Federal Reserve Banks

The Federal Reserve Banks provide payment services to depository and certain other institutions, distribute the nation's currency and coin to depository institutions, and serve as fiscal agents and depositories for the U.S. government and other entities. The Reserve Banks also contribute to setting national monetary policy and supervision of banks and other financial entities operating in the United States (discussed in sections 2 through 4 of this annual report).

Federal Reserve Priced Services

Reserve Banks provide a range of payment and related services to depository and certain other institutions; these "priced services" include collecting checks, operating an automated clearinghouse (ACH) service, transferring funds and securities, and providing a multilateral settlement service.¹

The Reserve Banks have been engaged in a number of multiyear technology initiatives that will modernize their priced-services processing platforms. The Reserve Banks reached a significant milestone in the multiyear Fedwire Modernization Program by successfully migrating the Fedwire Securities Service off the legacy mainframe system in November 2015. (The Banks completed the migration of the Fedwire Funds Service in 2014.) The Reserve Banks suspended the FedACH technology modernization initiative and began to investigate the use of other technology solutions in 2014, and after an extensive review of options for an alternative processing solution, the Reserve Banks selected a vendor and signed a contract in December 2015 to proceed with the new FedACH platform.

On July 23, 2015, the Reserve Banks implemented new posting rules for ACH and commercial check transactions associated with the changes to part II of the Policy on Payment System Risk and companion amendments to Regulation J adopted by the Federal Reserve Board in December 2014.² Under the new posting rules, commercial and government ACH debit and credit transactions specified for future settlement post at 8:30 a.m., and commercial check transactions settle at 8:30 a.m., 1:00 p.m., and 5:30 p.m., with the bulk of credits for deposits and debits for presentments settling at 8:30 a.m.³ The amendments to Regulation J permit the Reserve Banks to obtain settlement from paying banks as early as 8:30 a.m. for checks that the Reserve Banks present. The amendments also permit the Reserve Banks to require paying banks that receive presentment of checks from the Reserve Banks to make the proceeds of settlement for those checks available to the Reserve Banks as soon as 30 minutes after receipt of the checks.

Cost Recovery

The Monetary Control Act of 1980 requires that the Federal Reserve establish fees for priced services to recover, over the long run, all direct and indirect costs actually incurred as well as the imputed costs that would have been incurred--including financing costs, taxes, and certain other expenses--and the return on equity (profit) that would have been earned if a private business firm had provided the services.⁴ The imputed costs and imputed profit are collectively referred to as the private-sector adjustment factor (PSAF). From 2006 through 2015, the Reserve Banks recovered 102.6 percent of the total priced services costs, including the PSAF (see table 1).⁵

In 2015, Reserve Banks recovered 106.4 percent of the total priced services costs, including the PSAF.⁶ The Reserve Banks' operating expenses and imputed costs totaled $397.8 million. Revenue from operations totaled $429.1 million, resulting in net income from priced services of $31.3 million. All services achieved full cost recovery. Greater-than-expected check volume processed by the Reserve Banks was the single most significant factor influencing priced services cost recovery.

Table 1. Priced services cost recovery, 2006-15
Millions of dollars, except as noted

Year	Revenue from services1	Operating expenses and imputed costs2	Targeted return on equity3	Total costs	Cost recovery (percent)4
2006	1,029.7	874.8	72.0	946.8	108.8
2007	1,012.3	912.9	80.4	993.3	101.9
2008	873.8	820.4	66.5	886.9	98.5
2009	675.4	707.5	19.9	727.5	92.8
2010	574.7	532.8	13.1	545.9	105.3
2011	478.6	444.4	16.8	461.2	103.8
2012	449.8	423.0	8.9	432.0	104.1
2013	441.3	409.3	4.2	413.5	106.7
2014	433.1	418.7	5.5	424.1	102.1
2015	429.1	397.8	5.6	403.4	106.4
2006-15	6,397.7	5,941.6	292.9	6,234.5	102.6

Note: Here and elsewhere in this section, components may not sum to totals or yield percentages shown because of rounding.

1. For the 10-year period, includes revenue from services of $6,019.7 million and other income and expense (net) of $378.0 million. Return to table

2. For the 10-year period, includes operating expenses of $5,710.5 million, imputed costs of $24.6 million, and imputed income taxes of $206.5 million. Return to table

3. From 2009 to 2012, the PSAF was adjusted to reflect the actual clearing balance levels maintained; previously, the PSAF had been calculated based on a projection of clearing balance levels. Return to table

4. Revenue from services divided by total costs. For the 10-year period, cost recovery is 92.8 percent, including the effect of accumulated other comprehensive income (AOCI) reported by the priced services under ASC 715. For details on changes to the estimation of priced services accumulated other comprehensive income and their effect on the pro forma financial statements, refer to note 3 to the "Pro Forma Financial Statements for Federal Reserve Priced Services" at the end of this section. Return to table

Commercial Check-Collection Service

The commercial check-collection service provides a suite of electronic and paper processing options for forward and return collections. In 2015, the Reserve Banks recovered 113.0 percent of the total costs of their commercial check-collection service, including the related PSAF. Revenue from operations totaled $160.6 million, resulting in net income of $20.4 million. The Reserve Banks' operating expenses and imputed costs totaled $140.2 million. Reserve Banks handled 5.5 billion checks in 2015, a decrease of 5.0 percent from 2014 (see table 2). The average daily value of checks collected by the Reserve Banks in 2015 was approximately $32.3 billion, or roughly the same as in 2014.

