[Federal Register Volume 87, Number 108 (Monday, June 6, 2022)]
[Rules and Regulations]
[Pages 34350-34376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11090]



[[Page 34349]]

Vol. 87

Monday,

No. 108

June 6, 2022

Part II





Federal Reserve System





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12 CFR Part 210





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

Federal Register / Vol. 87, No. 108 / Monday, June 6, 2022 / Rules 
and Regulations

[[Page 34350]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 210

Regulation J; Docket No. R-1750
RIN 7100-AG 16


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

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

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SUMMARY: The Board is publishing final amendments to Regulation J to 
govern funds transfers through the Federal Reserve Banks' (Reserve 
Banks) new FedNow\SM\ Service. The final rule also includes changes and 
clarifications to regulations governing the Fedwire Funds Service, to 
reflect the fact that the Reserve Banks will be operating a second 
funds transfer service in addition to the Fedwire Funds Service, as 
well as technical corrections to regulations governing the check 
service.

DATES: Effective October 1, 2022.

FOR FURTHER INFORMATION CONTACT: Jess Cheng, Senior Counsel (202) 452-
2309, Gavin L. Smith, Senior Counsel (202) 452-3474, Legal Division, or 
Ian C.B. Spear, Assistant Director (202) 452-3959, Kirstin E. Wells, 
Principal Economist (202) 452-2962, Division of Reserve Bank Operations 
and Payment Systems; for users of telephone systems via text telephone 
(TTY) or any TTY-based Telecommunications Relay Services (TRS), please 
call 711 from any telephone, anywhere in the United States; Board of 
Governors of the Federal Reserve System, 20th and C Streets NW, 
Washington, DC 20551.

SUPPLEMENTARY INFORMATION: 

I. Background

    Regulation J (12 CFR part 210) provides the legal framework for the 
collection and return of checks through the Federal Reserve System 
(subpart A) and specifies terms and conditions governing funds 
transfers over the Fedwire Funds Service (subpart B). The Reserve Banks 
are developing a new interbank 24x7x365 real-time gross settlement 
service with integrated clearing functionality, called the FedNow 
Service, to support instant payments in the United States. In August 
2020, the Board issued a Federal Register notice describing the details 
of the FedNow Service (the 2020 Notice).\1\ Subpart B would not apply 
to transfers over the FedNow Service, which will be a separate funds 
transfer service operated by the Reserve Banks.
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    \1\ ``Service Details on Federal Reserve Actions To Support 
Interbank Settlement of Instant Payments,'' 85 FR 48522 (Aug. 11, 
2020).
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II. Overview of Proposal and Comments

    In June 2021, the Board published a notice of proposed rulemaking 
to establish a new subpart C of Regulation J to govern funds transfers 
made through the FedNow Service and amend the title of the regulation 
(the 2021 Notice).\2\ The proposed new subpart C of Regulation J 
specifies the terms and conditions under which Reserve Banks will 
process funds transfers over the FedNow Service. Proposed subpart C 
would also grant the Reserve Banks authority to issue an operating 
circular for the FedNow Service, which would detail more specific terms 
and conditions governing the FedNow Service consistent with the 
proposed subpart. As it did for subpart B of the regulation, the Board 
also proposed to adopt a commentary to subpart C that would constitute 
a Board interpretation of the regulation. Finally, the proposal 
included technical changes and clarifications to subpart B of 
Regulation J to reflect the fact that the Reserve Banks will be 
operating two funds transfer services, as well as technical corrections 
to subpart A of the regulation.
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    \2\ ``Collection of Checks and Other Items by Federal Reserve 
Banks and Funds Transfers Through Fedwire,'' 86 FR 31376 (Jun. 11, 
2021).
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    The Board received 31 substantive comments from a variety of 
commenters, including small and midsize banks, large banks, 
individuals, consumer organizations, service providers and processors, 
private-sector operators, trade organizations, and other interested 
parties. Overall, financial industry commenters broadly supported the 
Board's proposal, noting in particular that it would provide legal 
clarity and certainty to foundational aspects of the FedNow Service. 
Some commenters offered suggestions for the final rule, as detailed 
below. Consumer associations and certain academics opposed aspects of 
the proposal for various reasons that went beyond the Board's proposed 
rulemaking, namely citing their view that consumer protections for 
instant payments are insufficiently covered by the Electronic Fund 
Transfer Act (EFTA) and its implementing regulation, which is issued by 
and within the jurisdiction of the Consumer Financial Protection 
Bureau. The Board has considered all comments received and has adopted 
amendments to Regulation J as described below.

A. Subparts A and B

    The Board proposed minor changes to Regulation J to make clarifying 
amendments to subpart B and technical corrections in subpart A. The 
Board did not receive any comments on these proposed amendments and has 
adopted the amendments as proposed.

B. Application of UCC Article 4A to All Transfers Over the FedNow 
Service

    Proposed subpart C incorporates those provisions of Article 4A of 
the Uniform Commercial Code (UCC) that are not inconsistent with the 
provisions set forth expressly in the subpart. UCC Article 4A, which 
has been adopted in all 50 states, provides comprehensive rules 
governing the rights and responsibilities of the parties to funds 
transfers. Proposed subpart C provides that the provisions of UCC 
Article 4A apply to all transfers over the FedNow Service, even those 
that might meet the definition of an ``electronic fund transfer'' under 
the EFTA; however, in the event of an inconsistency between the 
provisions of subpart C and the EFTA, the EFTA would prevail to the 
extent of the inconsistency. For example, a funds transfer may be 
initiated from a consumer's account at a depository institution, and 
the depository institution may execute that payment order by sending a 
conforming payment order to a Reserve Bank through the FedNow Service. 
If that transfer is subject to the EFTA, then the depository 
institution would be required to comply with the EFTA and the 
applicable provisions of the EFTA would govern the institution's 
obligations to its customer.
    Nine commenters, including two trade associations, stated that the 
Board's proposal should include additional examples where potential 
conflicts between the EFTA and UCC Article 4A are likely to arise, as 
well as prescribe how ambiguities should be resolved. Seven commenters, 
including a trade association and a group of consumer organizations 
(the ``consumer group letter''), generally did not support the Board's 
proposal with respect to applying UCC Article 4A to all transfers over 
the FedNow Service, including those transfers subject to the EFTA. 
Commenters stated that it would be too burdensome to interpret and 
compare differences between the EFTA and UCC Article 4A if both were to 
apply; rather, only the EFTA and supplemental FedNow terms of service 
should apply to consumer fund transfers, with the application of UCC 
Article 4A reserved for funds transfers that are not governed by the 
EFTA. One commenter requested

[[Page 34351]]

that the Board acknowledge that the application of UCC Article 4A to 
consumer transfers is not the only means of providing a consistent, 
predictable, and clear legal framework for payment systems. Certain 
commenters raised concerns that because UCC Article 4A provides that 
most of its provisions may be varied by agreement of the affected 
parties, contracts between banks and consumers may vary and lack 
adequate consumer protections.
    The Board has considered the comments received and has adopted 
Sec.  210.40 largely as proposed. The Board believes that the benefits 
of the proposed approach outweigh the potential burdens mentioned by 
the commenters. In particular, by incorporating UCC Article 4A and 
providing that its provisions apply to all transfers over the FedNow 
Service, proposed subpart C confers important rights upon financial 
institutions that use the service, such as protection from 
consequential damages liability (unless they are provided for in an 
express written agreement) if an issue occurs in relation to a transfer 
over the FedNow Service. This protection would help allow FedNow 
participants to offer instant payment services at lower costs and with 
greater speed. The Board recognizes that other instant payment services 
might choose different approaches with respect to the rules that govern 
their systems.
    The Board does not believe that the application of the provisions 
of UCC Article 4A to all transfers over the FedNow Service would result 
in contracts between banks and consumers that lack adequate consumer 
protections. As explained in the 2021 Notice, the proposal provides a 
clear, predictable, and comprehensive set of interbank rules for all 
funds transfers over the FedNow Service, while being consistent with 
the EFTA. Although UCC Article 4A, as incorporated by subpart C, 
provides that most, but not all, of its provisions may be varied by 
agreement of the affected parties, banks must nevertheless comply with 
requirements under other applicable law that, unlike UCC Article 4A, 
cannot be varied by agreement, such as applicable consumer protection 
requirements under the EFTA.
    Finally, the Board appreciates comments regarding the challenges a 
FedNow participant may face in assessing the various laws that may 
apply to a transfer over the FedNow Service. In response to these 
comments, the Board has revised the commentary to proposed Sec.  210.40 
in the final rule with an additional example of how a transfer a 
portion of which is governed by the EFTA may also be governed by 
subpart C.\3\ Otherwise, the Board has adopted Sec.  210.40 as 
proposed.
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    \3\ As explained in the commentary, a funds transfer may be 
initiated from a consumer's account at a depository institution, and 
the depository institution may execute that payment order by sending 
a conforming payment order to a Reserve Bank through the FedNow 
Service. The commentary includes the following additional example of 
how the provisions of subpart C may govern that transfer if it is 
also subject to the EFTA: where the customer properly asserts an 
error under the EFTA with respect to the transfer and exercises the 
right to obtain a refund to correct the error under the EFTA, the 
depository institution would be required to comply with the EFTA, 
and the applicable provisions of the EFTA would govern the 
institution's obligations to its customer, even if under subpart C 
the institution is obliged to pay its payment order sent to the 
Reserve Bank through the FedNow Service. As a practical matter, 
banks may implement procedures to resolve erroneous payments, and 
the institution could request that the beneficiary's bank send a new 
transfer to return funds.
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C. Immediate Funds Availability

    The FedNow Service is designed for the end-to-end transfer to be 
completed in a matter of seconds, as described in the 2020 Notice. This 
means that the beneficiary's bank would agree, as provided in proposed 
subpart C, that it will make funds available to the beneficiary 
immediately after it has accepted the payment order. The Board 
specifically requested comment on whether subpart C should set out 
specific time parameters to clarify the meaning of ``immediately'' as 
used in this funds availability requirement and, if so, whether a 
timeframe of within seconds or, alternatively, within one minute after 
the bank has accepted the payment order would be reasonable.
    Eight commenters stated that the Board should define the timing 
parameters of an instant payment in Regulation J and, in particular, 
specify that time period to be within ten seconds. Other commenters 
suggested the timing parameters should be consistent with other instant 
payment providers, or if a definition is not workable for all 
providers, then the Board should postpone defining the timing 
parameters until more information can be gathered. Ten commenters 
supported not defining ``immediately'' in the regulation but instead 
conveying the general intent of a real time, end-to-end completion. 
Some of these commenters argued it would be premature to define 
``immediately'' and more information is needed regarding the 
operational aspects of processing transactions over the service. Among 
the commenters who stated that the Board should not define timing 
parameters in the regulation, some believed that the operating 
circulars issued by the Reserve Banks governing the service would be 
the more appropriate place to have such specificity, while still 
providing the flexibility to update and change the time frame as 
instant payments evolve. One commenter noted the importance of having 
sufficient time to determine whether to accept a payment order, and two 
other commenters suggested changing the definition of when acceptance 
of a payment order occurs for purposes of measuring ``immediately'' 
rather than incorporating UCC Article 4A's approach.
    The Board has considered the comments regarding specific time 
parameters to clarify the meaning of ``immediately'' as used in this 
funds availability requirement and believes that on balance, the 
regulation does not need to contain specific time parameters in a 
definition at this time. Rather, the Board believes that establishing 
the requirement in Regulation J that a beneficiary's bank using the 
FedNow Service must make funds available ``immediately'' is sufficient 
to convey the need to make funds available in real time. As the instant 
payment industry evolves, the time period of what is considered 
immediate may continue to evolve and not specifying a particular time 
frame in the regulation will allow necessary flexibility in the future. 
As such, the Board is not adopting a time period in the final rule to 
define the meaning of ``immediately'' as used in the funds availability 
requirement.

D. Additional Time To Determine Whether To Accept a Payment Order

    The proposed rule accommodates a feature of the FedNow Service 
under which the beneficiary's bank may notify its Reserve Bank that it 
requires additional time to determine whether to accept the payment 
order because it has reasonable cause to believe that the beneficiary 
is not entitled or permitted to receive payment. The Board proposed to 
clarify in commentary that such reasonable cause could exist, for 
example, in instances when making funds available to the beneficiary 
may potentially violate applicable U.S. sanctions. The Board requested 
public comment on whether the regulation should allow for a 
beneficiary's bank to use this feature under a broader range of 
circumstances.
    Four commenters, including a trade association, supported the 
Board's proposal to keep the range of circumstances where a FedNow 
participant that is the beneficiary's bank may have additional time 
relatively

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limited, in line with the business process described in the Board's 
2020 Notice announcing the service details of the FedNow Service. 
Eleven commenters, including the trade association and the consumer 
group letter, stated that the exception to the ``immediate'' funds 
availability requirement should explicitly allow the beneficiary's bank 
to delay making funds available for any suspected fraud. Some of these 
commenters and others also stated that a there should be a further 
exception to the ``immediate'' funds availability requirement for 
system disruptions and operational issues that affect incoming and 
outgoing payment orders.
    Two commenters stated that the range of circumstances where a 
FedNow participant that is the beneficiary's bank may have additional 
time to determine whether to accept a payment order should be 
broadened, for example to instances where a FedNow participant has 
``reasonable suspicion,'' rather than ``reasonable cause'' to believe 
the beneficiary is not entitled or permitted to receive the payment. 
Two other commenters expressed concern that defining finite 
circumstances where a beneficiary's bank can have additional time to 
accept a payment order is overly limiting; rather, the commenters 
stated that the beneficiary's bank should have full discretion on when 
to delay making funds available to the beneficiary.
    Three commenters requested that the Board expressly set out rules 
for operational aspects of the exception to the ``immediate'' funds 
availability requirement, such as messaging requirements and time 
parameters. One commenter requested the Board to conduct further 
studies on whether any exception to the ``immediate'' funds 
availability requirement is needed in the long term.
    The Board has considered the comments received and has adopted 
Sec.  210.44(b)(3) as proposed, with a clarification in the commentary 
in response to comments received. The Board believes that keeping the 
range of circumstances where a FedNow participant may have additional 
time to determine whether to accept a payment order relatively limited 
is critical to preserving the speed of the end-to-end process for an 
instant payment service, consistent with the service details described 
in the 2020 Notice. Accordingly, the final rule allows a FedNow 
participant additional time to determine whether to accept a payment 
order only in instances where the FedNow participant has reasonable 
cause to believe that the beneficiary is not entitled or permitted to 
receive payment. In response to comments, however, the Board has added 
an example in the commentary noting that such reasonable cause could 
exist where a particular payment order may be related to fraudulent 
activity.
    The Board understands concerns regarding the challenges a FedNow 
participant may face to making funds available to a beneficiary 
immediately as a result of operational issues, such as cybersecurity 
incidents or system maintenance needs. However, subpart C will 
accommodate efforts by FedNow participants to address such challenges. 
For example, subpart C does not prohibit a FedNow participant from 
signing off from the FedNow Service for limited periods of time, 
including where the participant encounters an operational disruption. 
Accordingly, the Board does not believe it is necessary to further 
expand the circumstances where a beneficiary's bank may have additional 
time to determine whether to accept a payment order to cover 
operational issues.
    Finally, with respect to commenters that requested the Board 
expressly set out rules for operational aspects of the exception to the 
``immediate'' funds availability requirement, the Board believes that 
such operational details may more appropriately be addressed in the 
operating circulars issued by the Reserve Banks, and thus has not 
included such operational details in the regulation, particularly 
because the Board anticipates that the practices that are used may 
evolve.
    The Board has revised the commentary to proposed Sec.  210.44 in 
the final rule as described above, but otherwise the Board has adopted 
Sec.  210.44 as proposed.

E. Errors and Misdirected Payments

    Four commenters raised concerns with respect to the FedNow 
Service's safety measures to prevent and resolve errors. A few 
commenters stated that the service should address instances of 
mismatched information in a payment order with respect to the 
beneficiary that indicates potentially incorrect information, with a 
requirement that the Reserve Banks take steps in such instances to seek 
to prevent errors. The Board believes that such a requirement for the 
Reserve Banks in the regulation would not be feasible for an instant 
payment system, like the FedNow Service, because it would slow 
processing of time-sensitive payments as well as introduce numerous 
operational complexities.
    Additionally, the Board recognizes that errors can take a variety 
of forms with instant payments, and the Federal Reserve is committed to 
providing tools to reduce and quickly address erroneous payments as 
part of the service. To address erroneous payments that may occur 
within the FedNow Service, the Board has previously announced in the 
2020 Notice that the service will include the functionality to request 
a return of payment when an error has been identified. In addition, to 
the extent the EFTA applies to a consumer's instant payment, the EFTA's 
procedures for resolving errors as between a consumer and their 
financial institution would also apply. Due to the importance of these 
issues, the Federal Reserve will continually engage with industry 
stakeholders on best practices for financial institutions to address 
erroneous payments.

F. Other Comments

    Other commenters raised topics beyond the specific provisions 
proposed by the Board. For example, eight commenters stated that the 
Board should prioritize collaboration with private-sector instant 
payment services, as well as consistent policies and practices to 
remove unnecessary and burdensome incompatibilities. As noted in the 
2020 Notice, the Federal Reserve is committed to working towards 
compatible standards and operating procedures with the existing 
private-sector instant payment service, and has already advanced that 
effort by using the widely accepted ISO 20022 standard for FedNow 
payment messages and aligning the implementation of the standard very 
closely to that of the private-sector service.
    In addition, five commenters stated that the Board should give 
greater consideration to the operational details with respect to 
authentication and the potential for fraud, including instances where a 
third party fraudulently induces a consumer into initiating an instant 
payment from the consumer's bank account. The Board recognizes that the 
irrevocable, real-time nature of instant payments can pose a challenge 
to the industry as a whole in detecting and preventing fraud, which as 
noted in the consumer group letter, ultimately might impact the safety 
of all instant payment systems. The Board believes strengthening 
consumer protections related to instant payments broadly is a desirable 
goal and supports commenters' suggestions for examining Regulation E as 
a potential tool.
    In addition, as indicated in its 2020 Notice approving the FedNow 
Service, the Federal Reserve is committed to promoting the development 
and implementation of industry-wide measures to help financial 
institutions

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detect and prevent fraud. To this end, as the Board has previously 
indicated in the 2020 Notice, the FedNow Service will have fraud 
prevention tools and, as described below, subpart C authorizes the 
Reserve Banks to issue an operating circular for the FedNow Service 
which would include service terms governing such tools. Over time, the 
Reserve Banks will augment fraud prevention tools as the FedNow Service 
matures.

III. Section-by-Section Analysis

A. Subparts A and B

    The Board proposed technical corrections in subpart A of Regulation 
J to update cross-references to other regulations that are no longer 
current. The Board did not receive any comments on proposed amendments 
to Sec.  210.2. The Board has adopted these amendments as proposed.
    The Board also proposed amendments to subpart B, which governs 
funds transfers through the Fedwire Funds Service, to reflect the fact 
that the Reserve Banks will be operating two separate funds transfer 
systems with the launch of the FedNow Service and distinguish between 
the two services. For example, the proposed amendments include 
clarifications to Sec.  210.25(b) with respect to subpart B's scope of 
application and modifications to the definitions of the following 
terms: beneficiary, beneficiary's bank, payment order, receiving bank, 
and sender. These proposed amendments are intended to clarify that the 
provisions of subpart B are limited to payment orders and parties to a 
funds transfer that are sent through the Fedwire Funds Service; payment 
orders and parties to a funds transfer that are sent through the FedNow 
Service, for example, would not be governed by subpart B. The Board did 
not receive any comments on proposed Sec. Sec.  210.25, 210.26, 210.28, 
and 210.30 and proposed commentary to those sections. The Board has 
adopted these amendments as proposed.
    Additionally, the Board proposed amendments to subpart B to update 
Sec.  210.25(c), which authorizes Reserve Banks to issue operating 
circulars consistent with the subpart in connection with the Fedwire 
Funds Service. The proposed revisions explicitly authorize Reserve 
Banks to issue operating circulars that also specify the time and 
method of receipt, execution, and acceptance of a payment order and 
settlement of a Reserve Bank's payment obligation for purposes of UCC 
Article 4A; specify service terms governing ancillary features of the 
Fedwire Funds Service; and provide for the acceptance of documents in 
electronic form to the extent any provision in UCC Article 4A requires 
an agreement or other document to be in writing. The Board did not 
receive any comments on proposed Sec.  210.25(c). The Board has adopted 
these amendments as proposed.
    The proposed amendments to subpart B further include minor changes 
to Sec.  210.28(b)(3) to provide that the security interest that a 
sender grants to a Reserve Bank is with respect to all of the sender's 
assets in the possession of, as well as in the control of, or held for 
the account of, the Reserve Bank; additional revisions are proposed to 
the commentary to that section to clarify its description of relevant 
UCC Article 4A provisions. The Board did not receive any comments on 
proposed Sec.  210.28(b)(3) and commentary to that section. The Board 
has adopted these amendments as proposed.
    The proposed amendments to subpart B also include a minor change to 
Sec.  210.30 to clarify that a sender may not send a payment order to a 
Reserve Bank that specifies an execution date, nor may it specify a 
payment date, that is later than the day on which the payment order is 
issued, unless the Reserve Bank agrees with the sender in writing to 
follow such instructions. The Board did not receive any comments on 
proposed Sec.  210.30. The Board has adopted these amendments as 
proposed.
    Additionally, the Board's proposed amendments to subpart B include 
a clarifying revision to Sec.  210.32, which governs the payment of 
compensation by Reserve Banks in the form of interest. Section 210.32 
currently provides that, when a Reserve Bank is obligated to pay 
compensation to another party in connection with its handling of a 
funds transfer under UCC Article 4A, the Reserve Bank shall pay 
compensation in the form of interest to its sender, its receiving bank, 
its beneficiary, or another party to the funds transfer that is 
entitled to such payment. The proposed revisions refer to these 
payments as ``compensation'' rather than interest payments. The Board 
proposed this clarification to help remove any confusion that such 
payment is related to any purpose other than compensation, such as 
monetary policy transmission. The Board did not receive any comments on 
proposed Sec.  210.32 and commentary to that section. The Board has 
adopted these amendments as proposed.
    Finally, the Board proposed technical revisions in the commentary 
to subpart B to correct cross-references to UCC Article 1 and to update 
cross-references to statutes and other regulations that are no longer 
current. The Board did not receive any comments on the proposed 
commentary to Sec. Sec.  210.25 and 210.26. The Board has adopted these 
amendments as proposed.

