Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 64933

1These imputed expenses, such as taxes that 

would have been paid, and the return on equity that 

would have to be earned had the services been 

furnished by a private business firm, are referred to 

as the private-sector adjustment factor (PSAF). The 

ten-year recovery rate is based upon the pro forma 

income statements for Federal Reserve Banks’

priced services published in the Board’s Annual 

Report. Beginning in 2000, the PSAF has included 

additional financing costs associated with pension 

assets attributable to priced services. This ten-year 

cost recovery rate has been computed as if these 

costs were not included in the PSAF calculations 

prior to 2000. If these costs were included in the 

calculations, and assuming that the Reserve Banks 

would not have made any contemporaneous cost or 

revenue adjustments, the ten-year recovery rate 

would be 96.9 percent.

tape. Best Copy and Printing, Inc. may 

be reached by e-mail at 

FCC@BCPIWEB.com.

Federal Communications Commission. 

Marlene H. Dortch, 

Secretary.

[FR Doc. 04–25056 Filed 11–5–04; 12:04 pm] 

BILLING CODE 6712–01–U

FEDERAL RESERVE SYSTEM

[Docket No. OP–1216] 

Federal Reserve Bank Services

AGENCY: Board of Governors of the 

Federal Reserve System.

ACTION: Notice.

SUMMARY: The Board has approved the 

2005 fee schedules for Federal Reserve 

priced services and electronic access 

and a private-sector adjustment factor 

(PSAF) for 2005 of $161 million. These 

actions were taken in accordance with 

the requirements of the Monetary 

Control Act of 1980, which requires 

that, over the long run, fees for Federal 

Reserve priced services be established 

on the basis of all direct and indirect 

costs, including the PSAF. The Board 

has also approved changing the earnings 

credit rate on clearing balances from 90 

percent of the three-month Treasury bill 

rate to 80 percent of the three-month 

Treasury bill rate.

DATES: The new fee schedules become 

effective January 3, 2005, except 

Fedwire funds transaction fees, which 

become effective July 1, 2005. The 

change in the earnings credit rate on 

clearing balances becomes effective 

January 6, 2005.

FOR FURTHER INFORMATION CONTACT: For 

questions regarding the fee schedules: 

Jack K. Walton II, Assistant Director, 

(202/452–2660); Gregory E. Cannella, 

Financial Services Analyst, (202/530–

6214), Division of Reserve Bank 

Operations and Payment Systems. For 

questions regarding the PSAF and 

earnings credits on clearing balances: 

Gregory L. Evans, Manager, Financial 

Accounting, (202/452–3945); or Brenda 

Richards, Financial Project Leader, 

(202/452–2753); or Jonathan Mueller, 

Financial Analyst, (202/530–6291), 

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 2005 fee schedules for the 

check service are available from the 

Board, the Federal Reserve Banks, or the 

Reserve Banks’ financial services Web 

site at http://www.frbservices.org.

SUPPLEMENTARY INFORMATION: 

I. Priced Services 

A. Discussion—From 1994 through 

2003, the Reserve Banks recovered 97.8 

percent of their total costs for providing 

priced services, including special 

project costs, imputed expenses, and 

targeted after-tax profits or return on 

equity (ROE).1

Table 1 summarizes 2003 actual, 2004 

estimated, and 2005 budgeted cost 

recovery rates for priced services. Cost 

recovery is estimated to be 94.6 percent 

in 2004 and budgeted to be 100.1 

percent in 2005. The performance of the 

check service heavily influences the 

aggregate cost recovery rates, and 

accounts for approximately 80 percent 

of the total cost of priced services. The 

electronic services (FedACH, Fedwire 

funds and national settlement (NSS), 

and Fedwire securities) account for 

approximately 20 percent of costs, while 

the noncash collection service 

represents a de minimis amount.

TABLE 1.—PRO FORMA COST AND REVENUE PERFORMANCE a

[$ millions] 

Year 1 b

Revenue 

2 c

Total expense 

3

Net income 

(ROE)

[1–2] 

4 d

Target ROE 

5

Recovery rate 

after target 

ROE

[1/(2+4)] 

2003e .................................................................................... 881.7 931.3 ¥49.6 104.7 85.1% 

2004 (Estimate) .................................................................... 910.8 850.6 60.2 112.4 94.6% 

2005 (Budget) ...................................................................... 900.6 796.9 103.7 102.9 100.1% 

a Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding. 

b Revenue includes net income on clearing balances (NICB). For 2003, clearing balances, net of imputed reserve requirements and balances 

used to finance priced services assets, are assumed to be invested in three-month Treasury bills. For 2004 and 2005, net clearing balances are 

assumed to be invested in a broader portfolio of investments. Based on the historical average return on the broader portfolio, income is imputed 

as a constant return over the rate used to determine the cost of clearing balances. NICB equals the imputed income from these investments less 

earnings credits granted to holders of clearing balances. For 2003, the cost of clearing balances was based on the federal funds rate, and for 

2004 and 2005 the cost is based on the discounted three-month Treasury bill rate. cThe calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, FDIC insurance, Board of Governors’ priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pensions under FAS 87 are also included. dTarget ROE is the after-tax ROE included in the PSAF. 

e 2003 calculations include special cash services, which are no longer offered by the Reserve Banks. 

Table 2 presents an overview of the 

2003 actual, 2004 budget, 2004 estimate, 

and 2005 budget cost recovery 

performance by priced service.

64934 Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 

2The first round of the Reserve Banks’ check 

restructuring initiative will have reduced Federal 

Reserve check processing locations from 45 to 32 

sites and streamlined check adjustments functions 

by the end of 2004. Additionally, in August 2004, 

the Reserve Banks announced further changes to 

increase the efficiency of their check processing 

operations and will reduce further the number of 

check operations from 32 to 23 sites by early 2006. 

(See http://www.federalreserve.gov/boarddocs/

press/other/2004/20040802/default.htm.)

3The Federal Reserve’s 2001 retail payments 

research indicated that check use began declining 

in the mid 1990s. See Gerdes, Geoffrey R. and Jack 

K. Walton II, ‘‘The Use of Checks and Other 

Noncash Payment Instruments in the United 

States,’’ Federal Reserve Bulletin, August 2002, pp. 

360–374. (See http://www.federalreserve.gov/pubs/

bulletin/default.htm.) This study is being updated 

and the results are forthcoming by early December 

2004.

4 Data elements used in calculating the price 

index for 2003 and previous years include explicit 

fee revenue from priced services and volumes 

associated with those services. For 2004 and 2005, 

the year-over-year percentage changes are based on 

comparisons of the 2003 results, 2004 estimates, 

and 2005 projections.

TABLE 2.—PRICED SERVICES COST RECOVERY

[percent] 

Priced service 2003 2004

Budget 

2004

Estimate 

2005

Budget a

All services ....................................................................................................................... 85.1 92.9 94.6 100.1 

Check ............................................................................................................................... 82.7 91.5 93.5 100.0 

FedACH ........................................................................................................................... 100.3 99.7 101.0 100.4 

Fedwire funds & NSS ...................................................................................................... 97.4 100.9 98.1 100.0 

Fedwire securities ............................................................................................................ 106.1 104.0 102.4 102.3 

Noncash collection ........................................................................................................... 123.1 112.0 110.2 76.0 

a 2005 budget figures reflect the latest data from Reserve Banks. Reserve Banks will report final budget data to the Board by the end of November 2004. 

