[Federal Register Volume 62, Number 178 (Monday, September 15, 1997)]
[Rules and Regulations]
[Pages 48166-48174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24405]


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FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-0972]


Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: Effective January 2, 1998, the Reserve Banks will begin to 
implement a policy under which each depository institution may maintain 
only a single funds account with the Federal Reserve. A single account 
will establish a single debtor-creditor relationship between each 
institution and a Federal Reserve Bank and will make account management 
more efficient for banks with interstate branches. The Board is 
adopting amendments to subpart A of Regulation J to conform the Federal 
Reserve check collection rules to the single account structure.

EFFECTIVE DATE: January 2, 1998.

FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General 
Counsel, (202/452-3625), Stephanie Martin, Senior Attorney (202/452-
3198), or Heatherun Allison, Attorney (202/452-3565), Legal Division. 
For the hearing impaired only, contact Diane Jenkins, 
Telecommunications Device for the Deaf (TDD) (202/452-3544), Board of 
Governors of the Federal Reserve System, 20th and C Streets, N.W., 
Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION:

Overview

    The Riegle-Neal Interstate Banking and Branching Efficiency Act of 
1994 (Pub. L. 103-328) made significant changes to various banking laws 
to authorize and facilitate interstate banking. Consequently, the 
number of depository institutions that operate branches in more than 
one Federal Reserve District is expected to increase. On January 2, 
1998, the Federal Reserve Banks will begin to implement a new account 
structure that will provide a single Federal Reserve account for each 
institution. <SUP>1</SUP> A primary objective of the single account 
structure is to establish a single debtor-creditor relationship

[[Page 48167]]

between each chartered entity and the Federal Reserve. A single debtor-
creditor relationship is the most effective means for Reserve Banks to 
manage their affairs with a depository institution. A single account 
structure also may allow depository institutions to manage their 
overall position with the Reserve Banks more efficiently.
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    \1\  A foreign bank's U.S. branches and agencies and an Edge or 
agreement corporation's offices will not be required to adopt a 
single account structure. The Board has proposed amendments to 
Regulation D to allow such institutions with offices in multiple 
Federal Reserve Districts to choose whether to adopt a single-
account structure or retain multiple accounts as they do currently 
[62 FR 42708, August 8, 1997].
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    The Board is adopting amendments to subpart A of Regulation J, 
governing the collection of checks and other items by Federal Reserve 
Banks, to conform the Federal Reserve check collection rules to the 
single account structure. The Board does not believe it is necessary to 
amend subpart B of Regulation J, which governs funds transfers through 
Fedwire, to accommodate the single account structure. The Reserve Banks 
will, however, issue revised operating circulars governing collection 
of cash items, Fedwire funds transfers, and other Reserve Bank services 
to reflect the new account structure.
    Under the Regulation J amendments, all of an institution's check 
collection and return transactions through the Federal Reserve Banks 
will be reflected in a single account held at that institution's 
``Administrative Reserve Bank'' (or in a correspondent's account at a 
Reserve Bank). Recent amendments to Regulation D provide a means to 
determine the location of an institution's reserve account.<SUP>2</SUP> 
The final amendments to Regulation J provide that the account location 
for an institution that sends items to a Reserve Bank for collection 
(and the identity of its Administrative Reserve Bank) will be 
determined in accordance with the provisions of Regulation D, even if 
the institution is not otherwise subject to that regulation.
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    \2\ Regulation D provides that a depository institution is 
considered to be located in the Federal Reserve District specified 
in the institution's charter or organizing certificate, or, if no 
such location is specified, the location of its head office. If that 
location, in the Board's judgment, is ambiguous, would impede the 
ability of the Board or the Federal Reserve Banks to perform their 
functions under the Federal Reserve Act, or would impede the ability 
of the institution to operate efficiently, the Board could make 
exceptions to the general rule for a particular institution after 
considering certain criteria. [62 FR 34613, June 27, 1997].
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    Under the amendments, an institution generally is permitted to send 
an item to any Reserve Bank for collection, but the item is deemed to 
have been sent first to that institution's Administrative Reserve Bank. 
The amendments designate the parties that are deemed to handle the item 
and the order in which they are deemed to have handled it. (Although 
the Administrative Reserve Bank is deemed to handle the check, it would 
not be considered to have ``received'' the check as that term is used 
in subpart A of Regulation J if the check is initially sent to another 
Reserve Bank.) The amendments require a paying bank to settle for an 
item with its Administrative Reserve Bank (regardless of whether the 
institution received the item from its Administrative Reserve Bank) and 
specify the time and manner in which the paying bank is to make 
settlement. The amendments also make changes in the rules governing the 
handling of and settlement for returned checks parallel to those 
proposed for cash items.

Section-by-Section Analysis and Summary of Public Comments

    The Board received nine comments on the proposed amendments to 
Regulation J from two bank holding companies, two trade associations, 
two clearing houses, two Federal Reserve Banks, and a financial 
services company. Overall, the commenters supported the changes and 
agreed that the single-account structure as implemented by the 
Regulation J proposal would promote operational efficiency, speed the 
collection of checks, and facilitate account management.