B. Subpart C --Funds Transfers Through the FedNow Service

Section 210.40 Authority, Purpose, and Scope
    The Board proposed to add Sec.  210.40 to summarize the Board's 
authority to adopt this subpart of the regulation and provides a 
description of how the subpart is organized. The Board did not receive 
any comments on proposed Sec.  210.40(a) or proposed commentary to that 
section. The Board has adopted these amendments as proposed.
    The proposed amendment would also incorporate those provisions of 
UCC Article 4A (as set forth in an appendix to Regulation J) into 
subpart C that are not inconsistent with the provisions set forth 
expressly in subpart C. Specifically, the Board proposed to add new 
Sec.  210.40(b) to provide that all transfers over the FedNow Service 
are covered by subpart C, which incorporates UCC Article 4A by 
reference. In the event that a transfer over the FedNow Service meets 
the definition of ``electronic fund transfer'' under the Electronic 
Fund Transfer Act (EFTA), proposed subpart C provides that its 
provisions would apply to the transfer but the EFTA would prevail to 
the extent of any inconsistency.
    Commenters generally supported the Board's approach to providing 
legal clarity and certainty on important aspects of the service. The 
Board received specific comments on applying UCC Article 4A to all 
transfers over the FedNow Service, including those transfers subject to 
the EFTA, which is discussed in detail in the relevant overview of 
comments. The Board has considered the comments received and has 
revised the proposed commentary to Sec.  210.40 to provide an 
additional example of how the provisions of subpart C may govern a 
transfer over the FedNow Service that is also subject to the EFTA.
    The Board also proposed to add new subsections that specify the 
parties subject to proposed subpart C with respect to the FedNow 
Service. These parties would include senders that send payment orders 
to a Reserve Bank over the service, receiving banks that receive 
payment orders from a Reserve Bank over the service, beneficiaries that 
receive payment for payment orders by means of a credit to their 
settlement account with a Reserve Bank, and Reserve Banks that send or 
receive payment orders over the FedNow

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Service. For a Reserve Bank that acts in other capacities in connection 
with a transfer over the FedNow Service (e.g., the Reserve Bank of the 
correspondent bank for which a sender or receiving bank chooses to 
settle its activity), that Reserve Bank would not be a party to the 
funds transfer for purposes of proposed subpart C and UCC Article 4A.
    The Board further proposed to specify that other parties to a funds 
transfer sent through the FedNow Service that are not in privity with a 
Reserve Bank would be covered by this proposed subpart only under 
certain circumstances. If these remote parties have notice that the 
FedNow Service might be used for their funds transfer and that subpart 
C is the governing law with respect to the transfer over the FedNow 
Service, then proposed subpart C would govern their rights and 
obligations with respect to the FedNow Service. Even still, under the 
Board's proposal, remote parties under these circumstances may 
nevertheless expressly select by agreement a governing law other than 
subpart C with respect to its rights and obligations in connection with 
that transfer.
    The Board did not receive any comments on proposed Sec.  
210.40(b)(2), (b)(3), or (d) or proposed commentary to those sections. 
The Board has adopted these amendments as proposed.
    The Board proposed to authorize Reserve Banks to issue operating 
circulars which would detail more specific terms and conditions 
governing the FedNow Service consistent with the proposed subpart. Five 
commenters stated that the Board should provide the public an 
opportunity to review and comment on any FedNow operating circular 
before it is issued by the Reserve Banks. Operating circulars are 
contracts between a Reserve Bank and a financial institution that 
govern the provision of Reserve Bank services. Consistent with 
longstanding practice for all other operating circulars issued by the 
Reserve Banks, the Board does not believe those contractual documents 
need to be issued for public comment. Moreover, any operating circular 
issued under proposed subpart C to govern the FedNow Service must be 
consistent with its provisions, which have been subject to public 
comment. The Board did not receive any comments on proposed Sec.  
210.40(c) or proposed commentary to that section. The Board has adopted 
these amendments as proposed.
Section 210.41 Definitions
    The Board proposed to add Sec.  210.41 to define terms used in the 
regulation with respect to the FedNow Service. Similar to subpart B, 
the Board proposed to incorporate in subpart C the definitions set 
forth in UCC Article 4A, in some instances with modifications. In 
general, these modifications are intended to clarify that, for the 
purposes of subpart C, these terms would be limited to payment orders 
and parties in a funds transfer that are sent through the FedNow 
Service.
    The Board also proposed to add definitions of other terms not 
defined in UCC Article 4A, including ``sender's settlement account,'' 
``receiving bank's settlement account,'' ``beneficiary's settlement 
account,'' and ``Federal Reserve Bank'' with respect to an entity.
    The Board did not receive any comments on proposed Sec.  210.41 or 
proposed commentary to that section. The Board has adopted these 
amendments as proposed.
Section 210.42 Reliance on Identifying Number
    The Board proposed to add Sec.  210.41 providing that a Reserve 
Bank may rely on the number in the payment order identifying the 
beneficiary's bank or the beneficiary, consistent with UCC Article 4A. 
Under the Board's proposal, a Reserve Bank, where it acts as a 
receiving bank, may rely on the routing number of the beneficiary's 
bank specified in a payment order as identifying the appropriate 
beneficiary's bank, even if the payment order identifies another bank 
by name, provided that the Reserve Bank does not know of the 
inconsistency. Similarly, a Reserve Bank, where it acts as the 
beneficiary's bank, may rely on the number identifying a beneficiary, 
such as the beneficiary's account number, specified in a payment order 
as identifying the appropriate beneficiary, even if the payment order 
identifies another beneficiary by name, provided that the Reserve Bank 
does not know of the inconsistency.
    The proposed section also serves to provide notice to nonbank 
senders that send payment orders directly to a Reserve Bank through the 
FedNow Service that the Reserve Bank may rely on the numbers in the 
payment orders identifying the beneficiary's bank and the beneficiary.
    The Board received some comments stating that the regulation should 
address instances of mismatched information in a payment order with 
respect to the beneficiary that indicates potentially incorrect 
information, in particular by imposing a requirement for Reserve Banks 
to investigate or, more generally, for the payment order not to be 
processed when a name and a number identifying the beneficiary are 
inconsistent. The Board believes that such a requirement for Reserve 
Banks in the regulation would not be feasible for an instant payment 
system, like the FedNow Service, because it would slow processing 
important time-sensitive payments as well as introduce numerous 
operational complexities. Accordingly and for the reasons described in 
the overview section, the Board has adopted the amendments as proposed.
Section 210.43 Agreement of Sender
    The Board proposed to add Sec.  210.43(a) to specify when an 
obligation to pay arises for FedNow participants that send a payment 
order over the FedNow Service and how that obligation is discharged. 
Under that proposed section, when a sender sends a payment order to a 
Reserve Bank over the FedNow Service and the Reserve Bank accepts the 
payment order, the sender has an obligation to pay the Reserve Bank for 
the amount of the payment order. The proposed section also provides 
that the sender authorizes its Reserve Bank to obtain payment for a 
payment order by debiting, or causing another Reserve Bank (i.e., the 
Reserve Bank of the correspondent bank, if one is used) to debit, the 
amount of the payment order from the settlement account. The Board did 
not receive any comments on proposed Sec.  210.43(a) or proposed 
commentary to that section. The Board has adopted these amendments as 
proposed.
    The proposal further includes provisions addressing overdrafts. 
Proposed Sec.  210.43(b) establishes that a sender does not have a 
right to an overdraft in its settlement account and sets out the 
sender's obligations to ensure there are sufficient funds in its 
settlement account and to cover any overdraft by the time the overdraft 
becomes due and payable. This section also provides a Reserve Bank with 
a security interest in the sender's assets held at any Reserve Bank to 
secure any obligation owed and also specifies the actions a Reserve 
Bank may take to recover the amount of an overdraft, including set-off 
and realization of collateral. Finally, the proposed section clarifies 
that settlement accounts could be subject to overdraft charges, where 
applicable.
    One commenter stated that the Board should consider the 
implications of proposed Sec.  210.43(b) for FedNow participants that 
choose to settle transfers over the service in the master account of a 
correspondent, particularly where the correspondent bank incurs an 
overdraft charge and passes the charge on to the FedNow participant, 
with the

[[Page 34355]]

possibility that the FedNow participant in turn passes on the charge to 
its customer. As is the case today for correspondent/respondent 
relationships for existing Reserve Bank services established under 
Reserve Banks' Operating Circular 1, FedNow participants will be 
expected to manage their correspondent/respondent relationships, and 
therefore, some participants banks may need to adjust their internal 
account monitoring practices. In that regard, the Board believes that 
the FedNow Service's reporting capabilities will be important to 
facilitate participants' effective use of the service. In the 2020 
Notice, the Board stated that the FedNow Service will be designed to 
provide reports to participating banks to support transaction 
monitoring, reporting, and reconciliation, including reports to 
correspondent banks with transaction-level and summary reports for 
respondent banks to which they provide services. Accordingly, the Board 
does not believe it is necessary to adjust Sec.  210.43(b) and has 
adopted the amendment as proposed.
    Finally, proposed Sec.  210.43 includes a provision establishing 60 
calendar days as a reasonable period of time within which a FedNow 
participant that is a sender must notify a Reserve Bank to be entitled 
to compensation in the form of interest on any amount refundable to the 
sender, in the event that the payment order sent by the FedNow 
participant to the Reserve Bank was not authorized or was erroneously 
executed. One commenter stated that the Board should specify whether 
proposed Sec.  210.43(c) or the EFTA would govern with respect to such 
instances. The Board believes it is unnecessary to specify in the final 
rule whether proposed Sec.  210.43(c) or consumer protections under the 
EFTA govern the rights and obligations of a FedNow participant vis-
[agrave]-vis a Reserve Bank in such instances. That is because 
consumers would not be eligible to be FedNow participants, and 
therefore consumers would not be able to send a payment order to a 
Reserve Bank over the FedNow Service. Thus, in the event that the 
payment order sent by a FedNow participant to a Reserve Bank was not 
authorized or was erroneously executed under the relevant provisions of 
UCC Article 4A, proposed Sec.  210.43(c) would govern the rights and 
obligations of FedNow participants vis-[agrave]-vis the Reserve Bank. 
In contrast, to the extent EFTA applies to a transfer over the FedNow 
Service, EFTA would govern the relationship between the consumer and 
their financial institution, including in the event that the payment 
order sent by the consumer to their financial institution was not 
authorized or there was an error, as discussed above. Accordingly, the 
Board does not believe it is necessary to adjust Sec.  210.43(c) and 
has adopted the amendment as proposed.
Section 210.44 Agreement of Receiving Bank
    The Board proposed to add Sec.  210.44 to specify how FedNow 
participants that receive payment orders over the service and accept 
the order would receive payment. The proposed section provides that for 
payment orders that a receiving bank receives from a Reserve Bank over 
the FedNow Service, payment for the order is made by credit to the 
settlement account of the receiving bank. The Board did not receive any 
comments on proposed Sec.  210.44(a) or the proposed commentary to that 
section. The Board has adopted these amendments as proposed.
    The proposed section also includes a requirement for a FedNow 
participant that is the beneficiary's bank to make funds available to 
the beneficiary immediately after its acceptance of the payment order 
over the service. The Board specifically requested comment on whether 
the regulation should set out specific time parameters to clarify the 
meaning of ``immediately'' as used in this funds availability 
requirement and, if so, whether a timeframe of within seconds or, 
alternatively, within one minute after the bank has accepted the 
payment order would be reasonable. The Board received a range of 
comments on this question, as described in the overview section. The 
Board agrees with the commenters that the regulation does not need to 
contain specific time parameters in a definition at this time.
    Additionally, the proposed section clarifies that the rights and 
obligations with respect to the availability of funds are also governed 
by the Expedited Funds Availability Act (EFAA) and its implementing 
regulation, Regulation CC, which will continue to apply independently 
of subpart C. The proposed section also clarifies that the obligation 
for the beneficiary's bank to provide immediate funds availability to 
the beneficiary does not affect any liability of the beneficiary's bank 
to the beneficiary, or any party other than a Reserve Bank, under UCC 
Article 4A or other law. Three commenters stated that the proposal 
should give consumers an enforceable right to immediate funds 
availability. The Board believes that doing so would significantly 
increase the costs and risks for FedNow participants to offer instant 
payment services, which would not be outweighed by any benefits to the 
public.
    Finally, the proposed section addresses certain circumstances in 
which a FedNow participant that is the beneficiary's bank requires 
additional time to determine whether to accept the payment order 
because it has reasonable cause to believe that the beneficiary is not 
entitled or permitted to receive payment. In those circumstances, if 
the FedNow participant notifies its Reserve Bank that it requires 
additional time, the FedNow participant would not be deemed to have 
accepted the payment order at such time as would otherwise be 
considered acceptance of the payment under proposed subpart C (i.e., 
when it receives payment from its Reserve Bank). The Board specifically 
requested comment on whether this proposed section is sufficient to 
cover the likely range of circumstances where a FedNow participant may 
need additional time to determine whether to accept a payment order. 
The Board received a range of comments on this question, as discussed 
in detail in the overview section.
    The Board has considered the comments received on proposed Sec.  
210.44(b) and has revised the proposed commentary to that section to 
provide an additional example of circumstances where a FedNow 
participant may need additional time to determine whether to accept a 
payment order--specifically, where a FedNow participant has reasonable 
cause to believe that a particular payment order may be related to 
fraudulent activity. Accordingly, the Board has revised the commentary 
to proposed Sec.  210.44(b) in the final rule, but otherwise the Board 
has adopted Sec.  210.44(b) as proposed.
Section 210.45 Payment Orders
    The Board proposed to add Sec.  210.45 to set forth the terms under 
which a Reserve Bank will accept payment orders from a sender over the 
FedNow Service. The proposed section provides that a sender must make 
arrangements with its Reserve Bank before it may send payment orders 
over the FedNow Service. This proposed section also provides that a 
Reserve Bank may reject any payment order or impose conditions on the 
acceptance of payment orders over the FedNow Service for any reason.
    This proposed section also provides that a FedNow participant may 
not (1) send a payment order to a Reserve Bank that requires the 
Reserve Bank to issue a payment order to an intermediary bank other 
than another Reserve Bank or (2) send a value-dated payment order 
through the FedNow Service without

[[Page 34356]]

the agreement of the Reserve Bank in writing to follow such 
instructions.
    The Board did not receive any comments on proposed Sec.  210.45 or 
proposed commentary to that section. The Board has adopted these 
amendments as proposed.
Section 210.46 Payment by a Federal Reserve Bank to a Receiving Bank or 
Beneficiary
    The Board proposed to add Sec.  210.46 to address the timing of 
when a Reserve Bank makes payment to a receiving bank (when the Reserve 
Bank is an intermediary bank) or beneficiary (when the Reserve Bank is 
the beneficiary's bank). The Board proposed adopting a similar approach 
as that taken by subpart B for the Fedwire Funds Service, with 
adjustments to reflect the fact that the FedNow Service will also 
accommodate participants that choose to settle their activity over the 
service in the master account of a correspondent bank. The proposed 
section, therefore, provides that payment to a FedNow participant by 
Reserve Banks is final at the earlier of the time when the amount of 
the payment order is credited to the FedNow participant's settlement 
account (which may be the participant's own master account or the 
master account of its correspondent bank), or the time when the Reserve 
Bank sends to the FedNow participant either a conforming payment order 
or, in instances where the FedNow participant is the beneficiary, a 
notice of the credit. This payment would be final and irrevocable when 
made.\4\
---------------------------------------------------------------------------

    \4\ This does not prevent FedNow participants from implementing 
procedures to resolve erroneous payments, nor does it impede the 
ability of the receiving bank to initiate a new transfer to return 
funds in certain circumstances.
---------------------------------------------------------------------------

    The Board did not receive any comments on proposed Sec.  210.46 or 
proposed commentary to that section. The Board has adopted these 
amendments as proposed.
Section 210.47 Federal Reserve Bank Liability; Payment of Compensation
    The Board proposed to add Sec.  210.47 address the liability of the 
Reserve Banks, similar to the rules governing the Fedwire Funds Service 
in subpart B. The Board's proposal provides that, in connection with 
its handling of a payment order, a Reserve Bank shall not agree to be 
liable to a sender, receiving bank, beneficiary, or other Reserve Bank 
for consequential damages resulting from the Reserve Bank's failure to 
execute a payment order.
    The Board's proposal also provides that where a Reserve Bank is 
obligated under UCC Article 4A to provide compensation in the form of 
interest to another party in connection with its handling of a funds 
transfer over the FedNow Service, the Reserve Bank shall do so. In such 
cases where a Reserve Bank provides compensation in the form of 
interest, interest would be calculated in accordance with Article 4A.
    The Board did not receive any comments on proposed Sec.  210.47 or 
the proposed commentary to that section. The Board has adopted these 
amendments as proposed.

IV. Competitive Impact Analysis

    The Board conducts a competitive impact analysis when it considers 
an operational or legal change to a new or existing service, if that 
change would have a direct and material adverse effect on the ability 
of other service providers to compete effectively with the Federal 
Reserve in providing similar services due to legal differences or due 
to the Federal Reserve's dominant market position deriving from such 
legal differences. All operational or legal changes having a 
substantial effect on payments-system participants will be subject to a 
competitive impact analysis, even if competitive effects are not 
apparent on the face of the proposal. If such legal differences exist, 
the Board will assess whether the same objectives could be achieved by 
a modified proposal with lesser competitive impact or, if not, whether 
the benefits of the proposal (such as contributing to payments-system 
efficiency or integrity or other Board objectives) outweigh the 
materially adverse effect on competition.\5\
---------------------------------------------------------------------------

    \5\ Board of Governors of the Federal Reserve System, ``The 
Federal Reserve in the Payments System,'' (Issued 1984; revised 
1990). Available at https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
---------------------------------------------------------------------------

    In the proposal, the Board stated that it does not believe that the 
proposed amendments would affect the competitive position of private-
sector providers vis-[agrave]-vis the Reserve Banks. The proposed rule 
incorporates UCC Article 4A, with revisions to reflect the nature of 
funds transfers over the FedNow Service and consistent with the 
purposes of UCC Article 4A. The proposed amendments do not govern 
similar services provided by private-sector providers.
    One commenter, a private-sector funds-transfer system operator, 
observed that with respect to transfers over the FedNow Service where a 
portion is governed by the EFTA, the scope of subpart C is broader than 
that of UCC Article 4A.\6\ This commenter stated that the Board should 
recognize that private-sector funds-transfer system operators for 
instant payments do not have the ability to issue Federal regulations 
and apply rules that similarly address issues with respect to transfers 
where a portion is also governed by the EFTA. Even still, the commenter 
stated that it has sought to achieve similar results through the design 
of its funds-transfer system and in its legal framework, including by 
requiring a clear chain of contracts to ensure end-to-end coverage of 
its rules for transfers over its service where a portion of such 
transfer is governed by the EFTA.
---------------------------------------------------------------------------

    \6\ Section 4A-108 states that UCC Article 4A does not apply to 
a funds transfer if any part of the transfer is governed by the 
EFTA.
---------------------------------------------------------------------------

    Accordingly, the Board does not believe the amendments to 
Regulation J will have any direct and material adverse effect on the 
ability of other service providers to compete with the Reserve Banks. 
The Board agrees with the commenter that private-sector funds-transfer 
systems for instant payments could seek to achieve similar results, 
including by agreement or through a funds-transfer system rule. 
Therefore, the Board does not believe that the final rule would have a 
material adverse effect on the competitive position of private-sector 
providers vis-[agrave]-vis the Reserve Banks.

V. Administrative Law Matters

A. The Riegle Community Development and Regulatory Improvement Act of 
1994

    The Riegle Community Development Regulatory Improvement Act of 1994 
requires that agency regulations that impose additional reporting, 
disclosure, and other requirements on insured depository institutions 
take effect on the first calendar quarter following publication in 
final form, unless the agency determines for good cause that the 
regulation should become effective before such time. 12 U.S.C. 4802(b). 
Consistent with the Riegle Community Development Act, this final rule 
is effective on October 1, 2022.

B. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 appendix A.1), the Board may not conduct 
or sponsor, and a respondent is not required to respond to, an 
information collection unless it displays a valid Office of Management 
and Budget (OMB) control number. The Board reviewed the final rule 
under the authority delegated to the Board by the OMB and determined 
that

[[Page 34357]]

it contains no collections of information under the PRA.\7\ 
Accordingly, there is no paperwork burden associated with the rule.
---------------------------------------------------------------------------

    \7\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------

C. Regulatory Flexibility Act

    An initial regulatory flexibility analysis (IRFA) was included in 
the proposal in accordance with section 603(a) of the Regulatory 
Flexibility Act (the RFA) (5 U.S.C. 601 et seq.). The Board did not 
receive any comments on the proposed rule on small entities and on any 
significant alternatives that would reduce the regulatory burden on 
small entities. The RFA requires an agency, in connection with a final 
rule, to prepare a final regulatory flexibility analysis unless the 
agency certifies that the rule will not, if promulgated, have a 
significant economic impact on a substantial number of small entities. 
Based on its analysis, and for the reasons stated below, the Board 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities.
    While the Reserve Banks can prescribe by agreement terms and 
conditions in providing the FedNow Service, the Board believes it is 
appropriate to bring the FedNow Service within the coverage of 
Regulation J. As discussed in previous sections, the main objective of 
the final amendments to Regulation J is to establish a new subpart C to 
govern funds transfers made through the FedNow Service. Depository 
institutions that choose to use the FedNow Service will have to comply 
with the applicable provisions of this final rule, which include the 
requirement on the availability of funds as a term of the service.
    The final rule will apply to all depository institutions that 
choose to participate in the FedNow Service regardless of their size. 
Pursuant to regulations issued by the Small Business Administration (13 
CFR 121.201), a ``small banking organization'' includes a depository 
institution with $600 million or less in total assets. Based on call 
report data, there are approximately 7,802 depository institutions that 
have total domestic assets of $600 million or less and thus are 
considered small entities for purposes of the RFA analysis.\8\
---------------------------------------------------------------------------

    \8\ As an example, the SBA defines a bank as small if it has 
$600 million or less in assets. See 13 CFR 121.201 (as amended by 84 
FR 34261, effective August 19, 2019). In its determination, the SBA 
counts the receipts, employees, or other measure of size of the 
concern whose size is at issue and all of its domestic and foreign 
affiliates. See 13 CFR 121.103. Depository institution data is 
derived from December 31, 2021 Call Reports.
---------------------------------------------------------------------------

    Given that the rule consists of service terms, there are no new 
projected reporting, recordkeeping, or other compliance requirements on 
depository institutions associated with the rule. In addition, there 
are no substantive changes to existing reporting, recordkeeping or 
other compliance requirements in the final amendments to Regulation J. 
Depository institutions that choose to provide a new service to their 
customers to process instant payments may incur costs associated with 
necessary operational, personnel, compliance, and other costs in order 
to become technologically ready to process instant payments through an 
instant payment service like the FedNow Service, should they choose to 
do so.

D. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471, 12 U.S.C. 4809) requires the Federal banking agencies 
to use plain language in all proposed and final rules published after 
January 1, 2000. The Board has sought to present the proposed rule in a 
simple and straightforward manner, and invited comment on the use of 
plain language and whether any part of the proposed rule could be more 
clearly stated. No commenters commented on use of plain language in the 
proposed rule, and the Board has adopted proposed plain language in the 
final rule.

List of Subjects in 12 CFR Part 210

    Banks, banking, Federal Reserve System.

    For the reasons set forth in the preamble, the Board amends 
Regulation J, 12 CFR part 210, as follows:

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

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 12 U.S.C. 248(i), (j), and 248-1, 342, 360, 464, 
4001-4010, and 5001-5018.


0
2. Revise the heading to part 210 as set forth above.

0
3. Revise Sec.  210.2 to read as follows:


Sec.  210.2  Definitions.