Table 2. Activity in Federal Reserve priced services, 2013-15
Thousands of items, except as noted

Service	2015	2014	2013	Percent change
				2014 to 2015	2013 to 2014
Commercial check	5,452,369	5,741,527	5,988,302	-5.0	-4.1
Commercial ACH	12,298,307	11,620,376	11,142,821	5.8	4.3
Fedwire funds transfer	146,006	138,133	137,219	5.7	0.7
National settlement	508	597	661	-14.9	-9.7
Fedwire securities	4,218	4,578	6,535	-7.9	-30.0

Note: Activity in commercial check is the total number of commercial checks collected, including processed and fine-sort items; in commercial ACH, the total number of commercial items processed; in Fedwire funds transfer and securities transfer, the number of transactions originated online and offline; and in national settlement, the number of settlement entries processed.

Commercial Automated Clearinghouse Service

The commercial ACH service provides domestic and cross-border batched payment options for same-day and next-day settlement. In 2015, the Reserve Banks recovered 100.7 percent of the total costs of their commercial ACH services, including the related PSAF. Revenue from operations totaled $125.5 million, resulting in net income of $2.7 million. The Reserve Banks' operating expenses and imputed costs totaled $122.8 million. The Reserve Banks processed 12.3 billion commercial ACH transactions in 2015, an increase of 5.8 percent from 2014 (see table 2). The average daily value of FedACH transfers in 2015 was approximately $81.9 billion, an increase of 3.4 percent from the previous year.

In September 2015, after consideration of public comment, the Board approved enhancements, effective beginning September 23, 2016, to the Reserve Banks' same-day ACH service. The enhancements require receiving depository financial institutions (RDFIs) to participate in the service and require originating depository financial institutions to pay a fee to the RDFIs for each same-day ACH forward transaction. The enhancements align the Reserve Banks' same-day ACH service with amendments to NACHA's (formerly the National Automated Clearing House Association) ACH operating rules and establish a ubiquitous same-day ACH service with improved efficiency for the ACH network and the broader U.S. payment system. The enhancements will facilitate the use of the ACH network for certain time-critical payments, accelerate final settlement, and improve funds availability to payment recipients, consistent with the Federal Reserve System's Strategies for Improving the U.S. Payment System (see box 1, "Improving the U.S. Payment System").

Fedwire Funds and National Settlement Services

In 2015, the Reserve Banks recovered 103.9 percent of the costs of their Fedwire Funds and National Settlement Services, including the related PSAF. Revenue from operations totaled $116.0 million, resulting in a net income of $5.9 million. The Reserve Banks' operating expenses and imputed costs totaled $110.1 million in 2015.

Fedwire Funds Service

The Fedwire Funds Service allows its participants to send or receive domestic time-critical payments using their balances at Reserve Banks to transfer funds in real time. In 2015, the number of Fedwire funds transfers originated by depository institutions increased 5.7 percent from 2014, to approximately 146 million (see table 2). The average daily value of Fedwire funds transfers in 2015 was $3.3 trillion, a decrease of 6 percent from the previous year.

National Settlement Service

The National Settlement Service is a multilateral settlement system that allows participants in private-sector clearing arrangements to settle transactions using their balances at Reserve Banks. In 2015, the service processed settlement files for 17 local and national private-sector arrangements. The Reserve Banks processed 9,372 files that contained 507,559 settlement entries for these arrangements in 2015 (see table 2). Activity in 2015 represents a 5.3 percent decrease in settlement files and a 10.9 percent decrease in settlement entries compared with 2014.

Fedwire Securities Service

The Fedwire Securities Service allows its participants to transfer electronically to other service participants certain securities issued by the U.S. Treasury Department, federal government agencies, government-sponsored enterprises, and certain international organizations.⁷ In 2015, the Reserve Banks recovered 108.2 percent of the costs of their Fedwire Securities Service, including the related PSAF. Revenue from operations totaled $27.1 million, resulting in a net income of $2.4 million. The Reserve Banks' operating expenses and imputed costs totaled $24.7 million in 2015. In 2015, the number of non-Treasury securities transfers processed via the service decreased 7.9 percent from 2014, to approximately 4.2 million (see table 2). The average daily value of Fedwire Securities transfers in 2015 was $1.2 trillion, an increase of 2.6 percent from the previous year.

Float

In 2015, the Reserve Banks had daily average credit float of $193.2 million, compared with daily average credit float of $590.8 million in 2014.⁸

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Currency and Coin

The Board is the issuing authority for the nation's currency (in the form of Federal Reserve notes). In 2015, the Board paid Treasury's Bureau of Engraving and Printing (BEP) $637.3 million for costs associated with the production of nearly 7.1 billion Federal Reserve notes. The Reserve Banks distribute and receive currency and coin through depository institutions in response to public demand. Together, the Board and Reserve Banks work to maintain the integrity of and confidence in Federal Reserve notes.

In 2015, the Reserve Banks distributed 36.8 billion Federal Reserve notes into circulation, a 1.5 percent decrease from 2014, and received 35.1 billion Federal Reserve notes from circulation, a 1.5 percent decrease from 2014. In 2015, the Reserve Banks also distributed 71.4 billion coins into circulation, a 2.9 percent increase from 2014, and received 55.9 billion coins from circulation, a 0.9 percent decrease from 2014.

The value of Federal Reserve notes in circulation increased nearly 6.2 percent in 2015, to $1,380 billion at year-end. The increase in value is largely attributable to increased demand for $100 notes, which are used internationally primarily as a store of value. Demand for denominations primarily used for domestic transactions also increased. The volume of $1 and $20 notes in circulation increased 4.2 percent in 2015, compared with 6.7 percent growth in the volume of $100 notes in circulation.

Improvements to Efficiency and Risk Management

During 2014 and 2015, the Reserve Banks tested and implemented several new concepts in receiving and high-speed processing of cash to improve operational flexibility and cost-effectiveness, while still maintaining a well-controlled environment. The Federal Reserve estimates that the implementation of these new concepts will result in savings of more than $5 million between 2014 and 2016, primarily because of lower personnel expenses.