Section 210.2  Definitions

    The Board proposed to add two new definitions to Regulation J. 
Under the new account structure, all of an institution's transactions 
will be reflected in a single account held at the institution's 
Administrative Reserve Bank. The Board proposed to add a definition of 
``account'' to mean an account with reserve or clearing balances held 
on the books of a Federal Reserve Bank. The proposed definition stated 
that a subaccount is an informational record of a subset of 
transactions that affect an account and is not a separate account. (If 
a depository institution desires, the Reserve Banks will keep records 
of certain transactions in ``subaccounts,'' such as the transactions 
performed by a branch of a bank that may be in another District from 
the Administrative Reserve Bank.) The Board proposed to define 
``Administrative Reserve Bank'' as the Reserve Bank in whose District 
the entity in question is located, as determined in the same way as 
location is determined for purposes of reserve accounts under the 
Board's Regulation D. The Board also proposed to amend the definition 
of ``bank'' to conform to the Uniform Commercial Code (U.C.C.) sections 
4-105 and 4-107). Finally, the Board proposed to amend the definition 
of ``cash item'' to provide that, under the new single-account system, 
the Reserve Bank that initially receives an item for deposit, rather 
than the Reserve Bank in whose District the item is payable, is the 
Reserve Bank that decides whether to accept the item as a cash item.
    The Board received one comment on the definition of ``account,'' 
specifically, on the discussion of a subaccount. The commenter noted 
that, due to recent bank mergers and for other reasons, certain banks 
may have several routing numbers within the same District for a period 
of time. The commenter suggested that the Board clarify that 
subaccounts could be established based on a bank's routing numbers 
presently in use. The Board anticipates that banks will be able to 
establish subaccounts based on routing numbers in use immediately prior 
to a merger. The Board also believes that a broad definition of 
subaccount is desirable to encompass transaction subsets based on 
routing numbers or on other criteria and has adopted the definition as 
proposed.
    The Board received one comment on the proposed definition of 
``Administrative Reserve Bank.'' The commenter stated that a depository 
institution should have more flexibility in choosing where its account 
will be located, that is, the depository institution should be allowed 
to hold its account at any Reserve Bank in whose District it operates, 
which may not be the Reserve Bank where the institution is located 
under Regulation D. The commenter argued that the proposed definition 
unnecessarily tied priced service offerings and account relationship 
issues to regulatory oversight issues. The theory behind the single-
account structure, however, is that each depository institution will 
have a debtor-creditor relationship with a single Reserve Bank. 
Allowing an institution to choose to hold a clearing account for 
payment-related purposes at a Reserve Bank other than the Reserve Bank 
where its reserve account is located would result in debtor-creditor 
relationships with at least two Reserve Banks. If a depository 
institution wishes to have an account relationship with a Reserve Bank 
other than the Reserve Bank whose District encompasses its charter 
location, it may request a location determination under the procedure 
described in Regulation D. Moreover, the location of a depository 
institution's account for check collection and return purposes should 
not matter to the institution under the Regulation J amendments; the 
institution will be able to send checks to any Reserve Bank for 
collection with settlement through its Federal Reserve account 
regardless of the account's

[[Page 48168]]

location. The Board, therefore, has adopted the proposed definition of 
``Administrative Reserve Bank,'' as well as the other proposed changes 
to Sec. 210.2.

Section 210.3(a)  General Provisions

    This paragraph provides that the Reserve Banks may issue operating 
circulars governing the details of their check collection services and 
related matters. The Board proposed to specify that the operating 
circulars may allow an Administrative Reserve Bank to give instructions 
to other Reserve Banks, such as instructions regarding the handling of 
items that would affect an account on its books. The Board received no 
comments on this amendment and has adopted it as proposed.

Section 210.4  Sending Items to Reserve Banks

    The Board proposed to amend this section to provide that a sender 
(other than a Reserve Bank sender) may send an item to any Reserve Bank 
for collection, regardless of where the sender or the paying bank is 
located, but that the sender's Administrative Reserve Bank may override 
this rule and require the sender to send the item to a particular 
Reserve Bank. The Board provided an example of a bank in financial 
difficulty, in which case the Administrative Reserve Bank may want to 
require the bank to deposit all of its items directly with a particular 
Reserve Bank in order to retain closer control over the bank's account.
    Three commenters objected to the broad powers that this section 
gives to the Administrative Reserve Bank to require that checks be sent 
to a specific Reserve Bank. One commenter expressed concern that such 
an action could introduce inefficiencies into the payments system, 
increase return item risk, and provide the Administrative Reserve Bank 
with open-ended power over its private-sector competitors and 
customers. This commenter suggested that the Board remove the 
Administrative Reserve Bank's override power or, alternatively, clearly 
define the circumstances under which the Administrative Reserve Bank 
has this authority. The other commenters suggested that the Board limit 
the Administrative Reserve Bank's override authority to cases where the 
depositing institution is in financial difficulty or where the override 
is necessary to protect the safety and soundness of the payments 
system.
    The Board believes this provision is necessary to address isolated 
emergency situations that may arise. The Board expects that an 
Administrative Reserve Bank would direct a bank to send checks to a 
specific Reserve Bank only under extreme and unusual circumstances. 
These circumstances might be caused by different situations, including 
a severe operational problem at a Reserve Bank. Consequently, the Board 
does not believe that it is feasible or appropriate to attempt to 
specify all such circumstances in advance. The Board, therefore, has 
adopted the provision as proposed.
    The Board received no other specific comments on Sec. 210.4. Three 
commenters generally supported giving depository institutions the 
flexibility to deposit checks with any Reserve Bank. The Board, 
therefore, has adopted the Sec. 210.4 as proposed. The following 
discussion describes the amendments to this section in more detail:
    Section 13(1) of the Federal Reserve Act (FRA) <SUP>3</SUP> 
authorizes a Reserve Bank to accept deposits of checks and other items 
from its member banks or from other depository institutions and to 
accept from other Reserve Banks checks and other items payable within 
its District. Under the Regulation J amendment, if a sender sends a 
check to a Reserve Bank other than its Administrative Reserve Bank or 
the Reserve Bank in whose District the check is payable, the receiving 
Reserve Bank is deemed to be acting as agent of the Administrative 
Reserve Bank. Regulation J requires, however, that such a receiving 
Reserve Bank take on additional rights, duties, and liabilities in its 
own name that it would not necessarily have as a common law agent of 
the Administrative Reserve Bank. For example, the receiving Reserve 
Bank is considered an indorser on the check and makes warranties on the 
check under Sec. 210.6, Regulation CC, and the U.C.C. in its own name. 
The Board believes that requiring such a receiving Reserve Bank to take 
on these rights, duties, and liabilities is necessary to preserve a 
clear chain of warranties and other claims in the check collection and 
return system. Currently, in those limited situations where a Reserve 
Bank accepts deposits from institutions other than those located in its 
District, it does so under a special agency agreement with the 
institution's home Reserve Bank. Rather than perpetuating these special 
agreements, the new Regulation J amendments establish the terms under 
which the receiving Reserve Bank will handle items on behalf of an 
Administrative Reserve Bank.
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    \3\ 12 U.S.C. 360.
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    Specifically, the amendments to Sec. 210.4 designate the parties 
that are deemed to handle an item and the order in which they are 
deemed to have handled the item. These amendments establish the chain 
of indorsements on an item under Regulation J, Regulation CC, and the 
U.C.C., as well as the order in which the parties are agents or 
subagents of the owner of an item, as provided in Sec. 210.6(a). As 
noted above, the rule provides that the sender is deemed to send the 
item to its Administrative Reserve Bank, regardless of whether that 
Reserve Bank actually receives the item first. The Administrative 
Reserve Bank is deemed to send the item to the Reserve Bank that 
actually receives the item from the sender (if different from the 
Administrative Reserve Bank). Any subsequent Reserve Bank that receives 
the item from another Reserve Bank is deemed to handle the item in 
turn.
    If, for example, an Iowa branch of a Richmond bank, with an account 
at the Richmond Reserve Bank, sends a check to the Chicago Reserve Bank 
for collection, the check is deemed handled in the following order: the 
initial sender, the Richmond Reserve Bank (the Administrative Reserve 
Bank), and the Chicago Reserve Bank (the first Reserve Bank to receive 
the item). If the check in this example were drawn on a banking office 
in New York, the Chicago Reserve Bank would send the check to the 
Federal Reserve Bank of New York, in which case the New York Reserve 
Bank would be the last Reserve Bank to handle the check and would 
present the check to the paying bank. No other Reserve Bank would 
handle or would be deemed to handle the item. In the example, if the 
paying bank's Administrative Reserve Bank is the Federal Reserve Bank 
of Boston (which might be the case if the check is payable by a New 
York office of a bank headquartered in Boston), the Boston Reserve Bank 
is not a party to the check, even though settlement for the check will 
ultimately take place by a debit to an account on the Boston Reserve 
Bank's books. (See Table 1.)