1. 2004 Estimated Performance—In 

2004, the Reserve Banks estimate that 

they will recover 94.6 of the costs of 

providing priced services, including 

imputed expenses and targeted ROE, 

compared with a targeted recovery rate 

of 92.9 percent, as shown in table 2. The 

Reserve Banks exceeded the 2004 

budget targets for the check and 

FedACH services. The 98.1 percent 

estimated recovery rate for the Fedwire 

funds and national settlement service, 

however, is below the targeted recovery 

rate of 100.9 percent. This difference is 

due to both lower revenue, associated 

with less-than-anticipated volume 

growth, and greater costs, associated 

with a movement to an Internet-based 

distribution channel for these and other 

electronic services. While achieving full 

cost recovery, the Fedwire securities 

and noncash collection services’

shortfalls relative to the budgeted 

recovery rates are primarily attributed to 

lower-than-expected volume. Although 

the estimated 2004 overall recovery rate 

for priced services is below 100 percent, 

the Reserve Banks estimate that they 

will fully recover actual and imputed 

expenses and earn net income of $60.2 

million compared with a targeted ROE 

of $112.4 million. This ROE shortfall is 

largely driven by the accrual of one-time 

costs associated with the second round 

of Reserve Banks’ check restructuring 

efforts, lower-than-expected check 

service revenues due to a greater-thananticipated decline in check volumes, 

and by lower-than-expected net income 

from clearing balances (NICB).2

Recent anecdotal information from 

the industry suggests that check use in 

the United States continues to decline.3

Additionally, an increasing proportion 

of checks are being converted to 

automated clearinghouse transactions at 

retail lockboxes, which results in fewer 

interbank checks. As a result of these 

factors, check volume processed by the 

Reserve Banks has declined about 10 

percent year-to-date. In response to 

volume declines, the Reserve Banks 

have continued to restructure their 

check processing operations and in 2004 

incurred additional one-time costs 

associated with further restructurings in 

2005. This initiative will provide 

ongoing operational and cost 

efficiencies for the Reserve Banks and is 

expected to enable the Reserve Banks to 

achieve full cost recovery in 2005.

2. 2005 Projected Performance—For 

2005, the Reserve Banks project a priced 

services cost recovery rate of 100.1 

percent. The 2005 fees for priced 

services are projected to result in a net 

income of $103.7 million or $0.8 million 

above the targeted ROE. The primary 

risks to the Reserve Banks’ ability to 

achieve their budget targets are (1) 

greater-than-expected costs associated 

with the check restructuring initiatives, 

(2) a greater falloff in the Reserve Banks’

check volume than the projected 15.8 

percent decrease, and (3) a greater-thanexpected shift from higher margin 

products to lower margin products. In 

light of these risks and the changing 

payments landscape, the Reserve Banks 

will continue to modify their business 

and operational strategies to improve 

efficiency, reduce excess capacity and 

other costs, and position themselves to 

achieve their financial and payment 

system objectives and statutory 

requirements over the long term. 

3. 2005 Pricing—The following 

summarizes the changes in the Reserve 

Banks’ fee structures and levels for 

priced services in 2005, and indicates 

the overall experience with prices in 

each service line since 1996: 4

Check 

• The Reserve Banks will raise fees 

for forward-collection check products 

7.9 percent, return-check products 8.1 

percent, and payor bank check products 

2.8 percent compared with January 2004 

fees. 

• With the 2005 fee changes, the price 

index for the check service will have 

increased 40 percent since 1996. 

FedACH 

• The Reserve Banks will retain fees 

at their current levels. 

• With the 2005 fee changes, the price 

index for the FedACH service will have 

decreased 66 percent since 1996. 

Fedwire funds and national settlement 

• The Reserve Banks will increase 

Fedwire funds per transfer fees by one 

cent in all volume tiers, effective July 1, 

2005. 

• With the 2005 fee changes, the price 

index for the Fedwire funds and 

national settlement service will have 

decreased 59 percent since 1996.

Fedwire Securities 

• The Reserve Banks will increase the 

off-line surcharge from $28 to $33 per 

transfer and increase the joint custody 

surcharge from $30 to $35. The Reserve 

Banks will retain all other fees at their 

current levels. 

• With the 2005 fee changes, the price 

index for the Fedwire securities service 

will have decreased 43 percent since 

1996. 

Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 64935

4. 2005 Price Index—Figure 1 

compares indexes of fees for the Federal 

Reserve’s priced services with the GDP 

price deflator. Compared with the price 

index for 2004, the price index for all 

Federal Reserve Bank priced services is 

projected to increase 7.3 percent in 

2005. The price index for electronic 

payment services (FedACH, Fedwire 

funds and national settlement, Fedwire 

securities, and electronic check 

products), as well as electronic access to 

Federal Reserve Banks’ priced services, 

is projected to increase 2.6 percent in 

2005. The price index for paper-based 

payment services (check and noncash 

collection) is expected to increase 7.9 

percent in 2005. Since 1996, the price 

index for all priced services has 

increased a total of 10.6 percent. 

BILLING CODE 6210–01–P

BILLING CODE 6210–01–C


EN09NO04.000</GPH>
64936 Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 

5Two adjustments are applied to the earnings 

credit rate so that the return on clearing balances 

at the Federal Reserve is comparable to what the 

depository institution would have earned had it 

maintained the same balances at a private-sector 

correspondent. The ‘‘imputed reserve requirement’’

adjustment is made because a private-sector 

correspondent would be required to hold reserves 

against the respondent’s balance with it. As a result, 

the correspondent would reduce the balance on 

which it would base earnings credits for the 

respondent because it would be required to hold a 

portion, determined by its marginal reserve ratio, in 

the form of non-interest-bearing reserves. For 

example, if a depository institution held $1 million 

in clearing balances with a correspondent bank and 

the correspondent had a marginal reserve ratio of 

10 percent, then the correspondent bank would be 

required to hold $100,000 in reserves, and it would 

grant credits to the respondent based on 90 percent 

of the balance, or $900,000. This adjustment 

imputes a marginal reserve ratio of 10 percent to the 

Reserve Bank. 

The ‘‘marginal reserve requirement’’ adjustment 

accounts for the fact that the respondent can deduct 

balances maintained at a correspondent, but not the 

Federal Reserve, from its reservable liabilities. This 

reduction has value to the respondent when it frees 

up balances that can be invested in interest-bearing 

instruments, such as federal funds. For example, a 

respondent placing $1 million with a correspondent 

rather than the Federal Reserve would free up 

$30,000 if its marginal reserve ratio were 3 percent. 

The formula used by the Reserve Banks to 

calculate earnings credits can be expressed as e = 

[b * (1–FRR) * r] + [b * (MRR) * f] 

Where e is total earnings credits, b is the average 

clearing balance maintained, FRR is the assumed 

Reserve Bank marginal reserve ratio (10 percent), r 

is the earnings credit rate, MRR is the marginal 

reserve ratio of the depository institution holding 

the balance (either 0 percent, 3 percent, or 10 

percent), and f is the average federal funds rate. A 

depository institution that meets its reserve 

requirement entirely with vault cash is assigned a 

marginal reserve requirement of zero.