    As used in this subpart, unless the context otherwise requires:
    Account means an account 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.
    Actually and finally collected funds means cash or any other form 
of payment that is, or has become, final and irrevocable.
    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(g) of this chapter 
(Regulation D), even if the entity is not otherwise subject to that 
section.
    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.
    Bank draft means a check drawn by one bank on another bank.
    Banking day means the part of a day on which a bank is open to the 
public for carrying on substantially all of its banking functions.
    Cash item means--
    (1) A check other than one classified as a noncash item under this 
section; or
    (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.
    Check means a check or an electronic check, as those terms are 
defined in Sec.  229.2 of this chapter (Regulation CC).
    Clock hour and clock half-hour. (1) Clock hour means a time that is 
on the hour, such as 1:00, 2:00, etc.
    (2) Clock half-hour means a time that is on the half-hour, such as 
1:30, 2:30, etc.
    Fedwire Funds Service and Fedwire have the same meaning as that set 
forth in Sec.  210.26.
    Item. (1) Means--
    (i) An instrument or a promise or order to pay money, whether 
negotiable or not, that is--
    (A) Payable in a Federal Reserve District \1\ (District);
---------------------------------------------------------------------------

    \1\ For purposes of this subpart, the Virgin Islands and Puerto 
Rico are deemed to be in the Second District, and Guam, American 
Samoa, and the Northern Mariana Islands in the Twelfth District.
---------------------------------------------------------------------------

    (B) Sent by a sender to a Reserve Bank for handling under this 
subpart; and
    (C) Collectible in funds acceptable to the Reserve Bank of the 
District in which the instrument is payable; or
    (ii) A check.
    (2) Unless otherwise indicated, item includes both a cash and a 
noncash item, and includes a returned check sent by a paying or 
returning bank. Item does not include a check that cannot be collected 
at par, or a payment order as defined in Sec.  210.26(i) and handled 
under subpart B of this part. The term also does not include an 
electronically-created item as defined in Sec.  229.2 of this chapter 
(Regulation CC).

[[Page 34358]]

    Nonbank payor means a payor of an item, other than a bank.
    Noncash item means an item that a receiving Reserve Bank classifies 
in its operating circulars as requiring special handling. The term also 
means an item normally received as a cash item if a Reserve Bank 
decides that special conditions require that it handle the item as a 
noncash item.
    Paying bank means--
    (1) The bank by which an item is payable unless the item is payable 
or collectible at or through another bank and is sent to the other bank 
for payment or collection;
    (2) The bank at or through which an item is payable or collectible 
and to which it sent for payment or collection; or
    (3) The bank whose routing number appears on a check in the MICR 
line or in fractional form (or in the MICR-line information that 
accompanies an electronic item) and to which the check is sent for 
payment or collection.
    Returned check means a cash item returned by a paying bank, 
including an electronic returned check as defined in Sec.  229.2 of 
this chapter (Regulation CC) and a notice of nonpayment in lieu of a 
returned check, whether or not a Reserve Bank handled the check for 
collection.
    Sender means any of the following entities that sends an item to a 
Reserve Bank for forward collection--
    (1) A depository institution, as defined in section 19(b) of the 
Federal Reserve Act (12 U.S.C. 461(b));
    (2) A member bank, as defined in section 1 of the Federal Reserve 
Act (12 U.S.C. 221);
    (3) A clearing institution, defined as--
    (i) An institution that is not a depository institution but that 
maintains with a Reserve Bank the balance referred to in the first 
paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 342); or
    (ii) An Edge corporation or agreement corporation that maintains an 
account with a Reserve Bank in conformity with part 211 of this chapter 
(Regulation K);
    (4) Another Reserve Bank;
    (5) An international organization for which a Reserve Bank is 
empowered to act as depositary or fiscal agent and maintains an 
account;
    (6) A foreign correspondent, defined as any of the following 
entities for which a Reserve Bank maintains an account: A foreign bank 
or banker, a foreign state as defined in section 25(b) of the Federal 
Reserve Act (12 U.S.C. 632), or a foreign correspondent or agency 
referred to in section 14(e) of that act (12 U.S.C. 358); or
    (7) A branch or agency of a foreign bank maintaining reserves under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 347d, 
3105).
    State means a State of the United States, the District of Columbia, 
Puerto Rico, or a territory, possession, or dependency of the United 
States.
    Uniform Commercial Code and U.C.C. mean the Uniform Commercial Code 
as adopted in a state
    Terms not defined in this section. Unless the context otherwise 
requires--
    (1) The terms not defined herein have the meanings set forth in 
Sec.  229.2 of this chapter applicable to subpart C or D of part 229 of 
this chapter (Regulation CC), as appropriate; and
    (2) The terms not defined herein or in Sec.  229.2 of this chapter 
have the meanings set forth in the Uniform Commercial Code.

0
4. Revise the heading to subpart B to read as follows:

Subpart B--Funds Transfers Through the Fedwire Funds Service

0
5. In subpart B, remove the words ``appendix B of this subpart'' and 
``appendix B to this subpart'' and add in their place the words 
``appendix A of this part'' wherever they appear.

0
6. In Sec.  210.25, revise paragraphs (b)(2) and (c) to read as 
follows:


Sec.  210.25  Authority, purpose, and scope.

* * * * *
    (b) * * *
    (2) Except as otherwise provided in paragraphs (b)(3) and (4) of 
this section, this subpart, including Article 4A as set forth in 
appendix A of this part and operating circulars of the Federal Reserve 
Banks issued in accordance with paragraph (c) of this section, governs 
the rights and obligations of the following parties with respect to the 
Fedwire Funds Service:
    (i) Federal Reserve Banks that send or receive payment orders;
    (ii) Senders that send payment orders directly to a Federal Reserve 
Bank;
    (iii) Receiving banks that receive payment orders directly from a 
Federal Reserve Bank;
    (iv) Beneficiaries that receive payment for payment orders by means 
of credit to an account maintained or used at a Federal Reserve Bank; 
and
    (v) Other parties to a funds transfer any part of which is carried 
out through the Fedwire Funds Service to the same extent as if this 
subpart were considered a funds-transfer system rule under Article 4A.
* * * * *
    (c) Operating Circulars. Each Federal Reserve Bank shall issue an 
Operating Circular consistent with this subpart that governs the 
details of its funds-transfer operations in connection with the Fedwire 
Funds Service and other matters it deems appropriate. Among other 
things, the Operating Circular may set cut-off times and funds-transfer 
business days; address security procedures offered by the Federal 
Reserve Banks to verify the authenticity of a payment order; specify 
format and media requirements for payment orders; specify the time and 
method of receipt, execution, and acceptance of a payment order and 
settlement of a Federal Reserve Bank's payment obligation for purposes 
of Article 4A; specify service terms governing ancillary features of 
the Fedwire Funds Service; provide for the acceptance of documents in 
electronic form to the extent any provision in Article 4A requires an 
agreement or other document to be in writing; identify messages that 
are not payment orders; and impose charges for funds-transfer services.
* * * * *

0
7. Revise Sec.  210.26 to read as follows:


Sec.  210.26  Definitions.

    As used in this subpart, the following definitions apply:
    Article 4A means Article 4A of the Uniform Commercial Code as set 
forth in appendix A of this part, which is incorporated into this 
subpart in accordance with Sec.  210.25(b).
    Automated clearing house transfer means any transfer designated as 
an automated clearing house transfer in an operating circular issued by 
the Federal Reserve Banks.
    Beneficiary has the same meaning as in Article 4A except that the 
term is limited to a beneficiary in a funds transfer any portion of 
which is sent through the Fedwire Funds Service.
    Beneficiary's bank has the same meaning as in Article 4A, except 
that:
    (1) The term is limited to a beneficiary's bank in a funds transfer 
any portion of which is sent through the Fedwire Funds Service;
    (2) A Federal Reserve Bank need not be identified in the payment 
order in order to be the beneficiary's bank; and
    (3) The term includes a Federal Reserve Bank when that Federal 
Reserve Bank is the beneficiary of a payment order.
    Fedwire Funds Service means the funds-transfer system owned and 
operated by the Federal Reserve Banks that is used primarily for the 
transmission and settlement of payment orders governed by this subpart. 
The Fedwire Funds Service does not include the FedNow Service or the 
system for making automated clearing house transfers.

[[Page 34359]]

    Interdistrict transfer means a funds transfer involving entries to 
accounts maintained at two Federal Reserve Banks.
    Intradistrict transfer means a funds transfer involving entries to 
accounts maintained at one Federal Reserve Bank.
    Off-line bank means a bank that sends payment orders to and 
receives payment orders from a Federal Reserve Bank by telephone orally 
or by other means other than electronic data transmission.
    Payment order has the same meaning as in Article 4A except that the 
term includes only instructions sent or received through the Fedwire 
Funds Service and does not include automated clearing house transfers 
or any communication designated in an operating circular issued by a 
Federal Reserve Bank under this subpart as not being a payment order.
    Receiving bank has the same meaning as in Article 4A except that 
the term is limited to a receiving bank in a funds transfer any portion 
of which is sent through the Fedwire Funds Service.
    Sender has the same meaning as in Article 4A except that the term 
is limited to a sender in a funds transfer any portion of which is sent 
through the Fedwire Funds Service.
    Sender's account, receiving bank's account, and beneficiary's 
account mean the reserve, clearing, or other funds deposit account at a 
Federal Reserve Bank maintained or used by the sender, receiving bank, 
or beneficiary, respectively.
    Sender's Federal Reserve Bank and receiving bank's Federal Reserve 
Bank mean the Federal Reserve Bank at which the sender or receiving 
bank, respectively, maintains or uses an account.

0
8. In Sec.  210.28, revise paragraphs (b)(1) through (3) to read as 
follows:


Sec.  210.28  Agreement of sender.

* * * * *
    (b) * * *
    (1) A sender does not have the right to an overdraft in the 
sender's account. In the event an overdraft is created, the overdraft 
shall be due and payable immediately, without the need for a demand by 
the Federal Reserve Bank, at the earliest of the following times:
    (i) At the end of the Fedwire Funds Service funds-transfer business 
day;
    (ii) At the time the Federal Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the sender; or
    (iii) At the time the sender suspends payments or is closed.
    (2) The sender shall have in its account, at the time the overdraft 
is due and payable, a balance of actually and finally collected funds 
sufficient to cover the aggregate amount of all its obligations to the 
Federal Reserve Bank, whether the obligations result from the execution 
of a payment order or otherwise.
    (3) To secure any overdraft, as well as any other obligation due or 
to become due to its Federal Reserve Bank, each sender, by sending a 
payment order to a Federal Reserve Bank that is accepted by the Federal 
Reserve Bank, grants to the Federal Reserve Bank a security interest in 
all of the sender's assets in the possession or control of, or held for 
the account of, the Federal Reserve Bank. The security interest 
attaches when an overdraft, or any other obligation to the Federal 
Reserve Bank, becomes due and payable.
* * * * *

0
9. In Sec.  210.30, revise paragraphs (b) and (c) to read as follows:


Sec.  210.30  Payment orders.

* * * * *
    (b) Selection of an intermediary bank. For an interdistrict 
transfer through the Fedwire Funds Service, a Federal Reserve Bank is 
authorized and directed to execute a payment order through another 
Federal Reserve Bank. A sender shall not send a payment order to a 
Federal Reserve Bank that requires the Federal Reserve Bank to send a 
payment order to an intermediary bank (other than a Federal Reserve 
Bank) unless that intermediary bank is designated in the sender's 
payment order. A sender shall not send to a Federal Reserve Bank a 
payment order through the Fedwire Funds Service that instructs use by a 
Federal Reserve Bank of a funds-transfer system or means of 
transmission other than the Fedwire Funds Service unless the Federal 
Reserve Bank agrees with the sender in writing to follow such 
instructions.
    (c) Execution date and payment date. A sender shall not send a 
payment order through the Fedwire Funds Service that instructs a 
Federal Reserve Bank to execute the payment order or to pay the 
beneficiary on a funds-transfer business day that is later than the 
Fedwire Funds Service funds-transfer business day on which the order is 
received by the Federal Reserve Bank, unless the Federal Reserve Bank 
agrees with the sender in writing to follow such instructions.

0
10. In Sec.  210.32, revise the section heading and paragraph (b) to 
read as follows:


Sec.  210.32  Federal Reserve Bank liability; payment of compensation.

* * * * *
    (b) Payment of compensation. (1) A Federal Reserve Bank shall 
satisfy its obligation, or that of another Federal Reserve Bank, to pay 
compensation in the form of interest under Article 4A by paying such 
compensation in the form of interest to a sender, receiving bank, 
beneficiary, or another party to the funds transfer that is entitled to 
such payment in an amount that is calculated in accordance with section 
4A-506 of Article 4A.
    (2) If the sender or receiving bank that is the recipient of the 
payment of compensation is not the party entitled to compensation under 
Article 4A, the sender or receiving bank shall pass through the benefit 
of the compensation by making an interest payment, as of the day the 
compensation was paid by the Federal Reserve Bank, to the party 
entitled to compensation. The interest payment that is made to the 
party entitled to compensation shall not be less than the value of the 
compensation that was paid by the Federal Reserve Bank to the sender or 
receiving bank. The party entitled to compensation may agree to accept 
compensation in a form other than a direct interest payment, provided 
that such an alternative form of compensation is not less than the 
value of the interest payment that otherwise would be made.
* * * * *

0
11. In appendix A of subpart B of part 210:
0
a. Under ``Section 210.25--Authority, Purpose, and Scope,'' revise 
paragraphs (a) through (c);
0
b/Revise ``Section 210.26--Definitions;''
0
c. Under ``Section 210.28--Agreement of Sender,'' revise paragraphs 
(a), (b), and (c)(2);
0
d. Under ``Section 210.30--Payment Orders,'' revise paragraphs (b)(2) 
and (c); and
0
e. Under ``Section 210.32--Federal Reserve Bank Liability; Payment of 
Interest,'' revise the heading and paragraphs (a)(2), (b), and (c).
    The revisions read as follows:

Appendix A of Subpart B of Part 210--Commentary

* * * * *

Section 210.25--Authority, Purpose, and Scope

    (a) Authority and purpose. Section 210.25(a) states that the 
purpose of subpart B of this part is to provide rules to govern 
funds transfers through the Fedwire Funds Service and recites the 
Board's rulemaking authority for this subpart. Subpart B of this 
part is Federal law and is not a ``funds-transfer system rule'' as 
defined in section 4A-501(b) of Article 4A, Funds Transfers, of the 
Uniform Commercial Code (UCC), as set

[[Page 34360]]

forth in appendix A of this part. Certain provisions of Article 4A 
may not be varied by a funds-transfer system rule, but under section 
4A-107, regulations of the Board and operating circulars of the 
Federal Reserve Banks supersede inconsistent provisions of Article 
4A to the extent of the inconsistency. In addition, regulations of 
the Board may preempt inconsistent provisions of state law. 
Accordingly, subpart B of this part supersedes or preempts 
inconsistent provisions of state law. It does not affect state law 
governing funds transfers that does not conflict with the provisions 
of subpart B of this part, such as Article 4A as enacted in any 
state, as such state law may apply to parties to funds transfers 
through the Fedwire Funds Service whose rights and obligations are 
not governed by subpart B of this part.
    (b) Scope. (1) Subpart B of this part incorporates the 
provisions of Article 4A set forth in appendix A of this part. The 
provisions set forth expressly in the sections of subpart B of this 
part supersede or preempt any inconsistent provisions of Article 4A 
as set forth in appendix A of this part or as enacted in any state. 
The official comments to Article 4A are not incorporated in subpart 
B of this part or this commentary to subpart B of this part, but the 
official comments may be useful in interpreting Article 4A as set 
forth in appendix A of this part. Because section 4A-105 refers to 
other provisions of the Uniform Commercial Code (e.g., definitions 
in article 1 of the UCC), these other provisions of the UCC, as 
approved by the National Conference of Commissioners on Uniform 
State Laws, which is now also known as the Uniform Law Commission, 
and the American Law Institute, from time to time, are also 
incorporated into subpart B of this part. Subpart B of this part 
applies to any party to a funds transfer over the Fedwire Funds 
Service that is in privity with a Federal Reserve Bank. These 
parties include a sender (bank or nonbank) that sends a payment 
order directly to a Federal Reserve Bank, a receiving bank that 
receives a payment order directly from a Federal Reserve Bank, and a 
beneficiary that receives credit to an account that it uses or 
maintains at a Federal Reserve Bank as payment for a payment order 
accepted by a Federal Reserve Bank. Other parties to a funds 
transfer over the Fedwire Funds Service are covered by subpart B of 
this part to the same extent subpart B would apply to them if 
subpart B were a ``funds-transfer system rule'' under Article 4A 
that selected subpart B of this part as the governing law.
    (2) The scope of the applicability of a funds-transfer system 
rule under Article 4A is specified in section 4A-501(b), and the 
scope of the choice of law provision is specified in section 4A-
507(c). Under section 4A-507(c), a choice of law provision is 
binding on the participants in a funds-transfer system and certain 
other parties having notice that the funds-transfer system might be 
used for the funds transfer and of the choice of law provision. The 
Uniform Commercial Code provides that a person has notice of a fact 
when the person has actual knowledge of it, receives a notice or 
notification of it, or has reason to know that it exists from all 
the facts and circumstances known to the person at the time in 
question. (See UCC section 1-202.) However, under sections 4A-507(b) 
and 4A-507(d), a choice of law by agreement of the parties takes 
precedence over a choice of law made by funds-transfer system rule.
    (3) If originators, receiving banks, and beneficiaries that are 
not in privity with a Federal Reserve Bank have the notice 
contemplated by section 4A-507(c) or if those parties agree to be 
bound by subpart B of this part, subpart B of this part generally 
would apply to payment orders between those remote parties, 
including participants in other funds-transfer systems. For example, 
a payment order may be sent from an originator's bank through a 
funds-transfer system other than the Fedwire Funds Service to a 
receiving bank which, in turn, executes that payment order by 
sending a payment order through the Fedwire Funds Service. 
Similarly, a Federal Reserve Bank may send a payment order through 
the Fedwire Funds Service to a receiving bank that sends it through 
a funds-transfer system other than the Fedwire Funds Service to the 
beneficiary's bank. In the first example, if the originator's bank 
has notice that the Fedwire Funds Service may be used to effect part 
of the funds transfer, the sending of the payment order through the 
other funds-transfer system to the receiving bank will be governed 
by subpart B of this part unless the parties to the payment order 
have agreed otherwise. In the second example, if the beneficiary's 
bank has notice that the Fedwire Funds Service may be used to effect 
part of the funds transfer, the sending of the payment order to the 
beneficiary's bank through the other funds-transfer system will be 
governed by subpart B of this part unless the parties have agreed 
otherwise. In both cases, the other funds-transfer system's rules 
would also apply to, at a minimum, the portion of these funds 
transfers being made through that funds transfer system. Because 
subpart B of this part is Federal law, subpart B of this part will 
take precedence over any funds-transfer system rule applicable to 
the remote sender or receiving bank or to a Federal Reserve Bank to 
the extent of any inconsistency. If remote parties to a funds 
transfer, a portion of which is sent through the Fedwire Funds 
Service, have expressly selected by agreement, in accordance with 
section 4A-507(b), a law other than subpart B of this part, subpart 
B of this part would not take precedence over the choice of law made 
by the agreement even though the remote parties had notice that the 
Fedwire Funds Service might be used and of the governing law. (See 
section 4A-507(d).) In addition, subpart B of this part would not 
apply to a funds transfer sent through another funds-transfer system 
where no Federal Reserve Bank handles the funds transfer, even 
though settlement for the funds transfer is made by means of a 
separate net settlement or funds transfer through the Fedwire Funds 
Service.
    (4) Under section 4A-108, Article 4A does not apply to a funds 
transfer any part of which is governed by the Electronic Fund 
Transfer Act (EFTA) (15 U.S.C. 1693 et seq.). In general, Fedwire 
funds transfers to or from consumer accounts are exempt from the 
EFTA and Regulation E (12 CFR part 1005). A funds transfer from a 
consumer originator or a funds transfer to a consumer beneficiary 
could be carried out in part through the Fedwire Funds Service and 
in part through an automated clearinghouse or other means that is 
subject to the EFTA or Regulation E. In these cases, subpart B would 
not govern the portion of the funds transfer that is governed by the 
EFTA or Regulation E. (See the commentary to Sec.  210.26 in this 
appendix, ``Payment Order''.)
    (5) Section 919 of the EFTA, however, governs ``remittance 
transfers,'' which may include funds transfers over the Fedwire 
Funds Service. Section 919 of the EFTA sets out the obligations of 
remittance transfer providers with respect to consumer senders of 
remittance transfers. Section 919 of the EFTA generally does not 
affect the rights and obligations of financial institutions involved 
in a remittance transfer. To the extent that a Fedwire funds 
transfer is a ``remittance transfer'' governed by section 919 of the 
EFTA, it continues to be governed by subpart B of this part, except 
that, in the event of an inconsistency between the provisions of 
subpart B of this part and section 919 of the EFTA, section 919 of 
the EFTA shall prevail. For example, a consumer may initiate a 
remittance transfer governed by EFTA section 919 from the consumer's 
account at a depository institution, and the depository institution 
may initiate that transfer by sending a payment order to a Federal 
Reserve Bank through the Fedwire Funds Service. If the consumer 
subsequently exercised the right to cancel the remittance transfer 
and obtain a refund under the terms of section 919 of the EFTA, the 
depository institution would be required to comply with section 919 
even if the institution does not have a right to reverse the payment 
order sent to the Federal Reserve Bank under subpart B of this part.
    (6) Finally, section 4A-404(a) provides that a beneficiary's 
bank is obliged to pay the amount of a payment order to the 
beneficiary on the payment date unless acceptance of the payment 
order occurs on the payment date after the close of the funds-
transfer business day of the bank. The Expedited Funds Availability 
Act provides that funds received by a bank by wire transfer shall be 
available for withdrawal not later than the business day after the 
business day on which such funds are received (12 U.S.C. 4002(a)). 
That act also preempts any provision of state law that was not 
effective on September 1, 1989, that is inconsistent with that act 
or its implementing Regulation CC (12 CFR part 229). Accordingly, 
the Expedited Funds Availability Act and Regulation CC may preempt 
section 4A-404(a) as enacted in any state. In order to ensure that 
section 4A-404(a), or other provisions of Article 4A, as 
incorporated in subpart B of this part, do not take precedence over 
provisions of the Expedited Funds Availability Act, this section 
210.25(b)(4) provides that where subpart B of this part establishes 
rights or obligations that are also governed by the Expedited Funds 
Availability Act or Regulation CC, the Expedited Funds

[[Page 34361]]

Availability Act or Regulation CC provision shall apply and subpart 
B of this part shall not apply.
    (c) Operating Circulars. The Federal Reserve Banks issue 
Operating Circulars consistent with this subpart that contain 
additional provisions applicable to payment orders and other 
messages sent through the Fedwire Funds Service. Under section 4A-
107, these Operating Circulars supersede inconsistent provisions of 
Article 4A, both as set forth in appendix A of this part and as 
enacted in any state. These Operating Circulars are not funds-
transfer system rules, but, by their terms, they are binding on all 
parties covered by this subpart.
* * * * *