Table 1.

    This table illustrates the following example:
    A Richmond-based bank has its account at the Federal Reserve 
Bank of Richmond (Richmond Fed), its Administrative Reserve Bank. An 
Iowa branch of the bank sends a check to the Federal Reserve Bank of 
Chicago (Chicago Fed) for collection. The check is payable by a New 
York office of a Boston-based bank, which has an account at the 
Federal Reserve Bank of Boston (Boston Fed). The Chicago Fed sends 
the check to the Federal Reserve Bank of New York (NY Fed), which 
presents the check to the New York office of the paying bank.

[[Page 48169]]

Path of Physical Check

Initial sender <r-arrow> Chicago Fed <r-arrow> NY Fed <r-arrow> 
Paying Bank

Parties Deemed To Have Handled the Check (Chain of Indorsements)

    Initial sender <r-arrow> Richmond Fed <r-arrow> Chicago Fed 
<r-arrow> NY Fed <r-arrow> Paying Bank

Section 210.5  Sender's Agreement; Recovery by Reserve Bank

    Paragraph (a) of Sec. 210.5 sets forth the terms and warranties to 
which a sender agrees when it sends an item to a Reserve Bank. The 
Board proposed to amend this paragraph to conform with the provisions 
of Sec. 210.4. Specifically, a sender would authorize its 
Administrative Reserve Bank, as well as any other Reserve Bank to which 
the item is sent, to handle an item and would authorize the Reserve 
Banks to make the appropriate accounting entries in settlement for the 
item. The Board proposed to make minor amendments to paragraph (c) (and 
parallel amendments to Sec. 210.12(f)) to simplify the provisions 
describing how settlements occur between Reserve Banks. The Board also 
proposed to redesignate the paragraph numbers in paragraph (c). 
Paragraph (d) of Sec. 210.5 requires a sender to grant a security 
interest in all its assets held by a Reserve Bank to secure any of its 
obligations related to items collected through the Reserve Banks. The 
Board proposed to amend this section to provide that the security 
interest is granted to the sender's Administrative Reserve Bank. The 
Board received no comments on the amendments to this section and has 
adopted them as proposed.

Section 210.6  Status, Warranties, and Liability of Reserve Bank

    Paragraph (a) of this section provides that Reserve Banks act as 
agents or subagents of the owner of an item. The Board proposed to 
modify the reference to a Reserve Bank in the first sentence with the 
phrase ``that handles an item'' to clarify that this paragraph refers 
to the Reserve Banks that are identified in Sec. 210.4. The current 
language provides that the agency terminates when a Reserve Bank 
receives final payment for the item and makes the proceeds available 
for use by the sender. The Board proposed to amend this provision by 
stating that the agency status will not end unless the time for 
commencing all actions against the Reserve Bank has expired. This 
amendment would ensure that the agency and subagency relationships 
between Reserve Banks regarding a particular item, as set forth in 
Sec. 210.4, will continue until the statute of limitations has run on 
claims regarding any dispute concerning the item. The Board also 
proposed to reorganize the numbering in paragraphs (a) and (b) of this 
section.
    The Board received one comment that specifically supported the 
amendments to this section. Another commenter asked why the agency 
status of a Reserve Bank should continue for an open-ended period of 
time. The commenter believed that the Reserve Bank's agency status 
should continue for the same period of time as the agency status of a 
private-sector collecting bank (until the settlement received for the 
item becomes final, as provided in U.C.C. section 4-201(a)), absent a 
compelling reason. The Board intended this provision to provide a 
theoretical basis for an Administrative Reserve Bank's right to 
instruct another Reserve Bank relating to risk, even after settlement 
is final. (Under Regulation CC, 12 CFR 229.36(d), settlements between 
banks are final when made.) For example, the Administrative Reserve 
Bank may wish to instruct another Reserve Bank about possible warranty 
claims and returns. The agency status is necessary for the Reserve 
Banks because they are separate corporations. Private-sector collecting 
banks can also extend the agency period by agreement. The Board has 
adopted Sec. 210.6 as proposed.

Section 210.7  Presenting Items for Payment

    This section provides rules regarding the presentment of items for 
payment. The Board proposed to make minor changes to paragraphs (c) and 
(d). Rather than referring to an item that is ``payable'' in a certain 
Federal Reserve District, the Board proposed to improve the precision 
of these provisions by referring to items that may be ``sent to the 
paying bank or nonbank payor'' in a certain Federal Reserve District. 
The Board received no comments on these amendments and has adopted them 
as proposed.