Other Improvements and Efforts

During 2015, the Reserve Banks continued to develop a new cash automation platform (CashForward) that will replace legacy software applications, automate business concepts and processes, and employ technologies to meet the cash business's current and future needs more cost-effectively. The new platform will also facilitate business continuity and contingency planning and enhance the support provided to Reserve Bank customers. During 2015, the Federal Reserve completed development of the application and began integration and quality assurance testing. Deployment of the application at each Reserve Bank is estimated to begin in mid-2016 and finish by late 2017.

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Fiscal Agency and Government Depository Services

As fiscal agents and depositories for the federal government, the Reserve Banks auction Treasury securities, process electronic and check payments for Treasury, collect funds owed to the federal government, maintain Treasury's bank account, and develop, operate, and maintain a number of automated systems to support Treasury's mission. The Reserve Banks also provide certain fiscal agency and depository services to other entities; these services are primarily related to book-entry securities. Treasury and other entities fully reimburse the Reserve Banks for the expense of providing fiscal agency and depository services.

In 2015, fiscal agency expenses increased to $650.6 million (see table 3), primarily as a result of requests from Treasury's Bureau of the Fiscal Service (Fiscal Service) and the addition of $54.6 million in Reserve Bank pension costs to be reimbursed by Treasury and other entities.⁹ Support for Treasury programs accounted for 94.1 percent of expenses, and support for other entities accounted for 5.9 percent.

In April 2014, as part of the federal government's effort to increase operational efficiency and effectiveness, Treasury announced the consolidation of the fiscal agency services provided by the Reserve Banks. Although Treasury expects long-term savings by reducing the number of Reserve Banks that provide fiscal agency services, an increase in expenses is projected during the consolidation process, which will continue over the next several years. In 2015, total consolidation expenses amounted to $27.2 million, as a result of the first three Reserve Bank business lines that transitioned and preparations for the upcoming transitions.¹⁰ Consolidation expenses are included in the line items for Payment, Collection, and Cash-management services in table 3.

Table 3. Expenses of the Federal Reserve Banks for fiscal agency and depository services, 2013-15
Thousands of dollars

Agency and service	2015	2014r	2013
Department of the Treasury
Treasury securities services
Treasury retail securities	52,945	54,958	55,334
Treasury auction	35,701	29,491	26,673
Treasury securities safekeeping and transfer	21,254	16,568	14,397
Computer infrastructure development and support	6,371	5,792	5,801
Other services	2,194	853	2,971
Total	118,465	107,662	105,176
Payment, collection, and cash-management services
Payment services	161,681	157,869	151,715
Collection services	59,513	52,878	44,788
Cash-management services	79,161	74,428	66,519
Computer infrastructure development and support	89,069	79,289	75,565
Other services	10,998	11,465	9,360
Total	400,422	375,928	347,947
Other Treasury
Total	41,971	44,756	42,826
Total, Treasury	560,857	528,346	495,949
Other entities
Total, other entities	35,140	34,588	34,077
Pension costs
Total, Treasury and other entities	54,586	6,704	n/a
Total reimbursable expenses	650,583	569,638	530,026

Note: "Pension costs" is a new category in this table. The 2014 figures were restated to reflect this change.

r Revised.

n/a Not applicable.

Treasury Securities Services

The Reserve Banks work closely with Treasury's Fiscal Service in support of the borrowing needs of the federal government. The Reserve Banks auction, issue, maintain, and redeem securities; provide customer service; and operate the automated systems supporting U.S. savings bonds and marketable Treasury securities (bills, notes, and bonds). Treasury securities services consist of retail securities programs, which primarily serve individual investors, and wholesale securities programs, which serve institutional customers.

Retail Securities Programs

Reserve Bank operating expenses for the retail securities program decreased to $52.9 million in 2015, largely because of the transition of the savings bond print operation from the Reserve Banks to the Treasury and the decommissioning of the Legacy Treasury Direct system as part of an ongoing effort to eliminate aging technology platforms.¹¹ Program expense drivers included the Reserve Banks' implementation of a virtual case-file system and a virtual contact center to modernize retail securities services, and increased staffing to manage the increasing inventory of savings bond redemption work.

The Reserve Banks also provided support to Treasury's Retail Program Review initiative, which will define the retail securities program's future mission, vision, and operating model. Operating expenses to support this effort were $1.4 million in 2015.

Wholesale Securities Programs

The Reserve Banks support wholesale securities programs through the sale, issuance, safekeeping, and transfer of marketable Treasury securities for institutional investors. The Reserve Banks conducted 272 Treasury securities auctions in 2015. Of the 272 auctions, 12 auctions were for Floating Rate Notes--a marketable Treasury security with a floating rate interest payment that was introduced in 2014.¹²

In 2015, Reserve Bank operating expenses to support Treasury securities auctions increased to $35.7 million. Operating expenses were driven by upgrades to the auction system, which receives and processes bids submitted primarily by wholesale securities auction participants.¹³

Operating expenses associated with Treasury securities safekeeping and transfer activities increased to $21.3 million in 2015, as a result of the Reserve Banks' effort to migrate the securities services from a mainframe system to a distributed computing environment.

Payment Services

The Reserve Banks work closely with the Treasury's Fiscal Service and other government agencies to process payments to individuals and companies. The Reserve Banks process federal payroll payments, Social Security and veterans' benefits, income tax refunds, vendor payments, and other types of payments.

Reserve Bank operating expenses for payments-related activity increased to $161.7 million in 2015. Expenses were primarily attributable to increased consolidation expenses, and increased program expenses associated with Do Not Pay (DNP), International Treasury Services (ITS), Post Payment System (PPS), and Stored Value Card (SVC). These expense increases were partly offset by decreased expenses for the U.S. Treasury Electronic Payment Solution Center (formerly known as the Go Direct Contact Center) and Invoice Processing Platform (IPP).