6A band is established around the contracted 

clearing balance to determine the maximum balance 

on which credits are earned as well as any 

deficiency charges. The clearing balance allowance 

is 2 percent of the contracted amount, or $25,000, 

whichever is greater. Earnings credits are based on 

the period-average balance maintained up to a 

maximum of the contracted amount plus the 

clearing balance allowance. Deficiency charges 

apply when the average balance falls below the 

contracted amount less the allowance, although 

credits are still earned on the average maintained 

balance.

B. Earnings Credits on Clearing 

Balances—The Board has approved 

changing the rate used in calculating 

earnings credits on clearing balances 

from 90 percent of the three-month 

Treasury bill rate to 80 percent of the 

three-month Treasury bill rate, effective 

January 6, 2005.5 This change will lower 

the Reserve Banks’ cost of clearing 

balances. 

Clearing balances were introduced in 

1981, as a 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. Beginning 

in 2004, the earnings credit calculation 

was changed from using the federal 

funds rate to using a percentage 

discount on a rolling thirteen-week 

average of the annualized coupon 

equivalent yield of three-month 

Treasury bills in the secondary market. 

Earnings credits can be used only to 

offset charges for priced services, are 

calculated monthly, and expire if not 

used within one year.6

C. Check—Table 3 below shows the 

2003, 2004 estimate, and 2005 budgeted 

cost recovery performance for the check 

service.

TABLE 3.—CHECK PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions] 

Year 1

Revenue 

2

Total expense 

3

Net income 

(ROE)

[1-2] 

4

Target ROE 

5

Recovery rate 

after target 

ROE

[1/(2+4)] 

2003 ..................................................................................... 737.9 803.2 ¥65.3 89.4 82.7% 

2004 (Estimate) .................................................................... 756.0 714.9 41.1 93.6 93.5% 

2005 (Budget) ...................................................................... 731.6 649.2 82.4 82.0 100.0% 

1. 2004 Estimate—For 2004, the 

Reserve Banks estimate that the check 

service will recover 93.5 percent of total 

expenses, including imputed expenses, 

and targeted ROE, compared with the 

budgeted recovery rate of 91.5 percent 

(see table 4). Through August 2004, the 

check service has recovered 94.3 

percent of total costs, including imputed 

expenses, and targeted ROE. For the full 

year, the Reserve Banks expect to 

recover all actual and imputed expenses 

of providing check services and earn net 

income of $41.1 million, representing a 

portion of the targeted ROE.

TABLE 4.—CHECK 2004 BUDGET VS. 2004 ESTIMATE

[millions of dollars] 

2004 Budget 2004 Estimate Variance 

Service revenue ....................................................................................................................................... 727.1 718.1 ¥9.0 

NICB ........................................................................................................................................................ 43.6 37.9 ¥5.7 

Total revenue .................................................................................................................................... 770.7 756.0 ¥14.7 

Local operating costs ............................................................................................................................... 506.7 472.0 ¥34.7 

Other operating costs .............................................................................................................................. 224.7 225.3 0.6 

RPO initiativesa ........................................................................................................................................ 29.0 24.0 ¥5.0 

Pension credits ........................................................................................................................................ ¥11.4 ¥6.4 5.0 

Total expense ................................................................................................................................... 749.0 714.9 ¥34.1 

Net Income ....................................................................................................................................... 21.7 41.1 19.4 

Target ROE .............................................................................................................................................. 93.6 93.6 

Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 64937

7Two Reserve Banks offer an electronic fine-sort 

product, which allows depository institutions to 

exchange fine-sort information electronically 

between themselves with paper checks to follow.

TABLE 4.—CHECK 2004 BUDGET VS. 2004 ESTIMATE—Continued

[millions of dollars] 

2004 Budget 2004 Estimate Variance 

Recovery rate (percent) ........................................................................................................................... 91.5 93.5 

aThese are primarily check restructuring and Check 21-related expenses. 

The higher-than-budgeted cost 

recovery is the result of lower-thananticipated costs of $34.1 million that 

were partially offset by revenue 

shortfalls of $14.7 million. The lower 

costs were largely due to Reserve Banks 

reducing local operating costs by $34.7 

million. The shortfall in revenue is due 

to lower-than-anticipated service 

revenue and NICB. Service revenue is 

estimated to be $9.0 million below 

budget due to a greater-than-anticipated 

decline in check volumes. 

The volume of checks handled by the 

Reserve Banks has declined (as shown 

in table 5), reflecting broader market 

trends including alternative clearing 

methods and less frequent use of 

checks. Forward-collection check 

volume through August, excluding 

electronic fine sort volume, declined 

10.5 percent.7 For full-year 2004, the 

Reserve Banks estimate that forwardcollection volume will decline 10.1 

percent, compared with a budgeted 

decline of 8.9 percent. Return check 

volume has declined 11.7 percent 

through August 2004. The Reserve 

Banks expect that return check volume 

will decline 8.3 percent for the full year, 

compared with a budgeted decline of 

7.0 percent. The Reserve Banks 

anticipate higher forward and return 

volume growth for the remainder of the 

year based additional new customer 

volumes. Board staff believes that these 

volume expectations for full-year 2004 

may be somewhat optimistic.

TABLE 5.—PAPER CHECK PRODUCT VOLUME CHANGES

[percent] 

Budgeted 

2004 change 

Year-to-date 

change 

through

August 2004 

Estimated 

2004 change 

Total forward-collectiona .............................................................................................................. ¥8.9 ¥10.5 ¥10.1 

Forward-processed ............................................................................................................... ¥8.9 ¥9.9 ¥9.7 

Fine-sort a ............................................................................................................................. ¥8.1 ¥19.6 ¥16.7 

Returns ........................................................................................................................................ ¥7.0 ¥11.7 ¥8.3 

aThese rates exclude electronic fine-sort volume. Including the electronic fine-sort product, fine-sort volume was budgeted to decline 32.9 percent in 2004 and is now estimated to decline 11.3 percent. 

Electronic check presentment 

volumes are estimated to decline for 

full-year 2004, as summarized in table 6. 

Reserve Banks provide paying banks 

with electronic check data or images for 

approximately 41 percent of the checks 

they collect. Image volumes are 

estimated to decline 4.7 percent to 

approximately 1.4 billion check images, 

which represent about 10.7 percent of 

all checks collected by the Reserve 

Banks. The aggregate decline in 

electronic check data and image 

volumes is less than that of check 

volume more generally, and as a 

proportion of total check volume, the 

use of electronic check data and images 

is growing.

TABLE 6.—ELECTRONIC CHECK PRODUCT SHARE AND VOLUME CHANGES

Volume 

change 

through

August 2004

(percent) 

Estimated 

2004 change

(percent) 

Share of 

checks collected through 

August 2004

(percent) 

Electronic check presentment a ................................................................................................... ¥10.2 ¥8.3 24.2 

Truncation ............................................................................................................................. ¥11.1 ¥9.9 5.7 

Non-truncation ...................................................................................................................... ¥9.9 ¥7.7 18.6 

Electronic check information ........................................................................................................ ¥12.7 ¥11.2 6.4 

Images ......................................................................................................................................... ¥1.6 ¥4.7 10.7 

aECP consists of truncated and non-truncated checks. Non-truncated checks include checks presented through the MICR presentment and 

MICR presentment plus products. 