Section 210.26--Definitions

    Article 4A defines many terms (e.g., beneficiary, intermediary 
bank, receiving bank, security procedure) used in subpart B of this 
part. These terms are defined or listed in sections 4A-103 through 
4A-105. These terms, such as the term bank (defined in section 4A-
105(d)(2)), may differ from comparable terms in subpart A and 
subpart C of this part. As subpart B of this part incorporates 
consistent provisions of Article 4A, it incorporates these 
definitions unless these terms are expressly defined otherwise in 
subpart B of this part. Subpart B modifies the definitions of five 
Article 4A terms, beneficiary, beneficiary's bank, payment order, 
receiving bank, and sender. Subpart B also defines terms not defined 
in Article 4A.
    Article 4A. Article 4A means the version of that article of the 
Uniform Commercial Code set forth in appendix A of this part. It 
does not refer to the law of any particular state unless the context 
indicates otherwise. Subject to the express provisions of this 
subpart, this version of Article 4A is incorporated into this 
subpart and made Federal law for transactions covered by subpart B 
of this part. (See Sec.  210.25(b)(1) and accompanying commentary.) 
Because section 4A-105 refers to other provisions of the Uniform 
Commercial Code (e.g., definitions in article 1 of the UCC), these 
other provisions of the UCC, as approved by the National Conference 
of Commissioners on Uniform State Laws, which is now also known as 
the Uniform Law Commission, and the American Law Institute, from 
time to time, are also incorporated into subpart B of this part.
    Beneficiary, beneficiary's bank, receiving bank, and sender. The 
definitions of ``beneficiary,'' ``beneficiary's bank,'' ``receiving 
bank,'' and ``sender'' in subpart B of this part differ from the 
definitions in sections 4A-103(a)(2) through (4). The subpart B 
definitions clarify that, for the purposes of subpart B of this 
part, these terms are limited to parties in a funds transfer that is 
sent through the Fedwire Funds Service. For example, the parties to 
a funds transfer that is sent through the FedNow Service would be 
governed by subpart C of this part, and would not be a 
``beneficiary,'' ``beneficiary's bank,'' ``receiving bank,'' or 
``sender'' governed by subpart B of this part. The subpart B 
definition of ``beneficiary's bank'' further clarifies that where a 
Federal Reserve Bank functions as the beneficiary's bank, it need 
not be identified in the payment order as the beneficiary's bank and 
that a Federal Reserve Bank that receives a payment order as 
beneficiary is also the beneficiary's bank with respect to that 
payment order.
    Fedwire Funds Service. This term refers to the funds-transfer 
system owned and operated by the Federal Reserve Banks that is 
governed by this subpart. The term does not refer to any particular 
computer, telecommunications facility, or funds transfer, but rather 
to the system as a whole, which may include transfers by telephone 
or by written instrument in particular circumstances. The term does 
not include the FedNow Service or the system used for automated 
clearing house transfers.
    Off-line bank. Most Fedwire payment orders are sent 
electronically from a sender to a Federal Reserve Bank or from a 
Federal Reserve Bank to a receiving bank. Banks that send payment 
orders to Federal Reserve Banks electronically are often referred to 
as on-line banks. Some Fedwire Funds Service participants, however, 
send payment orders to a Federal Reserve Bank or receive payment 
orders from a Federal Reserve Bank orally by telephone or, in 
unusual circumstances, in writing. A bank that does not use either a 
terminal or a computer that links it electronically to a terminal or 
computer at its Federal Reserve Bank to send payment orders through 
the Fedwire Funds Service is an off-line bank.
    Payment Order. (1) The definition of ``payment order'' in 
subpart B of this part differs from the section 4A-103(a)(1) 
definition. The subpart B definition clarifies that, for the 
purposes of subpart B of this part, the term includes only 
instructions transmitted through the Fedwire Funds Service. For 
example, instructions transmitted through the FedNow Service would 
be governed by subpart C of this part, and not subpart B of this 
part. Additionally, the subpart B definition provides that certain 
messages that are transmitted through the Fedwire Funds Service are 
not payment orders. Federal Reserve Banks and banks participating in 
the Fedwire Funds Service send various types of messages relating to 
payment orders or to other matters, through the Fedwire Funds 
Service, that are not intended to be payment orders. In some cases, 
messages sent through the Fedwire Funds Service, such as certain 
requests for credit transfer, may be payment orders under Article 
4A, but are not treated as payment orders under subpart B because 
they are not an instruction to a Federal Reserve Bank to pay or 
cause another bank to pay money. Under the subpart B definition, 
these messages are not ``payment orders'' governed by subpart B of 
this part. The operating circulars of the Federal Reserve Banks may 
specify those messages that may be transmitted through the Fedwire 
Funds Service but that are not payment orders.
    (2) Subpart B of this part, including its incorporation of 
Article 4A, governs a payment order even though the originator's or 
beneficiary's account may be a consumer account established 
primarily for personal, family, or household purposes. Under section 
4A-108, Article 4A does not apply to a funds transfer any part of 
which is governed by the Electronic Fund Transfer Act. That act and 
Regulation E (12 CFR part 1005) implementing it do not apply to 
funds transfers through the Fedwire Funds Service (see 15 U.S.C. 
1693a(7)(B) and 12 CFR 1005.3(c)(3)), except that section 919 of the 
Electronic Fund Transfer Act may govern a Fedwire funds transfer 
that is a ``remittance transfer.'' Such remittance transfers that 
are Fedwire funds transfers continue to be governed by subpart B. 
Thus, subpart B applies to all funds transfers through the Fedwire 
Funds Service even though some such transfers involve originators or 
beneficiaries who are consumers. (See also Sec.  210.25(b) and 
accompanying commentary.)
* * * * *

Section 210.28--Agreement of Sender

    (a) Payment of sender's obligation to a Federal Reserve Bank. 
When a sender sends a payment order to a Federal Reserve Bank and 
the Federal Reserve Bank accepts the payment order by issuing a 
conforming order executing the sender's payment order, under section 
4A-402 the sender is indebted to the Federal Reserve Bank for the 
amount of the payment order. Section 4A-403 specifies the various 
methods by which a sender may settle the obligation under section 
4A-402. With respect to a payment order sent through the Fedwire 
Funds Service, the obligation of a sender (other than a Federal 
Reserve Bank) is settled by a debit to the account of the sender at 
a Federal Reserve Bank. Section 210.28(a) provides that a sender, 
other than a Federal Reserve Bank, that maintains or uses an account 
at a Federal Reserve Bank authorizes the Federal Reserve Bank to 
debit that account so that the Federal Reserve Bank can obtain 
payment for the payment order.
    (b) Overdrafts. (1) In some cases, debits to a sender's account 
will create an overdraft in the sender's account. The Board and the 
Federal Reserve Banks have established policies concerning when a 
Federal Reserve Bank will permit a bank to incur an overdraft in its 
account at a Federal Reserve Bank. These policies do not give a bank 
or other sender a right to an overdraft in its account. Subpart B 
clarifies that a sender does not have a right to such an overdraft. 
If an overdraft arises, it becomes immediately due and payable at 
the earliest of the following times: The end of the Fedwire Funds 
Service funds-transfer business day; the time the Federal Reserve 
Bank, in its sole discretion, deems itself insecure and gives notice 
to the sender; or the time that the sender suspends payments or is 
closed by governmental action, such as the appointment of a 
receiver. In some cases, a Federal Reserve Bank extends its Fedwire 
Funds Service operations beyond the standard cut-off time for that 
funds-transfer business day. For the purposes of this section, 
unless otherwise specified by the Federal Reserve Bank making such 
an extension, an overdraft becomes due and payable at the end of the 
extended operating hours. An overdraft becomes due and payable prior 
to a Federal Reserve Bank's cut-off time if the Federal Reserve Bank 
deems itself insecure and gives notice to the sender. A Federal 
Reserve Bank that deems itself insecure may give such notice in 
accordance

[[Page 34362]]

with the provisions on notice in section 1-202(d) of the UCC, in 
accordance with any other applicable law or agreement, or by any 
other reasonable means. An overdraft also becomes due and payable at 
the time that a bank is closed or suspends payments. For example, an 
overdraft becomes due and payable if a receiver is appointed for the 
bank or the bank is prevented from making payments by governmental 
order. The Federal Reserve Bank need not make demand on the sender 
for the overdraft to become due and payable.
    (2) A sender must cover any overdraft and any other obligation 
of the sender to the Federal Reserve Bank by the time the overdraft 
becomes due and payable. By sending a payment order to a Federal 
Reserve Bank, the sender grants a security interest to the Federal 
Reserve Bank in all of the assets of the sender possessed or 
controlled by, or held for the account of, the Federal Reserve Bank 
in order to secure all obligations due or to become due to the 
Federal Reserve Bank. The security interest attaches when the 
overdraft, or other obligation of the sender to the Federal Reserve 
Bank, becomes due and payable. The security interest does not apply 
to assets held by the sender as custodian or trustee for the 
sender's customers or third parties. Once an overdraft is due and 
payable, a Federal Reserve Bank may exercise its right of setoff, 
liquidate collateral, or take other similar action to satisfy the 
obligation the sender owes to the Federal Reserve Bank.
    (c) * * *
    (2) Section 4A-505 provides that, in order for a customer to 
assert a claim objecting to a debit to its account by a receiving 
bank, the customer must notify the receiving bank of its objection 
within one year after the customer received notification reasonably 
identifying the payment order. Subpart B of this part does not vary 
this one-year claim preclusion period.
* * * * *

Section 210.30--Payment Orders

* * * * *
    (b) * * *
    (2) This section provides that in an interdistrict transfer, a 
Federal Reserve Bank is authorized and directed to select another 
Federal Reserve Bank as an intermediary bank. A sender may, however, 
instruct a Federal Reserve Bank to use a particular intermediary 
bank by designating that bank as the bank to be credited by that 
Federal Reserve Bank (or the second Federal Reserve Bank in the case 
of an interdistrict transfer) in its payment order, in which case 
the Federal Reserve Bank will send the payment order to that bank if 
that bank receives payment orders through the Fedwire Funds Service. 
A sender may not instruct a Federal Reserve Bank to use its 
discretion to select an intermediary bank other than a Federal 
Reserve Bank or an intermediary bank designated by the sender. In 
addition, a sender may not send a payment order through the Fedwire 
Funds Service that instructs a Federal Reserve Bank to use a funds-
transfer system or means of transmission other than the Fedwire 
Funds Service unless the sender and the Federal Reserve Bank agree 
in writing to the use of that funds-transfer system or means of 
transmission.
    (c) Execution date and payment date. Generally, the Fedwire 
Funds Service is a same-day value transfer system through which 
funds may be transferred from the originator to the beneficiary on 
the same funds-transfer business day. A sender may not send a 
payment order to a Federal Reserve Bank that specifies an execution 
date or payment date later than the day on which the payment order 
is issued, unless the sender of the order and the Federal Reserve 
Bank agree in writing to the arrangement.
* * * * *

Section 210.32--Federal Reserve Bank Liability; Payment of 
Compensation

    (a) * * *
    (2) This section does not affect the ability of other parties to 
a funds transfer to agree to be liable for consequential damages, 
the liability of a Federal Reserve Bank under section 4A-404 
(relating to obligation of beneficiary's bank to pay and give notice 
to beneficiary), or the liability to parties governed by subpart B 
for claims not based on the handling of a payment order under 
subpart B.
    (b) Payment of compensation. (1) Under article 4A, a Federal 
Reserve Bank may be required to pay compensation in the form of 
interest to another party in connection with its handling of a funds 
transfer. For example, payment of compensation in the form of 
interest is required in certain situations pursuant to sections 4A-
204 (relating to refund of payment and duty of customer to report 
with respect to unauthorized payment order), 4A-209 (relating to 
acceptance of payment order), 4A-210 (relating to rejection of 
payment order), 4A-304 (relating to duty of sender to report 
erroneously executed payment order), 4A-305 (relating to liability 
for late or improper execution or failure to execute a payment 
order), 4A-402 (relating to obligation of sender to pay receiving 
bank), and 4A-404 (relating to obligation of beneficiary's bank to 
pay and give notice to beneficiary).
    (2) Section 210.32(b) requires Federal Reserve Banks to provide 
compensation through payment in the form of interest. Under section 
4A-506(a), the amount of such interest may be determined by 
agreement between the sender and receiving bank or by funds-transfer 
system rule. If there is no such agreement, under section 4A-506(b), 
the amount of interest is based on the Federal funds rate. 
Similarly, compensation in the form of interest will be paid to 
government senders, receiving banks, or beneficiaries described in 
Sec.  210.25(d) if they are entitled to interest under subpart B. A 
Federal Reserve Bank may also, in its discretion, pay compensation 
in the form of interest directly to a remote party to a Fedwire 
funds transfer that is entitled to interest, rather than providing 
compensation to its sender or receiving bank.
    (3) If a sender or receiving bank that received a payment of 
compensation is not the party entitled to compensation under Article 
4A, the sender or receiving bank must pass the benefit of the 
payment made to it to the party that is entitled to compensation. 
The benefit may be passed on either in the form of a direct payment 
of interest or in the form of a compensating balance if the party 
entitled to interest agrees to accept the other form of 
compensation. In the latter case, the value of the compensating 
balance must be at least equivalent to the value of the interest 
payment that otherwise would have been provided.
    (c) Nonwaiver of right of recovery. Several sections of Article 
4A allow a party to a funds transfer to make a claim pursuant to the 
applicable law of mistake and restitution. Nothing in subpart B of 
this part or any operating circular issued in accordance with 
subpart B of this part waives any such claim by a Federal Reserve 
Bank. A Federal Reserve Bank, however, may waive such a claim by 
express written agreement in order to settle litigation or for other 
purposes.

Appendix B to Subpart B of Part 210--[Removed]

0
12. Remove appendix B of subpart B of part 210.

0
13. Add subpart C to read as follows:
Subpart C--Funds Transfers Through the FedNow Service
Sec.
210.40 Authority, purpose, and scope.
210.14 Definitions.
210.42 Reliance on identifying number.
210.43 Agreement of sender.
210.44 Agreement of receiving bank.
210.45 Payment orders.
210.46 Payment by a Federal Reserve Bank to a receiving bank or 
beneficiary.
210.47 Federal Reserve Bank liability; payment of compensation.
Appendix A of Subpart C of Part 210--Commentary

Subpart C--Funds Transfers Through the FedNow Service


Sec.  210.40  Authority, purpose, and scope.

    (a) Authority and purpose. This subpart provides rules to govern 
funds transfers through the FedNow Service, and has been issued 
pursuant to the Federal Reserve Act--section 13 (12 U.S.C. 342), 
paragraph (f) of section 19 (12 U.S.C. 464), paragraph 14 of section 16 
(12 U.S.C. 248(o)), and paragraphs (i) and (j) of section 11 (12 U.S.C. 
248(i) and (j))--and other laws and has the force and effect of Federal 
law. This subpart is not a funds-transfer system rule as defined in 
Section 4A-501(b) of Article 4A.
    (b) Scope. (1) This subpart incorporates the provisions of Article 
4A set forth in appendix A of this part. In the event of an 
inconsistency between the provisions of the sections of this subpart 
and appendix A of this part, the provisions of the sections of this 
subpart shall prevail.
    (2) Except as otherwise provided in paragraphs (b)(3) and (4) of 
this section, this subpart, including Article 4A as

[[Page 34363]]

incorporated herein and operating circulars of the Federal Reserve 
Banks issued in accordance with paragraph (c) of this section, governs 
the rights and obligations of the following parties with respect to the 
FedNow Service:
    (i) Federal Reserve Banks that send or receive payment orders;
    (ii) Senders that send payment orders directly to a Federal Reserve 
Bank;
    (iii) Receiving banks that receive payment orders directly from a 
Federal Reserve Bank;
    (iv) Beneficiaries that receive payment for payment orders by means 
of credit to the beneficiary's settlement account; and
    (v) Other parties to a funds transfer any part of which is carried 
out through the FedNow Service to the same extent as if this subpart 
were considered a funds-transfer system rule under Article 4A.
    (3) A Federal Reserve Bank that is not the sender's Federal Reserve 
Bank, receiving bank's Federal Reserve Bank, or beneficiary's Federal 
Reserve Bank is not a party to the funds transfer for purposes of this 
subpart and Article 4A.
    (4) This subpart governs a funds transfer that is sent through the 
FedNow Service, even if a portion of the funds transfer is governed by 
the Electronic Fund Transfer Act, but in the event of an inconsistency 
between the provisions this subpart and the Electronic Fund Transfer 
Act, the Electronic Fund Transfer Act shall prevail to the extent of 
the inconsistency.
    (c) Operating Circulars. Each Federal Reserve Bank shall issue an 
Operating Circular consistent with this subpart that governs the 
details of its funds-transfer operations in connection with the FedNow 
Service and other matters it deems appropriate. Among other things, the 
Operating Circular may: set cut-off times and funds-transfer business 
days; address security procedures offered by the Federal Reserve Banks 
to verify the authenticity of a payment order; specify format and media 
requirements for payment orders; specify the time and method of 
receipt, execution, and acceptance of a payment order and settlement of 
a Federal Reserve Bank's payment obligation for purposes of Article 4A; 
prescribe time limits for the processing of payment orders; specify 
service terms governing ancillary features of the FedNow Service; 
provide for the acceptance of documents in electronic form to the 
extent any provision in Article 4A requires an agreement or other 
document to be in writing; identify messages that are not payment 
orders; and impose charges for funds-transfer services.
    (d) Government senders, receiving banks, and beneficiaries. Except 
as otherwise expressly provided by the statutes of the United States, 
the parties specified in paragraphs (b)(2)(ii) through (v) of this 
section include a department, agency, instrumentality, independent 
establishment, or office of the United States, or a wholly-owned or 
controlled government corporation.
    (e) Financial messaging standards. Financial messaging standards 
(e.g., ISO 20022), including the financial messaging components, 
elements, technical documentation, tags, and terminology used to 
implement those standards, do not confer or connote legal status or 
responsibilities. This subpart, including Article 4A as incorporated 
herein, and the operating circulars of the Federal Reserve Banks issued 
in accordance with paragraph (c) of this section govern the rights and 
obligations of parties to funds transfers sent through the FedNow 
Service as provided in paragraph (b) of this section. To the extent 
there is any inconsistency between a financial messaging standard 
adopted by the Federal Reserve Banks for the FedNow Service and this 
subpart, this subpart shall prevail.


Sec.  210.41  Definitions.

    As used in this subpart, the following definitions apply:
    Article 4A means Article 4A of the Uniform Commercial Code as set 
forth in appendix A of this part, which is incorporated into this 
subpart in accordance with Sec.  210.40(b).
    Beneficiary has the same meaning as in Article 4A, except that the 
term is limited to a beneficiary in a funds transfer that is sent 
through the FedNow Service.
    Beneficiary's bank has the same meaning as in Article 4A, except 
that:
    (1) The term is limited to a beneficiary's bank in a funds transfer 
that is sent through the FedNow Service;
    (2) A Federal Reserve Bank need not be identified in the payment 
order in order to be the beneficiary's bank; and
    (3) The term includes a Federal Reserve Bank when that Federal 
Reserve Bank is the beneficiary of a payment order.
    Federal Reserve Bank with respect to an entity means the Federal 
Reserve Bank in whose District the entity is located, as determined 
under the procedure described in Part 204 of this chapter (Regulation 
D), even if the entity is not otherwise subject to that section, or, if 
the entity maintains an account on the books of a different Federal 
Reserve Bank, the Federal Reserve Bank at which the entity maintains an 
account.
    FedNow Service means the funds-transfer system owned and operated 
by the Federal Reserve Banks to support instant payments that is used 
primarily for the transmission and settlement of payment orders 
governed by this subpart. The FedNow Service does not include the 
Fedwire Funds Service.
    Interdistrict transfer means a funds transfer involving entries to 
settlement accounts maintained at two Federal Reserve Banks.
    Payment order has the same meaning as in Article 4A, except that 
the term includes only instructions sent or received through the FedNow 
Service, and does not include automated clearing house transfers or any 
communication designated as not being a payment order in an Operating 
Circular issued by a Federal Reserve Bank under this subpart.
    Receiving bank has the same meaning as in Article 4A, except that 
the term is limited to a receiving bank in a funds transfer that is 
sent through the FedNow Service.
    Sender has the same meaning as in Article 4A, except that the term 
is limited to a sender in a funds transfer that is sent through the 
FedNow Service.
    Sender's settlement account, receiving bank's settlement account, 
and beneficiary's settlement account mean an account on the books of a 
Federal Reserve Bank maintained by the sender, receiving bank, or 
beneficiary, respectively. The term also includes any account on a 
Federal Reserve Bank's books used with respect to the FedNow Service by 
the sender, receiving bank, or beneficiary, respectively, by agreement 
with its Federal Reserve Bank, any other Federal Reserve Bank on whose 
books the settlement account is maintained, and the account-holder.


Sec.  210.42  Reliance on identifying number.

    (a) Reliance by a Federal Reserve Bank on number to identify a 
beneficiary's bank. A Federal Reserve Bank that receives a payment 
order from a sender containing a number that identifies the 
beneficiary's bank may rely on the number, even if it identifies a bank 
different from the bank identified by name in the payment order, if the 
Federal Reserve Bank does not know of such an inconsistency in 
identification. A Federal Reserve Bank has no duty to detect any such 
inconsistency in identification.
    (b) Reliance by a Federal Reserve Bank on number to identify 
beneficiary. A Federal Reserve Bank, acting as a beneficiary's bank, 
that receives a

[[Page 34364]]

payment order from a sender containing a number that identifies the 
beneficiary may rely on the number, even if it identifies a person 
different from the person identified by name in the payment order, if 
the Federal Reserve Bank does not know of such an inconsistency in 
identification. A Federal Reserve Bank has no duty to detect any such 
inconsistency in identification.


Sec.  210.43  Agreement of sender.

    (a) Payment of sender's obligation to a Federal Reserve Bank. A 
sender (other than a Federal Reserve Bank), by maintaining or using a 
settlement account with a Federal Reserve Bank, authorizes the sender's 
Federal Reserve Bank to obtain payment for the sender's payment orders 
by debiting, or causing any other Federal Reserve Bank on whose books 
the settlement account is maintained to debit, the amount of the 
payment order from the settlement account. The sender remains 
responsible for payment if the Federal Reserve Bank on whose books the 
settlement account is maintained does not, for any reason, obtain 
payment by debiting that account.
    (b) Overdrafts. (1) A sender does not have the right to an 
overdraft in its settlement account. In the event an overdraft is 
created, the overdraft shall be due and payable immediately, without 
the need for a demand by the Federal Reserve Bank, at the earliest of 
the following times:
    (i) At the end of the FedNow funds-transfer business day;
    (ii) At the time the Federal Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the sender; or
    (iii) At the time the sender suspends payments or is closed.
    (2) The sender shall have in its settlement account, at the time 
the overdraft is due and payable, a balance of actually and finally 
collected funds sufficient to cover the aggregate amount of all its 
obligations to the Federal Reserve Bank, whether the obligations result 
from the acceptance of a payment order or otherwise.
    (3) To secure any overdraft, as well as any other obligation due or 
to become due to its Federal Reserve Bank, a sender, by sending a 
payment order to a Federal Reserve Bank that is accepted by the Federal 
Reserve Bank, grants to the Federal Reserve Bank a security interest in 
all of its assets in the possession or control of, or held for the 
account of, the Federal Reserve Bank. The security interest attaches 
when an overdraft, or any other obligation to the Federal Reserve Bank, 
becomes due and payable.
    (4) A Federal Reserve Bank may take any action authorized by law to 
recover the amount of an overdraft that is due and payable, including, 
but not limited to, the exercise of rights of set off, the realization 
on any available collateral, and any other rights it may have as a 
creditor under applicable law.
    (5) If a sender, other than a government sender described in Sec.  
210.40(d), incurs an overdraft in its settlement account as a result of 
a debit to the account by a Federal Reserve Bank under paragraph (a) of 
this section, the settlement account will be subject to any applicable 
overdraft charges, regardless of whether the overdraft has become due 
and payable. A Federal Reserve Bank may debit the settlement account 
under paragraph (a) of this section immediately on acceptance of the 
payment order.
    (c) Review of payment orders. A sender, by sending a payment order 
to a Federal Reserve Bank, agrees that for the purposes of sections 4A-
204(a) and 4A-304 of Article 4A, a reasonable time to notify a Federal 
Reserve Bank of the relevant facts concerning an unauthorized or 
erroneously executed payment order is within 60 calendar days after the 
sender receives notice that the payment order was accepted or that the 
sender's settlement account was debited with respect to the payment 
order.


