Effective Date: July 23, 2015 for the Reg. J and policy changes and for the policy changes related to the posting and debiting of check and ACH transactions to financial institutions’ accounts and December 5, 2014 for the policy revisions to the principles for establishing future posting procedures for same-day ACH service and services for U.S. branches and agencies of foreign banking organizations.
Overview
Did you know that, had the timing been different, dinosaurs might have survived the asteroid that eliminated their species? Or so says a paleontologist from Edinburgh University, Steve Brusatte. Brusatte believes that the asteroid hit “at a bad time,” and that if the asteroid “had hit a few million years earlier, or a few million years later, then dinosaurs probably wouldn’t have gone extinct” (source).
If the asteroid hadn’t hit, you and I might not be here. Bad news for dinosaurs; good news for us.
Clearly, timing is everything. The Federal Reserve Board agrees and has taken two actions that affect the timing of check settlements. The first action is a final rule that amends Subpart A of Regulation J. Regulation J governs the collection of checks and other items by the Federal Reserve Banks, the handling of returned checks and the transfer of funds through Fedwire. In the second action, the Fed has adopted revisions to Part II of its policy on payment systems risk (PSR policy) that defines the procedures for measuring balances intraday in the accounts that institutions maintain at Federal Reserve Banks.
Operational Changes from Reg. J Amendments
The section being amended addresses the time and manner in which paying banks have to settle for or return items presented to them by the Federal Reserve Banks. Reg. J states that the proceeds of a paying bank’s settlement must be made available to its Federal Reserve Bank by (1) the latest of the next clock hour that is at least one hour after the paying bank receives the check, (2) 9:30 am EST, or (3) a later time as provided for in the Federal Reserve Banks’ operating circulars. Currently the earliest time that a paying bank is required to settle for a check it receives under Reg. J is 9:30 am EST and there has to be at least one hour between the time the check was presented to the paying bank and the time the paying bank settles for the check. The same rule applies to the settlement of returned items. However, Federal Reserve Banks’ Operating Circular 3 currently states that the deadline is 11:00 am EST or the next clock hour that is at least one hour after the paying bank receives the check, but no later than 3:00 pm local time for the paying bank. This rule change is an effort to create uniformity between Reg. J and the Operating Circular and to recognize technological enhancements.
Reg. J will now require paying banks that receive presentments of checks from Federal Reserve Banks to make the proceeds of settlement for those checks available to the Federal Reserve Banks as soon as one half hour after receipt of the checks. Specifically, this rule states that the paying bank must settle for the items by the latest of: (1) the next clock half-hour that is at least one half-hour after the paying bank receives the item; (2) 8:30 am EST; or (3) any later time identified by a Federal Reserve Circular. As you’ll see in the next section, the Federal Reserve Board is also revising its circular that addresses this issue to set the settlement time at 8:30 am EST, as well.
So, what does this mean from a practical perspective? If you are the paying bank and you receive the item by 8:00 am EST, you will be required to settle for the item or return the item by 8:30 am EST. The effective date for this change is July 23, 2015, which means that all items scheduled to settle on this date and after will be subject to the new rule, regardless of the date of deposit.
Federal Reserve Policy on Payment System Risk; Procedures for Measuring Daylight Overdrafts
In conjunction with the changes to Reg. J, the Federal Reserve Board has revised the procedures contained in this circular for measuring balances intraday in the accounts institutions hold at Federal Reserve Banks. Specifically, the changes relate to the Board’s procedures for posting debit and credit entries to institutions’ accounts for automated clearing (ACH) debit transactions and check transactions.
Some of the changes to the Fed’s procedures took effect immediately on December 5, 2014. These changes represent a set of principles for establishing future posting procedures for the Fed’s same-day ACH service and some clarifications related to the administration of its policy for U.S. branches and agencies of foreign banking organizations. These principles are:
- For each same-day ACH transmission deadline, the Federal Reserve Banks will establish expected distribution times for the same-day ACH files. The Banks will post settlement for same-day ACH debit transactions no earlier than 15 minutes after the bank’s expected distribution time and the Banks will post settlement for ACH credit and debit transactions associated with a particular same-day ACH file distribution time at the same time; and
- Settlement will not post between the close of the Federal Reserve Banks’ National Settlement Service and 8:30 am on the next day processing.
In conjunction with the Reg. J changes, on July 23, 2015, the posting times for commercial check transactions at the Federal Reserve Banks will be 8:30 am EST, 1:00 pm EST and 5:30 pm EST with specific posting times depending on when a check is deposited with the Federal Reserve Bank (for credit) or presented by the Federal Reserve Bank (for debit). Credits received by the deadlines will post on a rolling basis at the next available posting time at least 30 minutes after receipt by the Federal Reserve Bank. In the same vein, debits associate with electronic check transmission will post on a rolling basis at the next available posting time that is at least 30 minutes after presentment to the paying bank. Paper checks will post at the final posting time of 5:30 pm EST on the day the paper check is presented to the paying bank.
In addition, the Federal Reserve Banks will present multiple electronic cash letters per day to financial institutions with the first presentment by 8:00 am EST for settlement at 8:30 am EST. Settlement for large-value check corrections and adjustments will begin at 8:30 am EST and hourly thereafter on the half-hour depending on when the discrepancy is detected. Large-value debit corrections will be posted after the close of the Fedwire Funds Service, the same day as the large-value debit adjustments are posted.
Unlike the dinosaurs, noncompliant timing on these amendments probably won’t spell extinction for our species. However, to ensure the continued survival of your institution, compliance is always the best option.
To review the new rule and policy statement, please see:
https://www.federalregister.gov/articles/2014/12/05/2014-28516/collection-of-checks-and-other-items-by-federal-reserve-banks-and-funds-transfers-through-fedwire
https://www.federalregister.gov/articles/2014/12/05/2014-28664/federal-reserve-policy-on-payment-system-risk-procedures-for-measuring-daylight-overdrafts
Jane Pannier is senior vice president and in-house counsel for AffirmX LLC, a developer of an innovative remote compliance review solution. Ms. Pannier is also SVP of AdvisX, a CUSO that specializes in using technology to more effectively deliver consulting services to financial institutions.
