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CUNA Regulatory Comment Call

October 22, 2004

EXECUTIVE SUMMARY

• The Federal Reserve Board (Board) is asking for comments on a proposal to withdraw from the collection and processing of definitive municipal bonds and coupons issued by state and local governments by the end of 2005.
• Declining demand and availability of alternate service providers is prompting the Board’s proposal to withdrawal from this service.
• According to the Federal Reserve, it will be difficult for the Reserve Banks to recover the costs of this service in coming years because of declining demand and fixed-costs.
• This proposal does not include or impact the redemption of Treasury coupons currently handled by the Reserve Banks.
• Comments are due by December 20, 2004. Please submit your comments to CUNA by December 6, 2004.

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com and to Assistant General Counsel Lilly Thomas at lthomas@cuna.com or mail them to Mary and Lilly in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6733, if you would like a copy of the proposed guidance, or you may access it on the Internet here.

BACKGROUND

Noncash items under Regulation J (12 CFR 210.2(k)) are registered definitive municipal securities or bearer bonds that have been issued with interest coupons in certificated or physical form by local governments, as well as by states and their political subdivisions and agencies. The Federal Reserve Banks provide a service to depository institutions for the collection of definitive municipal securities. The "noncash collection service" provided by the Reserve Banks accepts deposits of coupons or bonds from depository institutions, identifies the appropriate paying agent, and presents the items to the paying agent for collection.

Originally, Reserve Banks offered both safekeeping and collection services in the securities business. However, they withdrew from the safekeeping business in 1993. While continuing to provide the priced noncash collection service, the Reserve Banks reduced noncash collection operation sites from 22 to one because of a decline in volume.

The noncash collection service is a separate business and is the smallest Reserve Bank priced service. In 2004, it represents less than 0.2 percent of the total budgeted priced financial services costs.

PROPOSAL TO WITHDRAW FROM NONCASH COLLECTION SERVICE

The Reserve Banks have requested to withdraw from the noncash collection service. Besides a small amount of definitive municipal securities being held in safekeeping for the Treasury Tax and Loan and Discount collateral programs, the elimination of this service should have no material adverse effect on the Federal Reserve’s ability to discharge any other responsibilities. This proposal does not include or impact the redemption of Treasury coupons currently handled by the Reserve Banks. There are additional factors that are being considered in analyzing this proposal.

• Decline in Volume and Underrecovery of Cost

• The volume of the Reserve Banks’ noncash collection is expected to decline by one-third in 2005. Already, it has decreased an average of 20 percent annually over the past five years, and 85 percent since 1995. The volume decline is accelerating because fallen interest rates prompted issuers to call high-interest-rate bonds and issue bonds in book-entry form with lower rates.
• There has also been a decline in the number of customers and paying agents that use the Reserve Banks’ noncash collection service.
• It will be difficult for the Reserve Banks to recover the costs of this service in next few years. Starting in 2005, the Reserve Banks expect a significant underrecovery of costs.

• Alternative Service Providers

• There are other service providers that may provide an adequate level of the same service. Some correspondent banks, such as corporate credit unions, provide services to their customers for processing definitive municipal securities. DTC also provides both securities safekeeping service and an over-the-counter collection service for its participants.
• Another alternative is for market participants to present directly to the paying agent. Depository institutions that present directly would avoid explicit fees because paying agents do not charge presenters for the redemption of their coupons or bonds; however, they may incur additional internal resource costs.
• To facilitate the identification of paying agents, the Reserve Banks are considering making their paying agent database available on the Internet. The list would be current as of the last day of the service and would include securities descriptions and associated paying agents with phone numbers and addresses.

• Are there alternative service providers or substitutable services that have not been mentioned in this Comment Call?
  
  

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• If presenting directly to paying agents, would you find it useful to have access to the Reserve Banks paying agent database?
  
  

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• Are there any other tools you may find useful to facilitate the transition?
  
  

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• Are there any public benefits of continuing this service that have not been mentioned?
  
  

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• Other comments?
  
  

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