2. 2005 Projection—The Reserve 

Banks are planning to return to full cost 

recovery in 2005 by focusing on further 

opportunities to streamline check 

processing and administrative activities 

across the System, as well as expanding 

their Check 21-related product offerings. 

A number of cost reduction initiatives 

have been identified and are currently 

in various stages of implementation. In 

2005, the service will achieve the full 

cost savings with the decisions made in 

64938 Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 

2003 and 2004 to discontinue 

processing checks at thirteen sites 

nationwide. The Reserve Banks will 

eliminate nine more processing sites by 

early 2006, reducing excess processing 

capacity and lowering ongoing 

operating costs by $14 million. 

Additionally, the Reserve Banks are in 

the process of centralizing their float 

management function and their pricing 

and product management activities. 

The Reserve Banks plan to offer a 

comprehensive suite of Check 21-related 

products in 2005. These products will 

include image cash letter receipt and 

delivery products as well as substitute 

check printing. The pricing of these 

products will reflect the value to 

customers of later deposit deadlines and 

improved availability. The Reserve 

Banks will also modify the pricing 

structure of existing paper products to 

encourage the use of the new Check 21-

related products. As the Check 21-

related products mature, the pricing of 

paper products will be strategically 

raised to encourage adoption of 

electronic collection and presentment 

alternatives. 

There is also a continuing effort in 

2005 to set fees to achieve greater 

pricing consistency across Reserve Bank 

product lines. Reserve Banks will also 

increase prices of selected products in 

2005 to enhance service revenue. Most 

of the price increases are targeted at 

markets that are costly for the Reserve 

Banks to serve. Fees to present and 

return checks to depository institutions 

that are distant from Federal Reserve 

check processing offices will be 

increased to better align with the 

Reserve Banks’ costs to deliver checks to 

these institutions. The fee changes will 

enhance the Reserve Banks’ ability to 

recover costs, while maintaining the 

competitiveness of these products. 

For 2005, the Reserve Banks are 

targeting an overall price increase of 7.9 

percent, as shown in table 7. This 

increase consists of a 7.9 percent 

increase in forward check-collection 

fees, composed of a 7.6 percent increase 

in forward cash letter fees and a 7.9 

percent increase in per-item fees. Fees 

for return services will increase by 8.1 

percent, which is composed of a 4.8 

percent increase in return cash letter 

fees and an 8.7 percent increase in peritem fees. The average volume-weighted 

fees for payor bank services will 

increase 2.8 percent compared with 

current fees.

TABLE 7.—2005 FEE CHANGES

[percent] 

Product Fee change 

Total check service ................... 7.9 

Forward-collection .................... 7.9 

Cash letter ............................. 7.6 

Item ....................................... 7.9 

Returns ..................................... 8.1 

Cash letter ............................. 4.8 

Item ....................................... 8.7 

Payor bank services ............. 2.8 

3. 2005 Cost Recovery—For 2005, 

projected cost recovery will be 100.0 

percent of total costs, including imputed 

expenses, and targeted ROE.

TABLE 8.—CHECK 2004 ESTIMATE VS. 2005 BUDGET

[millions of dollars] 

2004 Estimate 2005 Budget Variance 

Service revenue ....................................................................................................................................... 718.1 681.9 ¥36.2 

NICB ........................................................................................................................................................ 37.9 49.7 11.8 

Total revenue .................................................................................................................................... 756.0 731.6 ¥24.4 

Local operating costs ............................................................................................................................... 472.0 349.9 ¥122.1 

Other operating costs .............................................................................................................................. 225.3 295.6 70.3 

RPO initiativesa ........................................................................................................................................ 24.0 10.0 ¥14.0 

Pension credits ........................................................................................................................................ ¥6.4 ¥6.3 0.1 

Total expense ................................................................................................................................... 714.9 649.2 ¥65.7 

Net Income ....................................................................................................................................... 41.1 82.4 41.3 

Target ROE .............................................................................................................................................. 93.6 82.0 

Recovery rate (percent) ........................................................................................................................... 93.5 100.0 

aThese are primarily check restructuring and Check 21-related expenses. 

Total expenses are projected to 

decrease approximately $65.7 million, 

or 9.2 percent, from the 2004 estimate. 

The decrease owes largely to the decline 

in local operating costs, which are 

expected to decrease $122.1 million, or 

25.9 percent. This decline reflects 

significant reductions in personnel 

costs, full-year savings associated with 

discontinuing the processing of checks 

at thirteen Federal Reserve offices as 

well as partial-year savings associated 

with discontinuing the processing of 

checks at six offices, and a shift of 

adjustment costs resulting from a 

transition to the national management of 

the adjustments function. Additional 

reductions include centralizing float 

management and check product 

development and pricing activities. 

Total check revenue is projected to 

decline $24.4 million, or 3.2 percent, 

compared with the 2004 estimate. The 

revenue decline is driven by a $36.2 

million, or 5.0 percent, reduction in 

service revenue, largely attributable to a 

continued downtrend in the Reserve 

Banks’ check volumes due to the 

nationwide decline in check use. The 

price changes will somewhat attenuate 

the effect of volume losses on check 

revenue. Also partially offsetting the 

decline in service revenue is a projected 

$11.8 million increase in NICB. 

In 2005, forward-processed check 

volume is projected to be 10.6 billion, 

a decrease of 15.8 percent compared 

with the 2004 estimate. The decline in 

the volume of checks is attributed to the 

continued decline in the use of paper 

checks in the United States, the 

increasing use of the ACH to collect 

payments that were previously 

processed as checks, price increases, 

and the reduction in the number of 

check processing sites. Fine-sort check 

volume is expected to decline 16.7 

percent from the 2004 estimate. Total 

return volume is projected to decrease 

10.1 percent compared with the 2004 

estimate. 

Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 64939

The Reserve Banks expect payor bank 

volumes to decrease. Electronic 

presentment volume is expected to 

decline 6.1 percent in 2005. Image 

volume is projected to decline 1.8 

percent in 2005, compared with 

estimated 2004 volumes. The proportion 

of processed checks that the Reserve 

Banks provide to paying banks with 

electronic data or images is projected to 

rise in 2005 to about 47 percent.

The primary risks to the Reserve 

Banks’ ability to achieve their budget 

targets are (1) greater-than-expected 

costs associated with the restructuring 

initiatives, (2) a steeper decline in the 

Reserve Banks’ check volume than the 

projected 15.8 percent decrease, and (3) 

a greater-than-expected shift from 

higher margin products to lower margin 

products. 

D. Automated Clearinghouse 

(FedACH)—Table 9 below shows the 

2003, 2004 estimate, and 2005 budgeted 

cost recovery performance for the 

commercial FedACH service.

TABLE 9.—FEDACH PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions] 

Year 1

Revenue 

2

Total expense 

3

Net income 

(ROE) [1–2] 

4

Target ROE 

5

Recovery rate 

after target 

ROE [1/(2+4)] 

2003 ..................................................................................... 68.2 60.5 7.7 7.5 100.3% 

2004 (Estimate) .................................................................... 74.9 65.2 9.7 8.9 101.0% 

2005 (Budget) ...................................................................... 82.1 71.8 10.3 10.0 100.4% 

1. 2004 Estimate—For 2004, the 

Reserve Banks estimate that the 

FedACH service will recover 101.0 

percent of total expenses, including 

imputed expenses, and targeted ROE, 

compared with the budgeted recovery 

rate of 99.7 percent. Both ACH revenue 

and cost estimates were better than 

budgeted. Total revenue is estimated to 

be $0.1 million greater than budgeted, 

and total expenses are lower than 

budgeted by about $0.9 million. 