Sec.  210.44  Agreement of receiving bank.

    (a) Payment. A receiving bank (other than a Federal Reserve Bank) 
that receives a payment order from its Federal Reserve Bank authorizes 
that Federal Reserve Bank to pay for the payment order by crediting, or 
causing any other Federal Reserve Bank on whose books the settlement 
account is maintained to credit, the amount of the payment order to the 
settlement account.
    (b) Funds availability. (1) A beneficiary's bank (other than a 
Federal Reserve Bank) that accepts a payment order over the FedNow 
Service is obliged to pay the amount of the order to the beneficiary of 
the order immediately after its acceptance of the payment order, by 
crediting an account of the beneficiary in accordance with section 4A-
405(a) of Article 4A. The rights and obligations with respect to the 
availability of funds are also governed by the Expedited Funds 
Availability Act and the Board's Regulation CC, Availability of Funds 
and Collection of Checks.
    (2) Nothing in paragraph (b)(1) of this section or any Operating 
Circular issued hereunder shall create any rights that the beneficiary 
or any party other than a Federal Reserve Bank may assert against the 
beneficiary's bank, or affect any liability of the beneficiary's bank 
to the beneficiary or any party other than a Federal Reserve Bank under 
Article 4A or other law.
    (3) In circumstances where the beneficiary's bank (other than a 
Federal Reserve Bank) has reasonable cause to believe that the 
beneficiary is not entitled or permitted to receive payment, the 
beneficiary's bank may notify its Federal Reserve Bank that it requires 
additional time to determine whether to accept the payment order. In 
the event the beneficiary's bank gives such notice to its Federal 
Reserve Bank, for purposes of this subpart and Article 4A the 
beneficiary's bank does not accept the payment order upon its receipt 
of payment in the amount of the payment order by a Federal Reserve 
Bank.


Sec.  210.45  Payment orders.

    (a) Rejection. A sender shall not send a payment order to a Federal 
Reserve Bank unless authorized to do so by the Federal Reserve Bank. A 
Federal Reserve Bank may reject, or impose conditions that must be 
satisfied before it will accept, a payment order for any reason.
    (b) Selection of an intermediary bank. For an interdistrict 
transfer through the FedNow Service, a Federal Reserve Bank is 
authorized and directed to execute a payment order through another 
Federal Reserve Bank. A sender shall not send a payment order to a 
Federal Reserve Bank that requires the Federal Reserve Bank to send a 
payment order to an intermediary bank (other than a Federal Reserve 
Bank). A sender shall not send to a Federal Reserve Bank a payment 
order through the FedNow Service that instructs use by a Federal 
Reserve Bank of a funds-transfer system or means of transmission other 
than the FedNow Service, unless the Federal Reserve Bank agrees with 
the sender in writing to follow such instructions.
    (c) Execution date and payment date. A sender shall not issue a 
payment order through the FedNow Service that instructs a Federal 
Reserve Bank to execute the payment order or to pay the beneficiary on 
a FedNow funds-transfer business day that is later than the funds-
transfer business day on which the order is received by the Federal 
Reserve Bank, unless the Federal Reserve Bank agrees with the sender in 
writing to follow such instructions.

[[Page 34365]]

Sec.  210.46  Payment by a Federal Reserve Bank to a receiving bank or 
beneficiary.

    (a) Payment to a receiving bank. Payment of a Federal Reserve 
Bank's obligation to pay a receiving bank (other than a Federal Reserve 
Bank) occurs at the earlier of the time when the amount of the payment 
order is credited to the receiving bank's settlement account or when 
the payment order is sent to the receiving bank.
    (b) Payment to a beneficiary. Payment by a Federal Reserve Bank to 
a beneficiary of a payment order, where the Federal Reserve Bank is the 
beneficiary's bank, occurs at the earlier of the time when the amount 
of the payment order is credited to the beneficiary's settlement 
account or when notice of the credit is sent to the beneficiary.


Sec.  210.47  Federal Reserve Bank liability; payment of compensation.

    (a) Damages. In connection with its handling of a payment order 
under this subpart, a Federal Reserve Bank shall not be liable to a 
sender, receiving bank, beneficiary, or other Federal Reserve Bank, 
governed by this subpart, for any damages other than those payable 
under Article 4A. A Federal Reserve Bank shall not agree to be liable 
to a sender, receiving bank, beneficiary, or other Federal Reserve Bank 
for consequential damages under section 4A-305(d) of Article 4A.
    (b) Payment of compensation. (1) A Federal Reserve Bank shall 
satisfy its obligation, or that of another Federal Reserve Bank, to pay 
compensation in the form of interest under Article 4A by paying such 
compensation to a sender, receiving bank, beneficiary, or another party 
to the funds transfer that is entitled to such payment in an amount 
that is calculated in accordance with section 4A-506 of Article 4A.
    (2) If the sender or receiving bank that is the recipient of the 
payment of compensation is not the party entitled to compensation under 
Article 4A, the sender or receiving bank shall pass through the benefit 
of the compensation by making an interest payment, as of the day the 
compensation was paid by the Federal Reserve Bank, to the party 
entitled to compensation. The interest payment that is made to the 
party entitled to compensation shall not be less than the value of the 
compensation that was paid by the Federal Reserve Bank to the sender or 
receiving bank. The party entitled to compensation may agree to accept 
compensation in a form other than a direct interest payment, provided 
that such an alternative form of compensation is not less than the 
value of the interest payment that otherwise would be made.
    (c) Nonwaiver of right of recovery. Nothing in this subpart or any 
operating circular issued hereunder shall constitute, or be construed 
as constituting, a waiver by a Federal Reserve Bank of a cause of 
action for recovery under any applicable law of mistake and 
restitution.

Appendix A of Subpart C of Part 210--Commentary

    The Commentary provides background material to explain the 
intent of the Board of Governors of the Federal Reserve System 
(Board) in adopting a particular provision in the subpart and to 
help readers interpret that provision. In some comments, examples 
are offered. The Commentary constitutes an official Board 
interpretation of subpart C of this part. Commentary is not provided 
for every provision of subpart C of this part, as some provisions 
are self-explanatory.

Section 210.40--Authority, Purpose, and Scope

    (a) Authority and purpose. Section 210.40(a) states that the 
purpose of subpart C of this part is to provide rules to govern 
funds transfers through the FedNow Service and recites the Board's 
rulemaking authority for this subpart. Subpart C of this part is 
Federal law and is not a ``funds-transfer system rule,'' as defined 
in section 4A-501(b) of Article 4A, Funds Transfers, of the Uniform 
Commercial Code (UCC), as set forth in appendix A of this part. 
Certain provisions of Article 4A may not be varied by a funds-
transfer system rule, but under section 4A-107, regulations of the 
Board and Operating Circulars of the Federal Reserve Banks supersede 
inconsistent provisions of Article 4A to the extent of the 
inconsistency. In addition, regulations of the Board may preempt 
inconsistent provisions of state law. Accordingly, subpart C of this 
part supersedes or preempts inconsistent provisions of state law. It 
does not affect state law governing funds transfers that does not 
conflict with the provisions of subpart C of this part, such as 
Article 4A, as enacted in any state, as such state law may apply to 
parties to funds transfers through the FedNow Service whose rights 
and obligations are not governed by subpart C of this part.
    (b) Scope. (1) Subpart C of this part incorporates the 
provisions of Article 4A set forth in appendix A of this part. The 
provisions set forth expressly in the sections of subpart C of this 
part supersede or preempt any inconsistent provisions of Article 4A 
as set forth in appendix A of this part or as enacted in any state. 
The official comments to Article 4A are not incorporated in subpart 
C of this part or this commentary to subpart C of this part, but the 
official comments may be useful in interpreting Article 4A as set 
forth in appendix A of this part. Because section 4A-105 refers to 
other provisions of the Uniform Commercial Code (e.g., definitions 
in article 1 of the UCC), these other provisions of the UCC, as 
approved by the National Conference of Commissioners on Uniform 
State Laws, which is now also known as the Uniform Law Commission, 
and the American Law Institute, from time to time, are also 
incorporated into subpart C of this part. Subpart C of this part 
applies to any party to a funds transfer sent through the FedNow 
Service that is in privity with a Federal Reserve Bank. These 
parties include a sender (bank or nonbank) that sends a payment 
order to a Federal Reserve Bank through the FedNow Service, a 
receiving bank that receives a payment order from a Federal Reserve 
Bank, and a beneficiary that receives credit to an account that it 
uses or maintains at a Federal Reserve Bank as payment for a payment 
order accepted by a Federal Reserve Bank. Subpart C of this part 
also applies to Federal Reserve Banks that send or receive payment 
orders over the FedNow Service. For example, if a sender settles its 
activity over the FedNow Service in the account of a correspondent 
bank, the sender's Federal Reserve Bank would be a bank in the funds 
transfer chain, but the Federal Reserve Bank of the correspondent 
bank would not be a sender or receiving bank with respect to the 
payment order and would not be a party to the funds transfer. Other 
parties to a funds transfer sent through the FedNow Service are 
covered by this subpart to the same extent that this subpart would 
apply to them if this subpart were a ``funds-transfer system rule'' 
under Article 4A that selected subpart C of this part as the 
governing law.
    (2) The scope of the applicability of a funds-transfer system 
rule under Article 4A is specified in section 4A-501(b), and the 
scope of the choice of law provision is specified in section 4A-
507(c). Under section 4A-507(c), a choice of law provision is 
binding on the participants in a funds-transfer system and certain 
other parties having notice that the funds-transfer system might be 
used for the funds transfer and of the choice of law provision. The 
Uniform Commercial Code provides that a person has notice of a fact 
when the person has actual knowledge of it, receives a notice or 
notification of it, or has reason to know that it exists from all 
the facts and circumstances known to the person at the time in 
question. (See UCC sec. 1-202.) However, under sections 4A-507(b) 
and 4A-507(d), a choice of law by agreement of the parties takes 
precedence over a choice of law made by funds-transfer system rule.
    (3) With respect to funds transfers sent through the FedNow 
Service, if originators and beneficiaries that are not in privity 
with a Federal Reserve Bank have the notice contemplated by Section 
4A-507(c) or if those parties agree to be bound by subpart C of this 
part, subpart C of this part generally would apply to those remote 
parties. If remote parties to a funds transfer, a portion of which 
is sent through the FedNow Service, have expressly selected by 
agreement a law other than subpart C of this part under section 4A-
507(b), subpart C of this part would not take precedence over the 
choice of law made by the agreement even though the remote parties 
had notice that the FedNow Service may be used and of the governing 
law. (See 4A-507(d).) In addition, subpart C of this part would not 
apply to a funds transfer sent through a funds-transfer system

[[Page 34366]]

other than the FedNow Service, even though settlement for the funds 
transfer is made by means of a separate funds transfer through the 
FedNow Service.
    (4) Under section 4A-108, Article 4A does not apply to a funds 
transfer, any part of which is governed by the Electronic Fund 
Transfer Act (EFTA) (15 U.S.C. 1693 et seq.). A funds transfer from 
a consumer originator or a funds transfer to a consumer beneficiary 
could be carried out through the FedNow Service and could 
potentially be subject to the EFTA and Regulation E (12 CFR part 
1005) implementing it. If so, the funds transfer continues to also 
be governed by subpart C, except that, in the event of an 
inconsistency between the provisions of subpart C and the EFTA, the 
EFTA shall prevail to the extent of the inconsistency. (See also the 
commentary to section 210.41 in this appendix, ``Payment Order.'') 
For example, a funds transfer may be initiated from a consumer's 
account at a depository institution, and the depository institution 
may execute that payment order by sending a conforming payment order 
to a Reserve Bank through the FedNow Service. If that transfer is 
subject to the EFTA, then examples of how the provisions of subpart 
C may govern the transfer include, but are not limited to, the 
following:
    (i) Where the consumer subsequently gives timely notice that the 
transfer was an unauthorized electronic fund transfer to its 
depository institution and exercises the right to obtain a refund 
under the EFTA, the depository institution would be required to 
comply with the EFTA and the applicable provisions of the EFTA would 
govern the institution's obligations to its customer, even if under 
subpart C the institution does not have a right to receive a refund 
or reverse the payment order sent to the Reserve Bank through the 
FedNow Service.
    (ii) Where the customer properly asserts an error under the EFTA 
with respect to the transfer and exercises the right to obtain a 
refund to correct the error under the EFTA, the depository 
institution would be required to comply with the EFTA and the 
applicable provisions of the EFTA would govern the institution's 
obligations to its customer, even if under subpart C the institution 
is obliged to pay its payment order sent to the Reserve Bank through 
the FedNow Service.
    (c) Operating Circulars. The Federal Reserve Banks issue 
Operating Circulars consistent with this subpart that contain 
additional provisions applicable to payment orders and other 
messages sent through the FedNow Service. Under section 4A-107, this 
Operating Circular supersedes inconsistent provisions of Article 4A, 
both as set forth in appendix A of this part and as enacted in any 
state. These Operating Circulars are not funds-transfer system 
rules, but, by their terms, they are binding on all parties covered 
by this subpart.
    (d) Government senders, receiving banks, and beneficiaries. This 
section clarifies that unless a statute of the United States 
provides otherwise, subpart C of this part applies to governmental 
entities.
    (e) Financial messaging standards. This paragraph makes clear 
that financial messaging standards, including the financial 
messaging components, elements, technical documentation, tags, and 
terminology used to implement those standards, do not confer or 
connote legal status or responsibilities. Instead, subpart C of this 
part and Federal Reserve Bank operating circulars govern the rights 
and obligations of parties to funds transfers sent through the 
FedNow Service as provided in Sec.  210.40(b). Thus, to the extent 
there is any inconsistency between a financial messaging standard 
adopted by the FedNow Service and subpart C of this part, subpart C 
of this part, including Article 4A as set forth in appendix A of 
this part, will prevail. In the ISO 20022 financial messaging 
standard, for example, the term agent is used to refer to a variety 
of bank parties to a funds transfer (e.g., debtor agent, creditor 
agent, intermediary agent). Notwithstanding use of that term in the 
standard and in message tags, such banks are not the agents of any 
party to a funds transfer and owe no duty to any other party to such 
a funds transfer except as provided in subpart C of this part 
(including Article 4A) or by express agreement. The ISO 20022 
financial messaging standard also permits information to be carried 
in a funds-transfer message regarding persons that are not parties 
to that funds transfer (e.g., ultimate debtor, ultimate creditor, 
initiating party) for regulatory, compliance, remittance, or other 
purposes. An ``ultimate debtor'' is not an ``originator'' as defined 
in Article 4A. The relationship between the ultimate debtor and the 
originator (what the ISO 20022 standard calls the ``debtor'') is 
determined by law other than Article 4A.

Section 210.41-- Definitions

    Article 4A defines many terms (e.g., beneficiary, intermediary 
bank, receiving bank, security procedure) used in this subpart. 
These terms are defined or listed in sections 4A-103 through 4A-105. 
These terms, such as the term bank (defined in section 4A-
105(d)(2)), may differ from comparable terms in subpart A and 
subpart B of this part. As subpart C of this part incorporates 
consistent provisions of Article 4A, it incorporates these 
definitions unless these terms are expressly defined otherwise in 
subpart C of this part. This subpart modifies the definitions of 
five Article 4A terms: beneficiary, beneficiary's bank, payment 
order, receiving bank, and sender. This subpart also defines terms 
not defined in Article 4A.
    Article 4A. Article 4A means the version of that article of the 
Uniform Commercial Code set forth in appendix A of this part. It 
does not refer to the law of any particular state unless the context 
indicates otherwise. Subject to the express provisions of this 
Subpart, this version of Article 4A is incorporated into this 
subpart and made Federal law for transactions covered by this 
subpart. (See Sec.  210.40(b)(1) and accompanying commentary.) 
Because section 4A-105 refers to other provisions of the Uniform 
Commercial Code (e.g., definitions in article 1 of the UCC) these 
other provisions of the UCC, as approved by the National Conference 
of Commissioners on Uniform State Laws, which is now also known as 
the Uniform Law Commission, and the American Law Institute, from 
time to time, are also incorporated in subpart C of this part.
    Beneficiary, beneficiary's bank, receiving bank, and sender. The 
definitions of ``beneficiary,'' ``beneficiary's bank,'' ``receiving 
bank,'' and ``sender'' in subpart C of this part differ from the 
definitions in sections 4A-103(a)(2)-(4). The subpart C definition 
clarifies that, for the purposes of subpart C of this part, these 
terms are limited to parties in a funds transfer that is sent 
through the FedNow Service. For example, the parties to a funds 
transfer that is sent through the Fedwire Funds Service would be 
governed by subpart B of this part, and would not be a 
``beneficiary,'' ``beneficiary's bank,'' ``receiving bank,'' or 
``sender'' governed by subpart C. The definition of ``beneficiary's 
bank'' in subpart C further clarifies that where a Federal Reserve 
Bank functions as the beneficiary's bank, it need not be identified 
in the payment order as the beneficiary's bank and that a Federal 
Reserve Bank that receives a payment order as beneficiary is also 
the beneficiary's bank with respect to that payment order.
    The FedNow Service. The FedNow Service refers to the funds-
transfer system owned and operated by the Federal Reserve Banks to 
support instant payments that is governed by this Subpart. The term 
does not refer to any particular computer, telecommunications 
facility, or funds transfer, but rather to the system as a whole. 
The FedNow Service does not include the Fedwire Funds Service or the 
system used for automated clearing house transfers.
    Payment Order. (1) The definition of ``payment order'' in 
subpart C of this part differs from the section 4A-103(a)(1) 
definition. The subpart C definition clarifies that, for the 
purposes of subpart C of this part, the term includes only 
instructions transmitted through the FedNow Service. For example, 
instructions transmitted through the Fedwire Funds Service would be 
governed by subpart B of this part, and not subpart C.
    Additionally, the subpart C definition provides that certain 
messages that are transmitted through the FedNow Service are not 
payment orders. Federal Reserve Banks and banks participating in the 
FedNow Service send various types of messages relating to payment 
orders or to other matters, through the FedNow Service, that are not 
intended to be payment orders. In some cases, messages sent through 
the FedNow Service, such as certain requests for payment, may be 
payment orders under Article 4A, but are not treated as payment 
orders under subpart C because they are not an instruction to a 
Federal Reserve Bank to pay or cause another bank to pay money. 
Under the subpart C definition, these messages are not ``payment 
orders'' governed by this subpart. The operating circulars of the 
Federal Reserve Banks may specify those messages that may be 
transmitted through the FedNow Service but that are not payment 
orders.
    (2) Subpart C, including its incorporation of Article 4A, 
governs a payment order even though the originator's or 
beneficiary's account may be a consumer account established 
primarily for personal, family, or household purposes. Under section 
4A-108, Article 4A does not apply to a funds transfer

[[Page 34367]]

any part of which is governed by the Electronic Fund Transfer Act. 
That Act, and Regulation E (12 CFR part 1005) implementing it, may 
govern a transfer through the FedNow Service that is from a consumer 
originator or to a consumer beneficiary. In the event that a 
transfer through the FedNow Service is subject to the EFTA, the 
transfer continues to also be governed by this subpart, except that, 
in the event of an inconsistency between the provisions of subpart C 
and the EFTA, the EFTA shall prevail to the extent of the 
inconsistency. (See also Sec.  210.40(b) and accompanying 
commentary.) Thus, this subpart applies to all funds transfers 
through the FedNow Service even though some such transfers involve 
originators or beneficiaries that are consumers.
    Sender's settlement account, receiving bank's settlement 
account, and beneficiary's settlement account. A FedNow participant 
must designate an account on the books of a Federal Reserve Bank 
that the Federal Reserve Banks may use to settle the participant's 
activity over the FedNow Service. A FedNow participant may settle 
its activity over the FedNow Service in its master account. 
Alternatively, it may designate the account of a correspondent bank 
that the Federal Reserve Banks may use to settle activity through 
the service, subject to the correspondent bank's agreement to any 
such designation.

Section 210.42--Reliance on Identifying Number

    (a) Reliance by a Federal Reserve Bank on number to identify 
intermediary bank or beneficiary's bank. Section 4A-208 provides 
that a receiving bank, such as a Federal Reserve Bank, may rely on 
the routing number of an intermediary bank or the beneficiary's bank 
specified in a payment order as identifying the appropriate 
intermediary bank or beneficiary's bank, even if the payment order 
identifies another bank by name, provided that the receiving bank 
does not know of the inconsistency. Under section 4A-208(b)(2), if 
the sender of the payment order is not a bank, a receiving bank may 
rely on the number only if the sender had notice before the 
receiving bank accepted the sender's order that the receiving bank 
might rely on the number. This section provides this notice to 
entities that are not banks, such as the Department of the Treasury, 
that send payment orders directly to a Federal Reserve Bank through 
the FedNow Service.
    (b) Reliance by a Federal Reserve Bank on number to identify 
beneficiary. Section 4A-207 provides that a beneficiary's bank, such 
as a Federal Reserve Bank, may rely on the number identifying a 
beneficiary, such as the beneficiary's account number, specified in 
a payment order as identifying the appropriate beneficiary, even if 
the payment order identifies another beneficiary by name, provided 
that the beneficiary's bank does not know of the inconsistency. 
Under section 4A-207(c)(2), if the originator is not a bank, an 
originator is not obliged to pay for a payment order if the 
originator did not have notice that the beneficiary's bank might 
rely on the identifying number and the person paid on the basis of 
the identifying number was not entitled to receive payment. This 
section of subpart C provides this notice to entities that are not 
banks, such as the Department of the Treasury, that are originators 
of payment orders sent directly by the originators to a Federal 
Reserve Bank through the FedNow Service, where that Federal Reserve 
Bank or another Federal Reserve Bank is the beneficiary's bank (see 
also section 4A-402(b), providing that a sender must pay a 
beneficiary's bank for a payment order accepted by the beneficiary's 
bank).