In support of Treasury's DNP initiative, the Reserve Banks continued to enhance the DNP Portal, which is a single point of access through which federal agencies can query multiple data sources before making federal payments. In 2015, expenses for DNP increased to $17.7 million, largely because of increased staffing to support the advanced analytics function.

The Reserve Banks operate the ITS application, which provides cross-border payment and collection services as well as cash-management functions on behalf of the Treasury. U.S. government agencies use ITS to issue international benefit, payroll, and vendor payments in 100 currencies to recipients in established and emerging markets. ITS expenses in 2015 increased to $20.2 million primarily because of $6.5 million in consolidation costs.

The Reserve Banks continued work on the PPS initiative, a multiyear effort to modernize several of Treasury's legacy post-payment processing systems into a single application to enhance operations, reduce expenses, improve data analytics capabilities, and provide a centralized and standardized set of payment data. In 2015, program expenses for PPS increased to $16.6 million, as the result of greater system development expenses, and $2.1 million in consolidation expenses.

In 2015, Reserve Bank operating expenses for Treasury's SVC business increased to $19.8 million, largely because of $3.3 million in expenses associated with the transition of the Navy Cash program from a third-party financial agent, and $3.7 million in consolidation costs.¹⁴

The Reserve Banks operate the U.S. Treasury Electronic Payment Solution Center, which helps convert individuals' federal benefit payments from paper check to electronic delivery. As of December 2015, 98.0 percent of all federal benefit payments were made electronically. In 2015, expenses for the U.S. Treasury Electronic Payment Solution Center were $15.7 million.

The IPP is part of Treasury's all-electronic initiative--an electronic invoicing and payment information system that allows vendors to enter invoice data electronically, through either a web-based portal or electronic submission. The IPP accepts, processes, and presents data from agencies and supplier systems related to all stages of a payment transaction, including the purchase order, invoice, and other payment information. In 2015, the Reserve Banks' IPP expenses decreased to $21.4 million, primarily because of decreased consolidation expenses. The reduction of expenses was partially offset by increased program expenses to support a new Office of Management and Budget mandate that requires agencies to implement an electronic invoicing solution for commercial transactions by 2018.

Collection Services

The Reserve Banks also work closely with the Fiscal Service to collect funds owed to the federal government, including various taxes, fees for goods and services, and delinquent debts. In 2015, Reserve Bank operating expenses related to collection services increased to $59.5 million, largely because of greater operating expenses for Pay.gov, eCommerce, and the Collections Information Repository (CIR).

The Reserve Banks operate Pay.gov, an application that allows the public to use the Internet to authorize and initiate payments to federal agencies. During the year, the Pay.gov program expanded to include 100 new agency programs and processed more than 167 million online payments totaling $148 billion. Increased operational support and expanded functionality resulted in expenses of $19.1 million in 2015.

The Reserve Banks also continued supporting the Treasury's electronic commerce initiative (eCommerce) to expand ways for agencies and the public to do business with the Treasury through online banking solutions, mobile technologies, and other payment methods. Program expenses for eCommerce increased to $4.3 million in 2015, primarily because of expenses associated with developing a new mobile payment platform that will facilitate more efficient federal revenue collections.

In 2015, the Reserve Banks began working on the transition of the CIR application from a third-party financial agent.¹⁵ Expenses for CIR totaled $2.9 million in 2015 and were largely attributable to application development.

Treasury Cash-Management Services

The Reserve Banks maintain Treasury's operating cash account and provide collateral-management and collateral-monitoring services for those Treasury programs that have collateral requirements. The Reserve Banks also support Treasury's efforts to modernize its financial management processes by developing software, operating help desks, and managing projects on behalf of the Fiscal Service. In 2015, Reserve Bank operating expenses related to Treasury cash-management services increased to $79.2 million, of which $7.1 million was attributable to the consolidation.

During 2015, the Reserve Banks continued to support Treasury's efforts to improve centralized government accounting and reporting functions. In March 2015, the Reserve Banks, in collaboration with the Fiscal Service, deployed the Central Accounting Reporting System (CARS) as Treasury's new central accounting system of record.¹⁶ Expenses for CARS increased to $19.9 million as a result of increased application development expenses.

Services Provided to Other Entities

When permitted by federal statute or when required by the Secretary of the Treasury, the Reserve Banks provide fiscal agency and depository services to other domestic and international entities.

Reserve Bank operating expenses for services provided to other entities increased slightly to $35.1 million in 2015. Book-entry securities issuance and maintenance activities account for a significant amount of the work performed for other entities, with the majority performed for the Federal Home Loan Mortgage Association (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae).

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Use of Federal Reserve Intraday Credit

The Board's Payment System Risk policy governs the use of Federal Reserve Bank intraday credit, also known as daylight overdrafts. A daylight overdraft occurs when an institution's account activity creates a negative balance in the institution's Federal Reserve account at any time in the operating day. Daylight overdrafts enable an institution to send payments more freely throughout the day than if it were limited strictly by its available intraday funds balance. The Payment System Risk policy recognizes explicitly the role of the central bank in providing intraday balances and credit to healthy institutions; under the policy, the Reserve Banks provide collateralized intraday credit at no cost.