Section 210.8  Presenting Noncash Items for Acceptance

    Similar to the changes to Sec. 210.7, the Board proposed to replace 
the term ``payable elsewhere'' with the term ``may be presented 
elsewhere.'' The Board also proposed to reorganize the paragraph 
numbering in this section. The Board received no comments on these 
amendments and has adopted them as proposed.

Section 210.9  Settlement and Payment

    This section sets forth the time and manner by which a paying bank 
must settle for items it receives from a Reserve Bank. The Board 
proposed to add a new paragraph (a) (and to redesignate the following 
paragraphs accordingly) to provide that a paying bank must settle for 
an item with its Administrative Reserve Bank, whether or not the paying 
bank actually receives the item from that Reserve Bank. By settling 
with its Administrative Reserve Bank, the paying bank would meet any 
settlement obligation it may have under Regulation CC and the U.C.C. 
For example, the U.C.C. (sections 4-301 and 4-302) requires a paying 
bank to settle with the presenting bank by midnight on the day of 
presentment if it wants to preserve its right to return the check by 
its midnight deadline on its next banking day. By settling with its 
Administrative Reserve Bank, a paying bank would satisfy this 
obligation to a presenting Reserve Bank.
    The new paragraph (a) would also provide that a paying bank may 
settle through a correspondent account, with the agreement of its 
Administrative Reserve Bank, the Reserve Bank (if different) that holds 
the correspondent's account, and the correspondent. The paying bank 
would remain responsible for settlement if for some reason settlement 
does not occur through the correspondent account. The Board proposed to 
make a conforming change to paragraph (c) (as redesignated) related to 
payment for noncash items.
    Currently, Regulation J requires the paying bank to settle so that 
funds are available to the presenting Reserve Bank by the close of 
Fedwire on the day of presentment. The Board proposed: (1) amendments 
to paragraph (b) (as redesignated) of Sec. 210.9 to clarify that 
settlement funds must be made available to the paying bank's 
Administrative Reserve Bank, rather than the presenting Reserve Bank; 
(2) to change the references to a Reserve Bank's operating circular to 
include all of the Reserve Banks' operating circulars, as those 
circulars will be uniform as of January 1, 1998; (3) to clarify 
paragraph (b)(3) to refer to days the paying bank is closed voluntarily 
``so that it does not receive a cash item'' (the provisions of this 
paragraph would not apply if the paying bank's head office were closed 
for business but a branch still received presentment of cash items from 
the Reserve Banks); (4) to replace references to ``one hour after the 
scheduled opening of Fedwire'' with ``9:30 a.m. Eastern Time'' so that 
this time will remain unchanged when the Fedwire opening hour is moved 
to 12:30 a.m. in December 1997; (5) to add paragraph headings 
throughout paragraph (b); and (6) to make conforming changes to cross-
references

[[Page 48170]]

throughout Sec. 210.9 in light of the paragraph redesignations. The 
Board received one comment that specifically supported the amendments 
to this section and has adopted the amendments as proposed.

Section 210.10  Time Schedule and Availability of Credits for Cash 
Items and Returned Checks

    This paragraph provides that a Reserve Bank shall make proceeds 
available for cash items and returned checks according to its published 
time schedules. The Board proposed to clarify that the Reserve Bank 
that holds the settlement account will make credit available according 
to the time schedule of the Reserve Bank that first receives the cash 
item (or returned check) from the sender (or the paying or returning 
bank). The Board also proposed a conforming amendment to Sec. 210.11(b) 
regarding credit for noncash items. The Board received no comments on 
these amendments and has adopted them as proposed.

Section 210.12  Return of Cash Items and Handling of Returned Checks

    This section sets forth the rules governing handling of and 
settlement for returned checks. The rules for returned checks are 
generally parallel to the rules for cash items, and the Board proposed 
amendments that are parallel to the amendments for cash items discussed 
above. Under the proposal, a paying bank or returning bank may send a 
returned check to any Reserve Bank, unless its Administrative Reserve 
Bank directs it to send the returned check to a specific Reserve Bank. 
As with cash items, the paying or returning bank's Administrative 
Reserve Bank would be deemed to have handled the item first, prior to 
the Reserve Bank that actually received the item, for purposes of 
determining the relationships, rights, and liabilities of the parties 
(see discussion of Sec. 210.4). Also similar to cash items, a paying or 
returning bank would authorize the handling of a returned check by its 
Administrative Reserve Bank, as well as by any other Reserve Bank to 
which a returned check is sent, and would authorize the Reserve Banks 
to make the appropriate accounting entries in settlement for the 
returned check (see discussion of Sec. 210.5). A subsequent returning 
bank or depositary bank would be required to settle for a returned 
check with its Administrative Reserve Bank, whether or not the bank 
actually receives the returned check from that Reserve Bank. By 
settling with its Administrative Reserve Bank, the subsequent returning 
bank or depositary bank would meet its settlement obligations under 
Regulation CC and the U.C.C. (see discussion of Sec. 210.9(a)). 
Finally, a paying or returning bank would grant a security interest in 
all its assets held by its Administrative Reserve Bank to secure any of 
its obligations related to returned checks it sends to a Reserve Bank 
(see discussion of Sec. 210.5(d)). The Board received no comments on 
these amendments and has adopted them as proposed.

Transition Issues

    One commenter expressed concern that the proposal may not make 
adequate provision for post-merger situations, when a depository 
institution may have a temporary transition account at a Reserve Bank 
other than its Administrative Reserve Bank. The commenter stated that, 
when some of an institution's checks will settle in a transition 
account, the Reserve Bank holding the transition account should have 
rights, privileges, and duties comparable to those of the 
Administrative Reserve Bank with respect to settlement, check 
warranties, control over direct-sends, instructions to other Reserve 
Banks with respect to items that affect the account on its books, and 
security interests in assets held at other Reserve Banks.
    The Board believes that Regulation J as proposed adequately covers 
transition situations. For example, in the case of a bank merger, the 
surviving bank will have an account at its Administrative Reserve Bank 
while other offices may still have transition accounts at other Reserve 
Banks. Those transition accounts would operate similarly to 
correspondent settlement accounts. Checks that are deposited by the 
bank will be deemed to be handled first by the Administrative Reserve 
Bank and then by other Reserve Banks in the order set forth in 
Sec. 210.4. The Reserve Bank that holds the transition account will not 
be considered a party to a check unless it actually handles the check 
and therefore should be considered more like a correspondent bank than 
an Administrative Reserve Bank. If the bank settles for checks 
presented by a Reserve Bank through a transition account, it will be 
deemed to have settled with its Administrative Reserve Bank for those 
checks under Sec. 210.9(a).