Section 210.43--Agreement of Sender

    (a) Payment of sender's obligation to a Federal Reserve Bank. 
When a sender sends a payment order to a Federal Reserve Bank and 
the Federal Reserve Bank accepts the payment order by issuing a 
conforming order executing the sender's payment order, under section 
4A-402, the sender is indebted to the Federal Reserve Bank for the 
amount of the payment order. Section 4A-403 specifies the various 
methods by which a sender may settle the obligation under section 
4A-402. With respect to a payment order sent through the FedNow 
Service, the obligation of a sender (other than a Federal Reserve 
Bank) is settled by a debit to the account of the sender at a 
Federal Reserve Bank. Section 210.43(a) provides that a sender, 
other than a Federal Reserve Bank, that maintains or uses a 
settlement account at a Federal Reserve Bank authorizes its Federal 
Reserve Bank to debit, or cause any other Federal Reserve Bank on 
whose books the settlement account is maintained to debit, that 
account, so that the Federal Reserve Bank can obtain payment for the 
payment order.
    (b) Overdrafts. (1) In some cases, debits to a sender's 
settlement account will create an overdraft in the settlement 
account. The Board and the Federal Reserve Banks have established 
policies concerning when a Federal Reserve Bank will permit a bank 
to incur an overdraft in its account at a Federal Reserve Bank. 
These policies do not give a bank or other sender a right to an 
overdraft in its account. Subpart C clarifies that a sender does not 
have a right to such an overdraft. If an overdraft arises, it 
becomes immediately due and payable at the earliest of the following 
times: The end of the FedNow funds-transfer business day; the time 
the Federal Reserve Bank in its sole discretion, deems itself 
insecure and gives notice to the sender; or the time that the sender 
suspends payments or is closed by governmental action, such as the 
appointment of a receiver. In some cases, a Federal Reserve Bank 
extends its FedNow operations beyond the standard cut-off time for 
that FedNow funds-transfer business day. For the purposes of this 
section, unless otherwise specified by the Federal Reserve Bank 
making such an extension, an overdraft becomes due and payable at 
the end of the extended operating hours. An overdraft becomes due 
and payable prior to a Federal Reserve Bank's cut-off time if the 
Federal Reserve Bank deems itself insecure and gives notice to the 
sender. A Federal Reserve Bank that deems itself insecure may give 
such notice in accordance with the provisions on notice in section 
1-202(d) of the UCC, in accordance with any other applicable law or 
agreement, or by any other reasonable means. An overdraft also 
becomes due and payable at the time that a bank is closed or 
suspends payments. For example, an overdraft becomes due and payable 
if a receiver is appointed for the bank or the bank is prevented 
from making payments by governmental order. The Federal Reserve Bank 
need not make demand on the sender for the overdraft to become due 
and payable.
    (2) A sender must cover any overdraft and any other obligation 
of the sender to the Federal Reserve Bank by the time the overdraft 
becomes due and payable. By sending a payment order to a Federal 
Reserve Bank, the sender grants a security interest to the Federal 
Reserve Bank in all of the assets of the sender possessed or 
controlled by, or held for the account of, the Federal Reserve Bank 
in order to secure all obligations due or to become due to the 
Federal Reserve Bank. The security interest attaches when the 
overdraft, or other obligation of the sender to the Federal Reserve 
Bank, becomes due and payable. The security interest does not apply 
to assets held by the sender as custodian or trustee for the 
sender's customers or third parties. Once an overdraft is due and 
payable, a Federal Reserve Bank may exercise its right of set off, 
liquidate collateral, or take other similar action to satisfy the 
obligation the sender owes to the Federal Reserve Bank.
    (c) Review of payment orders. (1) Under section 4A-204, a 
receiving bank is required to refund the principal amount of an 
unauthorized payment order that the sender was not obliged to pay, 
together with interest on the refundable amount calculated from the 
date that the receiving bank received payment to the date of the 
refund. The sender is not entitled to compensation in the form of 
interest if the sender fails to exercise ordinary care to determine 
that the order was not authorized and to notify the receiving bank 
within a reasonable time after the sender receives a notice that the 
payment order was accepted or that the sender's account was debited 
with respect to the order. Similarly, under section 4A-304, if a 
sender of a payment order that was erroneously executed does not 
notify the bank receiving the payment order within a reasonable 
time, the bank is not liable to the sender for compensation in the 
form of interest on any amount refundable to the sender. Section 
210.43(c) establishes 60 calendar days as the reasonable period of 
time for the purposes of these provisions of Article 4A.
    (2) Section 4A-505 provides that in order for a customer to 
assert a claim objecting to a debit to its account by a receiving 
bank, the customer must notify the receiving bank of its objection 
within one year after the customer received notification reasonably 
identifying the payment order. Subpart C of this part does not vary 
this one-year claim preclusion period.

Section 210.44--Agreement of Receiving Bank

    (b) Funds availability. (1) Section 4A-209(b) provides that a 
beneficiary's bank accepts a payment order at the earliest of

[[Page 34368]]

certain specified events, including when the bank receives payment 
for the entire amount of the order from the sender (see section 4A-
209(b)(2)). Section 4A-404(a) provides that if a beneficiary's bank 
accepts a payment order, it is obliged to pay the amount of a 
payment order to the beneficiary on the payment date unless 
acceptance of the payment order occurs on the payment date after the 
close of the funds-transfer business day of the bank. Section 4A-
405(a) provides that if a beneficiary's bank pays the beneficiary by 
crediting an account of the beneficiary on its own books, payment of 
the bank's obligation under Section 4A-404(a) occurs when and to the 
extent (i) the bank notifies the beneficiary that it may withdraw 
the amount of the credit, (ii) the bank lawfully applies the credit 
to a debt of the beneficiary, or (iii) funds with respect to the 
payment order are otherwise made available to the beneficiary by the 
bank.
    (2) Section 210.44(b)(1) provides that if a FedNow participant 
that is the beneficiary's bank accepts a payment order, it must pay 
the beneficiary by credit to the beneficiary's account in accordance 
with section 4A-405(a) of Article 4A, and it must do so immediately 
after its acceptance of the payment order. This section further 
clarifies that the provisions of the Expedited Funds Availability 
Act (12 U.S.C. 4002(a)) and its implementing regulation, Regulation 
CC (12 CFR part 229), also govern. Regulation CC provides that funds 
received by a bank by an electronic payment shall be available for 
withdrawal not later than the business day after the banking day on 
which such funds are received. (12 CFR 229.10(b).) Because Subpart C 
of this part requires funds to be made available on a more prompt 
basis than the availability requirements of the Expedited Funds 
Availability Act and Regulation CC, that act and Regulation CC do 
not preempt or invalidate subpart C. For example, if a beneficiary's 
bank accepts a payment order through the FedNow Service at 10 a.m. 
but does not make funds available to the beneficiary until 5 p.m., 
the bank has failed to satisfy its obligations under subpart C of 
this part even if it has satisfied its obligations under Regulation 
CC.
    (3) Section 210.44(b)(2) clarifies that the obligation for the 
beneficiary's bank to provide immediate funds availability to the 
beneficiary under Sec.  210.44(b)(1), and any Operating Circular 
issued in accordance with subpart C, should not be construed as 
creating any rights that the beneficiary or any party other than a 
Federal Reserve Bank may assert against the beneficiary's bank, or 
affect any liability of the beneficiary's bank to the beneficiary or 
any party other than a Federal Reserve Bank under Article 4A or 
other law. In the example above, where the beneficiary's bank 
accepts a payment order through the FedNow Service at 10 a.m. but 
does not make funds available to the beneficiary until 5 p.m., the 
bank has failed to satisfy its obligations under Sec.  210.44(b)(1) 
but the beneficiary would not have a claim or right to assert 
against the bank under that provision.
    (4) Section 210.46(a) provides that payment by a Federal Reserve 
Bank to a receiving bank occurs when the receiving bank's settlement 
account is credited or when the payment order is sent by the Federal 
Reserve Bank to the receiving bank, whichever is earlier, and would 
ordinarily be considered acceptance of the payment order by the 
beneficiary's bank under section 4A-209(b). Section 210.44(b)(3) 
provides that notwithstanding section 4A-209(b), in certain 
circumstances a beneficiary's bank is not deemed to accept a payment 
order at such time as it receives payment from its Federal Reserve 
Bank. Specifically, where the beneficiary's bank has reasonable 
cause to believe that the beneficiary is not entitled or permitted 
to receive payment and the beneficiary's bank notifies its Federal 
Reserve Bank that it requires additional time to determine whether 
to accept the payment order, this section provides that for purposes 
of subpart C and Article 4A, the beneficiary's bank does not accept 
the payment order even if it has received payment for the entire 
amount of the order from its Federal Reserve Bank as provided in 
Sec.  210.46.
    For example, if the beneficiary's bank has reasonable cause to 
believe that making funds available to the beneficiary may violate 
applicable U.S. sanctions, the beneficiary's bank may notify its 
Federal Reserve Bank that it requires additional time to determine 
whether to accept the payment order, including to investigate if the 
beneficiary is subject to applicable sanctions. As an additional 
example, if the beneficiary's bank has reasonable cause to believe 
that a particular payment order may be related to fraudulent 
activity, the beneficiary's bank may notify its Federal Reserve Bank 
that it requires additional time to determine whether to accept the 
payment order, including to investigate the suspected fraudulent 
activity. In both examples, in the event the beneficiary's bank 
gives such notice, the beneficiary's bank would not be deemed to 
have accepted the payment order at the time it receives payment from 
its Federal Reserve Bank.

Section 210.45--Payment Orders

    (a) Rejection. (1) A sender must make arrangements with its 
Federal Reserve Bank before it can send payment orders to the 
Federal Reserve Bank. Federal Reserve Banks reserve the right to 
reject or impose conditions on the acceptance of payment orders for 
any reason. For example, a Federal Reserve Bank might reject or 
impose conditions on accepting a payment order where a sender does 
not have sufficient funds in its settlement account with the Federal 
Reserve Bank to cover the amount of the sender's payment order and 
other obligations of the sender due or to become due to the Federal 
Reserve Bank. As a further example, a Federal Reserve Bank may 
reject a payment order that is not successfully processed within 
time limits established by the Federal Reserve Banks. A Federal 
Reserve Bank may require a sender to execute a written agreement 
concerning security procedures or other matters before the sender 
may send payment orders to the Federal Reserve Bank.
    (b) Selection of an intermediary bank. (1) Under section 4A-302, 
if a receiving bank (other than a beneficiary's bank), such as a 
Federal Reserve Bank, accepts a payment order, it must issue a 
payment order that complies with the sender's order. The sender's 
order may include instructions concerning an intermediary bank to be 
used that must be followed by a receiving bank (see section 4A-
302(a)(1)). If the sender does not designate any intermediary bank 
in its payment order, the receiving bank may select an intermediary 
bank through which the sender's payment order can be expeditiously 
issued to the beneficiary's bank so long as the receiving bank 
exercises ordinary care in selecting the intermediary bank (see 
section 4A-302(b)).
    (2) This section provides that in an interdistrict transfer, a 
Federal Reserve Bank is authorized and directed to select another 
Federal Reserve Bank as an intermediary bank. A sender may not 
instruct a Federal Reserve Bank to use a particular intermediary 
bank or to use its discretion to select an intermediary bank other 
than a Federal Reserve Bank. In addition, a sender may not send a 
payment order through the FedNow Service that instructs a Federal 
Reserve Bank to use a funds-transfer system or means of transmission 
other than the FedNow Service, unless the sender and the Federal 
Reserve Bank agree in writing to the use of that funds-transfer 
system or means of transmission.
    (c) Execution date and payment date. (1) Under 4A-301(b), the 
``execution date'' of a payment order means the day on which the 
receiving bank may properly issue a payment order in execution of 
the sender's order. Under section 4A-401, the ``payment date'' of a 
payment order is the day on which the amount of the order is payable 
to the beneficiary by the beneficiary's bank. The execution date and 
the payment date may be determined by instruction of the sender but 
cannot be earlier than the day the order is received and, unless 
otherwise determined, is the day the order is received (see sections 
4A-301(b) and 4A-401). Section 4A-106, provides for the time that a 
payment order is received, including in the event that a receiving 
bank fixes a cut-off time for the receipt and processing of payment 
orders. If the bank receives a payment order after its cut-off time, 
the bank may treat the payment order as received at the opening of 
the next funds-transfer business day (see section 4A-106(a)).
    (2) The FedNow Service is designed to be an instant value 
transfer system through which funds may be transferred from the 
originator to the beneficiary on the same funds-transfer business 
day. This section provides that a sender may not send a payment 
order to a Federal Reserve Bank that specifies an execution date or 
payment date later than the day on which the payment order is 
issued, unless the sender of the order and the Federal Reserve Bank 
agree in writing to the arrangement.

Section 210.46--Payment by a Federal Reserve Bank to a Receiving 
Bank or Beneficiary

    (a) Payment to a receiving bank. (1) Under section 4A-402, when 
a Federal Reserve Bank executes a sender's payment order by issuing 
a conforming order to a receiving bank that accepts the payment 
order, the

[[Page 34369]]

Federal Reserve Bank must pay the receiving bank the amount of the 
payment order. Section 210.44(a) authorizes a Federal Reserve Bank 
to make the payment by crediting, or causing any other Federal 
Reserve Bank on whose books the settlement account is maintained to 
credit, the settlement account of the receiving bank. Section 
210.46(a) provides that the payment occurs when the receiving bank's 
settlement account is credited or when the payment order is sent by 
the Federal Reserve Bank to the receiving bank, whichever is 
earlier. Ordinarily, payment will occur during the FedNow funds-
transfer business day a short time after the payment order is 
received. This credit is final and irrevocable when made and 
constitutes final settlement under section 4A-403. Payment does not 
waive a Federal Reserve Bank's right of recovery under the 
applicable law of mistake and restitution (see Sec.  210.47(c)), 
affect a Federal Reserve Bank's right to apply the funds to any 
obligation due or to become due to the Federal Reserve Bank, or 
affect legal process or claims by third parties on the funds.
    (2) This section on final payment does not apply to settlement 
for payment orders between Federal Reserve Banks. These payment 
orders are settled by other means.
    (b) Payment to a beneficiary. Section 210.46(b) specifies when a 
Federal Reserve Bank makes payment to a beneficiary for which it is 
the beneficiary's bank. As in the case of payment to a receiving 
bank, this payment occurs at the earlier of the time that the 
Federal Reserve Bank credits the beneficiary's settlement account or 
sends notice of the credit to the beneficiary, and is final and 
irrevocable when made.

Section 210.47--Federal Reserve Bank Liability; Payment of 
Compensation

    (a) Damages. (1) Under section 4A-305(d), damages for failure of 
a receiving bank to execute a payment order that it was obligated to 
execute by express agreement are limited to expenses in the 
transaction and incidental expenses and interest and do not include 
additional damages, including consequential damages, unless they are 
provided for in an express written agreement of the receiving bank. 
This section clarifies that in connection with the handling of 
payment orders, Federal Reserve Banks may not agree to be liable for 
consequential damages under this provision and shall not be liable 
for damages other than those that may be due under Article 4A to 
parties governed by this subpart. Any agreement in conflict with 
these provisions would not be effective, because it would be in 
violation of subpart C.
    (2) This section does not affect the ability of other parties to 
a funds transfer to agree to be liable for consequential damages, 
the liability of a Federal Reserve Bank under section 4A-404 
(relating to obligation of beneficiary's bank to pay and give notice 
to beneficiary), or the liability to parties governed by subpart C 
for claims not based on the handling of a payment order under 
subpart C.
    (b) Payment of compensation. (1) Under Article 4A, a Federal 
Reserve Bank may be required to pay compensation in the form of 
interest to another party in connection with its handling of a funds 
transfer. For example, payment of compensation in the form of 
interest is required in certain situations pursuant to sections 4A-
204 (relating to refund of payment and duty of customer to report 
with respect to unauthorized payment order), 4A-209 (relating to 
acceptance of payment order), 4A-210 (relating to rejection of 
payment order), 4A-304 (relating to duty of sender to report 
erroneously executed payment order), 4A-305 (relating to liability 
for late or improper execution or failure to execute a payment 
order), 4A-402 (relating to obligation of sender to pay receiving 
bank), and 4A-404 (relating to obligation of beneficiary's bank to 
pay and give notice to beneficiary).
    (2) Section 210.47(b) requires Federal Reserve Banks to provide 
compensation through payment in the form of interest. Under section 
4A-506(a), the amount of such interest may be determined by 
agreement between the sender and receiving bank or by funds-transfer 
system rule. If there is no such agreement, under section 4A-506(b), 
the amount of interest is based on the Federal funds rate. 
Similarly, compensation in the form of interest will be paid to 
government senders, receiving banks, or beneficiaries described in 
Sec.  210.40(d) if they are entitled to interest under subpart C. A 
Federal Reserve Bank may also, in its discretion, pay compensation 
in the form of interest directly to a remote party to a transfer 
through the FedNow Service that is entitled to interest, rather than 
providing compensation to its sender or receiving bank.
    (3) If a sender or receiving bank that received a payment of 
compensation is not the party entitled to compensation under Article 
4A, the sender or receiving bank must pass the benefit of the 
compensation payment made to it to the party that is entitled to 
compensation. The benefit may be passed on either in the form of a 
direct payment of interest or in the form of a compensating balance, 
if the party entitled to interest agrees to accept the other form of 
compensation. In the latter case, the value of the compensating 
balance must be at least equivalent to the value of the interest 
payment that otherwise would have been provided.
    (c) Nonwaiver of right of recovery. Several sections of Article 
4A allow a party to a funds transfer to make a claim pursuant to the 
applicable law of mistake and restitution. Nothing in subpart C of 
this part or any Operating Circular issued in accordance with 
subpart C of this part waives any such claim by a Federal Reserve 
Bank. A Federal Reserve Bank, however, may waive such a claim by 
express written agreement in order to settle litigation or for other 
purposes.

0
14. Add appendix A of part 210 to read as follows:

Appendix A of Part 210--Article 4A, Funds Transfers

Part 1--Subject Matter and Definitions

Section 4A-101. Short Title

    This Article may be cited as Uniform Commercial Code--Funds 
Transfers.

Section 4A-102. Subject Matter

    Except as otherwise provided in section 4A-108, this Article 
applies to funds transfers defined in section 4A-104.

Section 4A-103. Payment Order--Definitions

    (a) In this Article:
    (1) Payment order means an instruction of a sender to a 
receiving bank, transmitted orally, electronically, or in writing, 
to pay, or to cause another bank to pay, a fixed or determinable 
amount of money to a beneficiary if:
    (i) The instruction does not state a condition to payment to the 
beneficiary other than time of payment,
    (ii) The receiving bank is to be reimbursed by debiting an 
account of, or otherwise receiving payment from, the sender, and
    (iii) The instruction is transmitted by the sender directly to 
the receiving bank or to an agent, funds-transfer system, or 
communication system for transmittal to the receiving bank.
    (2) Beneficiary means the person to be paid by the beneficiary's 
bank.
    (3) ``Beneficiary's bank'' means the bank identified in a 
payment order in which an account of the beneficiary is to be 
credited pursuant to the order or which otherwise is to make payment 
to the beneficiary if the order does not provide for payment to an 
account.
    (4) Receiving bank means the bank to which the sender's 
instruction is addressed.
    (5) Sender means the person giving the instruction to the 
receiving bank.
    (b) If an instruction complying with paragraph (a)(1) of this 
section is to make more than one payment to a beneficiary, the 
instruction is a separate payment order with respect to each 
payment.
    (c) A payment order is issued when it is sent to the receiving 
bank.

Section 4A-104. Funds Transfer--Definitions

    In this Article:
    (a) Funds transfer means the series of transactions, beginning 
with the originator's payment order, made for the purpose of making 
payment to the beneficiary of the order. The term includes any 
payment order issued by the originator's bank or an intermediary 
bank intended to carry out the originator's payment order. A funds 
transfer is completed by acceptance by the beneficiary's bank of a 
payment order for the benefit of the beneficiary of the originator's 
payment order.
    (b) Intermediary bank means a receiving bank other than the 
originator's bank or the beneficiary's bank.
    (c) Originator means the sender of the first payment order in a 
funds transfer.
    (d) Originator's bank means:
    (1) The receiving bank to which the payment order of the 
originator is issued if the originator is not a bank; or
    (2) The originator if the originator is a bank.

Section 4A-105. Other Definitions

    (a) In this Article:
    (1) Authorized account means a deposit account of a customer in 
a bank designated by the customer as a source of payment of payment 
orders issued by the customer to the

[[Page 34370]]

bank. If a customer does not so designate an account, any account of 
the customer is an authorized account if payment of a payment order 
from that account is not inconsistent with a restriction on the use 
of that account.
    (2) Bank means a person engaged in the business of banking and 
includes a savings bank, savings and loan association, credit union, 
and trust company. A branch or separate office of a bank is a 
separate bank for purposes of this Article.
    (3) Customer means a person, including a bank, having an account 
with a bank or from whom a bank has agreed to receive payment 
orders.
    (4) Funds-transfer business day of a receiving bank means the 
part of a day during which the receiving bank is open for the 
receipt, processing, and transmittal of payment orders and 
cancellations and amendments of payment orders.
    (5) Funds-transfer system means a wire transfer network, 
automated clearing house, or other communication system of a 
clearing house or other association of banks through which a payment 
order by a bank may be transmitted to the bank to which the order is 
addressed.
    (6) Good faith means honesty in fact and the observance of 
reasonable commercial standards of fair dealing.
    (7) Prove with respect to a fact means to meet the burden of 
establishing the fact (Section 1-201(8)).
    (b) Other definitions applying to this Article and the sections 
in which they appear are:

``Acceptance'' .....Sec. 4A-209
``Beneficiary'' .....Sec. 4A-103
``Beneficiary's bank'' .....Sec. 4A-103
``Executed'' .....Sec. 4A-301
``Execution date'' .....Sec. 4A-301
``Funds transfer'' .....Sec. 4A-104
``Funds-transfer system rule'' .....Sec. 4A-501
``Intermediary bank'' .....Sec. 4A-104
``Originator'' .....Sec. 4A-104
``Originator's bank'' .....Sec. 4A-104
``Payment by beneficiary's bank to beneficiary'' .....Sec. 4A-405
``Payment by originator to beneficiary'' .....Sec. 4A-406
``Payment by sender to receiving bank'' .....Sec. 4A-403
``Payment date'' .....Sec. 4A-401
``Payment order'' .....Sec. 4A-103
``Receiving bank'' .....Sec. 4A-103
``Security procedure'' .....Sec. 4A-201
``Sender'' .....Sec. 4A-103

    (c) The following definitions in Article 4 apply to this 
Article:

``Clearing house'' .....Sec. 4-104
``Item'' .....Sec. 4-104
``Suspends payments'' .....Sec. 4-104

    (d) In addition Article 1 contains general definitions and 
principles of construction and interpretation applicable throughout 
this Article.

Section 4A-106. Time Payment Order Is Received

    (a) The time of receipt of a payment order or communication 
canceling or amending a payment order is determined by the rules 
applicable to receipt of a notice stated in Section 1-201(27). A 
receiving bank may fix a cut-off time or times on a funds-transfer 
business day for the receipt and processing of payment orders and 
communications canceling or amending payment orders. Different cut-
off times may apply to payment orders, cancellations, or amendments, 
or to different categories of payment orders, cancellations, or 
amendments. A cut-off time may apply to senders generally or 
different cut-off times may apply to different senders or categories 
of payment orders. If a payment order or communication canceling or 
amending a payment order is received after the close of a funds-
transfer business day or after the appropriate cut-off time on a 
funds-transfer business day, the receiving bank may treat the 
payment order or communication as received at the opening of the 
next funds-transfer business day.
    (b) If this Article refers to an execution date or payment date 
or states a day on which a receiving bank is required to take 
action, and the date or day does not fall on a funds-transfer 
business day, the next day that is a funds-transfer business day is 
treated as the date or day stated, unless the contrary is stated in 
this Article.

Section 4A-107. Federal Reserve Regulations and Operating Circulars

    Regulations of the Board of Governors of the Federal Reserve 
System and operating circulars of the Federal Reserve Banks 
supersede any inconsistent provision of this Article to the extent 
of the inconsistency.