Before the 2007-09 financial crisis, overnight balances were much lower and daylight overdrafts significantly higher than levels observed since late 2008. The use of daylight overdrafts spiked amid the market turmoil near the end of 2008, but dropped sharply as various liquidity programs initiated by the Federal Reserve took effect. During this period, the Federal Reserve also began paying interest on balances held at the Reserve Banks, increased its lending under the Term Auction Facility, and began purchasing government-sponsored enterprise mortgage-backed securities. These measures tended to increase balances institutions held at the Banks, which decreased the demand for intraday credit. In 2007, for example, institutions held, on average, less than $20 billion in overnight balances, and total average daylight overdrafts were around $60 billion. In contrast, institutions held historically high levels of overnight balances--on average more than $2.77 trillion--at the Reserve Banks in 2015, while daylight overdrafts remained historically low. In fact, average daylight overdrafts across the Federal Reserve System declined further in 2015 to $1.13 billion from $1.62 billion in 2014, a decrease of about 30 percent (see figure 1). The average level of peak daylight overdrafts fell to $5.27 billion in 2015 from $8.44 billion in 2014; the average level of peak daylight overdrafts in 2015 was just a fraction of its level in 2008 (about 3 percent).

Daylight overdraft fees are also at historically low levels. In 2015, institutions paid about $14,100 in daylight overdraft fees; in contrast, fees totaled more than $50 million in 2008. The decrease in fees is largely attributable to the elevated level of reserve balances that began to accumulate in late 2008 and to the 2011 policy revision that eliminated fees for daylight overdrafts that are collateralized.

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FedLine Access to Reserve Bank Services

The Reserve Banks' FedLine access solutions provide financial institutions with a variety of alternatives for electronically accessing the Banks' payment and information services. For priced services, the Reserve Banks charge fees for these electronic connections and allocate the associated costs and revenue to the various 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 Direct. These FedLine channels are designed to meet the individual connectivity, security, and contingency requirements of depository institution customers.

Between 2007 and 2015, the number of depository institutions in the United States declined 25 percent, and Reserve Bank priced FedLine connections decreased nearly 15 percent. During this same period, the number of employees within depository institutions who have FedLine credentials increased 23 percent, reflecting in part the expansion of value-added services provided and use of the network for central bank applications.¹⁷ Between 2012 and 2015, more than 11,000 credentials for FedLine were issued to individuals accessing central bank applications for regulatory reporting purposes.

The Reserve Banks continue to maintain their focus on security and resiliency by upgrading critical elements of the FedLine solutions. Enhancements to the FedLine Advantage and FedLine Command access solutions were deployed to approximately 5,000 financial institutions, and enhancements to the FedLine Direct solution, used by approximately 250 of the largest financial institutions, are under way.

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Information Technology

The Reserve Banks continued to improve the efficiency, effectiveness, and security of information technology (IT) services and operations in 2015. The Reserve Banks' National IT organization led the completion of the first year of the System IT roadmap to help System leaders forecast their future business technology needs, identify additional opportunities to employ common technology services, and make better-informed IT investment and prioritization decisions.

The Reserve Banks remained vigilant about their cybersecurity posture, investing in risk-mitigation initiatives and programs and continuously monitoring and assessing cybersecurity risks to its operations. The Federal Reserve completed implementation of a new information security framework for key systems in 2014 and in keeping with its requirements has started recertifying key systems every three years. The framework, known as Security Assurance for the Federal Reserve, is based on guidance from the National Institute of Standards and Technology and adapted to the Federal Reserve's environment.

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Examinations of the Federal Reserve Banks

The combined financial statements of the Reserve Banks--as well as the financial statements of each of the 12 Reserve Banks and Maiden Lane LLC (ML)--are audited annually by an independent public accountant retained by the Board of Governors. ¹⁸ In addition, the Reserve Banks are subject to oversight by the Board of Governors, which performs its own reviews.

The Reserve Banks use the 2013 framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to assess their internal controls over financial reporting, including the safeguarding of assets. Within this framework, the management of each Reserve Bank annually provides an assertion letter to its board of directors that confirms adherence to COSO standards.

The Federal Reserve Board engaged KPMG LLP (KPMG) to audit the 2015 combined and individual financial statements of the Reserve Banks and ML.¹⁹

In 2015, KPMG also conducted audits of the internal controls associated with financial reporting for each of the Reserve Banks. Fees for KPMG's services totaled $6.7 million, of which $0.4 million was for the audit of ML. To ensure auditor independence, the Board requires that KPMG be independent in all matters relating to the audits. Specifically, KPMG may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2015, the Reserve Banks did not engage KPMG for significant non-audit services.

The Board's reviews of the Reserve Banks include a wide range of off-site and on-site oversight activities, conducted primarily by its Division of Reserve Bank Operations and Payment Systems. Division personnel monitor on an ongoing basis the activities of each Reserve Bank, National IT, and the System's Office of Employee Benefits (OEB). They conduct a comprehensive on-site review of each Reserve Bank and OEB at least once every three years and review National IT, the System Open Market Account (SOMA), and Fedwire annually.

The comprehensive on-site reviews include an assessment of the internal audit function's effectiveness and its conformance to the Institute of Internal Auditors' (IIA) International Standards for the Professional Practice of Internal Auditing, applicable policies and guidance, and the IIA's code of ethics.

The Board also reviews SOMA and foreign currency holdings to

• determine whether the New York Reserve Bank, while conducting the related transactions and associated controls, complies with the policies established by the Federal Open Market Committee (FOMC); and
• assess SOMA-related IT project management and application development, vendor management, and system resiliency and contingency plans.

In addition, KPMG audits the year-end schedule of participated asset and liability accounts and the related schedule of participated income accounts. The FOMC is provided with the external audit reports and a report on the Board review.

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Income and Expenses

Table 4 summarizes the income, expenses, and distributions of net earnings of the Reserve Banks for 2015 and 2014. Income in 2015 was $114.2 billion, compared with $116.7 billion in 2014.