Competitive Impact

    One commenter stated that the Board should review the competitive 
equity issues that arise from the combination of the proposed 
Regulation J amendments and the Board's proposed enhanced net 
settlement service for depository institutions [62 FR 32118, June 12, 
1997]. The commenter believed that private-sector clearing houses would 
be at a disadvantage vis-a-vis the Reserve Banks if the Reserve Banks 
are able to accommodate interstate banking starting on January 2, 1998, 
and the private-sector clearing houses are unable to avail themselves 
of the proposed net settlement services until late 1998. The commenter 
suggested that the Board analyze issues such as the risks that the 
Regulation J proposal is designed to address, the benefits that the 
proposal will provide to depository institutions, any cost savings that 
will accrue to Reserve Banks under the proposal, as well as other 
issues related to account monitoring and troubled banks. The commenter 
also asked that the Board consider allowing check clearing houses to 
have interim access to interdistrict net settlement services while the 
Board develops service enhancements.
    The Regulation J proposal is driven by both operational and risk 
concerns. The structural changes in the banking business brought about 
by the increase in the number of banks with interstate branches have 
necessitated a new account structure in the Federal Reserve Banks to 
handle interstate banking. The Regulation J changes are necessary to 
set forth the rules that will govern Federal Reserve check collection 
under the new account structure. Depository institutions will benefit 
from the efficiencies of having to manage only a single Federal Reserve 
account and the ability to deposit checks for collection at any Reserve 
Bank.
    In practical terms, the Regulation J proposal would likely have 
little immediate effect on current check collection patterns through 
the Reserve Banks. The proposal would allow branches of interstate 
banks to continue to deposits checks at the same Reserve Banks that 
they use today, irrespective of where their accounts are located. 
Eventually, these banks could benefit from price competition between 
Reserve Banks, which could result in volume shifts. Private-sector 
collecting banks could establish nationwide check collection or 
exchange systems as well. The Board does not believe that the 
Regulation J proposal, on its own, provides the Reserve Banks with any 
greater advantages in the check collection business than they already 
have today due to their nationwide presence and their ability to settle 
directly through Federal Reserve accounts.
    For private-sector check clearing arrangements that wish to settle 
on a net basis on the books of a Reserve Bank, there are currently two 
net settlement services available, as set forth in the

[[Page 48171]]

notice for the proposed service enhancement. The traditional 
settlement-sheet-based service provides next-day finality, and the 
Fedwire-based service provides same-day finality. The Board proposed an 
enhanced settlement-sheet-based service that would provide same-day 
finality and establish more effective risk controls than exist under 
the current traditional service, which was designed to handle 
intradistrict clearing. In the interim, the Board recognizes that some 
clearing arrangements that receive traditional net settlement services 
from the Reserve Banks may have participants with an interstate 
presence. The Board will not require that such participants be excluded 
from such arrangements while the Board is developing the enhanced 
service.

Final Regulatory Flexibility Analysis

    Two of the three requirements of a final regulatory flexibility 
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and 
the objectives of the rule and (2) a summary of the issues raised by 
the public comments, the agency's assessment of the issues, and a 
statement of the changes made in the final rule in response to the 
comments, are discussed above. The third requirement of a final 
regulatory flexibility analysis is a description of significant 
alternatives to the rule that would minimize the rule's economic impact 
on small entities and reasons why the alternatives were rejected.
    The rule will apply to all institutions, regardless of size, that 
send checks, returned checks, or other items to a Reserve Bank or 
receive items from a Reserve Bank. The rule sets out the terms under 
which the Reserve Banks handle items and does not impose significant 
burdens on small institutions, therefore no alternatives were 
considered for small institutions.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the 
authority delegated to the Board by the Office of Management and 
Budget. No collections of information pursuant to the Paperwork 
Reduction Act are contained in the rule.

List of Subjects in 12 CFR Part 210

    Banks, banking, Federal Reserve System.

    For the reasons set out in the preamble, the Board is amending part 
210 of chapter II of title 12 of the Code of Federal Regulations as set 
forth below:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

    1. The authority citation for part 210 continues to read as 
follows:

    Authority: 12 U.S.C. 248(i), (j), and (o), 342, 360, 464, and 
4001-4010.

    2. Section 210.2 is amended by redesignating paragraph (a) and 
paragraphs (b) through (p) as paragraph (b) and paragraphs (d) through 
(r), respectively; adding new paragraphs (a) and (c); and revising 
newly redesignated paragraphs (d), (g) introductory text, and (g)(2) to 
read as follows:


Sec. 210.2  Definitions.

* * * * *
    (a) Account means an account with reserve or clearing balances on 
the books of a Federal Reserve Bank. A subaccount is an informational 
record of a subset of transactions that affect an account and is not a 
separate account.
* * * * *
    (c) Administrative Reserve Bank with respect to an entity means the 
Reserve Bank in whose District the entity is located, as determined 
under the procedure described in Sec. 204.3(b)(2) of this chapter 
(Regulation D), even if the entity is not otherwise subject to that 
section.
    (d) Bank means any person engaged in the business of banking. A 
branch or separate office of a bank is a separate bank to the extent 
provided in the Uniform Commercial Code.
* * * * *
    (g) Cash item means --
* * * * *
    (2) Any other item payable on demand and collectible at par that 
the Reserve Bank that receives the item is willing to accept as a cash 
item. Cash item does not include a returned check.
* * * * *
    3. In Sec. 210.3, the last sentence of paragraph (a) is revised to 
read as follows:


Sec. 210.3  General provisions.

    (a) General. * * * The circulars may, among other things, classify 
cash items and noncash items, require separate sorts and letters, 
provide different closing times for the receipt of different classes or 
types of items, provide for instructions by an Administrative Reserve 
Bank to other Reserve Banks, set forth terms of services, and establish 
procedures for adjustments on a Reserve Bank's books, including 
amounts, waiver of expenses, and payment of interest by as-of 
adjustment.
* * * * *
    4. Section 210.4 is revised to read as follows:


Sec. 210.4  Sending items to Reserve Banks.