Through August 2004, origination 

volume was 3.1 percent higher than 

budgeted. 

2. 2005 Pricing—The Reserve Banks 

project that the FedACH service will 

recover 100.4 percent of costs in 2005, 

including imputed expenses, and 

targeted ROE. The Reserve Banks’ fees 

for the FedACH service will remain 

unchanged. The Reserve Banks consider 

continued price stability important to 

remaining competitive in the ACH 

market. 

Total revenue is budgeted to increase 

$7.2 million over the 2004 estimate, 

reflecting an increase in electronic 

access fees and service revenues. Total 

expenses, including imputed expenses, 

and targeted ROE are budgeted to 

increase $7.6 million over the 2004 

estimate because of an increase in the 

cost of national support projects, 

specifically costs associated with the 

movement to the Internet-based 

distribution channel. In addition, the 

Reserve Banks have budgeted increased 

costs for product development and 

service initiatives, including FedACH 

International and FedACH riskmanagement services. 

The Reserve Banks estimate that 

national ACH volume will grow 20 

percent in 2005. This growth is largely 

attributable to new one-time ACH debit 

transactions, such as check conversion 

and Internet-initiated payments. The 

Reserve Banks, however, generally 

believe that FedACH origination volume 

will grow at a slower rate of 7.7 percent 

as a greater proportion of volume shifts 

to the private-sector ACH operator. 

E. Fedwire Funds and National 

Settlement Service—Table 10 below 

shows the 2003, 2004 estimate, and 

2005 budgeted cost recovery 

performance for the Fedwire funds and 

national settlement service.

TABLE 10.—FEDWIRE FUNDS AND NATIONAL SETTLEMENT SERVICE PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions] 

Year 1

Revenue 

2

Total expense 

3

Net income 

(ROE) [1–2] 

4

Target ROE 

5

Recovery rate 

after target 

ROE [1/(2+4)] 

2003 ..................................................................................... 51.1 47.1 4.0 5.4 97.4% 

2004 (Estimate) .................................................................... 57.5 51.8 5.7 6.8 98.1% 

2005 (Budget) ...................................................................... 64.2 56.3 7.9 7.9 100.0% 

1. 2004 Estimate—For 2004, the 

Reserve Banks estimate that the Fedwire 

funds and national settlement service 

will recover 98.1 percent of total 

expenses, including imputed expenses, 

and targeted ROE, compared with a 

2004 budgeted recovery rate of 100.9 

percent. The underrecovery is primarily 

attributed to lower-than-expected online funds transfer volume. Funds 

transfer volume through August 2004 

has increased 0.2 percent relative to the 

same period in 2003. The Reserve Banks 

had originally projected a 6.8 percent 

growth in on-line funds volume for 

2004, which was based on historical 

volume growth. Volume growth has 

been weaker than expected, and the 

Reserve Banks experienced a slight loss 

of market share in 2004 to a competitor. 

For the full year, the Reserve Banks 

estimate that volume will increase 2.0 

percent compared with 2003. With 

respect to the national settlement 

service, the Reserve Banks estimate that 

the volume of settlement entries 

processed during 2004 will be slightly 

higher than the 2004 budget projection. 

2. 2005 Pricing—The Reserve Banks 

will increase on-line transfer fees for 

each Fedwire funds service price tier 

$0.01, effective July 1, 2005. The 

surcharge for off-line Fedwire funds 

transfers and fees for the national 

settlement service will remain 

unchanged. 

The Reserve Banks project that the 

Fedwire funds and national settlement 

service will recover 100.0 percent of 

64940 Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 

8The Reserve Banks provide transfer services for 

securities issued by the U.S. Treasury, federal 

government agencies, government-sponsored 

enterprises, and certain international institutions. 

The priced component of this service, reflected in 

this memorandum, consists of revenues, expenses, 

and volumes associated with the transfer of all nonTreasury securities. For Treasury securities, the 

U.S. Treasury assesses fees for the securities 

transfer component of the service. The Reserve 

Banks assess a fee for the funds settlement 

component of a Treasury securities transfer; this 

component is not treated as a priced service.

total costs in 2005, including imputed 

expenses, and targeted ROE. Total costs 

for 2005, including imputed expenses, 

and targeted ROE are expected to 

increase $5.6 million from the 2004 

estimate primarily because of rising 

national costs associated with a 

movement to an Internet-based 

distribution channel, as well as a higher 

PSAF. Funds transfer volume for 2005 

is expected to increase 2.8 percent 

compared with the 2004 estimate. 

National settlement volume for 2005 is 

expected to remain flat compared with 

the 2004 estimate. The Reserve Banks 

project 2005 total revenue to increase by 

$6.7 million over the 2004 estimate 

primarily because of mid-year price 

increases, modest volume growth, 

increased NICB, and higher electronic 

access revenue. 

F. Fedwire Securities Service—Table 

11 below shows the 2003, 2004 

estimate, and 2005 budgeted cost 

recovery performance for the Fedwire 

securities service.8

TABLE 11.—FEDWIRE SECURITIES SERVICE PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions] 

Year 1

Revenue 

2

Total expense 

3

Net income 

(ROE) [1–2] 

4

Target ROE 

5

Recovery rate 

after target 

ROE [1/(2+4)] 

2003 ..................................................................................... 21.8 18.3 3.4 2.2 106.1% 

2004 (Estimate) .................................................................... 20.7 17.3 3.4 2.9 102.4% 

2005 (Budget) ...................................................................... 21.4 18.1 3.3 2.9 102.3% 

1. 2004 Estimate—For 2004, the 

Reserve Banks estimate that the Fedwire 

securities service will recover 102.4 

percent of total expenses, including 

imputed expenses, and targeted ROE, 

compared with a 2004 budgeted 

recovery rate of 104.0 percent. Through 

August 2004, the Fedwire securities 

service recovered 100.6 percent of total 

costs, including imputed expenses, and 

targeted ROE. The lower-than-budgeted 

recovery is primarily attributed to 

lower-than-expected revenue from 

transfer volume. Through August 2004, 

total Fedwire securities transfer volume 

has decreased 8.8 percent relative to the 

same period in 2003. For the full year, 

the Reserve Banks estimate that total 

Fedwire securities volume will decrease 

8.8 percent from 2003, compared with a 

2004 budget estimate of 6.8 percent 

volume growth. The lower-thanexpected volume growth is primarily 

attributed to the slowdown in the 

growth of the mortgage financing 

market. 

2. 2005 Pricing—The Reserve Banks 

will raise the off-line transfer 

origination and receipt surcharge from 

$28 to $33 and raise the joint custody 

origination surcharge from $30 to $35. 

The Reserve Banks will retain all other 

fees at their current levels. The 

surcharge increases will more closely 

align the fee with the costs of these 

transactions. 

The Reserve Banks project that the 

Fedwire securities service will recover 

102.3 percent of costs in 2005, including 

imputed expenses, and targeted ROE. 

Total costs, including imputed 

expenses, and targeted ROE are 

expected to increase $0.8 million from 

the 2004 estimate. The Reserve Banks 

project that total securities volume in 

2005 will increase 2.0 percent from the 

2004 estimate. Total revenue is 

projected to increase $0.8 million from 

the 2004 estimate primarily due to 

projected modest volume increases, as 

well as higher NICB. 