Section 4A-108. Relationship to Electronic Fund Transfer Act

    (a) Except as provided in subsection (b), this Article does not 
apply to a funds transfer any part of which is governed by the 
Electronic Fund Transfer Act of 1978 (Title XX, Pub. L. 95-630, 92 
Stat. 3728, 15 U.S.C. 1693 et seq.) as amended from time to time.
    (b) This Article applies to a funds transfer that is a 
remittance transfer as defined in the Electronic Fund Transfer Act 
(15 U.S.C. 1693o-1) as amended from time to time, unless the 
remittance transfer is an electronic fund transfer as defined in the 
Electronic Fund Transfer Act (15 U.S.C. 1693a) as amended from time 
to time.
    (c) In a funds transfer to which this Article applies, in the 
event of an inconsistency between an applicable provision of this 
Article and an applicable provision of the Electronic Fund Transfer 
Act, the provision of the Electronic Fund Transfer Act governs to 
the extent of the inconsistency.

Part 2--Issue and Acceptance of Payment Order

Section 4A-201. Security Procedure

    Security procedure means a procedure established by agreement of 
a customer and a receiving bank for the purpose of (i) verifying 
that a payment order or communication amending or canceling a 
payment order is that of the customer, or (ii) detecting error in 
the transmission or the content of the payment order or 
communication. A security procedure may require the use of 
algorithms or other codes, identifying words or numbers, encryption, 
callback procedures, or similar security devices. Comparison of a 
signature on a payment order or communication with an authorized 
specimen signature of the customer is not by itself a security 
procedure.

Section 4A-202. Authorized and Verified Payment Orders

    (a) A payment order received by the receiving bank is the 
authorized order of the person identified as sender if that person 
authorized the order or is otherwise bound by it under the law of 
agency.
    (b) If a bank and its customer have agreed that the authenticity 
of payment orders issued to the bank in the name of the customer as 
sender will be verified pursuant to a security procedure, a payment 
order received by the receiving bank is effective as the order of 
the customer, whether or not authorized, if (i) the security 
procedure is a commercially reasonable method of providing security 
against unauthorized payment orders, and (ii) the bank proves that 
it accepted the payment order in good faith and in compliance with 
the security procedure and any written agreement or instruction of 
the customer restricting acceptance of payment orders issued in the 
name of the customer. The bank is not required to follow an 
instruction that violates a written agreement with the customer or 
notice of which is not received at a time and in a manner affording 
the bank a reasonable opportunity to act on it before the payment 
order is accepted.
    (c) Commercial reasonableness of a security procedure is a 
question of law to be determined by considering the wishes of the 
customer expressed to the bank, the circumstances of the customer 
known to the bank, including the size, type, and frequency of 
payment orders normally issued by the customer to the bank, 
alternative security procedures offered to the customer, and 
security procedures in general use by customers and receiving banks 
similarly situated. A security procedure is deemed to be 
commercially reasonable if (i) the security procedure was chosen by 
the customer after the bank offered, and the customer refused, a 
security procedure that was commercially reasonable for that 
customer, and (ii) the customer expressly agreed in writing to be 
bound by any payment order, whether or not authorized, issued in its 
name and accepted by the bank in compliance with the security 
procedure chosen by the customer.
    (d) The term sender in this Article includes the customer in 
whose name a payment order is issued if the order is the authorized 
order of the customer under subsection (a) of this section, or it is 
effective as the order of the customer under subsection (b) of this 
section.
    (e) This section applies to amendments and cancellations of 
payment orders to the same extent it applies to payment orders.
    (f) Except as provided in this section and in section 4A-
203(a)(1), rights and obligations arising under this section or 
section 4A-203 may not be varied by agreement.

Section 4A-203. Unenforceability of Certain Verified Payment Orders

    (a) If an accepted payment order is not, under section 4A-
202(a), an authorized order of a customer identified as sender, but 
is effective as an order of the customer pursuant to section 4A-
202(b), the following rules apply:

[[Page 34371]]

    (1) By express written agreement, the receiving bank may limit 
the extent to which it is entitled to enforce or retain payment of 
the payment order.
    (2) The receiving bank is not entitled to enforce or retain 
payment of the payment order if the customer proves that the order 
was not caused, directly or indirectly, by a person (i) entrusted at 
any time with duties to act for the customer with respect to payment 
orders or the security procedure, or (ii) who obtained access to 
transmitting facilities of the customer or who obtained, from a 
source controlled by the customer and without authority of the 
receiving bank, information facilitating breach of the security 
procedure, regardless of how the information was obtained or whether 
the customer was at fault. Information includes any access device, 
computer software, or the like.
    (b) This section applies to amendments of payment orders to the 
same extent it applies to payment orders.

Section 4A-204. Refund of Payment and Duty of Customer To Report With 
Respect to Unauthorized Payment Order

    (a) If a receiving bank accepts a payment order issued in the 
name of its customer as sender which is (i) not authorized and not 
effective as the order of the customer under section 4A-202, or (ii) 
not enforceable, in whole or in part, against the customer under 
section 4A-203, the bank shall refund any payment of the payment 
order received from the customer to the extent the bank is not 
entitled to enforce payment and shall pay interest on the refundable 
amount calculated from the date the bank received payment to the 
date of the refund. However, the customer is not entitled to 
interest from the bank on the amount to be refunded if the customer 
fails to exercise ordinary care to determine that the order was not 
authorized by the customer and to notify the bank of the relevant 
facts within a reasonable time not exceeding 90 days after the date 
the customer received notification from the bank that the order was 
accepted or that the customer's account was debited with respect to 
the order The bank is not entitled to any recovery from the customer 
on account of a failure by the customer to give notification as 
stated in this section.
    (b) Reasonable time under subsection (a) of this section may be 
fixed by agreement as stated in section 1-204(1), but the obligation 
of a receiving bank to refund payment as stated in subsection (a) 
may not otherwise be varied by agreement.

Section 4A-205. Erroneous Payment Orders

    (a) If an accepted payment order was transmitted pursuant to a 
security procedure for the detection of error and the payment order 
(i) erroneously instructed payment to a beneficiary not intended by 
the sender, (ii) erroneously instructed payment in an amount greater 
than the amount intended by the sender, or (iii) was an erroneously 
transmitted duplicate of a payment order previously sent by the 
sender, the following rules apply:
    (1) If the sender proves that the sender or a person acting on 
behalf of the sender pursuant to section 4A-206 complied with the 
security procedure and that the error would have been detected if 
the receiving bank had also complied, the sender is not obliged to 
pay the order to the extent stated in this paragraphs (2) and (3).
    (2) If the funds transfer is completed on the basis of an 
erroneous payment order described in clause (i) or (iii) of 
subsection (a), the sender is not obliged to pay the order and the 
receiving bank is entitled to recover from the beneficiary any 
amount paid to the beneficiary to the extent allowed by the law 
governing mistake and restitution.
    (3) If the funds transfer is completed on the basis of a payment 
order described in clause (ii) of subsection (a), the sender is not 
obliged to pay the order to the extent the amount received by the 
beneficiary is greater than the amount intended by the sender. In 
that case, the receiving bank is entitled to recover from the 
beneficiary the excess amount received to the extent allowed by the 
law governing mistake and restitution.
    (b) If (i) the sender of an erroneous payment order described in 
subsection (a) is not obliged to pay all or part of the order, and 
(ii) the sender receives notification from the receiving bank that 
the order was accepted by the bank or that the sender's account was 
debited with respect to the order, the sender has a duty to exercise 
ordinary care, on the basis of information available to the sender, 
to discover the error with respect to the order and to advise the 
bank of the relevant facts within a reasonable time, not exceeding 
90 days, after the bank's notification was received by the sender. 
If the bank proves that the sender failed to perform that duty, the 
sender is liable to the bank for the loss the bank proves it 
incurred as a result of the failure, but the liability of the sender 
may not exceed the amount of the sender's order.
    (c) This section applies to amendments to payment orders to the 
same extent it applies to payment orders.

Section 4A-206. Transmission of Payment Order Through Funds-Transfer or 
Other Communication System

    (a) If a payment order addressed to a receiving bank is 
transmitted to a funds-transfer system or other third-party 
communication system for transmittal to the bank, the system is 
deemed to be an agent of the sender for the purpose of transmitting 
the payment order to the bank. If there is a discrepancy between the 
terms of the payment order transmitted to the system and the terms 
of the payment order transmitted by the system to the bank, the 
terms of the payment order of the sender are those transmitted by 
the system. This section does not apply to a funds-transfer system 
of the Federal Reserve Banks.
    (b) This section applies to cancellations and amendments of 
payment orders to the same extent it applies to payment orders.

Section 4A-207. Misdescription of Beneficiary

    (a) Subject to subsection (b), if, in a payment order received 
by the beneficiary's bank, the name, bank account number, or other 
identification of the beneficiary refers to a nonexistent or 
unidentifiable person or account, no person has rights as a 
beneficiary of the order and acceptance of the order cannot occur.
    (b) If a payment order received by the beneficiary's bank 
identifies the beneficiary both by name and by an identifying or 
bank account number and the name and number identify different 
persons, the following rules apply:
    (1) Except as otherwise provided in subsection (c), if the 
beneficiary's bank does not know that the name and number refer to 
different persons, it may rely on the number as the proper 
identification of the beneficiary of the order. The beneficiary's 
bank need not determine whether the name and number refer to the 
same person.
    (2) If the beneficiary's bank pays the person identified by name 
or knows that the name and number identify different persons, no 
person has rights as beneficiary except the person paid by the 
beneficiary's bank if that person was entitled to receive payment 
from the originator of the funds transfer. If no person has rights 
as beneficiary, acceptance of the order cannot occur.
    (c) If (i) a payment order described in subsection (b) is 
accepted, (ii) the originator's payment order described the 
beneficiary inconsistently by name and number, and (iii) the 
beneficiary's bank pays the person identified by number as permitted 
by subsection (b)(1), the following rules apply:
    (1) If the originator is a bank, the originator is obliged to 
pay its order.
    (2) If the originator is not a bank and proves that the person 
identified by number was not entitled to receive payment from the 
originator, the originator is not obliged to pay its order unless 
the originator's bank proves that the originator, before acceptance 
of the originator's order, had notice that payment of a payment 
order issued by the originator might be made by the beneficiary's 
bank on the basis of an identifying or bank account number even if 
it identifies a person different from the named beneficiary. Proof 
of notice may be made by any admissible evidence. The originator's 
bank satisfies the burden of proof if it proves that the originator, 
before the payment order was accepted, signed a writing stating the 
information to which the notice relates.
    (d) In a case governed by subsection (b)(1), if the 
beneficiary's bank rightfully pays the person identified by number 
and that person was not entitled to receive payment from the 
originator, the amount paid may be recovered from that person to the 
extent allowed by the law governing mistake and restitution as 
follows:
    (1) If the originator is obliged to pay its payment order as 
stated in subsection (c), the originator has the right to recover.
    (2) If the originator is not a bank and is not obliged to pay 
its payment order, the originator's bank has the right to recover.

Section 4A-208. Misdescription of Intermediary Bank or Beneficiary's 
Bank

    (a) This subsection applies to a payment order identifying an 
intermediary bank or the beneficiary's bank only by an identifying 
number.
    (1) The receiving bank may rely on the number as the proper 
identification of the intermediary or beneficiary's bank and need 
not determine whether the number identifies a bank.

[[Page 34372]]

    (2) The sender is obliged to compensate the receiving bank for 
any loss and expenses incurred by the receiving bank as a result of 
its reliance on the number in executing or attempting to execute the 
order.
    (b) This subsection applies to a payment order identifying an 
intermediary bank or the beneficiary's bank both by name and an 
identifying number if the name and number identify different 
persons.
    (1) If the sender is a bank, the receiving bank may rely on the 
number as the proper identification of the intermediary or 
beneficiary's bank if the receiving bank, when it executes the 
sender's order, does not know that the name and number identify 
different persons. The receiving bank need not determine whether the 
name and number refer to the same person or whether the number 
refers to a bank. The sender is obliged to compensate the receiving 
bank for any loss and expenses incurred by the receiving bank as a 
result of its reliance on the number in executing or attempting to 
execute the order.
    (2) If the sender is not a bank and the receiving bank proves 
that the sender, before the payment order was accepted, had notice 
that the receiving bank might rely on the number as the proper 
identification of the intermediary or beneficiary's bank even if it 
identifies a person different from the bank identified by name, the 
rights and obligations of the sender and the receiving bank are 
governed by subsection (b)(1), as though the sender were a bank. 
Proof of notice may be made by any admissible evidence. The 
receiving bank satisfies the burden of proof if it proves that the 
sender, before the payment order was accepted, signed a writing 
stating the information to which the notice relates.
    (3) Regardless of whether the sender is a bank, the receiving 
bank may rely on the name as the proper identification of the 
intermediary or beneficiary's bank if the receiving bank, at the 
time it executes the sender's order, does not know that the name and 
number identify different persons. The receiving bank need not 
determine whether the name and number refer to the same person.
    (4) If the receiving bank knows that the name and number 
identify different persons, reliance on either the name or the 
number in executing the sender's payment order is a breach of the 
obligation stated in section 4A-302(a)(1).

Section 4A-209. Acceptance of Payment Order

    (a) Subject to subsection (d), a receiving bank other than the 
beneficiary's bank accepts a payment order when it executes the 
order.
    (b) Subject to subsections (c) and (d), a beneficiary's bank 
accepts a payment order at the earliest of the following times:
    (1) When the bank (i) pays the beneficiary as stated in section 
4A-405(a) or 4A-405(b), or (ii) notifies the beneficiary of receipt 
of the order or that the account of the beneficiary has been 
credited with respect to the order unless the notice indicates that 
the bank is rejecting the order or that funds with respect to the 
order may not be withdrawn or used until receipt of payment from the 
sender of the order;
    (2) When the bank receives payment of the entire amount of the 
sender's order pursuant to section 4A-403(a)(1) or (2); or
    (3) The opening of the next funds-transfer business day of the 
bank following the payment date of the order if, at that time, the 
amount of the sender's order is fully covered by a withdrawable 
credit balance in an authorized account of the sender or the bank 
has otherwise received full payment from the sender, unless the 
order was rejected before that time or is rejected within (i) one 
hour after that time, or (ii) one hour after the opening of the next 
business day of the sender following the payment date if that time 
is later. If notice of rejection is received by the sender after the 
payment date and the authorized account of the sender does not bear 
interest, the bank is obliged to pay interest to the sender on the 
amount of the order for the number of days elapsing after the 
payment date to the day the sender receives notice or learns that 
the order was not accepted, counting that day as an elapsed day. If 
the withdrawable credit balance during that period falls below the 
amount of the order, the amount of interest payable is reduced 
accordingly.
    (c) Acceptance of a payment order cannot occur before the order 
is received by the receiving bank. Acceptance does not occur under 
subsection (b)(2) or (3) if the beneficiary of the payment order 
does not have an account with the receiving bank, the account has 
been closed, or the receiving bank is not permitted by law to 
receive credits for the beneficiary's account.
    (d) A payment order issued to the originator's bank cannot be 
accepted until the payment date if the bank is the beneficiary's 
bank, or the execution date if the bank is not the beneficiary's 
bank. If the originator's bank executes the originator's payment 
order before the execution date or pays the beneficiary of the 
originator's payment order before the payment date and the payment 
order is subsequently canceled pursuant to section 4A-211(b), the 
bank may recover from the beneficiary any payment received to the 
extent allowed by the law governing mistake and restitution.

Section 4A-210. Rejection of Payment Order

    (a) A payment order is rejected by the receiving bank by a 
notice of rejection transmitted to the sender orally, 
electronically, or in writing. A notice of rejection need not use 
any particular words and is sufficient if it indicates that the 
receiving bank is rejecting the order or will not execute or pay the 
order. Rejection is effective when the notice is given if 
transmission is by a means that is reasonable in the circumstances. 
If notice of rejection is given by a means that is not reasonable, 
rejection is effective when the notice is received. If an agreement 
of the sender and receiving bank establishes the means to be used to 
reject a payment order, (i) any means complying with the agreement 
is reasonable, and (ii) any means not complying is not reasonable 
unless no significant delay in receipt of the notice resulted from 
the use of the noncomplying means.
    (b) This subsection applies if a receiving bank other than the 
beneficiary's bank fails to execute a payment order despite the 
existence on the execution date of a withdrawable credit balance in 
an authorized account of the sender sufficient to cover the order. 
If the sender does not receive notice of rejection of the order on 
the execution date and the authorized account of the sender does not 
bear interest, the bank is obliged to pay interest to the sender on 
the amount of the order for the number of days elapsing after the 
execution date to the earlier of the day the order is canceled 
pursuant to section 4A-211(d) or the day the sender receives notice 
or learns that the order was not executed, counting the final day of 
the period as an elapsed day. If the withdrawable credit balance 
during that period falls below the amount of the order, the amount 
of interest is reduced accordingly.
    (c) If a receiving bank suspends payments, all unaccepted 
payment orders issued to it are deemed rejected at the time the bank 
suspends payments.
    (d) Acceptance of a payment order precludes a later rejection of 
the order. Rejection of a payment order precludes a later acceptance 
of the order.

Section 4A-211. Cancellation and Amendment of Payment Order

    (a) A communication of the sender of a payment order canceling 
or amending the order may be transmitted to the receiving bank 
orally, electronically, or in writing. If a security procedure is in 
effect between the sender and the receiving bank, the communication 
is not effective to cancel or amend the order unless the 
communication is verified pursuant to the security procedure or the 
bank agrees to the cancellation or amendment.
    (b) Subject to subsection (a), a communication by the sender 
canceling or amending a payment order is effective to cancel or 
amend the order if notice of the communication is received at a time 
and in a manner affording the receiving bank a reasonable 
opportunity to act on the communication before the bank accepts the 
payment order.
    (c) After a payment order has been accepted, cancellation or 
amendment of the order is not effective unless the receiving bank 
agrees or a funds-transfer system rule allows cancellation or 
amendment without agreement of the bank.
    (1) With respect to a payment order accepted by a receiving bank 
other than the beneficiary's bank, cancellation or amendment is not 
effective unless a conforming cancellation or amendment of the 
payment order issued by the receiving bank is also made.
    (2) With respect to a payment order accepted by the 
beneficiary's bank, cancellation or amendment is not effective 
unless the order was issued in execution of an unauthorized payment 
order, or because of a mistake by a sender in the funds transfer 
which resulted in the issuance of a payment order (i) that is a 
duplicate of a payment order previously issued by the sender, (ii) 
that orders payment to a beneficiary not entitled to receive payment 
from the originator, or (iii) that orders payment in an

[[Page 34373]]

amount greater than the amount the beneficiary was entitled to 
receive from the originator. If the payment order is canceled or 
amended, the beneficiary's bank is entitled to recover from the 
beneficiary any amount paid to the beneficiary to the extent allowed 
by the law governing mistake and restitution.
    (d) An unaccepted payment order is canceled by operation of law 
at the close of the fifth funds-transfer business day of the 
receiving bank after the execution date or payment date of the 
order.
    (e) A canceled payment order cannot be accepted. If an accepted 
payment order is canceled, the acceptance is nullified and no person 
has any right or obligation based on the acceptance. Amendment of a 
payment order is deemed to be cancellation of the original order at 
the time of amendment and issue of a new payment order in the 
amended form at the same time.
    (f) Unless otherwise provided in an agreement of the parties or 
in a funds-transfer system rule, if the receiving bank, after 
accepting a payment order, agrees to cancellation or amendment of 
the order by the sender or is bound by a funds-transfer system rule 
allowing cancellation or amendment without the bank's agreement, the 
sender, whether or not cancellation or amendment is effective, is 
liable to the bank for any loss and expenses, including reasonable 
attorney's fees, incurred by the bank as a result of the 
cancellation or amendment or attempted cancellation or amendment.
    (g) A payment order is not revoked by the death or legal 
incapacity of the sender unless the receiving bank knows of the 
death or of an adjudication of incapacity by a court of competent 
jurisdiction and has reasonable opportunity to act before acceptance 
of the order.
    (h) A funds-transfer system rule is not effective to the extent 
it conflicts with subsection (c)(2) of this section.

Section 4A-212. Liability and Duty of Receiving Bank Regarding 
Unaccepted Payment Order

    If a receiving bank fails to accept a payment order that it is 
obliged by express agreement to accept, the bank is liable for 
breach of the agreement to the extent provided in the agreement or 
in this Article, but does not otherwise have any duty to accept a 
payment order or, before acceptance, to take any action, or refrain 
from taking action, with respect to the order except as provided in 
this Article or by express agreement. Liability based on acceptance 
arises only when acceptance occurs as stated in section 4A-209, and 
liability is limited to that provided in this Article. A receiving 
bank is not the agent of the sender or beneficiary of the payment 
order it accepts, or of any other party to the funds transfer, and 
the bank owes no duty to any party to the funds transfer except as 
provided in this Article or by express agreement.

Part 3--Execution of Sender's Payment Order by Receiving Bank

Section 4A-301. Execution and Execution Date

    (a) A payment order is ``executed'' by the receiving bank when 
it issues a payment order intended to carry out the payment order 
received by the bank. A payment order received by the beneficiary's 
bank can be accepted but cannot be executed.
    (b) Execution date of a payment order means the day on which the 
receiving bank may properly issue a payment order in execution of 
the sender's order. The execution date may be determined by 
instruction of the sender but cannot be earlier than the day the 
order is received and, unless otherwise determined, is the day the 
order is received. If the sender's instruction states a payment 
date, the execution date is the payment date or an earlier date on 
which execution is reasonably necessary to allow payment to the 
beneficiary on the payment date.

Section 4A-302. Obligations of Receiving Bank in Execution of Payment 
Order

    (a) Except as provided in subsections (b) through (d), if the 
receiving bank accepts a payment order pursuant to section 4A-
209(a), the bank has the following obligations in executing the 
order:
    (1) The receiving bank is obliged to issue, on the execution 
date, a payment order complying with the sender's order and to 
follow the sender's instructions concerning (i) any intermediary 
bank or funds-transfer system to be used in carrying out the funds 
transfer, or (ii) the means by which payment orders are to be 
transmitted in the funds transfer. If the originator's bank issues a 
payment order to an intermediary bank, the originator's bank is 
obliged to instruct the intermediary bank according to the 
instruction of the originator. An intermediary bank in the funds 
transfer is similarly bound by an instruction given to it by the 
sender of the payment order it accepts.
    (2) If the sender's instruction states that the funds transfer 
is to be carried out telephonically or by wire transfer or otherwise 
indicates that the funds transfer is to be carried out by the most 
expeditious means, the receiving bank is obliged to transmit its 
payment order by the most expeditious available means, and to 
instruct any intermediary bank accordingly. If a sender's 
instruction states a payment date, the receiving bank is obliged to 
transmit its payment order at a time and by means reasonably 
necessary to allow payment to the beneficiary on the payment date or 
as soon thereafter as is feasible.
    (b) Unless otherwise instructed, a receiving bank executing a 
payment order may (i) use any funds-transfer system if use of that 
system is reasonable in the circumstances, and (ii) issue a payment 
order to the beneficiary's bank or to an intermediary bank through 
which a payment order conforming to the sender's order can 
expeditiously be issued to the beneficiary's bank if the receiving 
bank exercises ordinary care in the selection of the intermediary 
bank. A receiving bank is not required to follow an instruction of 
the sender designating a funds-transfer system to be used in 
carrying out the funds transfer if the receiving bank, in good 
faith, determines that it is not feasible to follow the instruction 
or that following the instruction would unduly delay completion of 
the funds transfer.
    (c) Unless subsection (a)(2) applies or the receiving bank is 
otherwise instructed, the bank may execute a payment order by 
transmitting its payment order by first class mail or by any means 
reasonable in the circumstances. If the receiving bank is instructed 
to execute the sender's order by transmitting its payment order by 
the means stated or by any means as expeditious as the means stated.
    (d) Unless instructed by the sender, (i) the receiving bank may 
not obtain payment of its charges for services and expenses in 
connection with the execution of the sender's order by issuing a 
payment order in an amount equal to the amount of the sender's order 
less the amount of the charges, and (ii) may not instruct a 
subsequent receiving bank to obtain payment of its charges in the 
same manner.