    (a) Sending of items. A sender, other than a Reserve Bank, may send 
any item to any Reserve Bank, whether or not the item is payable within 
the Reserve Bank's District, unless the sender's Administrative Reserve 
Bank directs the sender to send the item to a specific Reserve Bank.
    (b) Handling of items. (1) The following parties, in the following 
order, are deemed to have handled an item that is sent to a Reserve 
Bank for collection--
    (i) The initial sender
    (ii) The initial sender's Administrative Reserve Bank
    (iii) The Reserve Bank that receives the item from the initial 
sender (if different from the initial sender's Administrative Reserve 
Bank); and
    (iv) Another Reserve Bank, if any, that receives the item from a 
Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of 
this section is not a party that handles an item and is not a 
collecting bank with respect to an item.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code. An initial sender's 
Administrative Reserve Bank that is deemed to handle an item is also 
deemed to be a sender with respect to that item. The Reserve Banks that 
are deemed to handle an item are deemed to be agents or subagents of 
the owner of the item, as provided in Sec. 210.6(a) of this subpart.
    (c) Checks received at par. The Reserve Banks shall receive cash 
items and other checks at par.
    5. In Sec. 210.5, paragraphs (a)(1) and (c) and the first sentence 
of paragraph (d) are revised to read as follows:


Sec. 210.5  Sender's agreement; recovery by Reserve Bank.

    (a) * * *
    (1) Authorizes the sender's Administrative Reserve Bank and any 
other Reserve Bank or collecting bank to which the item is sent to 
handle the item (and authorizes any Reserve Bank that handles 
settlement for the item to make accounting entries), subject to this 
subpart and to the Reserve Banks'

[[Page 48172]]

operating circulars, and warrants its authority to give this 
authorization;
* * * * *
    (c) Methods of recovery. (1) The Reserve Bank may recover the 
amount stated in paragraph (b) of this section by charging any account 
on its books that is maintained or used by the sender (or by charging a 
Reserve Bank sender), if--
    (i) The Reserve Bank made seasonable written demand on the sender 
to assume defense of the action or proceeding; and
    (ii) The sender has not made any other arrangement for payment that 
is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that 
has been charged under this paragraph (c) may recover from its sender 
in the manner and under the circumstances set forth in this paragraph 
(c). A Reserve Bank's failure to avail itself of the remedy provided in 
this paragraph (c) does not prejudice its enforcement in any other 
manner of the indemnity agreement referred to in paragraph (a)(3) of 
this section.
    (d) Security interest. When a sender sends an item to a Reserve 
Bank, the sender and any prior collecting bank grant to the sender's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
of part 229 of this chapter (Regulation CC). * * *
    6. In Sec. 210.6, paragraphs (a)(1) and (b) are revised to read as 
follows:


Sec. 210.6  Status, warranties, and liability of Reserve Bank.

    (a)(1) Status and liability. A Reserve Bank that handles an item 
shall act as agent or subagent of the owner with respect to the item. 
This agency terminates when a Reserve Bank receives final payment for 
the item in actually and finally collected funds, a Reserve Bank makes 
the proceeds available for use by the sender, and the time for 
commencing all actions against the Reserve Bank has expired. A Reserve 
Bank shall not have or assume any liability with respect to an item or 
its proceeds except--
    (i) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care;
    (ii) As provided in paragraph (b) of this section; and
    (iii) As provided in subpart C of part 229 of this chapter 
(Regulation CC).
* * * * *
    (b) Warranties and liability. (1) By presenting or sending an item, 
a Reserve Bank warrants to a subsequent collecting bank and to the 
paying bank and any other payor--
    (i) That the Reserve Bank is a person entitled to enforce the item 
(or is authorized to obtain payment of the item on behalf of a person 
who is either entitled to enforce the item or authorized to obtain 
payment on behalf of a person entitled to enforce the item); and
    (ii) That the item has not been altered.
    (2) The Reserve Bank also makes the warranties set forth in 
Sec. 229.34(c) of this chapter, subject to the terms of part 229 of 
this chapter (Regulation CC). The Reserve Bank shall not have or assume 
any other liability to the paying bank or other payor, except for the 
Reserve Bank's own lack of good faith or failure to exercise ordinary 
care.
* * * * *
    7. In Sec. 210.7, paragraph (c) introductory text and paragraph (d) 
are revised to read as follows:


Sec. 210.7  Presenting items for payment.

* * * * *
    (c) Presenting or sending direct. A Reserve Bank or subsequent 
collecting bank may, with respect to an item that may be sent to the 
paying bank or nonbank payor in the Reserve Bank's District--
* * * * *
    (d) Item sent to another district. A Reserve Bank receiving an item 
that may be sent to a paying bank or nonbank payor in another District 
ordinarily sends the item to the Reserve Bank of the other District, 
but with the agreement of the other Reserve Bank, may present or send 
the item as if it were sent to a paying bank or nonbank payor in its 
own District.
    8. Section 210.8 is revised to read as follows:


Sec. 210.8  Presenting noncash items for acceptance.

    (a) A Reserve Bank or a subsequent collecting bank may, if 
instructed by the sender, present a noncash item for acceptance in any 
manner authorized by law if--
    (1) The item provides that it must be presented for acceptance;
    (2) The item may be presented elsewhere than at the residence or 
place of business of the payor; or
    (3) The date of payment of the item depends on presentment for 
acceptance.
    (b) Documents accompanying a noncash item shall not be delivered to 
the payor upon acceptance of the item unless the sender specifically 
authorizes delivery. A Reserve Bank shall not have or assume any other 
obligation to present or to send for presentment for acceptance any 
noncash item.
    9. Section 210.9 is amended by redesignating paragraphs (a) through 
(e) as paragraphs (b) through (f); adding a new paragraph (a); revising 
newly redesignated paragraphs (b) and (c); and in newly redesignated 
paragraph (f) removing the references ``paragraphs (a), (b), and (c)'' 
and adding in their place ``paragraphs (b), (c), and (d)'' to read as 
follows:


Sec. 210.9  Settlement and payment.