G. Noncash Collection—Table 12 

below shows the 2003, 2004 estimate, 

and 2005 budgeted cost recovery 

performance for the noncash collection 

service.

TABLE 12.—NONCASH COLLECTION PRO FORMA COST AND REVENUE PERFORMANCE

[$ millions] 

Year 1

Revenue 

2

Total expense 

3

Net income 

(ROE) [1–2] 

4

Target ROE 

5

Recovery rate 

after target 

ROE [1/(2+4)] 

2003 ..................................................................................... 2.3 1.7 .6 .2 123.1% 

2004 (Estimate) .................................................................... 1.7 1.4 .3 .2 110.2% 

2005 (Budget) ...................................................................... 1.3 1.5 ¥.2 .2 76.0% 

1. 2004 Estimate—For 2004, the 

Reserve Banks estimate that the noncash 

collection service will recover 110.2 

percent of costs, including imputed 

expenses, and targeted ROE, compared 

with the budgeted recovery rate of 112.0 

percent. This lower-than-budgeted 

recovery is due to higher-than-expected 

volume declines. Through August 2004, 

noncash collection volume decreased 

24.3 percent compared with volume 

during the same period in 2003, and the 

service recovered 126.4 percent of its 

costs. For the full year, the Reserve 

Banks estimate that 2004 volume will 

decrease 28.2 percent from 2003, 

compared with a 2004 budgeted decline 

of 18.9 percent. 

2. 2005 Pricing—The Board recently 

requested comment on a proposal to 

withdraw from the noncash collection 

service at year-end 2005(69 FR 60496, 

October 19, 2004). The Reserve Banks’

fees for the noncash collection service 

will remain unchanged from 2004. New 

issues of bearer municipal securities 

effectively ceased in 1983 after the Tax 

Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 64941

9These connections may also be used to access 

non-priced services provided by the Reserve Banks. 

No fee is assessed if a particular connection is used 

only to access non-priced services.

10The remaining costs are allocated to non-priced 

services that use electronic access options.

11FedLine Advantage offers customers access to 

the Reserve Banks’ value-transaction applications: 

FedACH, the Fedwire funds and the national 

settlement service, and the Fedwire securities 

service.

12The peer group of the fifty largest bank holding 

companies is selected based on total deposits.

13A portion of clearing balances is used as a 

funding source for priced services assets. Long-term 

assets are partially funded from core clearing 

balances, currently $4 billion. Core clearing 

balances are considered the portion of the balances 

that has remained stable over time without regard 

to the magnitude of actual clearing balances. 

14The PSAF methodology includes an analysis of 

interest rate risk sensitivity, which compares ratesensitive assets with rate-sensitive liabilities and 

measures the change in cost recovery of a change 

in interest rates of up to 200 basis points.

15The pre-tax ROE is determined using the 

results of the comparable accounting earnings 

model (CAE), the discounted cash-flow model 

(DCF), and the capital asset pricing model (CAPM). 

Within the CAPM and DCF models, the ROE is 

weighted based on market capitalization, and 

within the CAE model, the ROE calculation is 

equally weighted. The results of the three models 

are averaged to impute the PSAF pre-tax ROE. 

16When needed to impute short- and long-term 

debt, the debt rates are derived based on the shortterm debt and long-term debt elements in the BHC 

peer group.

Equity and Fiscal Responsibility Act of 

1982 removed tax advantages for 

investors. As the number of outstanding 

physical municipal securities continues 

to decline, the volume of coupons and 

bonds presented for collection also will 

decline. The Reserve Banks project that 

volume will decrease 31.8 percent from 

the 2004 estimate. In 2005, the Reserve 

Banks project that the noncash 

collection service will recover 76.0 

percent of total costs, including imputed 

expenses, targeted ROE, and costs 

associated with exiting the business. 

H. Electronic Access—There are four 

types of electronic access options 

through which depository institutions 

can access the Reserve Banks’ priced 

services: FedLine, FedMail, FedPhone, 

and computer interface (mainframe to 

mainframe).9 The Reserve Banks 

allocate the costs and revenues 

associated with these electronic access 

options to the Reserve Banks’ priced 

services.10 For 2005, the Reserve Banks 

will change the FedLine connection fees 

only. Depository institutions currently 

use DOS-based terminals with either a 

dial connection or a frame relay 

connection to access the Reserve Banks’

services. The Reserve Banks are in the 

process of migrating their customers to 

a tiered web-based access. This 

migration is scheduled to be completed 

by mid-year 2006. At that time, FedLine 

customers will only be able to access 

services via web-based applications.

In the interim, those customers that 

have not yet migrated to the web-based 

access can continue to use DOS-based 

terminals. For customers selecting a dial 

connection, the Reserve Banks bundle a 

FedLine DOS connection and web-based 

access into a single FedLine Select 

package, which includes one DOS-based 

FedLine dial connection and FedLine 

Web institution-level access with three 

digital certificates for individual 

subscribers. In this arrangement, 

customers will use their DOS-based 

connection to access transaction 

services and FedLine Web to access 

information services. The Reserve Banks 

will increase the FedLine Select fee 

from $150 to $200. For customers 

selecting a frame relay connection, the 

Reserve Banks will raise the connection 

fee from $500 to $825. 

Those customers using the tiered webbased access can choose either FedLine 

Web to access information services or 

FedLine Advantage to access both 

transaction services and information 

services. The Reserve Banks will 

increase the standalone FedLine Web 

fee from $25 to $50 per month. FedLine 

Advantage offers customers access to 

value-transaction applications.11 A 

FedLine Advantage subscription will 

include the FedLine Advantage 

institution fee and three FedLine 

Advantage digital certificates for 

individual subscribers. The Reserve 

Banks will introduce FedLine 

Advantage at a monthly fee of $250. 

FedLine Select and FedLine Advantage 

support the Reserve Banks’ strategic 

direction of moving to web-based 

electronic access, consistent with and in 

response to customers’ preferences.

II. Private-Sector Adjustment Factor 

A. Background—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 return 

on equity (profit) that would have been 

earned if a private business firm 

provided the services. These imputed 

costs are based on data developed in 

part from a model comprising 

consolidated financial data for the 

nation’s fifty largest bank holding 

companies (BHCs).12 The imputed costs 

and imputed profit are collectively 

referred to as the PSAF. In a comparable 

fashion, investment income is imputed 

and netted with related direct costs 

associated with clearing balances to 

estimate net income on clearing 

balances (NICB).

The method for calculating the 

financing and equity costs in the PSAF 

requires determining the appropriate 

levels of debt and equity to impute and 

then applying the applicable financing 

rates. This process requires developing 

a pro forma priced services balance 

sheet using estimated Reserve Bank 

assets and liabilities associated with 

priced services and imputing the 

remaining elements that would exist if 

the Reserve Banks’ priced services were 

provided by a private business firm.

The amount of the Reserve Banks’

assets that will be used to provide 

priced services during the coming year 

is determined using Reserve Bank 

information on actual assets and 

projected disposals and acquisitions. 

The priced portion of mixed-use assets 

is determined based on the allocation of 

the related depreciation expense. The 

priced portion of actual Reserve Bank 

liabilities consists of balances held by 

Reserve Banks for clearing priced 

services transactions (clearing balances), 

projected based on historical data, and 

other liabilities such as accounts 

payable and accrued expenses. 

