packages, $100 per month for the FedLine Command Plus packages, $250 per month for FedLine Direct packages, and $200 per month for the FedLine Direct Premier packages.

In addition to raising the fees for select electronic access packages, the Reserve Banks will make other changes to electronic access pricing for 2012. In particular, the Reserve Banks will raise the monthly fees for additional dedicated electronic access connections, specifically, the 56K, T1, and VPN surcharge by $250, $150, and $25, respectively, to align with an increase in costs. The FedLine international one-time setup fee will increase from $1,000 to $5,000.⁴⁸ The Reserve Banks will also increase the monthly fees for accounting information services basic reports to improve the alignment of value and revenue.

II. Analysis of Competitive Effect

All operational and legal changes considered by the Board that have a substantial effect on payments system participants are subject to the competitive impact analysis described in the March 1990 policy, "The Federal Reserve in the Payments System."⁴⁹ Under this policy, the Board assesses whether proposed changes would have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services because of differing legal powers or constraints or because of a dominant market position deriving from such legal differences. If any proposed changes create such an effect, the Board must further evaluate the changes to assess whether the associated benefits--such as contributions to payment system efficiency, payment system integrity, or other Board objectives--can be achieved while minimizing the adverse effect on competition.

The Board projects that the 2012 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 fees 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.

By order of the Board of Governors of the Federal Reserve System, October 28, 2011.
 

Jennifer J. Johnson (signed)

Jennifer J. Johnson
Secretary of the Board.
 

Footnotes

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