    (a) Settlement through Administrative Reserve Bank. A paying bank 
shall settle for an item under this subpart with its Administrative 
Reserve Bank, whether or not the paying bank received the item from 
that Reserve Bank. A paying bank's settlement with its Administrative 
Reserve Bank is deemed to be settlement with the Reserve Bank from 
which the paying bank received the item. A paying bank may settle for 
an item using any account on a Reserve Bank's books by agreement with 
its Administrative Reserve Bank, any other Reserve Bank holding the 
settlement account, and the account-holder. The paying bank remains 
responsible for settlement if the Reserve Bank holding the settlement 
account does not, for any reason, obtain settlement in that account.
    (b) Cash items--(1) Settlement obligation. On the day a paying bank 
receives <SUP>2</SUP> a cash item from a Reserve Bank, it shall settle 
for the item such that the proceeds of the settlement are available to 
its Administrative Reserve Bank by the close of Fedwire on that day, or 
it shall return the item by the later of the close of its banking day 
or the close of Fedwire. If the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(1), it is 
accountable for the amount of the item as of the close of its banking 
day or the close of Fedwire on the day it receives the item, whichever 
is earlier.
---------------------------------------------------------------------------

    \2\ A paying bank is deemed to receive a cash item on its next 
banking day if it receives the item--
    (1) On a day other than a banking day for it; or
    (2) On a banking day for it, but after a ``cut-off hour'' 
established by it in accordance with state law.
---------------------------------------------------------------------------

    (2) Time of settlement. (i) On the day a paying bank receives a 
cash item from a Reserve Bank, it shall settle for the item so that the 
proceeds of the settlement are available to its Administrative Reserve 
Bank, or return the item, by the latest of--
    (A) The next clock hour that is at least one hour after the paying 
bank receives the item;
    (B) 9:30 a.m. Eastern Time; or

[[Page 48173]]

    (C) Such later time as provided in the Reserve Banks' operating 
circulars.
    (ii) If the paying bank fails to settle for or return a cash item 
in accordance with paragraph (b)(2)(i) of this section, it shall be 
subject to any applicable overdraft charges. Settlement under paragraph 
(b)(2)(i) of this section satisfies the settlement requirements of 
paragraph (b)(1) of this section.
    (3) Paying bank closes voluntarily. (i) If a paying bank closes 
voluntarily so that it does not receive a cash item on a day that is a 
banking day for a Reserve Bank, and the Reserve Bank makes the cash 
item available to the paying bank on that day, the paying bank shall 
either--
    (A) On that day, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank, or return 
the item, by the latest of the next clock hour that is at least one 
hour after it ordinarily would have received the item, 9:30 a.m. 
Eastern Time, or such later time as provided in the Reserve Banks' 
operating circulars; or
    (B) On the next day that is a banking day for both the paying bank 
and the Reserve Bank, settle for the item so that the proceeds of the 
settlement are available to its Administrative Reserve Bank by 9:30 
a.m. Eastern Time on that day or such later time as provided in the 
Reserve Banks' operating circulars and compensate the Reserve Bank for 
the value of the float associated with the item in accordance with 
procedures provided in the Reserve Bank's operating circular.
    (ii) If a paying bank closes voluntarily so that it does not 
receive a cash item on a day that is a banking day for a Reserve Bank, 
and the Reserve Bank makes the cash item available to the paying bank 
on that day, the paying bank is not considered to have received the 
item until its next banking day, but it shall be subject to any 
applicable overdraft charges if it fails to settle for or return the 
item in accordance with paragraph (b)(3)(i) of this section. The 
settlement requirements of paragraphs (b)(1) and (b)(2) of this section 
do not apply to a paying bank that settles in accordance with paragraph 
(b)(3)(i) of this section.
    (4) Reserve Bank closed. (i) If a paying bank receives a cash item 
from a Reserve Bank on a banking day that is not a banking day for the 
Reserve Bank, the paying bank shall--
    (A) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by the close of Fedwire on 
the Reserve Bank's next banking day, or return the item by midnight of 
the day it receives the item (if the paying bank fails to settle for or 
return a cash item in accordance with this paragraph (b)(4)(i)(A), it 
shall become accountable for the amount of the item as of the close of 
its banking day on the day it receives the item); and
    (B) Settle for the item so that the proceeds of the settlement are 
available to its Administrative Reserve Bank by 9:30 a.m. Eastern Time 
on the Reserve Bank's next banking day or such later time as provided 
in the Reserve Bank's operating circular, or return the item by 
midnight of the day it receives the item. If the paying bank fails to 
settle for or return a cash item in accordance with this paragraph 
(b)(4)(i)(B), it shall be subject to any applicable overdraft charges. 
Settlement under this paragraph (b)(4)(i)(B) satisfies the settlement 
requirements of paragraph (b)(4)(i)(A) of this section.
    (ii) The settlement requirements of paragraphs (b)(1) and (b)(2) of 
this section do not apply to a paying bank that settles in accordance 
with paragraph (b)(4)(i) of this section.
    (5) Manner of settlement. Settlement with a Reserve Bank under 
paragraphs (b) (1) through (4) of this section shall be made by debit 
to an account on the Reserve Bank's books, cash, or other form of 
settlement to which the Reserve Bank agrees, except that the Reserve 
Bank may, in its discretion, obtain settlement by charging the paying 
bank's account. A paying bank may not set off against the amount of a 
settlement under this section the amount of a claim with respect to 
another cash item, cash letter, or other claim under Sec. 229.34(c) of 
this chapter (Regulation CC) or other law.
    (6) Notice in lieu of return. If a cash item is unavailable for 
return, the paying bank may send a notice in lieu of return as provided 
in Sec. 229.30(f) of this chapter (Regulation CC).
    (c) Noncash items. A Reserve Bank may require the paying or 
collecting bank to which it has presented or sent a noncash item to pay 
for the item in cash, but the Reserve Bank may permit payment by a 
debit to an account maintained or used by the paying or collecting bank 
on a Reserve Bank's books or by any of the following that is in a form 
acceptable to the collecting Reserve Bank: bank draft, transfer of 
funds or bank credit, or any other form of payment authorized by State 
law.
* * * * *
    10. Section 210.10 is revised to read as follows:


Sec. 210.10  Time schedule and availability of credits for cash items 
and returned checks.