Long-term debt is imputed only when 

core clearing balances and long-term 

liabilities are not sufficient to fund longterm assets or if the interest rate risk 

sensitivity analysis, which measures the 

interest rate effect of the difference 

between interest rate sensitive assets 

and liabilities, indicates that a 200 basis 

point change in interest rates would 

change cost recovery more than two 

percentage points.13, 14 Short-term debt 

is imputed only when short-term 

liabilities and clearing balances not 

used to finance long-term assets are 

insufficient to fund short-term assets. 

Equity is imputed to meet the FDIC 

definition of a well-capitalized 

institution, which is currently 5 percent 

of total assets and 10 percent of riskweighted assets.

1. Financing rates—Equity financing 

rates are based on the average of the 

return on equity (ROE) results of three 

economic models using data from the 

BHC peer group.15, 16 For simplicity, 

given that federal corporate tax rates are 

graduated, state tax rates vary, and 

various credits and deductions can 

apply, a specific tax rate is not 

calculated for Reserve Bank priced 

services. Instead, imputed taxes are 

captured using a pre-tax ROE. The 

resulting ROE influences the dollar level 

of the PSAF and Federal Reserve price 

levels because this is the return a 

shareholder would expect in order to 

invest in a private business firm. The 

64942 Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 

17The investment portfolio is composed of 

investments comparable to a BHC’s investment 

holdings. In 2005, these investments were limited 

to federal funds, Treasury securities, government 

agency securities, commercial paper, municipal 

bonds, and money market and mutual funds. 

18The 2004 constant spread was revised from 35 

basis points to 30 basis points after correcting an 

error in the NICB portfolio model. The revised 

constant spread decreased the projected 2004 final 

NICB from $52.7 million to $47.6 million. Using the 

average spread of 29 basis points over the threemonth Treasury bill, applied to the clearing balance 

levels and rate assumptions used in the 2005 

pricing process, NICB is projected to be $61.3 

million for 2005.

19Previously, the projected balances were based 

on the average of the most recent six months of data 

prior to NICB calculation date and the projected Tbill rate was the rolling 13-week average of the 

three-month T-bill rate.

20Federal Reserve Regulatory Service (FRRS) 9–

1558.

use of the pre-tax return on equity 

assumes 100 percent recovery of 

expenses, including imputed costs and 

the targeted return on equity. The PSAF 

is, therefore, based on a matching of 

revenues with actual and imputed costs. 

If the pre-tax earnings are less than the 

targeted ROE, imputed expenses are 

adjusted for the tax savings associated 

with the adjusted recovery. The 

imputed tax rate is the median of the 

rates paid by the BHCs over the past five 

years adjusted to the extent that BHCs 

have invested in tax-free municipal 

bonds.

2. Other Costs—The PSAF also 

includes the estimated priced servicesrelated expenses of the Board of 

Governors and imputed sales taxes 

based on Reserve Bank estimated 

expenditures. An assessment for FDIC 

insurance, when required, is imputed 

based on current FDIC rates and 

projected clearing balances held with 

the Federal Reserve. 

B. Net Income on Clearing Balances—

The NICB calculation is made each year 

along with the PSAF calculation and is 

based on the assumption that Reserve 

Banks invest clearing balances net of 

imputed reserve requirements and 

balances used to finance priced-services 

assets. Based on these net clearing 

balance levels, Reserve Banks impute a 

constant spread, determined by the 

return on a portfolio of investments, 

over the three-month Treasury bill 

rate.17, 18 The calculation also involves 

determining the priced services cost of 

earnings credits (amounts available to 

offset future service fees) on contracted 

clearing balances held, net of expired 

earnings credits, based on a discounted 

Treasury bill rate. Beginning in 2005, 

rates and clearing balance levels used in 

the NICB estimate are based on the most 

recent rates and clearing balance levels. 

Recent clearing balance levels are 

adjusted using historical data on 

depository institution clearing balance 

management in a changing interest rate 

environment and applying the constant 

spread to the most recent three-month 

Treasury bill rate prior to the 

calculation date.19 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 imputed 

Treasury-bill investments and the cost 

associated with holding clearing 

balances, therefore, are considered net 

income for priced services activities.

C. Discussion—The decrease in the 

2005 PSAF is primarily due to a 

decrease in clearing balances on which 

investments are imputed and the 

resulting decrease in total assets. Since 

required imputed equity is based on five 

percent of total assets, priced services 

equity and the cost of equity also 

decreased proportionally. 

1. Asset Base—The estimated Federal 

Reserve assets in 2005 to provide priced 

services, reflected in table 13, have 

decreased $1,056.0 million, or 6.1 

percent. The decline in total assets is 

primarily a result of a decrease in 

imputed investments in marketable 

securities of $1,064.3 million and a 

decrease in imputed reserve 

requirements of $119 million. These 

elements are imputed based on the 

estimated level of clearing balances. As 

a result of consolidation and 

restructuring of several System 

functions, Bank premises assets are 

projected to decrease $38.8 million and 

leasehold improvements and long-term 

prepayments are projected to decrease 

$15.7 million. Offsetting these decreases 

in assets is an increase in items in 

process of collection of $201.1 million 

based on higher estimated float 

receivables.

As shown in table 14, the assets 

financed through the PSAF have 

decreased. Short-term assets funded 

with short-term payables and clearing 

balances total $38.9 million. This 

amount represents a decrease of $1.4 

million, or 3.5 percent, from the shortterm assets funded in 2004. Long-term 

assets funded with long-term liabilities, 

equity, and core clearing balances are 

projected to total $361.7 million. This 

amount represents a decrease of $5.2 

million or 1.4 percent from the longterm assets funded in 2004. 

2. Debt and Equity Costs and Taxes—

As previously mentioned, core clearing 

balances are available as a funding 

source for priced service assets. Table 

14 shows that $400.6 million in clearing 

balances is used to fund priced services 

assets in 2005. The interest rate 

sensitivity analysis in table 15 indicates 

that a 200 basis point decrease in 

interest rates affects the ratio of ratesensitive assets to rate-sensitive 

liabilities and produces a decrease in 

cost recovery of 0.8 percentage points, 

while an increase of 200 basis points in 

interest rates increases cost recovery by 

0.7 percentage points. The established 

threshold for a change in cost recovery 

is two percentage points; therefore, 

interest rate risk associated with using 

these balances is within acceptable 

levels and no long-term debt is imputed. 

Table 16 shows the imputed PSAF 

elements, the pre-tax ROE, and other 

required PSAF recoveries for 2004 and 

2005. The decrease in clearing balances 

from which investments are imputed 

decreases total assets. The decrease in 

total assets, and the resulting decrease 

in imputed equity, decreases the 

estimated cost of equity in 2005. As 

indicated previously, the pre-tax return 

on equity is calculated using the 

combined results of three models. 

Contributing to the decrease in the 

overall imputed cost of equity is a 

decrease in the DCF component of the 

ROE calculation, resulting in the pre-tax 

ROE decreasing from 18.6 percent in 

2004 to 18.1 percent in 2005. Sales taxes 

decreased from $12.0 million in 2004 to 

$8.2 million in 2005. The effective 

income tax rate used in 2005 also 

decreased to 29.6 percent from 29.8 

percent in 2004. The priced service 

portion of the Board’s expenses 

decreased $1 million from $7.6 million 

in 2004 to $6.6 million in 2005. 