Expenses totaled $13,024 million:

• $6,935 million in interest paid to depository institutions on reserve balances and term deposits;
• $4,042 million in Reserve Bank operating expenses;
• $563 million in net periodic pension expense;
• $248 million in interest expense on securities sold under agreements to repurchase;
• $705 million in assessments for Board of Governors expenditures;
• $689 million for the cost of producing, issuing, and retiring currency;
• $490 million for Consumer Financial Protection Bureau costs; and
• $2 million in other costs.

The expenses were reduced by $650 million in reimbursements for services provided to government agencies. Net deductions from current net income totaled $1,306 million, which includes $1,382 million in unrealized losses on foreign currency denominated investments revalued to reflect current market exchange rates, $36 million in net income associated with consolidated VIEs, and $43 million in realized gains on federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS). Dividends paid to member banks for 2015, set at 6 percent of paid-in capital for all member banks, totaled $1,743 million.

The Reserve Banks provided for remittances to Treasury of $117.1 billion in 2015, which included an initial transfer of $19.3 billion made in December 2015 to reduce aggregate Reserve Bank surplus to $10 billion, as required by the Fixing America's Surface Transportation Act (FAST Act).²⁰ The FAST Act, which amended section 7(a) of the Federal Reserve Act, requires that any Reserve Bank capital surplus in excess of $10 billion be transferred to Treasury. At the effective date of this Federal Reserve Act amendment, aggregate Reserve Bank capital surplus was $29 billion. The Reserve Banks reported a comprehensive loss of $16.8 billion after providing for remittances to Treasury.

Section 11 of this report, "Statistical Tables," provides more detailed information on the Reserve Banks. Table 9 is a statement of condition for each Reserve Bank; table 10 details the income and expenses of each Reserve Bank for 2015; table 11 shows a condensed statement for each Reserve Bank for the years 1914 through 2015; and table 13 gives the number and annual salaries of officers and employees for each Reserve Bank. A detailed account of the assessments and expenditures of the Board of Governors appears in the Board of Governors Financial Statements (see section 12, "Federal Reserve System Audits").

Table 4. Income, expenses, and distribution of net earnings of the Federal Reserve Banks, 2015 and 2014
Millions of dollars

Item	2015*	2014
Current income	114,234	116,562
Loan interest income	*	2
SOMA interest income	113,610	115,933
Other current income1	624	627
Net expenses	11,140	10,715
Operating expenses	4,042	3,926
Reimbursements	-650	-570
Net periodic pension expense	563	383
Interest paid on depository institutions deposits and term deposits	6,935	6,862
Interest expense on securities sold under agreements to repurchase	248	112
Other expenses	2	2
Current net income	103,094	105,847
Net additions to (deductions from) current net income	-1,306	-2,718
Federal agency and government-sponsored enterprise mortgage-backed securities	43	81
Foreign currency translation losses	-1,382	-2,907
Net income (loss) from consolidated VIEs	36	110
Other deductions	-3	-2
Assessments by the Board of Governors	1,884	1,864
For Board expenditures	705	590
For currency costs	689	711
For Consumer Financial Protection Bureau costs2	490	563
Net income before providing for remittances to the Treasury	99,904	101,265
Earnings remittances to the Treasury	117,099	96,902
Interest on Federal Reserve notes	91,143	96,902
Required by the Federal Reserve Act, as amended by the FAST Act	25,956	0
Net (loss) income after providing for remittances to the Treasury	-17,195	4,363
Other comprehensive gain (loss)	366	-1,612
Comprehensive income	-16,829	2,751
Total distribution of net income	100,270	99,653
Dividends on capital stock	1,743	1,686
Transfer to surplus and change in accumulated other comprehensive income	-18,572	1,065
Earnings remittances to the Treasury	117,099	96,902

1. Includes income from priced services, compensation received for services provided, and securities lending fees. Return to table

2. The Board of Governors assesses the Reserve Banks to fund the operations of the Consumer Financial Protection Bureau. Return to table

*Less than $500,000. Return to table

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SOMA Holdings and Loans

The Reserve Banks' average net daily SOMA holdings during 2015 amounted to $4,154 billion, an increase of $99 billion from 2014 (see table 5).

Table 5. System Open Market Account (SOMA) holdings of the Federal Reserve Banks, 2015 and 2014
Millions of dollars, except as noted

Item	Average daily assets (+)/liabilities (-)		Current income (+)/expense (-)		Average interest rate (percent)
	2015	2014*	2015	2014	2015	2014
U.S. Treasury securities1	2,588,099	2,520,120	63,317	63,011	2.45	2.50
Government-sponsored enterprise debt (GSE) securities1	36,630	46,122	1,330	1,579	3.63	3.42
Federal agency and GSE mortgage-backed securities2	1,793,787	1,700,521	48,931	51,264	2.73	3.01
Foreign currency denominated investments3	19,846	23,296	31	78	0.15	0.33
Central bank liquidity swaps4	209	192	1	1	0.68	0.52
Other SOMA assets5	30	28	*	*	0.01	0.01
Total SOMA assets	4,438,601	4,290,279	113,610	115,933	2.56	2.70
Securities sold under agreements to repurchase: Primary dealers and expanded counterparties	-125,656	-130,281	-84	-68	0.07	0.05
Securities sold under agreements to repurchase: Foreign official and international accounts	-157,929	-102,968	-164	-44	0.10	0.04
Total securities sold under agreements to repurchase	-283,585	-233,249	-248	-112	0.09	0.05
Other SOMA liabilities6	-1,116	-1,899	n/a	n/a	n/a	n/a
Total SOMA liabilities	-284,701	-235,148	-248	-112	0.09	0.05
Total SOMA holdings	4,153,900	4,055,131	113,362	115,821	2.73	2.86

1. Face value, net of unamortized premiums and discounts. Return to table

2. Face value, which is the remaining principal balance of the securities, net of unamortized premiums and discounts. Does not include unsettled transactions. Return to table

3. Foreign currency denominated assets are revalued daily at market exchange rates. Return to table

4. Dollar value of foreign currency held under these agreements valued at the exchange rate to be used when the foreign currency is returned to the foreign central bank. This exchange rate equals the market exchange rate used when the foreign currency was acquired from the foreign central bank. Return to table

5. Cash and short-term investments related to the federal agency and government-sponsored enterprise mortgage-backed securities (GSE MBS) portfolio. Return to table

6. Represents the obligation to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE MBS, as well as obligations that arise from the failure of a seller to deliver securities on the settlement date. Return to table

n/a Not applicable.