    (a) Each Reserve Bank shall include in its operating circulars a 
time schedule for each of its offices indicating when the amount of any 
cash item or returned check received by it is counted as reserves for 
purposes of part 204 of this chapter (Regulation D) and becomes 
available for use by the sender or paying or returning bank. The 
Reserve Bank that holds the settlement account shall give either 
immediate or deferred credit to a sender, a paying bank, or a returning 
bank (other than a foreign correspondent) in accordance with the time 
schedule of the receiving Reserve Bank. A Reserve Bank ordinarily gives 
credit to a foreign correspondent only when the Reserve Bank receives 
payment of the item in actually and finally collected funds, but, in 
its discretion, a Reserve Bank may give immediate or deferred credit in 
accordance with its time schedule.
    (b) Notwithstanding its time schedule, a Reserve Bank may refuse at 
any time to permit the use of credit given by it for any cash item or 
returned check, and may defer availability after credit is received by 
the Reserve Bank for a period of time that is reasonable under the 
circumstances.
    11. In Sec. 210.11, the last sentence of paragraph (b) is revised 
to read as follows:


Sec. 210.11  Availability of proceeds of noncash items; time schedule.

* * * * *
    (b) * * * A Reserve Bank may, however, refuse at any time to permit 
the use of credit given by it for a noncash item for which the Reserve 
Bank has not yet received payment in actually and finally collected 
funds.
* * * * *
    12. Section 210.12 is amended by revising paragraphs (a), (b), and 
(c)(1), the first sentence of paragraph (d), paragraphs (f) and (h), 
and the first sentence of paragraph (i); and by removing the last 
sentence of paragraph (g) to read as follows:


Sec. 210.12  Return of cash items and handling of returned checks.

    (a) Return of items--(1) Return of cash items handled by Reserve 
Banks. A paying bank that receives a cash item from a Reserve Bank, 
other than for immediate payment over the counter, and that settles for 
the item as provided in Sec. 210.9(b) of this subpart, may, before it 
has finally paid the item, return the item to any Reserve Bank (unless 
its Administrative Reserve Bank directs it to return the item to a 
specific Reserve Bank) in accordance with subpart C of

[[Page 48174]]

part 229 of this chapter (Regulation CC), the Uniform Commercial Code, 
and the Reserve Banks' operating circulars. A paying bank that receives 
a cash item from a Reserve Bank also may return the item prior to 
settlement, in accordance with Sec. 210.9(b) of this subpart and the 
Reserve Banks' operating circulars. The rules or practices of a 
clearinghouse through which the item was presented, or a special 
collection agreement under which the item was presented, may not extend 
these return times, but may provide for a shorter return time.
    (2) Return of checks not handled by Reserve Banks. A paying bank 
that receives a check as defined in Sec. 229.2(k) of this chapter 
(Regulation CC), other than from a Reserve Bank, and that determines 
not to pay the check, may send the returned check to any Reserve Bank 
(unless its Administrative Reserve Bank directs it to send the returned 
check to a specific Reserve Bank) in accordance with subpart C of part 
229 of this chapter (Regulation CC), the Uniform Commercial Code, and 
the Reserve Banks' operating circulars. A returning bank may send a 
returned check to any Reserve Bank (unless its Administrative Reserve 
Bank directs it to send the returned check to a specific Reserve Bank) 
in accordance with subpart C of part 229 of this chapter (Regulation 
CC), the Uniform Commercial Code, and the Reserve Banks' operating 
circulars.
    (b) Handling of returned checks. (1) The following parties, in the 
following order, are deemed to have handled a returned check sent to a 
Reserve Bank under paragraph (a) of this section----
    (i) The paying or returning bank;
    (ii) The paying bank's or returning bank's Administrative Reserve 
Bank;
    (iii) The Reserve Bank that receives the returned check from the 
paying or returning bank (if different from the paying bank's or 
returning bank's Administrative Reserve Bank); and
    (iv) Another Reserve Bank, if any, that receives the returned check 
from a Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of 
this section is not a party that handles a returned check and is not a 
returning bank with respect to a returned check.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code.
    (c) Paying bank's and returning bank's agreement. * * *
    (1) Authorizes the paying or returning bank's Administrative 
Reserve Bank, and any other Reserve Bank or returning bank to which the 
returned check is sent, to handle the returned check (and authorizes 
any Reserve Bank that handles settlement for the returned check to make 
accounting entries) subject to this subpart and to the Reserve Banks' 
operating circulars;
* * * * *
    (d) Warranties by Reserve Bank. By handling a returned check under 
this subpart, a Reserve Bank makes the returning bank warranties as set 
forth in Sec. 229.34 of this chapter, subject to the terms of part 229 
of this chapter (Regulation CC). * * *
* * * * *
    (f) Methods of recovery. (1) The Reserve Bank may recover the 
amount stated in paragraph (d) of this section by charging any account 
on its books that is maintained or used by the paying or returning bank 
(or by charging another returning Reserve Bank), if----
    (i) The Reserve Bank made seasonable written demand on the paying 
or returning bank to assume defense of the action or proceeding; and
    (ii) The paying or returning bank has not made any other 
arrangement for payment that is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that 
has been charged under this paragraph (f) may recover from the paying 
or returning bank in the manner and under the circumstances set forth 
in this paragraph (f). A Reserve Bank's failure to avail itself of the 
remedy provided in this paragraph (f) does not prejudice its 
enforcement in any other manner of the indemnity agreement referred to 
in paragraph (c)(3) of this section.
* * * * *
    (h) Settlement. A subsequent returning bank or depositary bank 
shall settle with its Administrative Reserve Bank for returned checks 
in the same manner and by the same time as for cash items presented for 
payment under this subpart. Settlement with its Administrative Reserve 
Bank is deemed to be settlement with the Reserve Bank from which the 
returning bank or depositary bank received the item.
    (i) Security interest. When a paying or returning bank sends a 
returned check to a Reserve Bank, the paying bank, returning bank, and 
any prior returning bank grant to the paying bank's or returning bank's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank, to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
of part 229 of this chapter (Regulation CC). * * *

    By order of the Board of Governors of the Federal Reserve 
System, September 10, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-24405 Filed 9-12-97; 8:45 am]
BILLING CODE 6210-01-P