Section 4A-303. Erroneous Execution of Payment Order

    (a) A receiving bank that (i) executes the payment order of the 
sender by issuing a payment order in an amount greater than the 
amount of the sender's order, or (ii) issues a payment order in 
execution of the sender's order and then issues a duplicate order, 
is entitled to payment of the amount of the sender's order under 
section 4A-402(c) if that subsection is otherwise satisfied. The 
bank is entitled to recover from the beneficiary of the erroneous 
order the excess payment received to the extent allowed by the law 
governing mistake and restitution.
    (b) A receiving bank that executes the payment order of the 
sender by issuing a payment order in an amount less than the amount 
of the sender's order is entitled to payment of the amount of the 
sender's order under section 4A-402(c) if (i) that subsection is 
otherwise satisfied and (ii) the bank corrects its mistake by 
issuing an additional payment order for the benefit of the 
beneficiary of the sender's order. If the error is not corrected, 
the issuer of the erroneous order is entitled to receive or retain 
payment from the sender of the order it accepted only to the extent 
of the amount of the erroneous order. This subsection does not apply 
if the receiving bank executes the sender's payment order by issuing 
a payment order in an amount less than the amount of the sender's 
order for the purpose of obtaining payment of its charges for 
services and expenses pursuant to instruction of the sender.
    (c) If a receiving bank executes the payment order of the sender 
by issuing a payment order to a beneficiary different from the 
beneficiary of the sender's order and the funds transfer is 
completed on the basis of that error, the sender of the payment 
order that was erroneously executed and all previous senders in the 
funds transfer are not obliged to pay the payment orders they 
issued. The issuer of the erroneous order is entitled to recover 
from the beneficiary of the order the payment received to the extent 
allowed by the law governing mistake and restitution.

Section 4A-304. Duty of Sender To Report Erroneously Executed Payment 
Order

    If the sender of a payment order that is erroneously executed as 
stated in section 4A-303 receives notification from the receiving

[[Page 34374]]

bank that the order was executed or that the sender's account was 
debited with respect to the order, the sender has a duty to exercise 
ordinary care to determine, on the basis of information available to 
the sender, that the order was erroneously executed and to notify 
the bank of the relevant facts within a reasonable time not 
exceeding 90 days after the notification from the bank was received 
by the sender. If the sender fails to perform that duty, the bank is 
not obliged to pay interest on any amount refundable to the sender 
under section 4A-402(d) for the period before the bank learns of the 
execution error. The bank is not entitled to any recovery from the 
sender on account of a failure by the sender to perform the duty 
stated in this section.

Section 4A-305. Liability for Late or Improper Execution or Failure To 
Execute Payment Order

    (a) If a funds transfer is completed but execution of a payment 
order by the receiving bank in breach of section 4A-302 results in 
delay in payment to the beneficiary, the bank is obliged to pay 
interest to either the originator or the beneficiary of the funds 
transfer for the period of delay caused by the improper execution. 
Except as provided in subsection (c), additional damages are not 
recoverable.
    (b) If execution of a payment order by a receiving bank in 
breach of section 4A-302 results in (i) noncompletion of the funds 
transfer, (ii) failure to use an intermediary bank designated by the 
originator, or (iii) issuance of a payment order that does not 
comply with the terms of the payment order of the originator, the 
bank is liable to the originator for its expenses in the funds 
transfer and for incidental expenses and interest losses, to the 
extent not covered by subsection (a), resulting from the improper 
execution. Except as provided in subsection (c), additional damages 
are not recoverable.
    (c) In addition to the amounts payable under subsections (a) and 
(b), damages, including consequential damages, are recoverable to 
the extent provided in an express written agreement of the receiving 
bank.
    (d) If a receiving bank fails to execute a payment order it was 
obliged by express agreement to execute, the receiving bank is 
liable to the sender for its expenses in the transaction and for 
incidential expenses and interest losses resulting from the failure 
to execute. Additional damages, including consequential damages, are 
recoverable to the extent provided in an express written agreement 
of the receiving bank, but are not otherwise recoverable.
    (e) Reasonable attorney's fees are recoverable if demand for 
compensation under subsection (a) or (b) of this section is made and 
refused before an action is brought on the claim. If a claim is made 
for breach of an agreement under subsection (d) and the agreement 
does not provide for damages, reasonable attorney's fees are 
recoverable if demand for compensation under subsection (d) is made 
and refused before an action is brought on the claim.
    (f) Except as stated in this section, the liability of a 
receiving bank under subsections (a) and (b) of this section may not 
be varied by agreement.

Part 4--Payment

Section 4A-401. Payment Date

    Payment date of a payment order means the day on which the 
amount of the order is payable to the beneficiary by the 
beneficiary's bank. The payment date may be determined by 
instruction of the sender but cannot be earlier than the day the 
order is received by the beneficiary's bank and, unless otherwise 
determined, is the day the order is received by the beneficiary's 
bank.

Section 4A-402. Obligation of Sender To Pay Receiving Bank

    (a) This section is subject to sections 4A-205 and 4A-207.
    (b) With respect to a payment order issued to the beneficiary's 
bank, acceptance of the order by the bank obliges the sender to pay 
the bank the amount of the order, but payment is not due until the 
payment date of the order.
    (c) This subsection is subject to subsection (e) and to section 
4A-303. With respect to a payment order issued to a receiving bank 
other than the beneficiary's bank, acceptance of the order by the 
receiving bank obliges the sender to pay the bank the amount of the 
sender's order. Payment by the sender is not due until the execution 
date of the sender's order. The obligation of that sender to pay its 
payment order is excused if the funds transfer is not completed by 
acceptance by the beneficiary's bank of a payment order instructing 
payment to the beneficiary of that sender's payment order.
    (d) If the sender of a payment order pays the order and was not 
obliged to pay all or part of the amount paid, the bank receiving 
payment is obliged to refund payment to the extent the sender was 
not obliged to pay. Except as provided in sections 4A-204 and 4A-
304, interest is payable on the refundable amount from the date of 
payment.
    (e) If a funds transfer is not completed as stated in subsection 
(c) and an intermediary bank is obliged to refund payment as stated 
in subsection (d) but is unable to do so because not permitted by 
applicable law or because the bank suspends payments, a sender in 
the funds transfer that executed a payment order in compliance with 
an instruction, as stated in section 4A-302(a)(1), to route the 
funds transfer through that intermediary bank is entitled to receive 
or retain payment from the sender of the payment order that it 
accepted. The first sender in the funds transfer that issued an 
instruction requiring routing through that intermediary bank is 
subrogated to the right of the bank that paid the intermediary bank 
to refund as stated in subsection (d) of this section.
    (f) The right of the sender of a payment order to be excused 
from the obligation to pay the order as stated in this subsection 
(c) or to receive refund under subsection (d) may not be varied by 
agreement.

Section 4A-403. Payment by Sender to Receiving Bank

    (a) Payment of the sender's obligation under section 4A-402 to 
pay the receiving bank occurs as follows:
    (1) If the sender is a bank, payment occurs when the receiving 
bank receives final settlement of the obligation through a Federal 
Reserve Bank or through a funds-transfer system.
    (2) If the sender is a bank and the sender (i) credited an 
account of the receiving bank with the sender, or (ii) caused an 
account of the receiving bank in another bank to be credited, 
payment occurs when the credit is withdrawn or, if not withdrawn, at 
midnight of the day on which the credit is withdrawable and the 
receiving bank learns of that fact.
    (3) If the receiving bank debits an account of the sender with 
the receiving bank, payment occurs when the debit is made to the 
extent the debit is covered by a withdrawable credit balance in the 
account.
    (b) If the sender and receiving bank are members of a funds-
transfer system that nets obligations multilaterally among 
participants, the receiving bank receives final settlement when 
settlement is complete in accordance with the rules of the system. 
The obligation of the sender to pay the amount of a payment order 
transmitted through the funds-transfer system may be satisfied, to 
the extent permitted by the rules of the system, by setting off and 
applying against the sender's obligation the right of the sender to 
receive payment from the receiving bank of the amount of any other 
payment order transmitted to the sender by the receiving bank 
through the funds-transfer system. The aggregate balance of 
obligations owed by each sender to each receiving bank in the funds-
transfer system may be satisfied, to the extent permitted by the 
rules of the system, by setting off and applying against that 
balance the aggregate balance of obligations owed to the sender by 
other members of the system. The aggregate balance is determined 
after the right of setoff stated in the second sentence of this 
subsection has been exercised.
    (c) If two banks transmit payment orders to each other under an 
agreement that settlement of the obligations of each bank to the 
other under section 4A-402 will be made at the end of the day or 
other period, the total amount owed with respect to all orders 
transmitted by one bank shall be set off against the total amount 
owed with respect to all orders transmitted by the other bank. To 
the extent of the setoff, each bank has made payment to the other.
    (d) In a case not covered by paragraph (a) of this section, the 
time when payment of the sender's obligation under section 4A-402(b) 
or 4A-402(c) occurs is governed by applicable principles of law that 
determine when an obligation is satisfied.

Section 4A-404. Obligation of Beneficiary's Bank to Pay and Give Notice 
to Beneficiary

    (a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), if 
a beneficiary's bank accepts a payment order, the bank is obliged to 
pay the amount of the order to the beneficiary of the order. Payment 
is due on the payment date of the order, but if acceptance occurs on 
the payment date after the close of the funds-transfer business day 
of the bank, payment is due on the next funds-transfer business day. 
If the bank refuses to pay after demand by the

[[Page 34375]]

beneficiary and receipt of notice of particular circumstances that 
will give rise to consequential damages as a result of nonpayment, 
the beneficiary may recover damages resulting from the refusal to 
pay to the extent the bank had notice of the damages, unless the 
bank proves that it did not pay because of a reasonable doubt 
concerning the right of the beneficiary to payment.
    (b) If a payment order accepted by the beneficiary's bank 
instructs payment to an account of the beneficiary, the bank is 
obliged to notify the beneficiary of receipt of the order before 
midnight of the next funds-transfer business day following the 
payment date. If the payment order does not instruct payment to an 
account of the beneficiary, the bank is required to notify the 
beneficiary only if notice is required by the order. Notice may be 
given by first class mail or any other means reasonable in the 
circumstances. If the bank fails to give the required notice, the 
bank is obliged to pay interest to the beneficiary on the amount of 
the payment order from the day notice should have been given until 
the day the beneficiary learned of receipt of the payment order by 
the bank. No other damages are recoverable. Reasonable attorney's 
fees are also recoverable if demand for interest is made and refused 
before an action is brought on the claim.
    (c) The right of a beneficiary to receive payment and damages as 
stated in subsection (a) may not be varied by agreement or a funds-
transfer system rule. The right of a beneficiary to be notified as 
stated in subsection (b) of this section may be varied by agreement 
of the beneficiary or by a funds-transfer system rule if the 
beneficiary is notified of the rule before initiation of the funds 
transfer.

Section 4A-405. Payment by Beneficiary's Bank To Beneficiary

    (a) If the beneficiary's bank credits an account of the 
beneficiary of a payment order, payment of the bank's obligation 
under section 4A-404(a) occurs when and to the extent (i) the 
beneficiary is notified of the right to withdraw the credit, (ii) 
the bank lawfully applies the credit to a debt of the beneficiary, 
or (iii) funds with respect to the order are otherwise made 
available to the beneficiary by the bank.
    (b) If the beneficiary's bank does not credit an account of the 
beneficiary of a payment order, the time when payment of the bank's 
obligation under section 4A-404(a) occurs is governed by principles 
of law that determine when an obligation is satisfied.
    (c) Except as stated in paragraphs (d) and (e) of this section, 
if the beneficiary's bank pays the beneficiary of a payment order 
under a condition to payment or agreement of the beneficiary giving 
the bank the right to recover payment from the beneficiary if the 
bank does not receive payment of the order, the condition to payment 
or agreement is not enforceable.
    (d) A funds-transfer system rule may provide that payments made 
to beneficiaries of funds transfer made through the system are 
provisional until receipt of payment by the beneficiary's bank of 
the payment order it accepted. A beneficiary's bank that makes a 
payment that is provisional under the rule is entitled to refund 
from the beneficiary if (i) the rule requires that both the 
beneficiary and the originator be given notice of the provisional 
nature of the payment before the funds transfer is initiated, (ii) 
the beneficiary, the beneficiary's bank and the originator's bank 
agreed to be bound by the rule, and (iii) the beneficiary's bank did 
not receive payment of the payment order that it accepted. If the 
beneficiary is obliged to refund payment to the beneficiary's bank, 
acceptance of the payment order by the beneficiary's bank is 
nullified and no payment by the originator of the funds transfer to 
the beneficiary occurs under section 4A-406.
    (e) This paragraph applies to a funds transfer that includes a 
payment order transmitted over a funds-transfer system that (i) nets 
obligations-multilaterally among participants, and (ii) has in 
effect a loss-sharing agreement among participants for the purpose 
of providing funds necessary to complete settlement of the 
obligations of one or more participants that do not meet their 
settlement obligations. If the beneficiary's bank in the funds 
transfer accepts a payment order and the system fails to complete 
settlement pursuant to its rules with respect to any payment order 
in the funds transfer, (i) the acceptance by the beneficiary's bank 
is nullified and no person has any right or obligation based on the 
acceptance, (ii) the beneficiary's bank is entitled to recover 
payment from the beneficiary, (iii) no payment by the originator to 
the beneficiary occurs under section 4A-406, and (iv) subject to 
section 4A-402(e), each sender in the funds transfer is excused from 
its obligation to pay its payment order under section 4A-402(c) 
because the funds transfer has not been completed.

Section 4A-406. Payment by Originator to Beneficiary; Discharge of 
Underlying Obligation

    (a) Subject to sections 4A-211(e), 4A-405(d), and 4A-405(e), the 
originator of a funds transfer pays the beneficiary of the 
originator's payment order (i) at the time a payment order for the 
benefit of the beneficiary is accepted by the beneficiary's bank in 
the funds transfer and (ii) in an amount equal to the amount of the 
order *40813 accepted by the beneficiary's bank, but not more than 
the amount of the originator's order.
    (b) If payment under paragraph (a) of this section is made to 
satisfy an obligation, the obligation is discharged to the same 
extent discharge would result from payment to the beneficiary of the 
same amount in money, unless (i) the payment under subsection (a) 
was made by a means prohibited by the contract of the beneficiary 
with respect to the obligation; (ii) the beneficiary, within a 
reasonable time after receiving notice of receipt of the order by 
the beneficiary's bank, notified the originator of the beneficiary's 
refusal of the payment; (iii) funds with respect to the order were 
not withdrawn by the beneficiary or applied to a debt of the 
beneficiary; and (iv) the beneficiary would suffer a loss that could 
reasonably have been avoided if payment had been made by a means 
complying with the contract. If payment by the originator does not 
result in discharge under this section, the originator is subrogated 
to the rights of the beneficiary to receive payment from the 
beneficiary's bank under section 4A-404(a).
    (c) For the purpose of determining whether discharge of an 
obligation occurs under paragraph (b) of this section, if the 
beneficiary's bank accepts a payment order in an amount equal to the 
amount of the originator's payment order less charges of one or more 
receiving banks in the funds transfer, payment to the beneficiary is 
deemed to be in the amount of the originator's order unless upon 
demand by the beneficiary the originator does not pay the 
beneficiary the amount of the deducted charges.
    (d) Rights of the originator or of the beneficiary of a funds 
transfer under this section may be varied only by agreement of the 
originator and the beneficiary.

Part 5--Miscellaneous Provisions

Section 4A-501. Variation by Agreement and Effect of Funds-Transfer 
System Rule

    (a) Except as otherwise provided in this Article, the rights and 
obligations of a party to a funds transfer may be varied by 
agreement of the affected party.
    (b) Funds-transfer system rule means a rule of an association of 
banks (i) governing transmission of payment orders by means of a 
funds-transfer system of the association or rights and obligations 
with respect to those orders, or (ii) to the extent the rule governs 
rights and obligations between banks that are parties to a funds 
transfer in which a Federal Reserve Bank, acting as an intermediary 
bank, sends a payment order to the beneficiary's bank. Except as 
otherwise provided in this Article, a funds-transfer system rule 
governing rights and obligations between participating banks using 
the system may be effective even if the rule conflicts with this 
Article and indirectly affects another party to the funds transfer 
who does not consent to the rule. A funds-transfer system rule may 
also govern rights and obligations of parties other than 
participating banks using the system to the extent stated in 
sections 4A-404(c), 4A-405(d), and 4A-507(c).

Section 4A-502. Creditor Process Served on Receiving Bank; Setoff by 
Beneficiary's Bank

    (a) As used in this section, creditor process means levy, 
attachment, garnishment, notice of lien, sequestration, or similar 
process issued by or on behalf of a creditor or other claimant with 
respect to an account.
    (b) This subsection applies to creditor process with respect to 
an authorized account of the sender of a payment order if the 
creditor process is served on the receiving bank. For the purpose of 
determining rights with respect to the creditor process, if the 
receiving bank accepts the payment order the balance in the 
authorized account is deemed to be reduced by the amount of the 
payment order to the extent the bank did not otherwise receive 
payment of the order, unless the creditor process is served at a 
time and in a manner affording the bank a reasonable opportunity to 
act on it before the bank accepts the payment order.

[[Page 34376]]

    (c) If a beneficiary's bank has received a payment order for 
payment to the beneficiary's account in the bank, the following 
rules apply:
    (1) The bank may credit the beneficiary's account. The amount 
credited may be set off against an obligation owed by the 
beneficiary to the bank or may be applied to satisfy creditor 
process served on the bank with respect to the account.
    (2) The bank may credit the beneficiary's account and allow 
withdrawal of the amount credited unless creditor process with 
respect to the account is served at a time and in a manner affording 
the bank a reasonable opportunity to act to prevent withdrawal.
    (3) If creditor process with respect to the beneficiary's 
account has been served and the bank has had a reasonable 
opportunity to act on it, the bank may not reject the payment order 
except for a reason unrelated to the service of process.
    (d) Creditor process with respect to a payment by the originator 
to the beneficiary pursuant to a funds transfer may be served only 
on the beneficiary's bank with respect to the debt owned by that 
bank to the beneficiary. Any other bank served with the creditor 
process is not obliged to act with respect to the process.

Section 4A-503. Injunction or Restraining Order With Respect to Funds 
Transfer

    For proper cause and in compliance with applicable law, a court 
may restrain:
    (i) a person from issuing a payment order to initiate a funds 
transfer,
    (ii) an originator's bank from executing the payment order of 
the originator, or
    (iii) the beneficiary's bank from releasing funds to the 
beneficiary or the beneficiary from withdrawing the funds. A court 
may not otherwise restrain a person from issuing a payment order, 
paying or receiving payment of a payment order, or otherwise acting 
with respect to a funds transfer.

Section 4A-504. Order In Which Items and Payment Orders May Be Charged 
to Account; Order of Withdrawals from Account

    (a) If a receiving bank has received more than one payment order 
of the sender or one or more payment orders and other items that are 
payable from the sender's account, the bank may charge the sender's 
account with respect to the various orders and items in any 
sequence.
    (b) In determining whether a credit to an account has been 
withdrawn by the holder of the account or applied to a debt of the 
holder of the account, credits first made to the account are first 
withdrawn or applied.

Section 4A-505. Preclusion of Objection to Debit of Customer's Account

    If a receiving bank has received payment from its customer with 
respect to a payment order issued in the name of the customer as 
sender and accepted by the bank, and the customer received 
notification reasonably identifying the order, the customer is 
precluded from asserting that the bank is not entitled to retain the 
payment unless the customer notifies the bank of the customer's 
objection to the payment within one year after the notification was 
received by the customer.

Section 4A-506. Rate of Interest

    (a) If, under this Article, a receiving bank is obliged to pay 
interest with respect to a payment order issued to the bank, the 
amount payable may be determined (i) by agreement of the sender and 
receiving bank, or (ii) by a funds-transfer system rule if the 
payment order is transmitted through a funds-transfer system.
    (b) If the amount of interest is not determined by an agreement 
or rule as stated in subsection (a), the amount is calculated by 
multiplying the applicable Federal Funds rate by the amount on which 
interest is payable, and then multiplying the product by the number 
of days for which interest is payable. The applicable Federal Funds 
rate is the average of the Federal Funds rates published by the 
Federal Reserve Bank of New York for each of the days for which 
interest is payable divided by 360. The Federal Funds rate for any 
day on which a published rate is not available is the same as the 
published rate for the next preceding day for which there is a 
published rate. If a receiving bank that accepted a payment order is 
required to refund payment to the sender of the order because the 
funds transfer was not completed, but the failure to complete was 
not due to any fault by the bank, the interest payable is reduced by 
a percentage equal to the reserve requirement on deposits of the 
receiving bank.

Section 4A-507. Choice of Law

    (a) The following rules apply unless the affected parties 
otherwise agree or paragraph (c) of this section applies:
    (1) The rights and obligations between the sender of a payment 
order and the receiving bank are governed by the law of the 
jurisdiction in which the receiving bank is located.
    (2) The rights and obligations between the beneficiary's bank 
and the beneficiary are governed by the law of the jurisdiction in 
which the beneficiary's bank is located.
    (3) The issue of when payment is made pursuant to a funds 
transfer by the originator to the beneficiary is governed by the law 
of the jurisdiction in which the beneficiary's bank is located.
    (b) If the parties described in each subsection of paragraph (a) 
of this section have made an agreement selecting the law of a 
particular jurisdiction to govern rights and obligations between 
each other, the law of that jurisdiction governs those rights and 
obligations, whether or not the payment order or the funds transfer 
bears a reasonable relation to that jurisdiction.
    (c) A funds-transfer system rule may select the law of a 
particular jurisdiction to govern (i) rights and obligations between 
participating banks with respect to payment orders transmitted or 
processed through the system, or (ii) the rights and obligations of 
some or all parties to a funds transfer any part of which is carried 
out by means of the system. A choice of law made pursuant to clause 
(i) is binding on participating banks. A choice of law made pursuant 
to clause (ii) is binding on the originator, other sender, or a 
receiving bank having notice that the funds-transfer system might be 
used in the funds transfer and of the choice of law by the system 
when the originator, other sender, or receiving bank issued or 
accepted a payment order. The beneficiary of a funds transfer is 
bound by the choice of law if, when the funds transfer is initiated, 
the beneficiary has notice that the funds-transfer system might be 
used in the funds transfer and of the choice of law by the system. 
The law of a jurisdiction selected pursuant to this subsection may 
govern, whether or not that law bears a reasonable relation to the 
matter in issue.
    (d) In the event of inconsistency between an agreement under 
paragraph (b) of this section and a choice-of-law rule under 
paragraph (c) of this section, the agreement under paragraph (b) 
prevails.
    (e) If a funds transfer is made by use of more than one funds-
transfer system and there is inconsistency between choice-of-law 
rules of the systems, the matter in issue is governed by the law of 
the selected jurisdiction that has the most significant relationship 
to the matter in issue.

    By order of the Board of Governors of the Federal Reserve 
System.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2022-11090 Filed 6-3-22; 8:45 am]
BILLING CODE 6210-01-P