*Less than $500,000. Return to table

SOMA Securities Holdings

The average daily holdings of Treasury securities increased by $68 billion, to an average daily amount of $2,588 billion. The average daily holdings of GSE debt securities decreased by $9 billion, to an average daily amount of $37 billion. The average daily holdings of federal agency and GSE MBS increased by $93 billion, to an average daily amount of $1,794 billion.

The increases in average daily holdings of federal agency and GSE MBS are due to reinvestment of principal payments from other SOMA holdings in federal agency and GSE MBS. The average daily holdings of GSE debt securities decreased as a result of maturities.

There were no significant holdings of securities purchased under agreements to resell in 2015 or 2014. Average daily holdings of foreign currency denominated investments in 2015 were $19,846 million, compared with $23,296 million in 2014. The average daily balance of central bank liquidity swap drawings was $209 million in 2015 and $192 million in 2014. The average daily balance of securities sold under agreements to repurchase was $283,585 million, an increase of $50,336 million from 2014.

The average rates of interest earned on the Reserve Banks' holdings of Treasury securities decreased to 2.45 percent, and the average rates on GSE debt securities increased to 3.63 percent in 2015. The average rate of interest earned on federal agency and GSE MBS decreased to 2.73 percent in 2015. The average interest rates for securities sold under agreements to repurchase increased to 0.09 percent in 2015. The average rate of interest earned on foreign currency denominated investments decreased to 0.15 percent while the average rate of interest earned on central bank liquidity swaps increased to 0.68 percent in 2015.

Lending

In 2015, the average daily primary, secondary, and seasonal credit extended by the Reserve Banks to depository institutions increased by $7 million, to $125 million. The average rate of interest earned on primary, secondary, and seasonal credit increased to 0.28 percent in 2015, from 0.21 percent in 2014.

ML is a lending facility established in 2008 under authority of FRA section 13(3) in response to the 2007-09 financial crisis. Net portfolio assets of ML decreased from $1,811 million in 2014 to $1,778 million in 2015 and liabilities decreased from $127 million to $57 million. ML net income of $36 million in 2015 comprised interest income of $4 million, gains on investments of $35 million, and operating expenses of $3 million.

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Federal Reserve Bank Premises

Several Reserve Banks took action in 2015 to maintain and renovate their facilities. The multiyear renovation programs at the New York, Richmond, Kansas City, and San Francisco Reserve Banks' headquarters buildings continued. All Reserve Banks continued to implement projects to maintain building systems to ensure efficient and reliable operations. The New York Reserve Bank continued repairs and renovations to the 33 Maiden Lane building, and the Chicago Federal Reserve Bank continued construction of security enhancements to its building. In 2015, the St. Louis Reserve Bank secured leased office space to accommodate increased Treasury services. The amount previously reported as "other real estate" for the Houston Branch of the Dallas Reserve Bank was reclassified to the "land" account in 2015, reflecting the Bank's intention to retain ownership.

For more information on the acquisition costs and net book value of the Reserve Banks and Branches, see table 14 in section 11 ("Statistical Tables") of this annual report.

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Pro Forma Financial Statements for Federal Reserve Priced Services

Table 7. Pro forma income statement for Federal Reserve priced services, 2015 and 2014
Millions of dollars

Item	2015		2014
Revenue from services provided to depository institutions (note 4)		429.1		433.1
Operating expenses (note 5)		381.2		399.0
Income from operations		47.9		34.1
Imputed costs (note 6)
Interest on debt	4.2		7.1
Interest on float	-0.2		-0.5
Sales taxes	3.6	7.5	4.5	11.0
Income before income taxes		40.4		23.0
Imputed income taxes (note 6)		9.0		8.6
Net income		31.3		14.5
Memo: Targeted return on equity (note 6)		5.6		5.5

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

Table 8. Pro forma income statement for Federal Reserve priced services, by service, 2015
Millions of dollars

Item	Total	Commercial check collection	Commercial ACH	Fedwire funds	Fedwire securities
Revenue from services (note 4)	429.1	160.6	125.5	116.0	27.1
Operating expenses (note 5) 1	381.2	131.6	119.8	106.2	23.5
Income from operations	47.9	29.0	5.7	9.7	3.6
Imputed costs (note 6)	7.5	2.7	2.2	2.2	0.5
Income before income taxes	40.4	26.3	3.5	7.6	3.1
Imputed income taxes (note 6)	9.0	5.9	0.8	1.7	0.7
Net income	31.3	20.4	2.7	5.9	2.4
Memo: Targeted return on equity (note 6)	5.6	2.0	1.8	1.6	0.3
Cost recovery (percent) (note 7)	106.4	113.0	100.7	103.9	108.2

Note: Components may not sum to totals because of rounding. The accompanying notes are an integral part of these pro forma priced services financial statements.

1. Operating expenses include pension costs, Board expenses, and reimbursements for certain nonpriced services. Return to table

Notes to Pro Forma Financial Statements for Priced Services

(1) Short-Term Assets

Receivables are composed of fees due the Reserve Banks for providing priced services and the share of suspense- and difference-account balances related to priced services.