3. Capital Adequacy and FDIC 

Assessment—As shown in table 13, the 

amount of equity imputed for the 2005 

PSAF is $808.0 million, a decrease of 

$52.8 million from imputed equity of 

$860.8 million in 2004. As noted above, 

equity is based on 5 percent of total 

assets, as required by the FDIC for a 

well-capitalized institution, as defined 

for purposes of assessing insurance 

premiums. In both 2005 and 2004, the 

capital to risk-weighted asset ratio and 

the capital to total assets ratio both 

exceed regulatory guidelines. As a 

result, no FDIC assessment is imputed 

for either year. 

III. 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 statement, 

‘‘The Federal Reserve in the Payments 

System.’’ 20 Under this policy, the Board 

assesses whether the change would have 

Federal Register / Vol. 69, No. 216 / Tuesday, November 9, 2004 / Notices 64943

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 the change creates such 

an effect, the Board must further 

evaluate the change to assess whether 

its benefits—such as contributions to 

payment system efficiency, payment 

system integrity, or other Board 

objectives—can be retained while 

minimizing the adverse effect on 

competition.

The Board believes that the 2005 fees 

and changes to the earnings credits on 

clearing balances will not 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. 

The changes will permit the Federal 

Reserve Banks to earn an ROE similar to 

that earned by the fifty largest BHCs. 

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52This option applies to test systems or 

contingency systems that are located at separate 

facilities, including another bank office or a thirdparty contingency site. Prices shown are for fullcircuit backup only located at the customer site. 

Multiple customers sharing a single disasterrecovery connection at a third-party provider 

require custom implementations.

53This option applies to test systems or 

contingency systems that are located at separate 

facilities. The institution uses a frame relay link 

connection with no ISDN dial-up backup. Prices 

shown are for frame connection only located at the 

customer site. Multiple customers sharing a single 

disaster recovery connection at a third-party 

provider require custom implementations.

54 Includes a Cisco router, a digital service unit, 

and a link encryptor.

55FedPhone and FedMail e-mail are free options.

56Some large computer interface customers may 

be required to ensure that their contingency 

connections to the Federal Reserve are diversely 

routed, and they will be expected to defray the costs 

incurred by the Federal Reserve of providing this 

network diversity. Depending on the cost of 

providing specific circuits, one of five tiered price 

points would apply: $250/$500/$1,000/$2,000/

$2,500 per month. Additionally, a group of the 

Reserve Banks’ largest frame relay customers will 

incur a $1,000 per circuit supplemental fee to 

recover the additional costs associated with this 

effort. The Reserve Banks began charging this select 

group on September 30, 2004.

FEDERAL RESERVE ELECTRONIC ACCESS FEE SCHEDULE

[Effective January 3, 2005. Bold indicates changes from 2004 prices] 

FedLine

FedLine Select Package (monthly) ................................................................................................................................................... $200.00

Includes: 

One dial—DOS-based FedLine 

One FedLine Web institution fee 

Three individual subscriptions 

Additional FedLine Web individual subscriber fee (monthly) ....................................................................................................... 15.00

Additional DOS-based FedLine—Dial (monthly) .......................................................................................................................... 100.00

Additional DOS-based FedLine—Frame Relay less than 56 kbps (monthly) ............................................................................. 825.00

Test and Contingency Options for Frame Relay: 

Full Circuit Backup 52—less than 56 kbps (monthly) ............................................................................................................ 825.00

Frame Connection Only 53—less than 56 kbps (monthly) .................................................................................................... 693.00

Redundant Component Set 54—less than 56 kbps (monthly) .............................................................................................. 155.00

FedLine Web (monthly) ..................................................................................................................................................................... 50.00

Set-up fee (one time) ................................................................................................................................................................... 50.00 

Individual subscriber fee (monthly) .............................................................................................................................................. 15.00

FedLine Advantage (monthly) ........................................................................................................................................................... 250.00

Includes: 

One FedLine Advantage institution fee 

Three FedLine Advantage individual subscriber digital certificates 

Set-up fee (one time) ................................................................................................................................................................... 400.00

VPN (monthly) .............................................................................................................................................................................. 50.00

Individual subscriber fee beyond first three (one time) ................................................................................................................ 100.00

Individual subscriber fee (monthly) .............................................................................................................................................. 20.00

FedPhone & FedMail

FedMail Fax (monthly per fax line) 55 ................................................................................................................................................ 15.00 

Computer Interface 56

Frame Relay-Computer Interface (CI) @ 56 kbps (monthly) .............................................................................................................. 1,000.00 

Frame Relay-CI @ 256 kbps (monthly) .............................................................................................................................................. 2,000.00 

Frame Relay-CI T1 (monthly) .............................................................................................................................................................. 2,500.00 

TEST AND CONTINGENCY OPTIONS FOR

FRAME RELAY

Connection type Full circuit 

backup 52

Frame connection 

only 53

CI @ 56 kbps ... $845 $765 

CI @ 256 kbps 1,750 1,585 

CI T1 ................. 2,230 2,010 

By order of the Board of Governors of the 

Federal Reserve System, November 4, 2004.

Jennifer J. Johnson, 

Secretary of the Board.

[FR Doc. 04–24967 Filed 11–8–04; 8:45 am] 

BILLING CODE 6210–01–P

FEDERAL RETIREMENT THRIFT 

INVESTMENT BOARD 

Sunshine Act Meeting

TIME AND DATE: 9 a.m. (e.s.t.), November 

15, 2004.

PLACE: SI International, 12012 Sunset 

Hills Road, Suite 800, Reston, VA 

20190.

STATUS: Parts will be open to the public 

and parts closed to the public.

MATTERS TO BE CONSIDERED: 

Parts Open to the Public 

1. Approval of the minutes of the 

October 18, 2004, Board member 

meeting. 

2. Thrift Savings Plan activity report 

by the Executive Director. 

Parts Closed to the Public 

3. Procurement. 

4. Personnel matters.

CONTACT PERSON FOR MORE INFORMATION:

Thomas J. Trabucco, Director, Office of 

External Affairs, (202) 942–1640.

Dated: November 5, 2004. 

Elizabeth S. Woodruff, 

Secretary to the Board, Federal Retirement 

Thrift Investment Board.

[FR Doc. 04–25139 Filed 11–5–04; 3:54 pm] 

BILLING CODE 6760–01–P

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Public Meeting of the President’s 

Council on Bioethics on December 2–

3, 2004

AGENCY: The President’s Council on 

Bioethics, HHS.

ACTION: Notice.

SUMMARY: The President’s Council on 

Bioethics (Leon R. Kass, M.D., 

chairman) will hold its nineteenth 

meeting, at which, among other things, 

it will continue its discussion of ethical 

issues relating to the treatment of the 

aged, and end-of-life care. Subjects 

discussed at past Council meetings 

(though not on the agenda for the 

present one) include: cloning, stem cell 

research, embryo research, assisted 

reproduction, reproductive genetics, 

IVF, ICSI, PGD, sex selection, 

inheritable genetic modification, 

patentability of human organisms, aging 

retardation, lifespan-extension, and 

organ procurement for transplantation. 

Publications issued by the Council to