Items in process of collection are gross Federal Reserve cash items in process of collection (CIPC), stated on a basis comparable to that of a commercial bank. They reflect adjustments for intra-Reserve Bank items that would otherwise be double-counted on the combined Federal Reserve balance sheet and adjustments for items associated with nonpriced items (such as those collected for government agencies). Among the costs to be recovered under the Monetary Control Act is the cost of float, or net CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion of gross CIPC that involves a financing cost), valued at the federal funds rate. Investments of excess financing derived from credit float are assumed to be invested in federal funds.

(2) Long-Term Assets

Long-term assets consist of long-term assets used solely in priced services and the priced-service portion of long-term assets shared with nonpriced services, including a deferred tax asset related to the priced services pension and postretirement benefits obligation. The tax rate associated with the deferred tax asset was 22.4 percent and 37.2 percent for 2015 and 2014, respectively.

Long-term assets also consist of an estimate of the assets of the Board of Governors used in the development of priced services.

(3) Liabilities and Equity

Under the matched-book capital structure for assets, short-term assets are financed with short-term payables and imputed short-term debt, if needed. Long-term assets are financed with long-term liabilities, imputed long-term debt, and imputed equity, if needed. To meet the Federal Deposit Insurance Corporation requirements for a well-capitalized institution, in 2015 equity is imputed at 6.4 percent of total assets and 10.0 percent of risk-weighted assets, and in 2014 equity is imputed at 5.8 percent of total assets and 10 percent of risk-weighted assets.

In 2014, the Board approved revisions to the Payment System Risk policy to reflect the new international standards for financial market infrastructures 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 policy retains the expectation that the Fedwire Services will meet or exceed the applicable risk-management standards. Effective December 31, 2105, the Reserve Banks' priced services imputed six months of the Fedwire Funds Service's current operating expenses as liquid net financial assets and equity on the pro forma balance sheet. The imputed assets held as liquid net financial assets are cash items in process of collection, which are assumed to be invested in federal funds.

In accordance with Accounting Standards Codification (ASC) Topic 715 (ASC 715), Compensation-Retirement Benefits, the Reserve Banks record the funded status of pension and other benefit plans on their balance sheets. To reflect the funded status of their benefit plans, the Reserve Banks recognize the deferred items related to these plans, which include prior service costs and actuarial gains or losses, on the balance sheet. This results in an adjustment to the pension and other benefit plan liabilities related to priced services and the recognition of an associated deferred tax asset with an offsetting adjustment, net of tax, to accumulated other comprehensive income (AOCI), which is included in equity. The Reserve Bank priced services recognized a pension liability, which is a component of accrued benefit costs, of $26.2 million in 2015 and $42.0 million in 2014. The change in the funded status of the pension and other benefit plans resulted in a corresponding increase in accumulated other comprehensive loss of $107.8 million in 2015.

(4) Revenue

Revenue represents fees charged to depository institutions for priced services and is realized from each institution through direct charges to an institution's account.

(5) Operating Expenses

Operating expenses consist of the direct, indirect, and other general administrative expenses of the Reserve Banks for priced services and the expenses of the Board related to the development of priced services. Board expenses were $3.3 million in 2015 and $4.1 million in 2014.

In accordance with ASC 715, the Reserve Bank priced services recognized qualified pension-plan operating expenses of $33.7 million in 2015 and $22.7 million in 2014. Operating expenses also include the nonqualified net pension expense of $3.2 million in 2015 and $4.7 million in 2014. The adoption of ASC 715 does not change the systematic approach required by generally accepted accounting principles to recognize the expenses associated with the Reserve Banks' benefit plans in the income statement. As a result, these expenses do not include amounts related to changes in the funded status of the Reserve Banks' benefit plans, which are reflected in AOCI.

The income statement by service reflects revenue, operating expenses, imputed costs, other income and expenses, and cost recovery. The tax rate associated with imputed taxes was 22.4 percent and 37.2 percent for 2015 and 2014, respectively.

(6) Imputed Costs

Imputed costs consist of income taxes, return on equity, interest on debt, sales taxes, and interest on float. Many imputed costs are derived from the PSAF model. The 2015 cost of short-term debt imputed in the PSAF model is based on nonfinancial commercial paper rates; the cost of imputed long-term debt is based on Merrill Lynch Corporate and High Yield Index returns; and the effective tax rate is derived from U.S. publicly traded firm data, which serve as the proxy for the financial data of a representative private-sector firm. The after-tax rate of return on equity is based on the returns of the equity market as a whole. ²¹

Interest is imputed on the debt assumed necessary to finance priced-service assets. These imputed costs are allocated among priced services according to the ratio of operating expenses, less shipping expenses, for each service to the total expenses, less the total shipping expenses, for all services.

Interest on float is derived from the value of float to be recovered for the check and ACH services, Fedwire Funds Service, and Fedwire Securities Services through per-item fees during the period. Float income or cost is based on the actual float incurred for each priced service.

The following shows the daily average recovery of actual float by the Reserve Banks for 2015, in millions of dollars:

Total float	-193.2
Float not related to priced services 1	0.1
Float subject to recovery through per-item fees	-193.1

1. Float not related to priced services includes float generated by services to government agencies and by other central bank services. Return to table

Float that is created by account adjustments due to transaction errors and the observance of nonstandard holidays by some depository institutions was recovered from the depository institutions through charging institutions directly. Float subject to recovery is valued at the federal funds rate. Certain ACH funding requirements and check products generate credit float; this float has been subtracted from the cost base subject to recovery in 2015 and 2014.

(7) Cost Recovery

Annual cost recovery is the ratio of revenue, including other income, to the sum of operating expenses, imputed costs, imputed income taxes, and after-tax targeted return on equity.

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References

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